Q4 2020 Fomento Economico Mexicano SAB de CV Earnings Call
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Good day, and welcome everyone to FEMSA, its fourth quarter and full year 2020 financial results conference call on.
All lines have been placed on mute to prevent any background noise. After the presentation. There will be a question and answer session.
During this conference call management may discuss certain forward looking statements concerning FEMSA <unk>.
Future performance and should be considered as good faith estimates made by the company.
These forward looking statements reflect management expectations and are based upon currently available data actual results are subject to future events and uncertainties.
Which can materially impact the companys actual performance at this time I will now turn the call over to Juan from Sucker FEMSA as director of Investor Relations. Please go ahead.
Good morning, everyone welcome to FEMSA fourth quarter 2020, and sales conference call. Today, we are joined by severance he spoke on mitral FEMSA Chief Corporate officer.
Our financing corporate development director on by Coca Cola Gasser, who heads our Coke FEMSA is investor relations effort.
For today is to come from Cisco comment on some higher level trends.
Our strategic considerations and to have low can you walk us through the numbers for the quarter.
Following their remarks with Q&A as we always do.
So with that let me turn it over to buckle got much.
Thank you Ken Good morning, everyone. Thank you for joining us today.
We hope you and you're finally starting to occur.
On today's call I want to start by reflecting on the year 'twenty 'twenty, taking some specific comments about the fourth quarter.
I will then share a few thoughts on how we will continue to navigate the short term volatility.
Okay and the day.
Getting to the details of the performance.
I would come back to share a few thoughts why you remain confident about the future.
I guess I don't have to tell you that the year 2020, what's a difficult one because of the global pandemic.
The volatility and B, although on change of faith tried a year certainly tested everybody thought leader.
We love about our company proved its resilience flexibility and agility across the book in these trying times.
That's an organization.
We had to prioritize collaborate become more on yet.
On the decision, making for the operations team for the ground like never before.
Well, we're trying to stay and keep everybody safe.
What do you want to discuss our portfolio.
<unk> 22 in each of our businesses quickly adopted their operations applied burden from the B pretty stages of the pandemic on wood Fox to recognize shipping locally.
Knoxville, the challenge was to make sure that they're on the 20000 stores remained on operational while facing supply imbalances.
Terry with friction on the drastic reduction from what we need to go with the market.
And Coca Cola FEMSA the teams more quickly so that their media supply and support from geography, we're always starts with the right diverse portfolio debt.
Even though consumer shifting preferences and looking for more affordable options different shopping day needs a moment of consumption.
You know the distribution business.
Teams to ensure that the thousands of clients. It was the Americas, where service property on deposits cheap and we see that type of margin.
So basically b.
On the pharma companies, So Paulo, a glove on CPE player in Mexico.
On a large bulky felicia cargo or San Diego de.
What's exactly done every day try the year, despite ever changing conditions and requirements from our clients.
Moving on.
I'm focusing on the fourth quarter.
While we were dealing with the operational challenges I. Just described we still managed to make progress on the capital deployment front.
On the FEMSA Comercio, we announced an agreement to acquire okay market.
Proximity store chain with more than 120 patients in Chile.
This transaction, which is still advancing through the customary regulatory approval process.
Will allow us to improve the way we serve our retail customers. We continue to grow all walks of platform interest market.
Importantly, we are specialized distribution operation in the United States. We made further progress right before the end of the year by making two acquisition that gave us a trump threatened in the central and south eastern regions of the United States.
We're steadily bribing always Friday, you're creating a relevant national platform.
This will allow us to improve the value proposition for our clients and would provide us with the benefits of increased scale.
Let me take this opportunity to take a moment on elaborate a bit on their capital deployment Friday on about complexity.
We are aware of market questions regarding some of our recent embedded on.
On the fact that there might not be on more moving parts with defensive story.
The key message for you on this topic is that we now have a solid presence in the business is there to go debt we have identified.
If I subtract it and then importantly, well first I mean, if people go on exited March with our capability set.
That's why he likes to say, we are pop or keep complexity on.
Now the task will be to grow these vertical to increase our scale on profitability.
And so doing we intend to provide you with momentum.
Moving on.
You could see 'twenty 'twenty, one not on easy here, you say, the b, but we emerged stronger out of it.
We adopted <unk> Peter.
We achieved an encouraging set of results later on.
We had a better and stronger organic stage.
This was only possible because of the dedication resilience agility and the engagement of the more than 300000 colleagues and friends.
A big Thank you goes to all of them, particularly those in the phone.
With that I will now turn the call over book any who will go over the fourth quarter, we sold.
Thank you Michael and good morning to everyone on the line.
Starting with <unk> consolidated quarterly numbers total revenue during the fourth quarter decreased one 5% while income from operations decreased by three 5% on an organic basis total revenues decreased five 3% and income from operations decreased by three 8%.
For this quarter the difference between reported and organic figures reflect the results of a JV in Brazil as well as those of vaccine North American Corporation in the U S.
Sensors net income decreased 88% driven by lower income from operations as I. Just described are negative impact due to temporary participation in Heineken results, a noncash operating exchange loss related to 10 cents U S dollar denominated cash position and higher interest expenses.
In terms of per consolidated net debt position during the fourth quarter. It increased 4% to 76 billion purchase at the end of December reflecting payments for the acquisitions carried out during the quarter for its part Capex was down 26% is definitely operation can you continue to rationalize noncritical investments.
Moving on to discuss our operations and beginning with FEMSA Comercio proximity division let.
Let me start by updating you on OXXO store openings.
