Q3 2021 Fomento Economico Mexicano SAB de CV Earnings Call

October 29, 2021

[music].

Thank you for standing by will begin momentarily again, thank you for standing by.

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Please standby.

Good morning, Good morning, and welcome everyone to FEMSA third quarter 2021 financial results Conference call. Today's call is being recorded 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 <unk> future performance and should be considered as good faith estimates made by the company.

These forward looking 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 company's actual performance at this time I would now like to turn the conference over to one from circa.

So as the director of Investor Relations. Please go ahead Sir.

Good morning, everyone. Welcome Defense was third quarter of 2021 results conference call.

Today, we have a full team for you we are joined by Eduardo Padilla <unk>.

<unk> Chief Executive Officer, Michael can match, our Chief Corporate Officer.

Daniel Garza, or finance and corporate development director and Daniel Rodriguez.

Currency Euro of FEMSA, Comercio, who will succeed and wanted to a CEO of FEMSA next January as you all know.

And as always we're also joined by pocket when you ask them, who heads our coke FEMSA is investor relations.

The plan for today is to have Michael comment on some higher level trends, we saw during the quarter and then Andrew will walk us through the numbers.

We will then turn the call to a while ago on veneer for some strategic considerations and final remarks, followed by Q&A.

So with that let me turn it over to talk about much.

Thank you Gwen.

Good morning, everyone. Thank you for joining us today.

We hope you and your families are doing well.

In many ways. This third quarter marked a continuation of the dynamics we saw in Q2.

Gradually improving health and mobility trend tempered by some operating reductions.

Restrictions that remain in place in many markets.

Consumers that need them do I need to feel more comfortable going back to what begins to look to them like almost normal activity level.

And their proximity division same store sales in Mexico were stable sequentially for an acquirer.

Importantly, we began to see an improvement in the last part of September and through the beginning of October.

This means that we are increasingly seeing figures that approach 2019 levels.

This combined with higher commercial income activity and a more efficient expense structure is translating into margin gains.

Breaking them everyday levels.

Moving onto our health Division, we continued to see a solid performance driven by our operations in Chile.

Which continues to be a market where consumers have been showered with extra liquidity, even as we begin to lap a tough comparison base.

Mexico, and Colombia are also operating at encouraging levels with.

With Ecuador, lagging a little because of a tougher macro environment.

The fuel division continues to see a consumer that is gradually becoming more mobile.

The demand numbers that are improving even though we remain below pre pandemic levels.

For its part our logistics and distribution operation grew its topline sequentially.

Once again balancing positive dynamics in several markets with some end user segments in the U S that continued to operate below 2019 level, such as facility supplies and hospitality.

As a result profitability levels were in line with those in the second quarter.

Importantly, we are already seeing returns on invested capital for the U S business.

Protein's web.

Further we have made good progress in expanding our footprint in key new markets and integrating the new operations into our platform.

We are executing on the strategy will be fine when we decided to enter this business last year and the results are very encouraging.

Finally, Coca Cola FEMSA had a strong quarter in terms of volume growth.

Particularly in South America.

However, we face a tough supply chain and raw material cost environment as well as a one time adverse tax effect from the Brazilian operation that we were able to mitigate only partially through pricing hedging and operating efficiency.

Beyond the short term results in the core operations, we are making progress with our beer portfolio in Brazil, as well as final testing additional categories distribution opportunity.

With that I will now turn the call over to Kenya, who will go over the numbers in more detail.

Thank you Paul while the third quarter of last year was relatively strong in the context of the health emergency our operations remained under severe restrictions and we are still facing operational challenges.

Therefore gross figures relative to 2020 still do not reflect the full story and we will complement that with some comparison data relative to 2019, we consider this to be helpful. As we did last quarter.

Starting with FEMSA consolidated quarterly numbers total revenues during the third quarter increased 12, 6% while income from operations increased 14% compared to the third quarter of 2020 when.

When we compare against the third quarter of 2019 total revenues increased 9% while income from operations increased two 7%.

<unk> net income increased significantly and reached 16 billion pesos, reflecting higher income from operations higher non operating income, including dividends received from our investment in general and noncash foreign exchange gain related to <unk> U S. Dollar denominated cash position as impacted by the depreciation of the Mexican peso and an increase in our.

Patient and associate results, which mainly reflects the results of our investment in Heineken.

This was partially offset by higher interest expense.

In terms of our consolidated net debt position. It reached 70 billion pesos at the end of September for its part Capex increased 38%, reflecting a low comparison base in the third quarter of 2020, when most of our operations have suspended non critical investment activity.

Moving on to discuss our operations and beginning with FEMSA Comercio proximity Division, we opened 163 net new OXXO stores during the third quarter, reaching 431 net openings year to date.

Our expansion operations were slowed down a bit by the third wave of Covid and we were running behind schedule. This year at its still we still have.

The objective of 800 net new stores in Mexico for the year, but we might come up a little bit short.

OXXO same store sales were up nine 7% for the third quarter, reflecting two 8% growth in store traffic and an increase of six 8% and the average customer ticket both against 2020.

When compared to the third quarter of 2019 same store sales declined three 5% gross margin increased 180 basis points to reach 41, 3%, reflecting a recovery in commercial income from promotional programs with our key supplier partners and strong performance from our services category.

Income from operations and operating margin increased significantly compared to the same period of 2020, reflecting improved operating leverage and strict expense discipline across the division relative.

Relative to the third quarter of 2019 operating income increased five 2% while operating margin was flat. These are encouraging numbers given the still challenging operating environment.

Moving on to FEMSA Comercio Health Division during the third quarter, we expanded our drugstore count by 81 net additions to reach a total of 3500 40 units across our territories at the end of September and 291 total net new stores for the last 12 months rent.

Revenues increased eight 2% while same store sales increased an average of four 2%.

