Q1 2021 Fomento Economico Mexicano SAB de CV Earnings Call

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You were currently on hold for Suntrust first quarter 2021 financial results at this time, we're assembling today's audience and plan to be underway. Shortly we appreciate your patience and please remain on the line.

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Good morning, and welcome everyone to from says first quarter 2021 financial results Conference call.

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 sensors future for performance and should be considered as good faith estimates made by the company.

These forward looking statements reflect management's expectations and are based upon currently available data.

Actual results are subject to future events, and uncertainties, which can materially impact the company's actual performance.

At this time I will now turn the conference over to Watson and circa census, director of Investor Relations.

Please go ahead Sir.

Good morning, everyone welcome to <unk> first quarter, 2020, one results conference call.

Today, we are joined by the other by the young our Chief Executive Officer.

And you'll go to sell our finance and corporate development director.

And well, yeah, so who heads our Coca Cola FEMSA as Investor Relations effort.

Backlog on My chart, Chief Corporate Officer is traveling this week and wasn't able to dial and today.

So let me turn it over to Daniel for some opening.

Any remarks.

Thank you Carlos good morning, everyone. Thank you for joining US today, we hope your families and yourselves are doing well.

The first message that jumped up and the data for the first quarter is that things are good and better and most importantly, they are getting better on the help them gradually and some cases painful so.

And there've been sent back to of course, such as the Big COVID-19 wave and so on Brazil.

And following the trends on the help from our numbers also tell a story on a sequential improvement not just quarter over quarter, but most of them up and it's happening across all of our business units and it's encouraging and.

One other thing to keep in mind as we look at the numbers it's comparable.

While the firsthand weeks of the year, we face demanding comps from a strong start in 2000, and 'twenty and an extra calendar day in February after that as you. All know we wanted to severe lockdowns across all other markets that remain in place. While we are at and are there for a full year net.

This will make for a low comparison basis in the next few months and quarters to come and so we must navigate complacent and.

In fact internally we are using 2019 numbers I think it was for.

Reference to measure our progress across states and James.

And on the disclosure front, we're also happy to percentage of logistics and distribution segment, providing much needed visibility into this part of our company.

And I think there's opportunity to reinforce our message that we now have a solid presence and debate. This vertical that we have identified as attractive and very importantly offer a clear and compelling fit with our current capabilities.

But that's now is to keep growing and every vertical and to drive incremental returns.

Before we dive into the numbers I just wanted to mentioned the $1 2 billion Euro bond issue, we announced yesterday and you probably know this was the first sustainability linked bond ever issued by and Mexican corporate and the largest one evolution by Latin America corporate.

We also achieved the lowest all in deals ever for a Latin American and short and the Euro bond market at 55% and 1.0% to 7% for the seven and 12 years for instance, respectively.

And the issuance will allow us to comfortably we've announced are currently outstanding 23, you have bumps and bruises on maturity profile and further strengthening our balance sheet, while generating a positive NPV of approximately 20 million and give us on the reasonable assumptions and.

And just as importantly, it reinforces our commitment to deliver on ambitious ESG targets that are an integral component of our long term business strategy.

Starting with total consolidated quarterly numbers total revenues for the first quarter increased one 8% while income from operations remained flat.

On an organic basis total revenue decreased 3% and income from operations decreased $2 four per cent.

For this quarter the difference between reported and organic figures reflect the results of our operations and the U S. All of which came on board there and the last 12 months.

Bill our figures continue to post sequential improvement which are encouraging.

As we mentioned before keep in mind that the full effect for the pandemic and the mobility restrictions started in the late part of March 2020 does the comparison basis is still high for this quarter.

Sensors net income decreased 31, 3%, reflecting a day mandate comp base in the first quarter of 2020 that benefited from a non cash foreign exchange gain related to <unk> dollar denominated cash position.

This was partially offset by lower interest expense and and increasing our participation and associates, which mainly reflects the results of our investment and Heineken.