During the fourth quarter, we opened 93, new stores and we opened 80 stores that were being remodeled or receiving major maintenance at the same time six stores remain temporarily closed and 234 stores were permanently closed.
I recall from previous calls during 2020, we took a hard look at certain stores that were already performing marginally even before the lockdowns throughout the year. We made attempts to further reduce their expense base to drive up returns.
But some of them, we eventually decided to close for good to avoid them, becoming a bigger drag on oxo on overall profitability.
The last group of stores.
Such stores, what's closed around the end of the year. So there will still be about 30 closed stores that will show up in the January numbers, but this will be the end of the pruning of the tree exercise in our OXXO Division.
The net result of these openings and closes closings was minus 67 stores for the fourth quarter for a total of 236 net additions in the last 12 months. While this is not the type of number that we're all used to seeing from us. So we should highlight the fact that we managed to open 652 gross new stores during 2020 not quite.
The historical run rate, but still a remarkable achievement in the context of Covid and one that bodes well going forward.
On that note, we would expect to open approximately 800 net new stores in Mexico. This year is much more in line with historical trends.
In terms of the operating environment, a significant percentage of per store base remains subject to COVID-19 related restrictions and measures that put further pressure on our sales such as limited time windows to sell alcoholic beverages.
These restrictions increased in nature and geographical reach during the fourth quarter. So that as of the end of December around 45 per cent of our stores were under some kind of restriction.
These numbers are expected to come down as the overall picture of Covid cases, and outcomes begins to improve in the coming months.
OXXO same store sales were down four 3% per the fourth quarter, a sequential improvement of almost 480 basis points, reflecting a 17% declining store traffic and an increase of 15% in average customer ticket.
Gross margin expanded by 60 basis points, reflecting a pickup in commercial income linked to the December holiday season, coupled with a dynamic performance of our services category.
Income from operations decreased 16, 5% and operating margin contracted 180 basis points, driven by operating deleveraging, but again, showing a meaningful meaningful sequential improvement from last quarter.
Moving on to FEMSA Comercio Health Division during the fourth quarter, we expanded our drug store count by 119 net additions to reach a total of 3368 open units across our territories at the end of December and.
207, total new stores for the last 12 months.
Revenues increased 15, 4%, while same store sales increased an average of 15, 3% in Mexican peso.
This reflects good momentum at our operations in Mexico, as well as a low comparison base and Bruce economic activity in Chile, fueled by consumers able to tap a portion of their retirement accounts.
Gross margin contracted by 90 basis points in the quarter driven by an increase in the demand of lower margin COVID-19 related products and higher institutional sales in our operations in Colombia.
Operating margin expanded 50 basis points, reflecting increased operating leverage.
Moving on to FEMSA Comercio fuel division, we note that vehicle mobility remained well below normal market levels.
In that context, we saw some sequential improvement even as many of our locations skewed towards residential neighborhoods.
Have recovered more slowly than commercial ones.
During the fourth quarter, we continued to see pressure on our same station sales, which decreased 31%.
Gross margin reached 13, 3%, while operating margin was two 5% of total revenues, reflecting tight expense control that partially offset operating deleverage.
Finally, moving on briefly to Coca Cola FEMSA day took advantage of favorable raw material dynamics and achieve broad expense containment achieving double digit growth in operating income despite significant foreign exchange headwinds.
And speaking of Coke FEMSA, we should note the very good deals announced last Wednesday on the redesign partnership between the Coca Cola system in Brazil, and Heineken, bringing clarity to the relationship and setting the stage for continued fruitful collaborations for years to come.
And with that let me turn it over to backup for some final comments.
Thank you Brittany.
Thinking about 2021 it is clear that near term there will be volatility and uncertainty related to the virus. When you look before the markets.
However direction on our expectation is that mobility and data consumption will improve as the months go by.
Particularly as vaccination efforts gain traction and more normality brought back towards the second half of this year.
We know that the vaccination b will be different by country, and we are prepared to adjust and adapt to the different recovery, but.
Relative to 2020, the comparison day for most business units will get easier in the summer and then level off towards the end.
Our expectation is that book so a multiple that we continued to improve through 2021.
Gradually closing the gap and reaching performance levels in the fourth quarter that begin to watch it the pre pandemic one for each part B has the decent set a new benchmark in 2020, and we would seek to build on that day.
Pandemic has accelerated the digital momentum we are poised to capitalize on this opportunity as we embrace and accelerate our digital initiatives across the board for example in OXXO efforts are led by the loans for a digital wallet.
Dean biopsy.
We are doing on the initial deployment in San Luis Potosi as we speak.
With the objective of the national rollout in the coming months, we will.
We'll keep you posted on our progress.
In terms of dividend to be paid during 2021 for our board of directors will depend on this proposal to shareholders, but you'd mentioned a couple of days. So we do not have a number yet, but we would share it with U S. B.
Pat.
And on core capital expenditure expectations, we are modeling a consolidated total capex of around 5% book revenue for 2021.
Approximately two thirds will be deployed in Mexico. This book.
Of course would be subject to how the year progresses.
We are confident about the future for our company and energized by the process B kind of a clear and defined business vertical.
I would like to thank you for your continued support and trust defensive.
And with that we can open the call for questions.
Good.
Thank you the question and answer session will begin at this time, if you would.
Like to ask a question on this time. Please press star one on your telephone keypad. If you would like to withdraw your question. Please press star two.
We will be taking on the order. It is received and the interest of time, we ask that you. Please limit yourself to one question at this time in order to allow for the maximum number of callers to ask their question.
Your first question will come from Ben Theurer with Barclays.