We continue to see good momentum at our operations in Chile, Mexico, and Colombia, coupled with gradually improving conditions in aquila.

Gross margin contracted by 40 basis points in the quarter, reflecting increased promotional activity and higher institutional sales in our south American operations, partially offset by improved efficiency and more effective collaboration and execution with our supplier partners in Mexico.

Operating margin contracted 20 basis points as we were able to partially mitigate the gross margin contraction.

Moving on to FEMSA Comercio fuel division revenues increased 25% and same station sales grew 16, 7% relative to the third quarter of 2020.

When compared to 2019 numbers, we're not we're not there yet reflecting vehicle mobility levels that remain depressed and an increased competitive environment.

During this quarter gross margin was 12, 9%, while operating margin was 4% of total revenues, reflecting tight expense control that offset operating deleverage.

Regarding our logistics and distribution business revenues increased sequentially, reflecting positive dynamics overall, however in the U S. We continued to see a different speeds of recovery at some end user categories, such as facility supplies and hospitality hospitality, which are still lagging their historical basis, particularly in some large metropolitan markets.

We expect trends to continue improving towards the end of this year and into 2022.

On the logistics front, our operation again showed good trends across its main Latin American markets of Brazil, Mexico, and Colombia, even if the economic recovery continues to be less dynamic in those countries than in the U S.

Finally, moving on to Coca Cola FEMSA volumes grew five 8% over the last year, reflecting double digit growth in South America revenues increased three 4% and gross profit grew two 1% despite supply chain disruptions and cost pressures on certain raw materials.

However, operating income fell by 9% largely driven by a onetime tax effects in Brazil, you can listen to the webcast of their quarterly call that took place yesterday.

And with that let me turn it over to Eduardo.

Thank you Daniel.

This morning, I would like to reflect a view on where our company and our business units are today, focusing on the big picture.

Reclamation, while we're still not fully recovered the woods.

<unk> been even more normal we will begin with OXXO, we have tightened our standards for approving on operating new stores, and we will see sublease.

More stores in Mexico over the next decade or so.

And importantly, we have reached the stage in Columbia, and Chile, where we can confirm that we are today the pace of openings.

Worst stores already.

Already profitable.

Loan basis.

We still need to increase our skills to fully absorb overhead and drive profitability at the country level in Peru, we continue to fine tune, our valuable position, whereas in Brazil of our joint venture is making progress faster than expected.

Setting the stage for a more aggressive pace of expansion beginning next year.

Of course, all life RMB digital opportunity, our new platform spin and OXXO premia are getting off to a very promising start in Mexico.

There are very interesting times ahead.

Our health Division things are also looking good the platform. We put together is operating as a single unit led by our team in Chile with the ability to develop those.

Both talent and best practices, such as loyalty programs and e-commerce are growth markets.

Inquiry in our circle for our legacy platform, we're putting our operations in Mexico, Colombia, and Ecuador and are positioned to grow rapidly in the medium term as we develop our scale in these markets and we'll continue to test new value propositions on formats, we expect to see margins gains that allow us to narrow the gap relative to our base.

Smart operation in Chile.

When we start the food division has seen some movies grow revenues curtailed by mobility Railroad authority charges will be continues to find opportunities to general reserves on these operations.

And is operating at a very attractive levels of profitability and returns.

Our logistics and distribution operations are gaining momentum and Ukraine.

The performance through our disclosure as Barbara mentioned earlier, we are excited by the.

They are potential or where particularly very happy at the speed of our efficiency.

We are growing our geographical footprint in the United States Biosimilars Valerie generating good returns on our capital that approach our cost.

Less than two years after entering the business.

In fact.

Our other investments in the United States Jetro restaurant book is also performing at a high level and has generated.

Total shareholder return above 25%. We're also far in this past two years.

Finally, Coca Cola FEMSA has a new framework the long term relationship model in place with the Coca Cola company that aligns system interest, even more and it's allowing coke to develop and maximize incremental revenue and profit opportunities and growth like never before.

During the recent renewal of our partnership with Heineken in Brazil, as well as exploring other distribution relationships and initial initiatives elsewhere.

<unk> with Coca Cola FEMSA formidable operational capabilities, the new framework holds significant promise to keep growing the business into the future.

As you can tell I am very optimistic about the platform, we have assembled and our opportunity to keep creating value for a long.

For a long period of time for these past three years, we view I'd say Latin American company, but today, we're a company of the Americas.

<unk>.

<unk> development.

<unk> being developed in our capabilities growing the business verticals, we want to be in.

Although which hold great promise as I move on I want to thank you for a compelling me in this journey all these years.

Always been inquisitive and for helping me understand the market's point of view.

And with that.

I will turn the call over the year for some final thoughts. Thank you.

Thank you Laurel.

There is no question in my mind that our company is positioned well to pursue and capture the next stage of growth.

In particular, I want to talk a little bit about the digital opportunity in <unk>.

Recently, taking shape our growth of our business units.

Beginning with speed by OXXO were still in the same regulatory status as we have been for the last few quarters.

<unk> <unk> subsidiary comp revival and awaiting final approval from the regulators.

However, we are expanding the number of markets, where the product is available.

We're already fine tuning our value proposition to ensure that we meet our customer's expectations, while improving the overall performance and engagement futures of the platform.

And then with our business case registered users are accelerating and they have already surpassed 600, Boston, even though the product is not yet available in every market and we have not done net nationwide launch or any significant media campaign.

However, we're looking beyond downloads and we are working to increase the engagement and stickiness of the App uninsured that technical brasilia to accommodate such rapid growth.

In a way, it's a bit like how we grow with OXXO.

Increasing the number of stores is powerful and to some extent it is straightforward, but improving the value proposition to grow your comparable state is what creates the most value and but it's harder for competitors to replicate in the long run.

For its part over new loyalty platform OXXO Premia is also off to a great start working well in tandem with spin and with more than 1 million accounts already created.

