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.

Hello.

Yes.

Good morning. Thanks for taking my question. I'll try to squeeze into a quick one. On your comments about APRIL, would you be able, willing to put some numbers around maybe the type of impact for APRIL for OXO, for central sales, just to get a sense on how the trend has inverted and what we should factor in. for the quarter. And with regard to the opening phase as well, realistically, I understand that you will not necessarily be able to open as many. But even in that respect, could you give us a sense of how big of an impact that could be? You should quantify or give us some ranges just to get a degree of the impact. That would be the first question. The second, more general, you... mentioned, you know, friends over things long term and take the long view and so forth, which makes me wonder, at times like this, when it comes to capital allocation, there have been several transactions over the last few months. Would you think that the decision-making process will lean more towards simplification or conservatism or maybe being more opportunistic, assuming that there will be assets um even when it comes to an organic growth that may come up for uh uh for grabs um or openings um including in mexico whether it's drugstores or whatever you know you can give us a sense how should we think about that through this period uh when maybe some projects uh that are not uh available before that become more uh more more available or you could be more fortunate

Okay, let me start with the second question first. You know, after this crisis, there are a lot of learnings of what we can do even better. And then there will be some, without doubt, there will be some, we have to adapt the new value, the valuable position of the stores, of in the footprint offering. And I think we have to adapt to the new environment. And that will take a lot of time. And I think our main effort is to rearrange our operations, make them very efficient again, and start growing organically and gaining share. In terms of the potential acquisitions or potential opportunities, we are not going to pursue in this period of time actively any because we will be focusing ourselves to what we have done and start operating efficiently and come up with, as I said, with the right connection and adapt to the new consumer needs. And I think we should be open to opportunities. I mean, there might be some opportunities, but we will be not actively looking for them. I don't know, Juan, if you'd like to add for the very first part.

Yeah, no, hi, Luca. This is Juan. I think on the capital deployment, we were probably already done anyway. I mean, having done the six transactions that we did in the last, you know, 12 to 18 months, Definitely, it is a stage for digestion and stabilization and capturing of synergies. And obviously, as Eduardo says, in the current environment, it's even more the case that we are not actively looking. Having said that, I guess we should also say that, you know, since crises breed opportunities, if something came along that was just too attractive not to take a look at, we would. but I don't think that's a high probability occurrence in the short term.

Yeah.

And I think if I take the first question that has to do with kind of what we are seeing in April, you know, if I look at more than the whole month, if I just look at maybe the last couple of weeks, I think April was, it's a tricky, if you look at the whole month, it's a little bit tricky because Holy Week is in there. And even though this year Holy Week was in April in both cases, 2019 and 2020, the comparison is not ideal given that Holy Week is an important period. And so if I just look at, let's say, the last 10 days of the month or the last week, what we are seeing is kind of a low teen contraction in sales at Oxxo. And I think if you look at, for example, the health division, it really varies a lot by country. The most restricted country in terms of customer mobility and so on is Colombia. But if you look at Chile, for example, I think we're looking at also kind of a low-teen contraction. I would make the caveat, though, in terms of OXO, Eduardo mentioned in the opening remarks that beer supply is an issue. Right now, we are still stocked. Both our suppliers, Heineken and Morello, were able to give us a fair amount of product a few weeks ago, but they're not producing as far as we can tell. And so when we, you know, if and when we run out of beer, which could happen in the next couple of weeks, that would be negative for sales as well. But in terms of what we've seen the last few days, as I said, kind of low teens is the number, Luca. And, Paul, if I can, is there something that has become apparent in the way consumers are using or abusing the Oxo during this period that maybe is somewhat counterintuitive? Are you, any takeaway maybe in behavioral changes that, you know, turn Oxo maybe more of a, proximity of that destination? Is there anything that you've learned so far with regard to that? I mean, certainly, as Eduardo mentioned, we have seen a very, you know, above normal growth in the categories or what we would consider daily and replenishment, grocery type of transactions, pantry loading, type of items. But unfortunately for us, that represents a small proportion of our mix. And even from a profitability standpoint, you know, our margins are generally better in the on-the-go kind of single serve, cold beverages, snacks, that sort of thing. So, yes, definitely I think some consumers are looking at the store, at the OXXO store, as a place where they can maybe refill the fridge for the short term, but we are not nearly as benefited as the big box supermarkets, which of course are having a good time. Thank you.