In terms of for consolidated net debt position during the first quarter decreased 5% from 72 billion per test at the end of March reflecting high cash generation and Coca Cola FEMSA that offset a slight increase and our debt balance during the quarter.

For its part Capex was down 37% as every operation continued to rationalize noncritical investments.

Moving on to discuss our operations and beginning with FEMSA Comercio proximity division we have.

Opened 140, new OXXO stores during the first quarter, which are net of 30 permanent closures that were carried over from last years start pruning exercise as well as 30 stores that are temporarily closed for maintenance.

While we are not yet fully up to speed with our expansion pace. We are on track to achieve our full year targets.

In terms of the operating environment, a significant percentage of our store base remains subject to COVID-19 related restrictions and measures for a good part of the quarter. However, many of these restrictions will gradually relaxed during March and resulted in better traffic and resilient and take a growth, which together together benefited oxfords overall performance.

OXXO same store sales were down six 5% for the first quarter, reflecting an 18% decline in store traffic and an increase of 14, 4% and average customer ticket.

Gross margin remained flat at 40%, reflecting positive trends and our services category, which offset a decrease and commercial income activity and promotional programs with our key supplier partners.

Income from operations decreased 21, 1% and operating margin contracted 110 basis points, reflecting operating deleverage.

Moving on for FEMSA Comercio Health Division during the first quarter, we expanded our drugstore counts by 37 net additions do and it's a total of 30 405 units across our territories at the end of March.

And 209 total new stores for the last 12 months.

Revenues increased 16%, while same store sales increased and average of 15, 5% and Mexican Texas, We continue to see good momentum at our operations and Mexico, coupled with resilient conditions and South America.

Gross margin expanded by 50 basis points in the quarter, reflecting improved efficiency and more effective collaboration and execution with our key supplier partners across geographies and.

Operating margin expanded 210 basis points, reflecting increased operating leverage.

Moving on to FEMSA Comercio fuel division, we note that vehicle mobility remains below pre COVID-19 levels and.

And that context, we again saw some sequential improvement even as many of our locations skewed towards residential neighborhoods that have recovered more slowly than commercial loans.

During the first quarter, we continued to see pressure on our same station sales, which decreased 22%.

Gross margin was 12, 7% while operating margin was two 7% of total revenues, reflecting tight expense control that partially offset operating deleverage.

Now, let me talk a little bit about our logistics and distribution business.

We are reporting its results and segments for the first time and.

And the U S. We are making good progress integrating the four distinct entities that we've acquired and to a single efficient platform that is prime for growth.

We have capitalized on the very strong teams that run the legacy companies and integrated them into a single highly experienced and motivated organization.

However, the U S is reopening and different speeds and different regions and some end user categories, such as hospitality and entertainment are still lagging.

Therefore, we expect trends to improve further in the second half of the year for it.

It's part of <unk> logistics operations. It is also making good progress across its main Latin American markets of Brazil, Mexico, and Colombia, even as the economic recovery is expected to be slower in those countries than in the U S.

Finally, moving on briefly to Coca Cola, FEMSA, Mexico, and Central America delivered double digit operating income growth, while currency headwinds and Brazil tempered the benefits of solid volume trends and gain gains in omni channel capabilities and South America.

You can listen to a webcast of the quarterly call held back Tuesday.

Wrapping up my final message today is one of cautious optimism.

Democrats force us to become a more flexible and agile organization and those learnings are here to stay.

And certainly levels in Arkansas, and our consumer environments remain high but relative to last year. It seems every day, we take a small step and the right direction. We have strong operations strong operators that accelerate execution and we believe that we have the right strategy for the team to execute.

This should be a better year, it should be a year of recovery and growth and we thank you for coming along with us.

And with that we can open the call up for your questions operator.

The question and answer.

For this session will begin at that time.

I would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

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Hi.

Your question will be taken and the order that is received and the interest of time, we ask that you. Please limit yourself to one question at a time in order to allow for the maximum number of colors and you ask their questions.

Your first question comes from the line up for it with Bank of America.