Digital initiatives are also being used aggressively to drive Omnichannel and E Commerce platform and our other business units, such as our health Division or Coca Cola FEMSA, whereas these.

Initiatives are fast becoming relevant contributor to the overall top and bottom line growth.

Rubbing up I'm honored and humbled by the opportunity to take the bottom from a lot of the next generation to.

To keep guidance is amazing team of more than 320 colleagues with a shared purpose to create economic and social value for the long term.

After January I look forward to sharing a productive dialogue with all of you beginning with our first conference call of the year in February.

I will be able to share this year's progress as well as our expectation for the coming year and our vision of the business for the future.

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

Thank you the question and answer session will begin at this time, if you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question Press Star to your question will be taken in the order that is received in 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 callers to ask your questions. Once again that is star one to ask a question. Our first question comes from Lewis Willard with G. B M.

Hey, guys. Good morning, Thanks for students.

Well, there's a lot more on.

On your new pace.

And then.

I know you've probably.

We're starting to get some details on that.

I mean, how do you see the company evolving in the strategy.

Great.

I mean, the one you mentioned.

He leaves the company in a great shape.

Very well positioned to grow in the future. So could you share with us maybe ballpark.

What do you see as your strategic and capital location priorities, and where do you see yourself, adding more value to Samsung in the future.

Thank you.

Well. Thank you very much I mean, as I said before I mean, I prefer to wait to January and other that I can share my views.

It was a great quarter and I don't think.

Yes.

And in the call in February.

Having finished the year on <unk>.

The start of a new year, I think that would be the perfect location for veneer to kind of talk about those.

High level.

Big picture.

In operations.

The idea today, obviously with the focus on the quarter on the.

Shorter term, but also to have a lot of old.

I'll talk a little bit about what the big picture issues that have already begun to address in the opening remarks.

How we consolidated workout.

That's perfect.

<unk>.

David.

Ben and I will just bring a rollout in Mexico.

Sure.

I know there is still.

We're still waiting for the regulatory approval through really rolled it out can you share with us some data.

Of the users.

And also how do you see the in the marketable youre highlighting bill.

How do you see that.

Especially in Spain.

Working with the floor and.

And I'll, maybe I'll take it.

Yes.

The use of the.

Proposals for OXXO.

That will be the question. Thank you.

Alright. Thank you resist Eduardo basically we're very excited we're very excited because here we are.

Binding.

Something that will evolve.

What was there.

<unk> was a very dumb.

Not very agile.

Obligation and we've seen that I think we're going to be able to enable the consumer and enabled the connection with the with the store with the loyalty program. So I think we're very excited and as Daniel said basically.

Acquiring <unk> acquiring <unk>.

Customers in OXXO or spin is.

He is not very expensive in fact is very cheap because we have a lot of customers. We have 12 medium Turkey medium basis today, so with that in mind I think we are.

Our airport and a reset of our obsession is to have a protocol that delivers value.

The value proposition of the probe is compelling to the consumer but also is sticky and it will be.

We review sandbox, there's been a lot of initiatives.

We're in the market where some of them.

Although they seem to be very interesting, but they are they don't have the stickiness and they don't have the value proposition. So I think our obsession is noteworthy about growing is about having a value proposition that is compelling and adds value to the consumer.

And the connection with our store is very very important as always we have thought that is something that it will neighborhood store and this entire.

Store will enable <unk> growth.

Great. Thank you that's very helpful.

Thank you.

Our next question comes from Antonio Hernandez with Barclays.

Hi, Good morning, Thanks for taking my question you mentioned the deceleration.

Well the relation in openings.

<unk>.

Yes.

All of them will send what are your expectations for the next year both for OXXO.

Pharmacy scoping.

Thanks.

Well.

Don't know.

But let me let me just give you.

Basically mobility affected us in the stores.

The stores.

A little bit down and because.

And because we were.

We set up our hour restrictions.

In a more strict way, we decided to be more cautious about opening stores I think is mobility is coming up.

Schools are backing in Mexico and offices are completing up I think we're very confident to speed up again.

I don't know one <unk>. Thank you, yes, I think.

Maybe six months ago, when things began to improve and of course, we have these three ways that we all know off.

So when things were improving.

<unk> works their numbers and came up with this 800 number for 2021.

And then of course, the third wave came along.

It's complicated and a little bit.

The way that we adopted or so as we mentioned in the opening remarks.

It is still within reach.

A bit of a stretch at this point obviously, we are a couple of months from the end of the year, but we're still shooting for 800.

The probability is that we're going to come up a little bit short of that now.

In terms of 2022, and we'll obviously, we'll give you harder numbers.

Across the business units in February but.

I think we are we returning to a place where if everything continues to improve with wireless point about mobility.

We could put the 1000 store bogey there.

The aspiration of the target.

And work towards that and if there are no more waves than I would imagine the 1000 store number.

Reason number one and Daniel mentioned in his remarks.

10000 stores over the next decade continues to be the the exploration I think Eduardo was due to also also I will say that we are very excited also the opportunities that we face.

In Columbia, and Chile, and Brazil, Columbia, and Chile are weaker.

A very profitable store base and we just have to.

Get it up and I think we're very excited about the opportunity and I think broadly we might.

We receive.

A lot of growth from from Chile.

<unk> in Brazil.

As never before so I think that makes room for growth is there to absorb these not only Mexico, Peru, Chile, Colombia, and Brazil, Yes, I think again with tightened these numbers show up in a couple of months, but for South America are really for cohort four Columbia, and Chile, you will probably be expecting about 150, new stores next.

Year.

And then of course, there is the joint venture in Brazil, which is shooting for a number that's above 200, new stores for next year. So of course that doesn't flow through our P&L.

But.

In terms of just sheer number of stores South America should be contributing several hundred stores starting in 2022, one I think that that's very relevant.