Thank you very much. Thank you, Luca.

Thank you. In the interest of time, we ask that you please limit yourself to one question at a time in order to allow the maximum number of callers to ask their questions. We'll now take our next question from Bob Forge of Bank of America. Please go ahead.

Thank you. Good morning, everybody. I think I hope you and your families are safe and healthy. You know, I had a question with respect to mix and gross margin. particularly when it comes to the strides you've made in commercial income, transaction income, correspondent banking fees and remittances.

And I was just wondering how you're thinking about that and how those services are behaving. Do the points of sale have greater relevance in this kind of environment and how do you see that evolving over the course of the year?

Yeah, sure. Hey, Bob. Yeah, I mean, if you look at even what happened in the first quarter, trends are still very, very strong, right? We had a gross margin expansion. I believe it was 160 basis points. And when we talk about the drivers for that, and I'm talking about OXO, basically, the drivers for that are a little bit different from what we've seen the last two, three years in the sense that financial services are no longer growing double-digit. I mean, we had so many quarters when we were looking at 20% type of growth for financial services. I think a lot of consumers, and I'm talking before the crisis, right? So this is kind of up until, you know, a few weeks ago. The consumers that were going to adopt banking through OXO were probably already doing it. And so most of the growth margin expansion that I just described has really been driven by commercial income, you know, promotional activity, our own, I think, enhanced abilities to offer, you know, layered promotions on top of each other, shorter term, some for, you know, the different parts of the country. So we would become a lot better at, catering to suppliers' needs to use also as an extension of their marketing arms. And of course, as Eduardo said, we are making progress on the FinTech and the loyalty side, and we're not slowing down through the crisis. And this is something that I expect later in the year towards the fourth quarter, hopefully we'll have more tangible news to share with you guys in terms of how that effort is going, especially in terms of the OXO digital platform, putting together the loyalty program and some kind of a fintech offering that begins to take shape. Right now, I would say we're kind of in the middle. So, you know, financial services not growing anymore, but, you know, getting close to the point where maybe there can be another interesting leg of development enabled by the FinTech platform. And Juan, when it comes to remittances, that effort's been under, you know, it's been in place for a while. And I know it may be a flat contracting pie, but is there an opportunity there for you to take greater market share? I mean, remittances, we've been working with Western Union and with other providers now for a few quarters. Obviously, that moves, you know, in line with whatever's happening in the U.S., And, you know, we do benefit probably, but not as much as the, you know, the bigger kind of durable goods stores in terms of when people receive their remittances. A big chunk of that money logically will go to, you know, washer, dryers and TVs and things like that. And maybe just a small portion will go to groceries or to, you know, giving themselves a little bit of a luxury while they're at the store, at our store. But I think we are going to learn in the next few weeks and months. One thing that I want to see personally is, and this is a little bit to Luca's question a few minutes ago, if people begin to privilege proximity a little bit more because getting on public transportation is a little bit risky or because they just don't want to be out of the house for as long. And so then they start looking at the corner store as more, you know, to satisfy even more needs than they have so far. So we're going to learn a lot about consumer behaviors and whether or not we can take an opportunity by leveraging the proximity in the coming months. Understood. Thank you. Thanks a lot.

Thank you. We'll now take our next question from Alan Alanis from Santander. Please go ahead.

Thank you. Thank you so much.

I hope your families, Juan and Eduardo and everyone around you is good, and I hope you can hear me correct? Yes. Yes, you can. Perfect. Okay. Just a couple of quick questions. One of them regarding how to think about of the pharmacy division. I think I was a bit surprised by the weakness there. Given everything that is happening, and I know you mentioned some differences between countries, so if you could expand on that. That's a basic question. And a more strategic question for both of you is I think you are very good at thinking about consumer behavior and how to match a value proposition in terms of consumer behavior. How's your preliminary thoughts of how consumer behavior will change after this crisis? What are the frames of references that are you using, either from a historical perspective or from other industries that you can share with us in terms of how you're thinking about the future of the whole Clemson platform, Eduardo?

