Fomento Economico Mexicano S.A.B. de C.V.

Good morning and welcome everyone to census first quarter 2020 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 census 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 may materially impact the company's actual performance. At this time, I would now like to turn the conference over to Mr. Eduardo Padilla, FEMSA's Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and welcome to FEMSA's first quarter 2020 results conference call. Juan Fonseca and Jorge Collazo are also on the line today. We hope that you and your loved ones are healthy and safe in these challenging times. As you might expect, today's call will be somewhat different from our usual quarterly calls. Certainly, we'll discuss our operating and financial results for the first quarter, but we know that you are also keen to know how the health emergency is impacting our operations, what we have seen so far, and what we expect going forward. We listened to Coca-Cola Spencer's call yesterday, and we have paid attention to the quarterly calls of other peer companies, and we'll try to address your questions and concerns as best as we can, given the high levels of uncertainty that surround the current situation and its potential duration. The first quarter got off to a strong start and with this being a leap year, yesterday in February came in handy, particularly since it was a Saturday. However, by the middle of March, we began to see a meaningful fall in consumer activity. following more restrictive measures by authorities in Mexico and elsewhere. Therefore, if you simply look at our results, the quarter looks fine, with most of our business unit delivering on trend. But the final days of the quarter were a preview of what April would look like, and it's important to have this context. As the severity of the crisis became more apparent, our entire organization engaged in a broad-race mitigation mode. focusing on ensuring the safety of our people and our customers, the continuity of our business, and the strength of our financial liquidity. We also began working to leverage our scale and our reach to provide health to our community. And let me tell you that the speed and effectiveness of these actions across our company have been extraordinary. I am very proud of what our teams have reached at every operation at every level. taking advantage of our strong execution capabilities. I strengthen my conviction that we're in a good position not only to navigate these uncertain times, but to come out stronger on the other side. Let me mention some of the initiatives and measures we have been doing so far. Our first priority, ensuring the safety and health of our people and our customers. To that end, we have sent home more than 25,000 vulnerable employees with pay, and we have enabled work-from-home capabilities where possible. Among many initiatives, we have enforced sanitary protocols at stores and distribution facilities, including the availability of face shields and other protective gear for our people. We are making hand sanitizer widely available at our stores, performing temperature checks, and disinfecting high-traffic surfaces periodically. We have rolled out plastic dividers to enhance protection for our drugstore cashiers, And we are enforcing our low density distancing protocols for employees and customers alike. Finally, we're making it easier for our customers to buy through digital platforms, reducing the risk of direct contact. We call for FEMSA leading the way with their own channel strategy and FEMSA commercial making progress with their own digital initiatives. In terms of our communities, we are donating and distributing assistance to operations as well as through the FEMSA Foundation. Examples include providing financial support and donating water, food, medical supplies, and even contributing our manufacturing expertise in a collaborative effort to produce low-cost medical ventilators in Mexico. From a financial standpoint, we are making every effort to further shore up our liquidity. Our corporate cash position increased by more than 100% during the quarter, driven by debt issuances at SAMHSA and CO-SAMHSA. during January, which is probably more than $3 billion. I will also do down approximately $1 billion from some of our available short-term revolving credit facilities. As I mentioned before, we're definitely rationalizing expenses, including looking at certain leases that are currently not generating income. And we're making an effort to address some fixed costs available. However, regarding our employees, our mindset is to preserve the maximum number of jobs possible, and therefore, our objective is to look for ways to keep our people employed. Regarding CapEx, we are carefully revising our plans, cutting or deferring non-critical investments, and we have also given ourselves some additional flexibility regarding the timing of our dividend payments, which we will likely push towards the end of the year. On the other hand, we're having a close dialogue with our supplier base, gaining visibility into our key supply chains and working with our smaller, more vulnerable suppliers to help them through the crisis. Moving on to the cost-sensor-consolidated quarterly numbers, total revenues during the first quarter increased 5.5%, while income from operations grew 6%. On an organic basis, total revenues increased 2.7% and income for operations increased 4.4%. That income increased significantly, reflecting a non-cash foreign exchange rate related to FEMSA dollar denominated cash position, and higher income for operations across our businesses, partially offset by high interest expense and a decrease in our participation in Heineken's results for the quarter. Our effective tax rate was 35%. In terms of our consolidated net debt position, during the first quarter, it increased by approximately 15 billion pesos compared to the previous quarter to reach a level of 62 billion pesos at the end of March, reflecting debt issuances at FEMSA and the whole FEMSA. Moving on to discuss our operations and beginning with FEMSA