One more thing to point out that just stop that actually works in our favor as we need to figure out where the consumer spending patterns will come out after the pandemic, but if we continue to see the trends both in services now with a digital offering a spin and also consumption of higher margin items, such as alcohol hard liquor et cetera that should make the bogey for new store.

Our openings are in terms of becoming profitable better so that should open up I think more space from a unit economic perspective than it did before so I think we've got.

That winter on our backs in that respect as well.

Perfect. Thanks, a lot.

Openings for pharmacies for the health unit.

Expectations for next year.

For the pharmacies.

It should be double digit so, let's let's talk about 10% for now and we will we will fine tune that into February call.

Okay perfect. Thanks, a lot and have a nice quick clarify as always.

If you kind of.

Through a double click on the pharmacies the countries that grow the most should be Columbia, Mexico, and Ecuador, and Chile growth.

More moderately it's a more mature market, but it generates a ton of cash flow. So we will achieve the services like a different role but.

But the fastest growth well into double digits should certainly come from from Mexico, Columbia, and a great team that just happened in Chile, we have a micro chain, which is obtained.

Of beauty.

<unk> that is just adding up all of the drugstore.

They are being retrofitted or wherever we need to enhance their value proposition to include men.

Yes.

Okay perfect. Thanks, a lot.

Thanks Anthony.

Our next question comes from Alvaro Garcia with BTG.

Hi team. Thanks for thanks for taking my question Aldo.

All the best of luck.

Going forward and congrats congrats Danielle.

My question's for Eduardo hopefully I can sneak in a second question with my first question is for a while ago you led the first wave of investments in the U S.

For FEMSA and I'd be curious to hear your view on how much more how much more American you think FEMSA will become.

Going forward.

We were very lucky that we.

We look for opportunities based on our capabilities and we found these businesses related with downturn packaging and food disposables and the great thing is we've been able to do.

Gather.

Group of companies that there were very well operated and Bud lacked scale.

Now with these kols, but putting all of these business together setting of a great team.

<unk>, having great partners our original.

The company that we bought we've been able to leverage. These this drug in the United States, probably we are looking we may have probably 11 12 companies altogether.

And the beauty of it is that these companies were very well operated and.

But by putting them together, we've been able to enhance the value proposition and have these.

Our geographical footprint. So we are very excited.

We are very excited and look forward to expand this capability even more so.

I think.

As I said in before we're becoming a Pan American company, we were in Latin America, Our company aware, our partner company and we're very excited about it.

I, thank all of our mines.

If you look at how much capital we've deployed in the U S. So far.

It's still not it's not.

Not even 10% of Memphis market cap.

You will see in the short run after the weather we're seeing we're fortunate that we are finding these small ish companies in the greater scheme of things, where we can continue to deploy capital. So we will hopefully be announcing more deals but in terms of moving the dial beyond 10% of FEMSA.

I don't think we are there yet anytime soon.

I don't think.

Thinking about longer horizon, yes.

Go above 10%, but it's going to take us a while to get there.

Great. Thank you very much and then just one second question sorry for the second question here, but we saw some rejections on the Fintech law upfront.

These companies were operating under a double transitory as well. So I was wondering if you could just give us a quick update.

As to your status.

And how you felt about that more than anything how you felt about the projections.

As you look to to seek approval under the Fintech well. Thank you very much.

Sure on Rins out of our thanks for the question around we continue to be in the same position we are confident that our.

Our submission to the authorities is is complete well rounded and the business case makes sense.

Again, we are we are we worry about these rejections again, we don't know the exact details, but so far I think we're making them we were confident that with the package that we put together and the application that we will get the approval in short notice.

Awesome. Thank you very much and congrats again.

Joe Thank you.

Thank you Eric.

Our next question comes from Fernanda CIO with credit Suisse.

Hi, Good morning, Thank you for the opportunity to ask questions and my first question.

Margin could you please comment on what.

Drivers behind it.

And also if you could.

Comment on prospective story.

Thanks Dale.

For the fourth quarter and next thank you.

Yes, I would say on gross margin we've got several things going on one is the return of I think more promotional activity in commercial spending by our supplier partners are coupled with I think a much better mix of services and some of the other higher margin categories.

Together with I think a little bit better tailored merchandising as we adapt to.

To the post pandemic consumer habits.

<unk>.

Your second question was with regards to.

Yes next.

Same store sales grew at the same store sales as you know we're about three 3% down from where we were in.

In 2019 traffic is still down ticket is up again as this is a problem up double clicking in terms of geographies.

ZIP stores et cetera, if you look at the office buildings, we're still not doing as well as we should but if you look at traffic stops. If you look at <unk>. If you look at tourism destinations are if you look at the north versus the south we're seeing much better traffic trends, but overall, you really need to do a double click we have high confidence that once that.

We are back to normal, especially with regards to lap traffic into the office has been schools that we will continue to see the same store sales growth trends that we had in the past, but with a much better margin mix, so that hopefully the double whammy that good.

Get our operating leverage to work again in our favor.

Yeah.

We will take our next question from Thiago <unk> with Goldman Sachs.

Yes, hi, good morning, everyone and thanks also for taking a question. My question is also on capital allocation you mentioned in the opening remarks that U S. Logistic is already approaching a cost of capital, which is a great news, but it is also true that you are adding more assets should the base. So it gets really tricky to recall today, telling you some moving parts putting this in <unk>.

The company's overall capital allocation strategy widens as short and medium term trajectory that we should expect for returns going forward.

And also as a follow up if you were to rank your west logistics also OXXO expansion up from Mexico, and health, where you see opportunities for higher returns and how does it fit with the company as an organic focus going forward. Thank you very much.

If you want I can take the first question with regards to capital allocation in the U S.

The whole strategy behind it is that as we're rolling up by these companies were able to get significant synergies on the purchasing side just by the scale that we've already accomplished we are serving the same customers with the same product that that at much higher margins and also bringing in.