Hey, good morning, everyone and thank you very much for taking my question just wanted to follow up a little bit on the dynamics and B in the proximity division and I mean, clearly the same store sales was very good.
I would say with all the positive surprise was just about a 4% decline, but could you elaborate a little bit about the trends you've seen throughout the quarter of two cash last quarter of 2020, and what you've been seeing in the first two months of January February and particularly in light of what basically last year on March started.
Kind of impact.
Impacted because of Covid, so just to give us a little bit of a better sense of how restrictions have impacted during the quarter at the beginning of the year and what are your exploration expectations going forward and then with in light of that B.
800 stores are opening.
I would assume the vast majority of that being back end loaded, but if you could elaborate a little bit about the pace of those openings throughout the year debt would be much appreciated. Thank you.
Yep.
If you remember last year, the second quarter was clearly the the worst part of what we experienced significant drops in traffic in that over the summer months. It's it got better and we reached a little bit of a plateau in terms of a negative comp during the year for the fourth quarter, we did see significant pick up some.
Mostly traffic.
Harvey teaching approach, especially in November and December and Thats, what caused the Ah.
The good surprise, it's obviously that that we saw in our numbers in the fourth quarter four for OXXO, having said that as you know the the contagion numbers during the holiday season for our for the Covid pandemic increased significantly and that caused the authorities to impose.
On the restrictions with regards to alcohol sales operating store numbers et cetera, and those those hit the first few weeks of January.
January having said that most of those restrictions with the case counts now under control on the better progression of the pandemic are on our had been lifted for the most part. So at this point. We are we are back to where we were and then I in March we would expect to see the beginning.
The beginning of the of easier comps because of the Covid the COVID-19 restrictions.
So that would be with.
With regards to the dynamic of the of the same store sales and the comps with regards to the opening pace, we do expect a little bit of a front loading. This year, we will obviously wait and see how the comp stores are doing at the beginning of the year.
But as opposed to using the past because of the pipeline of real estate that we have on the locations that we now have fine tuned towards the.
Towards the new Covid Covid reality, we would expect a more front loading of the opening of the openings in the free.
First half of this year as compared to B b.
The years prior.
Ben This is back book there the one thing that I would like to your question is that we also need to remember that there is a difference by CD.
In how each of the.
Cities are reacting on implementing specific things on on mobility restrictions on everything has been trading differently. So it's important to remember that OXXO is.
Very actively be average in the situation to adapt to the very specific.
Wei and.
Things that are happening in each of the cities and I believe that.
It is.
It's very important to keep doing that.
We start the new year and that is exactly what we're going to do.
Yeah, I think I would add hey, Ben this is borne out of just following up on what buckler and they're kind of just said.
To keep in mind that if you look at some of the restrictions that were put in place.
The final weeks of the year and throughout January where you had for example.
The state of Nevada on where we have more than a thousands force on Mexico City, where we also have probably more than a thousand stores, where you could not open at all on Sundays.
Where you had a number of states in the country on their red very cold in terms of the traffic light or rankings.
And.
In the opposite direction, just a few days ago, So I'm sure you're aware of.
There was a big improvement in the in the color codes across the country. There are no more Reds are almost 20 states are in yellow a couple of green from the South East. So you know we will obviously play it by year end and stucco, we're saying look very closely on what's happening in each locality because these.
Actions are local for the most part.
But it is looking a little bit better and that's that's part of our cautious optimism.
Okay, perfect very clear thank you very much.
Thank you Ben.
We will take our next question from Miguel I'll turn it on their own with GBM.
The one from thanks for the for the sales for the questions.
My one question would be regarding Brazil.
Could you share your first impressions of the market opening for a subsidy or it seems like a like a market that could open room floor for relevant on growth capital.
Capital deployment is it continues to be highly dominated by day by day.
Non bump stores network. So so in this regard what's the potential you see for this market and how aggressive should we expect you to b in terms of capital allocated to this region for the developing on the day of the absorbent.
Thank you.
Sure. Thanks for the question Yeah, I mean as you know we started to rollout the proximity concept in the outskirts of Sao Paolo late last year with a few stores are now open so far the results have been according to what we expected. It's a it's a different value proposition debt when the Brazilian consumer is.
It's used to on where we're still tinkering with.
The model to make sure that it adapts to the local take some customs. We are very very optimistic that as we start to learn more on the Brazilian consumer starts to become accustomed to this debt we will be able to grow this in the broader so paolo in other regions in Brazil as we go forward. So we do have a capital allocation plan on.
For for the venture, but you should recall, we also own and operate a franchise network of over 1000 stores that are already generating cash. So a big portion of that will be hopefully self funded with the operation that we already.
Control in conjunction with the with goes on and shell.
So while we do see.
A very very attractive.
Attractive growth platform going forward in Brazil, and so far we're going according to plan.
Yeah, and I would add that as I said, what I said.
You were saying.
On the gas station front, we have been able to open more quickly right because the value proposition of the gas station stores, which are operating under the the shell select banner.
We're not really changing their value proposition nearly as much and so the opening of those stores is moving more quickly some of those will be under the franchise.
Mechanism on some of them will B company owned and operated and then on the OXXO fronts.
What are we need to do a lot more kind of fine tuning of the value prop and we've opened a handful of stores in Campinas and we've opened a distribution center, which is also I think a big a big part of the equation that the critical mass that we have going in because of the two types of stores is allowing us to have a distribution center.
We're pretty much right off the bat.
M, which is a big advantage relative to what we've been able to do in other countries, where we've started a 100% from from scratch.
So that's also part of the reason why we're pretty optimistic.