Hey, Thank you and good morning, everybody I was wondering if you could talk a little bit about spin and some of those put to sea in terms of early learnings and the timetable to roll it out nationally and then when it comes to the changes and the labor law to the outsourcing elements had an impact or should we expect something from the pit to floor or are there other ELD.

And that's that warrant consideration. Thank you.

Sure. Thanks for the question Bob with regard to sustain as you know we launched the initial.

Program back in September and the city of Boston.

And this policy.

And so far it is coming along to plan and we still continue to believe that by the end of the year. It should be rolled out nationwide. So still early to tell but so.

And so far the the rollout is going according to plan.

And with regards to the labor law.

We have been studying it carefully and we believe that there will be some administrative changes that we will need to make.

And the company bylaws and and some other.

Some of the other legal requirements of registered and companies and whatnot.

And we should be ready to implement all these changes before the law comes into full effect in August and at this point, we don't see any portion of the law affecting all our view with regards to profitability or cash flow for.

For this year.

So so far we do expect again to be in full compliance by August and no and.

No major effect and interrupted for profitability.

Great to hear and thank you and hernia.

Thank you.

Our next question comes from Ricardo Alves with Morgan Stanley.

Good morning, everyone. Thanks for the call a couple of questions.

Just a quick.

Update on the OXXO same store sales.

The evolution for all the quarter would be quite helpful. We understand it and March was a little bit better than January and February but whatever.

Additional color you can provide on debt would be helpful, but even more interesting and make it even more interesting. If you could provide some color on April that'll be helpful. On.

B on the margin evolution and second question is.

If you could comment a little bit more both from the margin perspective into the EBITDA margin at OXXO.

Margin.

Flattish year over year, certainly positive highlight towards so just wanted to pick your brain.

It's mostly driven by the financial services or if there's anything else there.

But particularly on the EBITDA margin really surprised and towards the slower.

Slower.

Based on declines so if you could comment a little bit more on SG&A that would be helpful. The other Mike two questions I appreciate the time.

Sure. Thanks.

Thanks for thanks.

And for your question one I don't know if you could.

Provide a little bit more color in terms of the same store sales turned and I can talk a little bit of a margins.

Sure sure.

And regarding yes, I think it's a very relevant question that you ask because you know this.

This was.

From what I can remember one of the most a notable.

Notable quarters I think in terms of how different one month was to the previous one and and what I mean by that is.

You know the level of restrictions that we had on our stores coming out of the holiday period was very very intense right and so I think our if you just look at the monthly evolution of same store same store sales, we actually had a bit of a step back.

And January February are relative to what we had been doing towards the end of last year.

And then in March things really really turned around our the level of restrictions became a much more manageable. If you recall the color code the tiers and Mexico had a big improvement.

And in March we began to see more states going to green are probably half of the country went to yellow I think we we we stopped having and your Red States.

And what we mentioned last time around and when we've had conversations with you over the past few months, what we have serviced as soon as people feel like it's safe for it to go out or they have a reason to go out and they go to the store right and I think that reinforces our thesis that structurally.

There are no major changes to habits are patterns and so as soon as people are able to go out and about they they visit the store as they always have so what I would point out in terms of actual numbers is that if you look at the March data.

Same store sales were flat due to previous year.

So you know the number for the quarter as you saw the negative six six I believe.

You know if you factor in too significantly worst months than that and then March is significantly better than that as I mentioned going to flat and now I'll turn it over to and you for for the rest of the Collins.

Sure. Thanks, one with regards to your question on margins, you're right I mean part of the reason, we've been able to maintain but margins have been a b.

Very good performance by the.

By the payments business, which is obviously a higher margin, but the other encouraging Scott and there is that.

As traffic is coming back we are seeing the ticket remain high which is very very encouraging.

Basically signaling that that consumer.

Consumer habits with regards to other categories, such as pantry items, even liquor and alcohol and and the consumer patterns are shifting for that now they see us as a viable option for those categories as well, which should bode well for us for margins going forward once the lower ticket items come back so that is encouraging.

And with regards to the trends on on.