Thank you. Well, let me try to start with the second one, Adam. Without that, people will be avoiding crowds. People will be avoiding public transportation. People will be more sensitive towards traveling everywhere or moving as much as we were in the past. So, I think being close to the customer, having so many outlets everywhere, having the Coca-Cola distribution, which is a massive distribution, ubiquity everywhere, And I think we are in the position to be very sensible to these new behavioral changes of the consumer and start adapting. Without doubt, we don't know exactly. I mean, we don't have many self-serving things. Probably the hot, the Kingos, that would be among very few self-serving stuff. But we, on the other side, which is served, worn by someone who already has a very, very sanitary procedure to serve our customers, that could go too. So I think we, with these things happening, and as we know, things might get better, but I think people will be very sensible to those social distancing issues. I don't know, it will be, time will tell. And I think we'll be very much sensitive to what things might change. I mean, we, you understand that social distancing in Mexico will be a big thing, because we tend to be very close, socially speaking. So, I don't know. I think we just have to . You might have very good ideas, Alan. Let us know. Thank you. Well, I mean, it's not an idea, but it's something that is very evident, and it's unfortunate that it's not a good thing.

It's kind of sad, no? I mean, we're going to one of the most massive economic recessions that we've seen in Mexico, so I would think that people have to buy more on a daily basis, and eventually that would be positive for auction. But it's too soon to tell. Unfortunately, that's something that we're expecting as part of the corruption on the back of something negative for the economy. But we'll see. Thank you so much, Eduardo. Thank you so much. I'll let you know if I have any ideas. And, Juan, do you want to comment on the pharmacy? Yeah. Yeah. Hi, Alan. I mean, basically, the exchange rates, the way that the Chilean peso and the Colombian peso moved, relative to the Mexican peso made a big difference. I mean, the figures we have, for example, for revenues for the health division, and of course, South America is about 80% of that. As reported, it's basically 20% increase. But if we adjust for currencies, it's actually 36% increase. And if we look at same store sales, as reported, they decreased 6.8. but adjusting for currency, they actually grew by 3.1. So that's basically a 10-point shift in same-store sales once you control for exchange rates. So, I mean, as you said, it would be logical in the current environment for drugstores to perform well, but the effects did distort the data. But, you know, the trends are fine in terms of, you know, the The local operations are doing well, and then we just need to deal with the effects once we consolidate information. Thank you so much, Juan.

Stay safe. Thank you. Likewise. Thank you.

Thank you. Your next question comes from Marcela Rechia from Credit Suisse. Please go ahead.

Hi, thank you for taking my question. My question is more related to the recent acquisitions in the U.S., in Brazil. Just would like to understand if you can give us some color on how the integration of these assets has been, how you are, you know, an update of the integration of these assets into Fremsa, and also if you can have some visibility of when you should start disclosing some of these numbers for the market. Thank you very much.

We just had our very first board meeting, and it went very well. And unfortunately, now the current environment is really putting everything upside down. So, but I think we're very happy. We have very much the same way of thinking and how to make progress in the vaccine market. So far, so good, really, I would say. I think we are not going to be as aggressive as we thought with terms of expansion because of the current circumstances. But I think we are very happy with the relationship and sharing the same objectives and purpose of doing things in Brazil. So I think we are very happy. I don't know if you want to add anything, Juan.