Do you think you will find a new revenue.
Thanks again.
We will take our next question on from Alan Alanis with Santander.
Thank you and thanks for taking my questions Barco Okay.
So first just a housekeeping question I mean this is the first call growth. There's a lot of role are these just feel it's not on the call.
Okay.
It was the first question.
Just checking you will no longer being interest.
That's correct.
Hey, Alan.
Yeah.
We are just somebody book to many.
People on the kitchen, so our revenue.
[laughter].
Okay. Okay.
But could you check your book.
Good day, one, but the good thing.
That makes sense, Okay, let me.
Everything's good Okay. My question has to grow with B other business I know you're on it brings additional disclosure next quarter, but I'm already tracking so nice for something.
That's called my attention on that might be relevant for all investors.
All their business you are reporting.
1%, increasing sales total we mainly due to the acquisitions that you've.
Done.
Interest other supply.
It seems that you have a contraction over on you.
1% over 540 million pretzels.
That's almost as much.
So 600 million principally from Coca Cola FEMSA. So so we took a pretty material decline in EBITDA.
Well, if the others so.
My question for Julie.
Trumpet.
On the right what explain this discrepancy well structured.
An important growth.
Order sales, but also such a relevant declined year over year EBITDA.
On the others.
So much.
Sure.
Thank you for that and yes, you'll get more clarity as we start to disclose the figures of the logistics and distribution business going forward, but on the revenue side, you're right. It is the incorporation of waxing North America into our financial statements and I guess, what you're referring to is a sharp drop in the EBIT, it's not necessarily the EBIT Dom and the reason for that is because of the way we structure.
The acquisition of waxy in North America, we were able to get a significant step up in the asset base, which is obviously advantageous from.
From a from a tax perspective, but it will be putting basically part of the purchase price for those assets will be flowing through on amortization charge to the tune of around $26 million a year heating.
Obviously, the operating income line, but not the b to B a line. So that is why you see the discrepancy there we took debt charge for the entire year at the fourth quarter as we were wrapping up the purchase price allocation, but you should see that flowing on it.
See that flowing into the into.
Into the quarterly statements that going forward once we have the full disclosure, but it is basically the purchase price being allocated partially where a big portion of the purchase price being allocated to an intangible customers our customer assets on the balance sheet of the others Division.
Got it so basically if I'm understanding correctly, it's basically a onetime off adjustments that you need on the purchasing of Oh.
Some of the answers that you acquired throughout the year.
The charge in the fourth quarter of the group's debt.
Good sense for the business.
But it's not on operating decline of that amount.
The Argos business right.
I mean, partially yes, I mean, it was a one time in the fourth quarter for 2020, and having said that for 2021, we will continue to be amortizing debt.
This intangible customer list going forward and it will again to wait to see it is it's a portion of the purchase price that is flowing through the income statement.
But it's not affecting either how the business is doing how the profitability of the of the business is going according to our plan.
But it should be about a 2 million dollar per month charge, Oh intangible amortization going forward for the next few years in the North American waxy business.
It's obviously non cash and it's all on what this means for us.
Is that going forward, probably we're gonna be focusing on I mean, because we're gonna start opening vs business up on the P&L.
Couple of months.
Is that we're gonna be looking at the EBITDA line, probably more than we usually do to account for that.
Got it okay. Thanks, so much.
Thank you.
We'll take our next question from Bob Ford with Merrill Lynch.
Thank you and day.
Everybody, Oh, Hey, you mentioned digitalization in your comments and you know it was quickly I was curious how quickly paint.
Payments are going from physical to digital and the Mexico to air in Mexico during the pandemic if.
If at all and how you're thinking about debt.
Larger opportunity beyond just payments as you explore fintech.
So far.
Sure. Thank.
Thank you Bob I mean, as you did see during 2020, our services business grew significantly having said that day. They continued to be the old fashion way just stopped using the OXXO stores and that and using using.
Using the store as a platform to do money transfers payment remittance is et cetera in an analog way, having said that as we did mentioned in the comments we are as of today low.
I'm seeing the the spin product by OXXO selectively in San Luis Potosi area, and then hopefully be rolling out that product throughout the rest of the year and in other places. The spring product is basically just a starting point what it allows you to do basically is I mean to do the same thing that you would've done interest.
Doors.
B for services peer to peer pain from four airtime et cetera, but do it on your phone be able to charge.
Youre Spink card through the OXXO stores and withdraw money from other sources.
Stores as well.
And then hopefully as that takes off we should be able as we attract more customers into that platform be able to add other bells and whistles to the product.
So we are hoping that this would be a good value prop for them.
For customers to start to.
Take the analog.
On a way of doing things from moving more digitally and hopefully be adding other functionalities to both to that product as well as to our loyalty program, which we're also launching collectively this month actually last month in a couple of cities and rolling out.
To be able not only to have now ticket level data for all our stores, but actually customer level data for our stores. So that coupled with the fintech products should give us a clearer picture of who our customers are what they are doing what they are consuming what their trends are so that we can be more tailored with regards to promotion.
And that an offering of products to them and again. This is just the tip of the iceberg and hopefully if we get enough adoption will be able to grow this into other revenue streams going forward.
And so I may book of course, yes.
I would like just to add to that debt. What is important is that as you said Mexico is obviously also part of these digital acceleration.
The good news is that we have a number of options for us.
And you highlighted that will allow us to not only stay ahead, but importantly adapt to.
What specifically consumers need and require.
In Mexico on another geographies as they are different to what you see in other markets.