commercial proximity region, we opened up 268 net new offshore stores during the first quarter, reaching 1,365 net store openings for the last 12 months, including new stores and operations in South America. Also, same-store sales were up 5.5%. It was risen by 9.1% in average customer tickets, partially offset by a 3% decrease in store traffic. These trends accelerated during the second half of March when the lockdown period started to extend across Mexico. We did see an increase in certain grocery and pantry-related categories as consumers stocked up in a little bit of panic buying. But these represent just a small percentage of our overall mix of sales. Conversely, on-the-go purchases have contracted significantly as so many of our customers have stayed at home. Moving down the income statement for the first quarter, Growth margin expanded by 150 basis points, reflecting healthy trends in our commercial income activity, as well as increased and more efficient promotional programs with our key supplier partners. Income from operations grew 50.4%. Operating margin expanded 30 basis points, even as we continue our gradual shift from commission-based store teams to employee-based teams. and as we also step up investments in IT. Moving on to Pemsa Commercial Health Division, we added 73 drug stores during the quarter to reach 3,234 units across our territories at the end of March, and 850 total net new stores for the last 12 months. These figures include stores that were reopened in Chile following damages from the social unrest at the end of 2019. as well as the integration of GPS in Ecuador. Veteran use increased 19.9%, while on an organic basis, they decreased 1%. Same-store sales decreased an average of 6.8% in Mexican pesos, but increased more than 3% on the current scenario 12 basis, reflecting positive trends in our operations, as increased health awareness by the all COVID emergency providers and models tailwind during March. Growth margin contracted by 50 basis points in the quarter, affecting modified pricing regulations in Colombia and soft trading in our Maicao beauty store operations in Chile. These were partially offset by improved efficiency and more effective collaboration and execution with key drugstore suppliers in Mexico. Operating margin was stable as cost efficiencies and tight expense control across our territories were enough to offset the gross margin pressure I just described. For its part, Central Commercial Fuel Division added five new gas stations to reach 550 units at the end of March, which is still suboptimal, but at least moves us in the right direction. As you might imagine, with our business platform, the fuel division is among the most exposed to the current environment, of reduced mobility and social distancing, and this impact began to show towards the end of the first quarter. Same-station sales decreased 1.5% in the first quarter, and gross margin was 10.6%, while operating margin was 2.2% of total revenues, reflecting lower operating leverage. Operating expenses increased 15%, reflecting higher wages and improve compensation structures for our in-station personnel aimed at reducing turnover in a tight labor market. And number two, maintenance and remodeling expenses related to the transition into the new OxoGas brand image. Finally, moving on to the physical , as John highlighted yesterday, volumes were stable and various significant currency headwinds during the quarter, so they were able to expand their margins at the gross and operating levels. And regarding the COVID emergency, the reaction of code friends has been amazing. As in other parts of our company, their operational expertise is still being very helpful as we address the crisis. If you were unable to participate in the conference call, you can access a replay of the webcast for additional details and the results. Looking ahead, like everyone else, we are facing an uncertain environment. Our operators have worked hard putting together and analyzing potential scenarios with varying degrees of stress, what actions we will need to take in each case with the goal of ensuring our ability to function with adequate levels of liquidity. As you know, a big part of the equation has to do with how long this will last. That is the question. Most of our operations are deemed essential, and therefore, our stores are open and co-families operating and serving most of the clients. However, food tracking is down a double-digit adoption, as so many of our customers are staying home. When people are out and about on the streets and they are thirsty or hungry or they need to satisfy a craving, Those are the consumption occasions that are also lifeblood, and they are not happening as much these days. We have limited supply for some important categories, such as beer, and it's not clear when those key suppliers will be allowed to restart production. And there are local restrictions on hours of operation and cost of mobility, requiring us to reduce shifts and pressuring our numbers. And yet, as I mentioned before, we have moved quickly to cut expenses, deferred investments, and made it quite an adjustment to whether it's done, even if it lasts a while. It's very likely, for example, that we will be unable to open as many new stores as we expected at the beginning of the year. Results and performance metrics will suffer, but potentially, we take the long view, and therefore, there are some initiatives that we are not slowing down including everything that has to do with our digital initiatives, loyalty platforms, and FinTech. And we will continue to work hard so that when the storm passes, we came out stronger, more humane, more resilient, and better positioned company. And with that, we can offer the call for your questions. Operator?

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 the pound key. Your question will be taken in the order that it 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 their questions. We'll now take our first question from Luca Seeker from Goldman Sachs. Please go. Sir, your line is open if you have your mute function enabled.