Yes, no, I mean, specifically talking about AGV, the warehousing operation, which I think is the first one that Marcela was referring to and that you just explained, I think generally it has exceeded our expectations in terms of of the quality of the asset and the management and the processes that they had in place. And so I would say that, you know, bringing that business into our platform has been better than expected or faster than expected. I also would like to comment, I think, on the drugstore front in Ecuador, also very quickly, you know, expanding profitability and performing perhaps a little bit ahead of schedule. in what is a very complicated context because I think of the different countries where we operate, Ecuador has been especially hit by the pandemic. I think going to the second part of the question having to do with disclosure, definitely we are already working with our Solistica business, the logistics business, which is the one that really bought AGV, which is now basically round numbers, but it's about a billion-dollar revenue company. We are working with them so that we're all ready to start disclosing their numbers probably a year from now. So we're really shooting for first quarter of 2021. I think the acquisition that we are also in the process of making in the U.S., of WACSI and North American Corporation, the specialized distribution platform that we're creating in the U.S. Also, we should be in a position, I mean, that's a transaction that has not closed yet, but it will close soon. And also, I think we will be ready to start disclosing those results at the same time as Solistica, you know, first quarter of 2021. So, If you think about it, a year from now, we are going to start showing the performance, the income statement, the operating metrics of businesses that basically represent combined about $2 billion that today you're not seeing. So we're working on that, and that is our expectation right now, Marcela.

Excellent. Thank you very much, Ben.

Thank you.

Thank you. Your next question comes from Alvaro Garcia from BTG. Please go.

Hi, guys. Thanks for the call.

And I hope your family there as well. My question's on the balance sheet. You mentioned you're thinking about postponing the dividend. But I was wondering if you could mention the release also. You drew on some credit lines. And if you could just remind us, so if you could remind us, I mean, you know, what that amount was, and if you could remind us of what your net debt position is at FEMSA, sort of on a pro forma basis, assuming WACC and transaction is closed, that'd be very helpful. Thank you. This is Juan. Let me take a whack at that. So on the dividend, what we're saying is, I mean, normally, and the way that we've been paying the dividend for a number of years now has been in two installments, one in early May, one in early November. And what we did this time around was to just give us the flexibility to, rather than pay something up in May, which would basically be next week, we're giving ourselves the flexibility to do it later in the year, And in all likelihood, I think this is going to go to November, right? The way that the shareholder meeting resolution ended up being drafted, it says the dividend will be paid no later than November 5th, 2020. So it's not – I mean, I guess it's postponing the first half of the payment and moving it – again, I don't think it's been decided, but my view would be that it's going to be basically towards November 5th. but it will be paid during 2020. In terms of, I mean, I have the figures on a per share basis, but I mean, we can give you the total number a little bit later. You can calculate that. No, but I think that was the main kind of question, whether or not it will be paid or not. That's clear that it will be more of a postponement than a cancellation. Okay, okay. And in terms of the Wax North American transaction, that's basically a $900 million investment. So the numbers that we're disclosing today in terms of our press release are obviously pre that. The comments that we made, that Eduardo made on his remarks about the bond issuance and the drawing of the credit lines, you would need to subtract $900 million that will be paid for that transaction in the coming, probably in the, you know, certainly in the next month or so, or a couple of months. Great. Thank you very much. Thank you, Albert.

Thank you. Our next question comes from Carlos Laboy from HSBC. Please go ahead.

Yes, good morning, everyone. Juan Eduardo, can you please comment on the sustainability of the Coke FEMSA dividend and your expectation of that dividend going forward? And also, perhaps, share a little bit more insight on recent transactions.

well uh regarding to the sustainability of the uh hello carlos this is a lot of uh no we we don't have any trouble i mean it is uh uh impact is growing and and i i think the way propensa is really coming up uh out of this uh uh economic crisis uh that is just fine i think we are um I think we're very happy with the way the company is performing, the way they've been adjusting their structure to the new environment. So I think we are happy the way we've been working together. And I think for the long term, we're working to set up a better way of understanding between us and the Coca-Cola company. So we're making progress out of that. And I think we're happy that in the long run, we'll be better prepared to sort out this new economic and consumer environment. And regarding the acquisitions that we made, Well, I think we're very happy with the in the right sector. And I think we are just understanding how to close the deal by not being able to travel and not being able to connect as much as we could. But I think the current top management of the both companies, Waxing and North American, we're very happy with them, and I think we're very much aligned to try to close this deal somewhere during May. I don't know if you would like to add one about the other acquisitions Carlos Alvarez is referring to.