Yeah, well, it's very interesting and it with respect to the back end to handle White label Bank that you're using or are you do you plan on obtaining banking licenses and I was just curious as you look forward to just simple functionality is are we going to be looking for just a basic health for account or is it something more robust on that.
Yes at this point, we have basically obtained a free.
Fintech license that allows us to operate on via the power transitory of the Fintech lump and.
And that allows us basically to open up and two accounts similar to the sales also accounts that we have currently.
That's what we're operating under up to the extent that we need to add other functionality that.
And that will need a different license, we will look at that but for now.
We are looking basically to do the same thing we were doing with Saddam so accepting a digitally instead of analog or analog the product by the way also includes a physical visa card.
So that people can use the balancing their accounts also through the debit card.
So we believe that both the cash in cash out functionality at OXXO plus the the visa card will allow for maximum flexibility from a consumer perspective.
That's very interesting thank you very much.
Thank you.
We will take our next question from Alvaro Garcia with BTG.
Hi, gentlemen, thank you for the call.
Two quick ones they'll be quick.
One on spin.
Follow up to Bob's question My question, specifically, how it interacts with our vessel are seems to be.
Somewhat of a competing product in the sense that you're capturing debit customers.
And the same way that's industrial does something that's we're going to integrate into spin or will they be managed as separate entities.
And then just my second question on <unk>.
Labor costs at OXXO.
We will continue to refer to a tight labor market in the release.
In Mexico, I think maybe the pandemic might have changed that a bit but I guess, what's your outlook on the labor front for OXXO into 2020 on thank you.
Sure with regards to spin and sell downs. So we are maintaining two separate structures and really allowing the customer to decide what option is best for them and we will we will make decisions as SME.
B with regards to how those two products.
Move forward, but at this point, we are allowing the customer to basically go go their own way.
And with regards to the labor market. There there were two separate issues. One was obviously the health concerns and the fact last year with the pandemic and the fact that several thousand of our employees were not able to work for a significant proportion of time because they were in the vulnerable populations. So we have to pick up.
A bunch of extra costs in terms of hiring people and then the concern that a lot of the new people had just in terms of being exposed to the virus.
And working at the store.
So the labor market, specifically for the kind of labor that we need for OXXO stores.
Tight for the better part of the year, having said that at this point because of the restrictions more and more of the people that were involved in those populations are now coming back people feel more comfortable.
With regards to the safety of the store.
Regards to contingents as you know most of the contingents or actually not happening at the store level that they are happening more and people's homes as they get together for social gatherings and whatnot. So so we're more and more of that net pressure is easing and we see less of that affect that going forward that this year than we saw last year.
And I guess, the other thing that we need to keep in mind is that for 2020 precisely because of what the opinions that rigor.
Regarding the.
The initial part of the pandemic, we had the onetime.
Situations like a special bonus that we pay that moving forward, we are not hearing about it.
Great.
Thank you Michael Thank you your opinion.
Thanks, Laura.
We'll take our next question from Marcella Recchia with credit Suisse.
Hi, gentlemen, thank you for taking my question I have two quick questions here on the first one taking the opportunity that hot Hayes along with your.
Following the Red sign an agreement between the Brazilian Coke bottlers on tiny King business friendly or agreement change anything about your willingness to off keeping our divesting from the remaining stake in <unk> that would be my first question and secondly about OXXO.
How can we think about the margin recovery tragic sorry from thank you. Thank you on awards basically I understand the low that operating leverage has been one of the main drags, but we also understand that you're continuing testing they still and shifting our yard Commission day star team to employee they want so adjusted.
We hear from you on any color you can give us about the margin outlook going forward. Thank you very much.
Sure. Thank you Marcella first with regards to your question on Brazil, We're definitely thrilled from a number of perspectives about what happened in Brazil.
But do you have to remember that there are two separate things. One is just the commercial agreement reached between golf and Heineken with regards to how to move forward in terms of the beer distribution agreement and on that one we're thrilled I share holders of both companies, both golf and Heineken, but they were able to strike an agreement I think maximizes value for both of them in the medium term in the case of course.
It allows them to have a base volume of beer to not reduce drops significantly and allows them also flexibility to carry other brands going forward.
And for Heineken at least in Brazil, which is an important market for them. It gives them I think more clarity on the competitive situation going forward and then it also allows them to focus on day, two stellar brands, which are Heineken and amstel. So we couldnt be more thrilled and happy that both of them were able to reach an agreement.
And then with regards to our stake in Heineken again that debt is a separate a separate decision.
And at this point as we said in the last conference call we continue to.
Like the way that they've been handling and they've been performing through the pandemic clearly the on trade exposure that they have has been a significant drag on earnings in the in the past few months, having said that they are doing things very very well with regards to cost containment investing in digital.
So we are we are optimistic about the future and continue to be happy shareholders. As we believe this day provides I think a significant value anchoring our portfolio at this point, but.
And again the two questions are our separate accounts.
The way, we see it in on both fronts on both fronts. I think were very pleased with what has happened in the past few weeks.
[noise].
Thanks.
The second question.
The second question, sorry, because what they've got.
Sorry, with the trends for OXXO in 'twenty 'twenty, one I mean, clearly the most important effect is the operating deleveraging I mean, you have I mean.
Same store sales down high.
High single digits and that clearly has an impact with regards to operating costs, which was partially contained frankly and I don't think.
We mentioned this enough but book to cost.
Cost containment measures.
Improvements in the supply chain to be able to continue to deliver products.
At at prices that are competitive.
But in any case that continues to be the main theme as we go forward. We are investing as you said a lot on digital mostly on the backbone of the pls in some distribution centers, but on digital we have been investing on.