Different skill sets in terms of distribution.

Infrastructure technology et cetera that can also just on the operating side or improve our margins. So although we're paying multiples that I mean, our our usual for these kind of rollout in the U S and are higher than what we were used to when we were buying other kinds of assets in Latin America because of the synergies we were able to underwrite these kinds of values.

Asian and gain our cost of capital within the first couple of years.

With very little risk in terms of integrating the synergies. So that's why I think this platform makes a lot of sense to us and that we can bring our abilities and our skills and our capabilities to deploy this capital and earn our returns and again when I say returns. We are we are talking about that I mean, either high single digit to la.

Low <unk>.

Digit returns in dollar terms in the first couple of years. So it's very very powerful in terms of our compounding.

Activity.

Our next question comes from Alan Alanis with Santander.

Thank you so much for taking my question I have a couple of questions one for <unk> and one for Doug.

First of all congratulations.

Who would have thought in the 20 years ago that you took the OXXO chain with 1000 stores and you are leaving it now 2020, plus larger and more impactful over.

The market cap so congratulations for the very successful career. My question for you is very simple.

Young to retire what are you going to do now.

Now I would never thank you, Alex and I will let me retire I was just going to be a converted hard as hell and.

I Wonder if we experience and I think really about leading and working in this great company does have a very well was very passionate about what youre doing.

We're always have these detachment that is really that will that is part of the life of a human being.

The Dutchman.

Let leaf helped us convert in something else saw.

Our leasing your ideas haven't I look forward to see you again.

[laughter] LIBOR goodwill.

I wanted to be very respect.

But I want to be respectful about.

The ABF of speaking about the future until January and that makes total sense, but can you talk a little bit about the path I think investors would like to hear a little bit about about how you're making your decisions professionally throughout your career why did you choose to come to France, a quick reminder, and what have been the biggest.

Lessons you've learned in the five six years that <unk> been running the FEMSA comercio and being part of the FEMSA group.

Yes.

Well the question Alan.

Thank you.

I have been working over 30 years.

Okay.

Almost 18 I worked for shell in the oil company and then I spend I have.

And some of our markets or give me I would say a good sense about global organization and global businesses, then I move back to Chile, where I'm originally from and I took the royalty you. All four are up I mean, a large retail company with.

All of our formats.

But then I mean, if you are to put ballpark when you get a call from FEMSA is like <unk> of our Salon I told you I mean, so you'll have two here.

You're up to speak.

To be honest I think one of the elements that really convinced me to move to FEMSA. It was not only about the financial success or the size of the company was more about the value I mean on the culture of the organization and really.

I think that that really match with what I believe is the right thing to do in business. I mean, how you can really create economic but also social value going forward. So I mean, the decision to be honest it was not that difficult and I am very happy to come into the second time that they need to replace a lateral so I mean, it's not that.

Okay.

But I'm very happy.

I really enjoyed the time working below so thank you very much.

You're very welcome I will look forward to carrier Richard in January and we wish you best of luck. Thank you.

Yes.

Our next question comes from Rodrigo Alcantara with UBS.

Hey, Hi, good morning, Thanks for taking my questions I have.

Simple one here on they get to investment so as you mentioned that.

The results have been wildly above expectations here.

So just curious about your health care it perhaps you would be considering to increase.

The stake in the minority or perhaps exploring the option I remember that as part of the deal.

In Mexico to bring that model vessels in a table. So just curious about your thoughts about yet we will.

Considering that the Thundery salt that we have seen so far.

Just a quick one here with.

All key market in Chile, just just curious if you can remind most reminds us is that the acquisition has been approved in Chile.

<unk>.

Pending.

Does the elections.

The European market has been approved and we are just in the process of implementing.

The changes they recommended in terms of Jetblue gifts.

We wanted to be aligned with them.

<unk> on the line with them the Jv's in Latin America been Colgate game.

And Nike work, but we're very excited about the very large opportunities where were these capability and the way these cash and carry our works in the United States.

Where there is still room for growth.

Will evoke also in Latin America and also we are very excited about the opportunity I don't know <unk>.

Sure no absolutely.

Again, both from a financial perspective, as well as just from a learning from each other perspective, it's been a wonderful wonderful agents, so far and the joint venture in Mexico is still on obviously was put on hold because of the pandemic, but we still continue to see value in testing of these formats to compete against the Centralia last.

Modeled in in several cities in Mexico, So, we'll slowly make progress on that and hopefully at some point I'll be able to share some some better news, but we're very very happy about.

With the relationship as well as the financial return so far and the opportunities ahead.

Okay. That's great. Thank you. So 2022 are likely to see perhaps that format.

Arriving to Mexico.

Is that fair to say.

Yes, that's fair to say if anything maybe later towards the year, we'll start to get a move on.

But yes, that's fair to say.

Great. Thanks, Thank you.

Thank you.

And our next question comes from Carlos Laboy with HSBC.

Yes good.

Good morning, everyone Daniela first of all congratulations.

And.

Thank you for so many years of.

Educating us I always thought the most the most dangerous place to stand in a room was always between between you on a whiteboard.

So.

Yes.

Thinking that this being your last whiteboard opportunity with us.

What might be the most misunderstood element of FEMSA or the most exciting part of it as you look into the future that you would want a diagram for us.

This virtual whiteboard today.

I will say.

We have invested a lot of it in the culture.

And do you know.

And culture is a major lubricant for things for change and improve things.

<unk>.

This relative expansion that usually we have while you are evolving our value proposition.

But you also wanted to have a business model that make.

Ron do you want to make this a profitable.

<unk> made those two things that sometimes are this tension that might be that the vitamin question is only one direction.

In the.

Business model is going to the other.

The cultural approach so we're having of working.

As a team.

A lot of collaboration.