Yeah. Hi, Carlos. I mean, generally, and this is something that I think we've discussed with all of you on the line in the past, You know, there is certainly an appetite from our kind of returns-driven appetite to continue to grow the retail component of FEMSA. And, of course, some of the transactions that we've announced in the last year or so move us in that direction, whether it's the JV for Oxxo in Brazil, for Proximity in Brazil, whether it's the investment in cash and carry in the U.S. and the optionality that that gives us to develop that platform in Latin America and Mexico and beyond. Obviously, the special ed distribution is another part of the strategy where we are in the process of growing, where we think it will, you know, these are businesses that will satisfy our requirements in terms of ROIC. ROIC over WAC spread, so to speak. So I think directionally, we're moving in that direction. Obviously, also thinking about this, the way that, you know, if you go kind of back a little bit, go back in history, you know, when Coke FEMSA went into, you know, and acquired Hugo del Valle or Santa Clara, kind of expanding the scope a little bit of what they did. And when FEMSA Comercio went into drugstores, I think our incursions into the U.S. and these two acquisitions or investments that we've made in the U.S. follow the same logic, which is there's a lot of things about these companies that we're familiar with. It's just that they're operating in the U.S. as opposed to Latin America, and we need to learn how to do that and, of course, leverage local existing management as is the case in both of these transactions. Directionally, moving towards retail and specialized distribution. Geographically, looking at the whole continent as places where opportunities might arise. But of course, these are things that in the current environment are taking kind of a backseat to kind of getting through the current situation as best as we can, and then we can retake the the expansion phase more actively. Thank you.

Thank you, Carlos.

Thank you. Our next question comes from Joseph Giordino from JP Morgan.

So, hi. Good morning, everyone.

Thanks for taking my question and hope I'm safe and healthy here. Just like very briefly here on the digital initiative being implemented by the company. So I'd like to understand like how is the rollout of Neoxo taking place? So like the level of engagement you are seeing within customers and what are really the main challenges here? And thinking like a little bit beyond the COVID outbreak. how do you see like opportunities to further connecting like the OXO platform and also the logistics and distribution structures are existing inside a company with other e-commerce operators basically becoming more like a service provider but also like empowering those OXO stores with let's say sheep from stores capabilities to potential new needs from consumers, even social distancing kind of mindset that should remain here. And then moving away from the technology part, what's the view from you guys on potential opportunities to further expand into Latin America and also here, particularly Brazil, in light of the economic downturn that may be seen here So maybe we have, like, plenty of available good locations that could, like, feed toxins to it.

Thank you.