Some money to be able to make sure that b. The backbone of the stores continues to allow for continued growth not on.
On the analog but also in a digital format, but having said that there is still a lot of I think.
Winds in our way with regards to the MC sales of B or not being rolled out in all of the categories. We do believe that with this new <unk> product that there will be an increase in the customer's attractiveness to this product too.
To be able to boost the category as well as other modes of Av.
Consumption fast food.
And and I'm, very sorry, hunger and thirst of the needs that have not been met during the pandemic, which will come back from come back once the pandemic. Once we're on the other side of the pandemic with with hopefully better term soft for us. So so we do see again. These are these headwinds in costs being compensated through other.
Both avenues.
In the store going forward.
Yeah, I would add hey, Marcelo this is Juan.
Add on top of whatever credit you described that.
Some of the structural initiatives that we've been working on for four years.
Right and so we are at the point, where we can again.
Look at those initiatives and continue to invest behind them on what I'm talking about it I think you touched on it as you were framing of the question.
This gradual shift from commission based to employee based.
Which among other benefits has the the.
The advantage of addressing turnover and improving our long term turnover numbers are where they continue to work on that on the other I would highlight is international which are things that you know in the past we have discussed that put a little bit of pressure on the margins free.
Pandemic and this is also something that will continue to go on so for example.
If we talk about 800 stores are at OXXO in Mexico for for this year.
International actually has another 10% on top of that that is our plan for especially for Chile and Colombia.
And you know until we get to the to the critical mass.
How do we need in those countries. They are slightly dilutive to the overall margin. So I think it's.
For the right recent so obviously, because we continue to see a lot of attractiveness and growing OXXO outside of Mexico, but we are returning to the growth path.
Like I said in the beginning and part of that includes continuing to grow International in addition to the transaction that he mentioned debt that we're doing in Chile on each of the price of being approved.
That's great. So just a quick follow up if I may can you give us suggest that on per date on the current stats of your work Force between commission based on in play based.
I think something like 50, 545 employee versus commission so.
Slightly now more employees on commission.
Okay, but the target is 100 per cent.
Oh no this is dependent.
Dependent on geography, there are some markets a lot of them in the north where the commission format actually works incredibly well.
There are some places some of them happened to be in center on the South where we have found on the employee format.
A better fit.
So there's not a one size fits all or there's no goal to have 100% of either one it it will very much continue to be a market by market.
Okay. That's very helpful guys. Thank you very much.
Thank you Marcel.
Thank you we'll take our next question from Rodrigo Alcantara with UBS.
Yeah.
Hey, good afternoon. Thanks for taking my question I have two quick ones from me first.
First of all if you have a.
And yes special consideration regarding.
The upcoming energy with flow on the labor reform any potential impact that we should be.
Well that would be my first question.
Sure I'll start with the labor from clearly, we're keeping an eye on that.
Debt that it's been B prioritize.
Here on the Congress, so well wait and see what that what happens with that and we are obviously.
We will obviously respond the way we need to we do believe that we have.
Enough.
Margin to to be able to come.
Comply with whatever regulation or what's different things that are being discussed there. So I think it's less of a concern with regards to to introduce on clearly as you know we've been investing heavily especially with regards to wind energy.
We had an ambitious goal of about 85% of our I know you need to in Mexico coming from renewable sources and we're basically almost got there. So we will continue to see what happens with that and we need to make a change we will make the change, but we will continue to be heavily committed towards having a significant portion of our darrington needs going forward that b.
In renewable and renewable energy.
We've also been testing in other in other areas testing electric vehicles for our small vehicle fleets.
So I'm sure there'll be continued to be challenges from both the legal and regulatory fronts, but we will obviously continue to comply with those frameworks, but again continue to keep pushing forward towards achieving these targets.
Of getting on most of our energy from renewable sources.
Sure. So let's say close here in debt the draft just as it is now from debt than for them.
You see any friction at this bottom chrome from what you operate on them from what the drop it was mentioned in an infection that we should be aware of.
Well at all.
It will all depend on how the.
The private generation and consumption of energy a portion of sales come down up there.
There is that will not continue to be allowed or will continue to be a lot, but at some cost we will have to evaluate them on their uh huh.
How to adapt to that new regulatory environment, but as I said, we continue to be committed.
Supplying a significant amount of our energy with renewable resources.
Okay and the second one would be a very quickly just to follow up on on Alan's question on debt.
All their business aviation Fad, so very quickly.
Appears to me that Abidjan debt the DNA, a well that's just mix on the amortization and also Ah Ah.
A large increase at administrative expenses also happened during the quarter, so not sure if b.
It has to do also with debt.
With integration of.
American waxy or not sure what what drove this.
Increase on administrative expenses and also taking a look to the same alive at proximity deviation when it hasn't been a land that has been growing a low a lot of it over the last few quarters.
Low double digit I would say the last four or five so I was wondering if you can comment a bit about what's happening here.
And on the main drivers.
Thanks.
Oh sure I Havent expenses on our businesses.
B part has to do with just the addition of waxy North America, but that there were also a couple of one time charges are taken at that silicic out with regards to restructuring as we adapted to the pandemic.
So basically head count restructuring.
Restructuring debt from the pandemic.
And with regards to the proximity division. The admin expenses. There has has to do some of it has gone to Capex and then some of them has gone through to Opex and has to do basically with the with the continuing building of the pipeline for the growth in digital.
And then b the provision of certain bonuses.
That where pandemic related bonuses to employees during the course of 2020.
Understood. Thank you very much.
Okay.
Thank you we'll take our next question from Leandro fun, So nasty widespread ESCO.