I am playing I would equal is down so the game is about the whole.

What about any of us.

I think that's a great asset in the future and I think the more that we need to collaborate with our customers the more we need scrubber suppliers.

<unk> is a major enhancing opportunity.

Leasing has been opportunities where these pension goes from the value proposition and the business model.

<unk> is the lubricant for those to flow in a very very very dramatic way. So I'm very excited and I think is.

Something that we don't talk much about it we would experience in our lives and we experienced within the business units.

We.

Carlos you know March above our relationship with the Coca Cola Company and.

This approach we've been able to evolve in a major major step forward in the long term relation model, which is collaboration.

And having very much align incentives.

Working as a team.

Never before so I think that that would say that.

Major lever that we have and as product Roadmaps and we are we are very proud of it and we try to incorporate these these.

300000 people base to be part of this beautiful dream.

Well. Thank you. Thank you very much in line at all and best wishes to you.

Thank you Carlos.

My pleasure.

Ladies and gentlemen that is all the time, we have for questions. Today I will now turn the conference back to park will Camacho for closing additional remarks.

Thank you very much for your participation today and thank you also for your continued support of FEMSA and its team stay safe and have a great day everyone.

Ladies and gentlemen, if you wish to replay the webcast for this call you may do so at fences Investor Relations website. This concludes our conference for today. Thank you for your participation and have a nice day all parties may now disconnect.

Okay.

[music].

Yes.

[music].

Good morning, and welcome everyone to FEMSA third quarter 2021 financial results Conference call. Today's call is being recorded all lines have been placed on mute to prevent any background noise. After the presentation. There will be a question and answer session.

This conference call management May discuss certain forward looking statements concerning <unk> future performance and should be considered as good faith estimates made by the company. These forward looking looking statements reflect management expectations and are based upon currently available data actual results are subject.

Back to the future events, and uncertainties, which can materially impact the company's actual performance at this time I would now like to turn the conference over to Juan Fonseca FEMSA as a director of Investor Relations. Please go ahead Sir.

Good morning, everyone welcome to <unk> third quarter 2021 results conference call.

Today, we have a full team for you and we are joined by Eduardo Padilla <unk> Chief Executive Officer.

Look I'm not sure our chief corporate officer.

Danielle Russell, our finance and corporate development director and then the other piece of.

Currency of FEMSA, Comercio, who will succeed as one of the our CEO of FEMSA next January as you all know.

And as always we're also joined by perfectly Gaspar, who heads coke FEMSA investor relation section.

The plan for today is to have Michael comment on some higher level trends, we saw during the quarter and then Andrew will walk us through the numbers.

We will then turn the call to Eduardo Anthony in for some strategic considerations and final remarks, followed by Q&A.

So with that let me turn it over to Patrick how much.

Thank you Gwen.

Good morning, everyone. Thank you for joining us today.

We hope you and your families are doing well.

In many ways the third quarter marked a continuation of the dynamics we saw in Q2.

Gradually improving health and mobility trend tempered by some operating reductions.

With frictions that remain in place in many markets.

Consumers that needle right needle feel more comfortable going back to what begins to look to them like almost normal activity levels.

In our proximity division same store sales in Mexico were stable sequentially for an acquirer.

Importantly, we began to see an improvement in the last part of September and through the beginning of October.

This means that we are increasingly seeing figured that approach 2019 levels.

This combined with higher commercial income activity and a more efficient expense structure is translating into margin gains.

Operating and EBITDA levels.

Moving onto our sales division, we continued to see solid performance driven by our operations in Chile.

Which continue to be a market where consumers have been showered with extra liquidity, even as we begin to lap a tough comparison base.

Mexico, and Colombia are also operating at encouraging levels with.

With Ecuador, lagging a little because of a tougher macro environment.

The fuel division continues to see a consumer that is gradually becoming more mobile and demand numbers that are improving even as we remain below pre pandemic levels.

For its part our logistics and distribution operation grew its topline sequentially.

Once again balancing positive dynamics in several markets with some end user segments in the U S that continue to operate below 2019 level, such as facility supplies and hospitality.

As a result profitability levels were in line with those in the second quarter.

Importantly, we are already seeing returns on invested capital for the U S business.

Proteins Wap.

Further we have made good progress in expanding our footprint in key new markets and integrating the new operations into our platform.

We are executing on the strategy, we define when we decided to enter this business last year and the results are very encouraging.

Finally, Coca Cola FEMSA had a strong quarter in terms of volume growth.

Particularly in South America.

However, we faced a tough supply chain and raw material cost environment.

As well as a onetime adverse tax effect from the Brazilian operation that we were able to mitigate only partially true pricing hedging and operating efficiency.

Beyond the short term results in the core operations, we are making progress with our beer portfolio in Brazil, as well as final testing additional categories as distribution opportunity.

With that I will now turn the call over to Kenya.

We'll go over the numbers in more detail.

Thank you Paul while the third quarter of last year was relatively strong in the context of the health emergency our operations remained under severe restrictions and we're still facing operational challenges. Therefore.

Therefore gross figures relative to 2020 is still do not reflect the full story and we will complement that with some comparison data relative to 2019, while we consider this to be helpful. As we did last quarter.

Starting with FEMSA consolidated quarterly numbers total revenues during the third quarter increased 12, 6% while income from operations increased 14% compared to the third quarter of 2020 when.

When we compare against the third quarter of 2019 total revenues increased 9% while income from operations increased two 7%.

<unk> net income increased significantly and we have 16 billion pesos, reflecting higher income from operations higher non operating income, including dividends received from our investment in Jetro, a noncash foreign exchange gain relating to <unk> us dollar denominated cash position as impacted by the depreciation of the Mexican peso and an increase in our.

Patient and associate results, which mainly reflects the results of our investment in Heineken.

This was partially offset by higher interest expense.