Hi, Joe. This is Juan. You know, taking the first part of your question in terms of digital, Certainly, you know, we probably were a little bit late out of the gate on the whole FinTech development vis-a-vis other players. But I think we're catching up. This is going to be a very interesting year where I think both on the loyalty program and the FinTech platform, we are going to make a lot of progress There are a fair amount of resources being deployed to those efforts, not necessarily financially. I mean, there's some investment obviously, but also human and in terms of management time and focus. We are currently testing the loyalty program in a number of markets. You know, for many years also did not have a real loyalty program, but obviously now it's become, I think, more attractive than ever. because it brings with it the information, the consumer insights of knowing, you know, who is buying what and the opportunities that then present for potential monetization of that data. And on the fintech side, also, as I mentioned a few minutes ago, I think this is going to be an interesting year where hopefully by the fourth quarter, We have more tangible information to share with you in terms of our product and what it can do. I mean, obviously, we approach this with the benefit of, you know, like I would say a structural advantage that is unique to OXO, which is the, you know, the 19,000-plus physical stores where people are, you know, in terms of putting cash in and out, of a new wallet, the stores are already very, very relevant. And also the fact that the OXO brand already is a very broadly used and much trusted platform for cash payments today. And so I think that the Mexican consumer gradually embraces cashless and digital transactions that we can leverage the strength of our brand and the ubiquity of our store network And as we mentioned earlier in the call, I mean, I think the current environment, you know, these are some of the initiatives that we are not slowing down precisely because, you know, thinking about how the consumer emerges from this crisis, we believe, you know, the reliance on digital transactions probably will increase. It's not clear if this is going to be the catalyst that finally, you know, brings most Mexicans into the digital space, probably not, but certainly move us in that direction. In terms of Brazil, your second question, I mean, obviously we are, you know, our partners down there, the Raisen team is very, very knowledgeable and they already have, you know, about a thousand stores in their gas stations. But also in terms of the intelligence of where should we start looking, especially when we think about the standalone stores, which I think is going to be the biggest challenge, but potentially the biggest reward in the long run of this effort. We are obviously relying a lot on the Ryzen team to help us decide where the first stores are going to go, whether or not, and at what point, and where Would we need some distribution capacity in terms of DCs? So the strategy is already taking place. I think it's a little bit early for us to disclose, you know, with more detail what the plans are. But in terms of the current environment and expectations for Brazil, I mean, we, as Eduardo mentioned in his opening remarks, we tend to take a long view. And so the current, you know, whatever's happening in the short run in Brazil or in any one of our markets doesn't really change the long-term expectation. And so we are as excited as ever to finally have our foot in the door in Brazil. And hopefully also as the year progresses, we'll be in a position to share a little bit more about how that joint venture is going.

Perfect. Thank you. Thank you, Joe.

Thank you. Our next question comes from Rodrigo Alacantara from UPS. Please go ahead.

Hey, Eduardo, Juan, thanks for checking my question. Just a follow-up on the health division. So in 1Q, it was clearly the effects, negative effects, which could potentially revert into Q. However, my question here is on the performance. You have seen at e-commerce, on drugstores, particularly at Cruz Verde. Some industry numbers suggest that this segment of commerce is growing double digit. So what are you seeing at Cruz Verde in terms of its commerce?

This is Juan. Yes, you're absolutely right. You know, looking at it, not from an industry perspective, but just from the Cruz Verde perspective. And of course, Cruz Verde is a large player in Chile. I think the loyalty platform and the e-commerce and the home delivery platform are pretty well advanced. And definitely the current juncture facilitates or provides extra incentives for people to to buy from home. Chile is a market where mobility restrictions are in place that are stricter than most of our other countries. I think maybe Colombia is the only place where they're, Colombia and Ecuador are also strict, but certainly more than Mexico, right? And so I think it makes perfect sense for the consumers to be relying more on these type of e-commerce platforms. And I would say Cruz Verde is definitely well positioned for that.

And any figure you can provide, revenue contribution or growth, at least in the last few weeks, perhaps that would be helpful.

You know, I don't have the breakdown for the last few weeks in terms of e-commerce versus traditional, but it's something that we can definitely look into and get back to you with the figure. I apologize for that.

No worries. Thank you, Juan. And just a follow-up on the Solistica division, just qualitatively speaking, I mean, you, besides Sensa, you also serve other clients, right? So if you can comment on the performance that the division, that Solistica, particularly Mexico, has had in recent weeks, that would be helpful. Thanks.

I think in Solistica, I mean, it's itself a collection of several different business units. So, for example, there's the land and truckload operation, the warehousing operation, the dedicated carrier operation. And, you know, they're performing a little bit differently. I would say, for example, our dedicated carrier operation in Mexico, you know, Heineken is a big client. And so with Heineken basically not operating right now, that is clearly a problem for our Solistica team. I think less than truckload in Brazil has also had some weakness in their figures. But there are other parts of the operation like transportation management, which is performing well. So it varies in the different businesses and different geographies. Workhousing, for example, is really not impacted because you have long-term contracts and you're managing the space, and that is not something that changes from week to week. It's much more sticky in that sense. But directionally, yes, I would say Solistica has been affected, probably especially from direct fleet issues. with the brewers and with some other clients, but I would highlight Heineken because of what's happening in Mexico. And I would say Leventropo, Brazil, also seeing some weakness as economic activity down there.