Yeah.
Hi, Thank you very much for taking my question.
The first question I have is with regards to the definitive closures at OXXO stores.
Hum.
Oh, it was almost twice as much as the number of stores, we closed in the third quarter.
So just trying to understand why you increased that much the number of things in Florida, If you think that the.
The performance is improving.
That's the first question and the second question is.
With regards to financial services, and then you mentioned a lot of measures you were doing debt interest.
The measures, but I understand you had some challenges with cash handling.
Just trying to get on updates.
Something on that prompted.
If you have a cut.
Come on you.
Solutions with regards to catch them.
Sure first with regards to definitively cultures I mean, as we said during the year, we took advantage to basically pruned the portfolio of stores. So some of them wherever they are all very obvious like the ones in shopping centers, where we saw traffic was not coming back because certain other stores, we're closing et cetera.
So we did give them some time. So we finished that pruning exercise for the most part in the fourth quarter as I mentioned in my comments that there were 30 stores that were closed very late in January that would still show up in.
In our January numbers this year, but for the time being we are done with that pruning exercises.
But again the reason it was backend they'd rather than through the quarters was because we we gave some time to marginally performing stores to see how they behaved as mobility was coming back and then we might we may be the day.
Decision that the at the end of the at the end of the year.
But for the most part you should not see that.
That number of store closures in a lot of these are in a lot of these situations. We also had negotiations with landlords I mean, we opened up negotiations with I'm not saying look the stores traffic is never going to come back to the same thing in some landlords who are flexible and we decided to keep them open some landlords were not flexible and we decided to close them. So.
We made the decision as time goes on as time went by and at this point, we wouldn't expect anything major on four for at least this year and.
And with regards to your second question on on financial service and cash on Billings. There was as you know over the course of 2018 and 19 significant increases in the cost of handling cash for the most parts of those those increases have now been absorbed by the stores and and we saw the brunt of that impact.
In terms of loss of profitability already probably in the late 2019 and early 2020 and at this point we are running.
Other programs and pilot programs to see how we could use.
Use alternative sources of cash handling and exploring ways in which we could contain those costs into the future, but at this point, we're not seeing any additional pressure from what we saw back in 2019 on.
Just to add on on the cash.
Comment on the OXXO stores.
As we said before it you know.
If you sort of an exercise that is several day exercise.
To do as we try to become.
More efficient and.
It is also on an exercise of the average and as I said before on these.
The fact that debt.
Some type of stores have been affected more than others on regions have been affected more than others and I think that what we need to keep in mind is that we need to remain flexible.
Two b.
Truly looking at the stores that are not performing and then take decisions when need be but at the end of the day, it's a matter of making sure that we.
Followed closely what is happening in and stay close to the to the market.
I would do that.
One on the on the cash handling another thing to focus on you know.
The best way to address cash handling is to disburse it to customers right as opposed to putting it in a truck and sending it to the bank and so we've been working to increase.
The maximum amount that people kind of withdraw from their accounts.
This involved so really just a regular banking, but also remittances.
We're looking for ways to increase those numbers without or being very mindful of the security aspect of having more available cash its a bit of a fine fine tuning exercise.
But that's that's something else that we're working on which is you know take.
Take care of as much cash as possible by giving it to customers because also venue you probably make a fee.
Both ways when you receive it when you're just burst it so that's something else that youre going to continue to hear us talk about.
Thank you just a follow up on the first one.
Clear.
Just on.
What those scores.
Alrighty underperforming before COVID-19 or Covid changed the profitability on those scores.
And then it became we took the decision to shut them down.
Sure. The way. We started was we had a list of marginally performing stores, even before the lockdown and those were the ones that that we started to take a closer look at see EBITDA was anything we can do with regards to the fixed expenses the rent charges with the landlord and where we were able to make changes we gave them another channel, where we were not real close.
Them and then even if we gave them another janssen and traffic just did not pick up because of the location of those where I mean, the blunt on what we did in the fourth quarter.
Perfect. Thank you very much.
Thank you, we'll take our next question from Rodrigo and sugar.
Jay Bray with Scotiabank.
Thank you.
Quick question on on OXXO and you know this.
I guess, you have answered directly or indirectly.
Throughout the call, but I'm just curious do you think that the strategy on the sales mix of OXXO could change post pandemic, whether in terms of the skus that you carry the price points.
Occasions, where you open your store Cds, where you focus on.
Are there any.
Is there any impact from our from the pandemic on on the OXXO commercial strategy. Thank you.
Hi, Rodrigo.
Michael I mean in theory.
As we said this has been a very dynamic exercise of the teams and also have done tremendously well and you get to pick a few examples to your question.
On one hand consumer Scott.
Being more.
Careful with their out of pocket expenses. So you can imagine debt.
When it comes to for example of where private label free we have been doing a very good exercise in terms of understanding what additional things we need to offer that's one second.
You can imagine on so that when it comes to beverage for example, the ultra stores are usually are.
Very strong on single serve.
But does the pandemic.
Kane.
People were.
Mimicking the consumption of single serve because.
The traffic growth was lower than they were buying bigger sizes return levels and sometimes even.
Multi packs on once again the portfolio whats changed accordingly.
On the.
On decided the kind of things that we need to continue doing as we move forward. I mean, you have seen that the deep debt for example cash increase.
It's partially because of all these things that we're doing so it is probably fair to say, it's safe to say that some of these will remain.
On the.
The more we need to come into that once the pandemic.
Slowly starts moving away some of these.
New ways in which the portfolio has moved.