Moving on to discuss our operations and beginning with FEMSA Comercio proximity Division, we opened 163 net new OXXO stores during the third quarter, reaching 431 net openings year to date.

Our expansion operations were slowed down a bit by the third wave of Covid and we're running behind schedule. This year as it's still we still have the objective of 800 net new stores in Mexico for the year, but we might come up a little bit short.

OXXO same store sales were up nine 7% for the third quarter, reflecting two 8% growth in store traffic and an increase of six 8% in the average customer ticket both against 2020.

Relative to the third quarter of 2019 operating income increased five 2% while operating margin was flat. These are encouraging numbers given the still challenging operating environment.

Revenues increased eight 2% while same store sales increased an average of four 2%.

We continued to see good momentum at our operations in Chile, Mexico, and Colombia, coupled with gradually improving conditions in aquila.

Operating margin contracted 20 basis points as we were able to partially mitigate the gross margin contraction.

Moving on to FEMSA Comercio fuel division revenues increased 25% and same station sales grew 67% relative to the third quarter of 2020.

When compared to 2019 numbers, we're not we're not there yet reflecting vehicle mobility levels that remained depressed and an increased competitive environment.

During this quarter gross margin was 12, 9%, while operating margin was 4% of total revenues, reflecting tight expense control that offset operating deleverage.

Regarding our logistics and distribution business revenues increased sequentially, reflecting positive dynamics overall, however in the U S. We continue to see a different speed of recovery.

At some end user categories, such as facility supplies and hospitality hospitality.

Which are still lagging their historical basis, particularly in some large metropolitan markets.

We expect trends to continue improving towards the end of this year and into 2022.

However, operating income fell by 9% largely driven by a onetime tax effects in Brazil, you can listen to the webcast of their quarterly call that took place yesterday and with that let me turn it over to have a lot of them.

Thank you Daniel Good morning. This morning, I would like to reflect a view on where our company and our business units are today, focusing on the big picture.

As Marco mentioned, while we are still not fully out of the covered woods things are definitely being more normal it will begin with OXXO, we have tightened our standards for improving operating new stores.

Seed sublease 1000 more stores in Mexico over the next decade or so.

And importantly, we have reached the stage in Columbia, and Chile, where we can continue to accelerate the pace of openings, but the worst stores already very already profitable.

On a loan basis.

We still need to increase our scale to fully absorb overhead and drive profitability at the country level.

Peru will continue to fine tune, our valuable position, whereas in Brazil of our joint venture is making progress faster than expected 13 in this stage, where a more aggressive pace of expansion beginning next year.

And of course, all life RMB digital opportunity.

New platform, it's been an OXXO premia are getting off to a very promising start in Mexico.

There are very interesting times ahead.

Our health Division things are also looking good the platform. We put together is operating as a single unit led by our team in Chile, with the ability to develop and to deploy talent and best practices, such as loyalty programs and e-commerce are growth markets.

Corey in our circle for our legacy platform, we're putting our prisons in Mexico, Colombia, and Ecuador and are positioned to grow rapidly in the medium term as we develop our scale in these markets and we continue to test new value propositions in formats, we expect to see margins gains that will allow us to narrow the gap relative to our own.

Mark operation in Chile.

When we start the food division has seen some of it to grow revenues curtailed by mobility.

Third changes, where it continues to find opportunities to general reserves on these operations.

<unk> is operating at a very attractive levels of profitability and returns.

Our logistics and distribution operations are gaining momentum and you can follow the performance through our disclosure as Barbara mentioned earlier, we are excited by the potential of <unk>.

Particularly very happy at the speed of our efficiency.

We are growing our geographical footprint in the United States, while similar style.

Generating good returns on our capital that approach our cost.

Less than two years after entering the business.

Fact.

Our other investments in the United States Jetro restaurant Depot is also performing at a high level and has generated an annualized total shareholder return above 25%. We're also far in this past two years.

Finally, Coca Cola FEMSA has a new framework the long term relationship model in place with the Coca Cola Company.

<unk> system interest, even more and it's allowing.

To develop and maximize incremental revenue and profit opportunities and growth like never before.

During the recent renewal of our partnership with Heineken in Brazil.

As well as exploring other distribution relationships and initial initiatives elsewhere.

Combined with Coca Cola FEMSA formidable operational capabilities, the new framework holds significant promise to keep growing the business into the future.

As you can tell I'm very optimistic about the platform, we have assembled an array of opportunities to keep creating value for a long period for a long period of time for <unk>.

These past two years, we view as an American company, but today, we're a company of the Americas.

<unk>.

<unk> development.

Mean develop and network capabilities growing the business verticals, we want to be in.

Although which hold great promise as I move on I want to thank you for a compelling me in this journey all these years.

Always been inquisitive and for helping me understand the market's point of view.

And with that.

I will turn the call over the year for some final thoughts. Thank you.

Thank you Laurel.

There is no question in my mind that our company is positioned well to pursue and capture the next stage of growth in.

In particular I wanted to talk a little bit about the digital opportunity are increasingly taking shape our growth of our business units.

Beginning with speed by OXXO were still in the same regulatory status as we have been for the last few quarters operating through our subsidiary comparable and awaiting final approval from the regulators.

However, we are expanding the number of markets, where the product is available and.

And we're already fine tuning our value proposition to ensure that we meet our customer's expectations, while improving the overall performance and engagement future of the platform.

And language our business Gabe registered users are accelerating and they have already surpassed 600000, even though the product is not yet available in every market and we have not done net nationwide launch or any significant media campaign.

However, we're looking beyond downloads and we are working to increase the engagement and stickiness of the App uninsured that technical Brazilian to accommodate such rapid growth.

In a way, it's a bit like how we grow with OXXO increase.

Increasing the number of store is powerful and to some extent it is straightforward, but improving their value proposition to grow your comparable state is what creates the most value and what its harder for competitors to replicate in the long run.