That's very helpful. Thank you, Juan.

Thank you. Do we have any more questions? Hello?

One, I think somehow we've been disconnected.

Yeah, no. Maybe let's give it a couple of minutes, see if . Hello? Yes?

We'll now take our next question from Antonio Hernandez from Berkley's. Please go ahead. Your line is open.

Hi. Good morning. Thank you for taking my question, Antonio, and the results. My question is really if you could give us more light on the the proportion of OPSAs that are exposed to leaf peak areas. and also to corporate areas that can be affected due to social distancing and work from home restrictions.

Thanks. You know, Antonio, could you repeat the question? Because we have hardly hear you. Would you please ask the question again, please?

Sure. My question is regarding OXOS. If you could give us a breakdown or some writing on the proportion that are located in touristic areas or that can be affected by work-from-home policies?

Thanks. Oh, let me tell you, we, the spectrum of, we are really analyzing store-by-store basis. So, you might imagine some stores, let's say, in front of, in Cancun, where the hotel environment is, they have had a major collapse in sales. But some others that we probably are closer to hospitals or closer to even have some better contributions. I would say that in terms of tourist areas, I would say between 5% and 8% probably of the current, but I think really The major really damage to our store platform is that we really need by big people that are in the go, either that they are in the go, pedestrians or by car, but people that is moving. And because they are moving, whenever they need anything, also there to satisfy their needs. So, I think that is really the main sector, and I would say that would be probably around 50% or 60% of our stores have these deductions. I think as when the economy starts opening, that could be anywhere by the end of May, I think we would probably come up with, better understanding of the market. I would say the other threat that we have is really the beer shelf. We don't know. There have been some different findings from the government or the brewery that they will be open up or they are not. So I think they are still, the coin is still in the air. And we don't know yet if they will be allowed to manufacture beer again in the near term. I don't know if you want to add any one.

Yeah, I think in terms of, as you say, on the sale of beer, and generally, you know, the liquor regulation, liquor sales regulation is very local. And so we have seen varying degrees of restrictions in different parts of the country, some states where you, you know, much fewer hours in the day, for example, where you can sell alcohol, a small proportion of the markets where you are not selling really alcohol at all. But the bigger concern, as Eduardo was saying, is that for a category that is one of our most important that we could be running out of product in the not too distant future.

Okay. Perfect. Thanks a lot and stay well. Thank you, Antonio. Thank you.

Thank you. We'll now take our next question from Gustavo Oliveira from UBS. Please go ahead.

Thank you, everyone, for the call. My question was really on the beer supply. If you could just shed a little bit more light on when you think you're going to be running out of inventories. And what is the discussion on the ground today for the supply in general? Do you think it could normalize soon? Or you foresee more problems on that front going forward?

Thank you. You know, let me give you my own opinion. This is Largo speaking. Really, by sanitary procedures, beer makers have an excellent track of how is the manufacturing facility. So I think there are more things about distribution. And again, what really concerns me more is that there are a lot of changarros in Mexico that live by selling beer. And I think these changarros are being hit dramatically. So I really think that I hope the beer distribution comes up alive again, because there will be a lot of chingarros that really leave because they do sell beer. And again, people is a major lubricant for social interaction, and I think probably the government might be afraid that because if they do bring beer, there will be more social interaction. So I don't know, really. I have my own opinion that I think the gear should be start opening in some procedure by opening up a little bit more and more, but I think we don't know yet how will this end. Juan, I don't know if you want to add anything.

Yes. Hi, Gustavo. So I don't want people to just get off the call and run to the store, but right now we're probably looking at about 10 days of inventory.

Although there are some stores, although there are some also stores that do not longer have inventory because there might be some location inventory stores that do not sell as much as some others. No, it's very clear.

Thank you very much.

Thank you. There are no further questions in the queue. Ladies and gentlemen, that's all the time we have. I will now turn the conference back to Mr. Padilla for posing addition.

Well, thank you very much, everybody, for your participation today. Stay safe and be well. Look forward to the next conference call. Thank you.

Thanks, everyone.

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