Which one I think that what is important that we stick close to to what consumers are doing on what the shoppers want and we are confident that as we have done on the teams have done that we will continue to be adapted accordingly.
If I understand it correctly I mean, sorry.
Sorry go ahead.
So you every day, where this is Juan I think also in terms of locations on.
Following up on what package has said.
Doesn't mean that you should expect.
Given that there will be a percentage of consumers that maybe spend more time at home maybe working from home in less time and are in a proper office building is such that.
In terms of our own segmentation of stores are you know.
We overemphasize.
Thoughts on certain residential neighborhoods.
And deemphasize the opening of stores and in office parks or inside office buildings, where you know we have a.
On a model of store that debt.
What's going into the the basements or the parking lots into the basement of some office buildings to get the the captive traffic from that particular building.
Probably there's going to there's going to be fewer of those and we're going to have to take a look we are already taking a look at those stores that are.
Neighborhoods, where people are actually spending some time during the week because they're working from home what else do they need throughout the day right and I think the pocket point.
Same store sales number that we see today for the quarter.
It involves a double digit increase in ticket on a double digit decrease in traffic.
And we've seen the categories that are kind of pantry loading or supermarket type items.
Driving some of that increase in ticket things like spirits, as well, which we've discussed in the past I think the the absence of beer in the middle of the year made people discover a debt.
We carry on.
The portfolio of spirits. So if if we are able to retain some of those increases in certain categories.
And on it.
The average ticket remains above trend and then we'll recover most of the.
Traffic, then that will put us in a pretty good place.
And if I may.
Hello Rodrigo.
The fact is that what is important is that debt.
The team has demonstrated to be very flexible put out their portfolio that they offer input for the shopper and that basically means that that's why we are very optimistic about what the.
The future looks like because we need that flexibility will allow us once the mobility ease back debt.
The traditional categories, which are very strong for us such as a third.
Food the fast craving those will be back those will be backend loaded as it comes back and so we'll be in a better position understanding consumers.
<unk> continued to be in some.
Difficult regarding the cash.
The out of pocket.
In a perfect condition to offer all sorts of solutions for them. So.
We are very confident that more than ever.
The OXXO format.
Very relevant for consumers and we started moving out of the pandemic. So we remain very positive.
Got it very helpful and so from the comments you've made the comments around b, emphasizing office and emphasizing more residential probably sounds like the more on that.
Structural versus a tactical shifts.
Any other structural.
Changes, perhaps in terms of regions as people work from home perhaps.
Some of the thing that we've seen in other countries, where they are leaving the seedings are essentially buying houses that are cheaper.
In the interior and in Asia and elsewhere have you seen some of that do you think that will happen in Mexico.
As we said the revenue.
The that'd be average that you are highlighting something that has become.
On day to day for the OXXO team I mean, just adding to what you just said because it's true that that is happening. It is also true that you will see differences in the case of Mexico. For example, when it comes to pull it tourist area for example.
It depends on the.
The practice is.
The tourist traffic is growing then obviously, we will adapt from you'll see some differences there.
Same applies to the Dubai region, but once again, depending on whether you have seen on the restriction that the local authorities.
I'm doing it because it's different from different that's one set.
North of the country, we have certain restrictions throughout the month of December that were not in place for other parts of the country. So.
At the end of the day, what we need to ensure is that this flexibility that the teams have shown to adapt them to offer the sharper and to comply with regulations and take the opportunity to add new categories, we need to to stay like that in 2021 and.
On your shoulder that that is the plan.
Got it thank you.
Thank you we'll take our next question from Carlos Laboy with HSBC.
Yes, good morning, everyone.
On.
I think you said earlier that we're pretty much done.
Expansion into new businesses.
Does this mean that you will not go into some stores in the U S.
If you are going to go into some stores in the U S eliminating the stores become.
Prohibitively expensive and the reason on that could be true.
Organic growth.
It can be really slow so is there a point at which behind it in stages brokerage sense too much opportunity cost for you.
Not being able to go into the U S. I mean, we're already on what about 11 years.
Moving on the sidelines.
On the U S C store business.
Are you are you okay for another low enrollment of more participating in that business.
Yes, I mean from a portfolio perspective is as you know Carlos.
We have mentioned that we reached b complexity, but proximity continues to be one of the main pillars on which we expect to fund growth total. So clearly there is room to grow in Mexico still theres going to grow in the rest of the countries that were present in Latin America and elsewhere. So we continue to actively monitor on.
Convenience formats and proximity combat formats throughout the world, including the U S. We are aware of course of the restriction that the Heineken stake brings us brink's is there, but having said that as you well mentioned I mean, some of the assets there will have to evaluate on a one by one basis and see what the opportunity cost of having a one asset price.
The other is <unk>.
If opportunities come along that warranted, we will that will take a look at them.
But again there there are there are plenty of opportunities I think still outside of the U S, including in our regions. I mean, we just we're not currently in that then at least would allow us with our current business model to create value. So we will look at any and all but but again always looking at it from a just a relative risk reward perspective in our portfolio.
So so far now that hasnt materialized, but that but we continue to actively monitor all situations.
Thank you.
That will conclude our question and answer session. At this time I would like to turn the conference back over to Francisco Camacho for any additional or closing remarks.
Thank you all for for attending the call and thank you all for your support continued support to FEMSA and.
We wish you to stay safe from.
See you next time.
Thank you, ladies and gentlemen, if you wish to replay the webcast for this call you may do so at FEMSA <unk> Investor Relations website. This concludes our conference for today. Thank you for your participation on have a nice day all parties may now disconnect.
Okay.
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Yes.
Yeah.
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