For its part over new loyalty platform OXXO Premia is also off to a great start working well in tandem with spin and with more than 1 million accounts already created.

Digital initiatives are also being used aggressively to drive Omnichannel and E Commerce platform and our other business units such as our health Division or Coca Cola FEMSA, whereas these initiatives are fast becoming relevant contributor to the overall top and bottom line growth.

Wrapping up I'm honored and humbled by the opportunity to take the bottom from a lot of those next January.

To keep guidance this amazing team of more than 320 colleagues with a shared purpose to create economic and social value for the long term.

After January I look forward to sharing a productive dialogue with all of you beginning with our first conference call of the year in February.

What I will be able to share this year's progress as well as our expectation for the coming year and our vision of the business for the future.

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

At a time in order to allow for the maximum number of college to ask your questions. Once again that is star one to ask a question. Our first question comes from Lewis Willard with G. B M.

Hey, guys good morning for students.

Good luck on your new base.

And then.

I know you probably.

We're starting to get some details.

How do you see the company evolving in the strategy put in place.

I mean, the one dimension.

Comments he leaves the company in a great shape very well positioned to grow in the future. So if you could share with us maybe fall apart.

What do you see as your strategic and capital location priorities, and where do you see yourself, adding more value to Samsung in the future.

Thank you.

Well. Thank you very much I mean, as I said before I mean, I prefer to wait to January in order that I can share my views.

It was a great quarter.

Yes.

And in the colon in February.

Having finished the year on <unk>.

The start of a new year, I think that would be the perfect location for linear to kind of talk about those.

High level.

Big picture.

In operations.

The idea today, obviously was to focus on the quarter on the.

Charter term, but also to have a lot of <unk> on.

Talk a little bit about what the big picture issues that have already begun to address in the opening remarks, let's cover how we kind of thought it would work out.

Let's start with one.

Well then.

David.

<unk> bin I'll, just bring a rollout in Mexico. So.

I know there is still.

We're still waiting for the regulatory approval through really rolled it out can you share with us some data.

<unk>.

Of the users.

And also how do you see that.

And the marketable youre highlighting bill.

How do you see that.

Specialty.

Working with the store in Florida.

I don't know if maybe incremental tickets.

Yes.

After that the use of the.

<unk> OXXO.

That will be the question. Thank you.

Thank you Luis this is <unk> basically we are very excited we're very excited because here we are.

<unk> binding.

Binding.

Something that will evolve I mean, that's what was there was.

It was a very dumb.

Not very agile.

Macquarie are acquiring <unk>.

Customers in OXXO or spin is.

He is not very expensive in fact is very cheap because we have a lot of customers. We have 12 medium Turkey medium business today, so with that in mind I think we are.

Our airports and our set of our obsession is to have a probe that delivers value.

The value proposition of the probe is compelling to the consumer but also is a sticky and it will.

Reviews have booked there has been a lot of initiatives.

Elsewhere in the market, where some of them.

Although they seem to be very interesting, but they don't have the stickiness and they don't have the value proposition. So I think our obsession is noteworthy about drawing is about having a value proposition that is compelling and adds value to the consumer.

And the connection with our store is very very important as always we have thought that is something that it will enable the store at the same star.

The store will enable us <unk> growth.

Great. Thank you that's very helpful.

Thank you.

Our next question comes from Antonio Hernandez with Barclays.

Hi, good morning, Thanks for taking my question.

You mentioned the deceleration.

We will close.

<unk>.

We'll send what are your expectations for the next year both for OXXO.

Pharmacies, hoping.

Thanks.

Well.

No.

But let me let me just give you.

Basically mobility affected us in the stores.

The stores were.

A little bit down and because.

And because we were.

We set up our hour restrictions.

In a more strict way, we decided to be more cautious about opening stores I think of mobility is coming up.

Schools are backing in Mexico and offices are completing up I think we're very confident to speed up again.

I don't know one either to add on this.

Yes, I think.

Maybe six months ago, when things began to improve and of course, we've had these three waves that we all know off.

So when things were improving.

<unk> worked their numbers and came up with this 800 number for 2021.

And then of course, the third wave came along.

It's complicated and a little bit.

The way that we got there so as we mentioned in the opening remarks.

It's still within reach.

So theres a bit of a stretch at this point obviously, we are a couple of months from the end of the year, but we're still shooting for 800 I think the probability is that we're going to come up a little bit short of that now.

In terms of 2022.

Obviously, we'll give you harder numbers across the business units in February but I.

I think where we're returning to.

<unk> four if everything continues to improve with wireless point about mobility.

We could put the 1000 store bogey there as the duration of the target.

And that work towards that and if there are no more waves than I would've imagined.

The 1000 store number is.

Reason number one and Daniel mentioned in his remarks.

1000 stores over the next decade continues to be the.

Exploration.

Colorado was it.

You'd also also I will say that we are.

Very excited also the opportunities that were facing in Columbia and Chile.

In Brazil, Columbia, and Chile, we have a very profitable store base and we just have to.

Scale, it up and I think we're very excited about the opportunity and I think broadly we buy.

Receive.

A lot of growth from from Chile.

Columbia, and Brazil as never before so I think that makes room for growth is there to absorb these not only Mexico, Peru, Chile, Colombia, and Brazil, Yes, I think again with tightening these numbers show up in a couple of months, but for South America are really for cohort four Columbia, and Chile, you will probably.

Be expecting about 150, new stores next year.

And then of course, there is the joint venture in Brazil, which is shooting for a number that's above 200, new stores for next year. So of course that doesn't flow through our P&L.

Got.

In terms of just sheer number of stores South America should be contributing several hundred stores, starting in 2022, and I think that that's very relevant.

I think one more thing to point out that just stop that actually works in our favor as we figure out where the consumer spending patterns will come out after the pandemic, but if we continue to see the trends both in services.

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