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

Please stand by. Good morning and welcome everyone to FINSA's second quarter 2020 financial results conference call. Please note 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 FINSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations 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 Eduardo Padilla, PEMSA's Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and welcome to PEMSA's second quarter 2020 results conference call. As it is customary, Juan Fonseca and Jorge Collazo are also on the line, and today we're also joined by Eugenio Garza. We hope that you and your loved ones are healthy and safe. The second quarter was the most challenging period we have faced operationally in many decades, although there were differences in performance among our business units. But also, we saw a severe impact from continuing lack of consumer mobility in the geographies we served. That translated into soft performance for most of our categories and consumer locations. And the challenge was compounded by the lack of beer supply that only began to recover in the month of June. Our health vision fared better as demand for its production products remained high, but sales were constrained by strict restrictions imposed on consumers and their ability to move around, particularly in our key South American markets. The fuel division was impacted most as vehicle utilization fell quickly and drastically. However, from a deeper value and a relative sense, it is the retail operation that it seems to be rebounding faster. For its part, Coca-Cola Spencer was quite resilient, leveraging its execution capabilities to once again adapt to consumer needs and minimize the negative impact of the downturn. Having said all that, our team continues to execute at a high level in very complex environments. and we continue to focus on the safety and health of our people and our customers above all else. Moving on to discuss census consolidated quarterly numbers, total revenue during the second quarter decreased 10.7%, while income from operations decreased 37.5%. On an organic basis, total revenues decreased 14.3%, and income from operations decreased by 40.4%. For this quarter, the difference between reported and organic figures reflects two months of our drugstores in Ecuador, a full quarter of the AGB operation in Brazil, and 45 days of the WACSI and North American Janssen distribution platforms acquired in the United States. Net income decreased significantly, driven by, number one, lower income from operations, as I just described, number two, Higher other non-operating expenses, including ancillary charges related to the extraordinary payment of almost 8.8 billion pesos agreed with the Mexican tax authority, as well as impairments, including for certain assets of Coca-Cola FEMSA and the closure of our specialties operations. And number three, FEMSA participation in Heineken's results, which were lower relative to the comparable figure we reported last year. In terms of our consolidated net debt position, during the first quarter, it increased by approximately 10 billion pesos compared to the previous quarter, to reach a level of 72 billion pesos at the end of June. This reflects our investment of approximately $900 million in the Washington North American platforms, as well as the majority of the large tax payments mentioned before. While we are on the subject of debt, we should mention that during the quarter we placed $700 million in the second reopening of our 30-year dollar denominated bond issue, bringing the total amount to $2.5 billion, which was our original target. The weighted average yield for the total insurance was 3.5%, which was also our target back in September when we started with this project. And I highlight this because it took us nine months, and we went to the market on three separate locations in order to get the amount we wanted at the cost we wanted. We were very patient, and it paid off. And this is the approach, and it did fit in what we tried to bring to our financial decisions. Moving on to discuss our operations, and beginning with PEMSA's Commercial Proximity Division, we should start with a comment about store openings. While we managed to open a number of new stores in the quarter, we also have to close a small percentage of our store base due to COVID-19 restrictions and effects. Some of the closures will be temporary, but some will be permanent as we take this opportunity to remove certain marginal stores from our base. The numbers for the quarter went like this. 159 new openings, 85 reopening after remodeling and maintenance, 24 definite closures, and 260 temporary closures. As a result, we recorded a net reduction of 40 stores for the second quarter to reach 950 net store openings for the last 12 months. In addition to the store closures, we reduced the number of operating shifts from three to two. in a large percentage of our stores, as 24-7 operations were not viable or necessary given the current consumer dynamics. Also, sales were down 12.4% for the second quarter, reflecting a 24.1% decline in store traffic and an increase of 15.4% in average customer ticket. Here, it is also useful to pause a little bit what happened in the entire quarter because we did see meaningful differences as the quarter went by. During April, as you may recall, we still had relative availability of beer for most of the month, as well as some panic buying for certain categories on the part of consumers. And this mitigated the blow and made April the least bad month of the quarter for OXO. During May, however, we basically depleted our beer inventories and we saw the steepest contractions in traffic, making the worst month of the quarter. Finally, in June, we began to recover availability, and we also began to observe a gradual shift in consumer dynamics. In the first part of the quarter, most of the consumer demand weakness came from mobility restrictions and lockdowns, with a thirst and craving occasion suffering from the absence of customers going about on the street, and the gathering occasion reeling from social distancing. However, late in the quarter, the weakness in demand seemed to be driven increasingly by economic hardship. Also, many consumers have lost their income, making the crisis today a bit more similar to prior downstairs, but also more pronounced. Adding to the headwinds, as much as half of our stores in Mexico were under some type of cooperating restriction from local authorities during the quarter. often related to the sale of alcohol in uncertain time windows, we expect most of these restrictions to be temporary. Moving down the income statement, for the second quarter, gross margin contracted by 10 basis points, reflecting a negative sales mix effect caused by the beer shortage in May, and improved performance of our daily and replenishment categories, partially offset by a high single digit increase of our services category. Income for operations decreased almost 66%, and operating margin contracting 620 basis points, reflecting significant operating debt deleverage. Moving on to Francis Commercial Health Division, we reduced our store count by seven drugstores, and the amount of temporary closures was enough to offset the small number of stores we opened during the quarter. Having said that, we have a total of 3,189 open units across our territories at the end of June, and 128 total net new stores for the last 12 months. Revenues increased 2.4%, while on an organic basis they decreased 9.1%. Same-store sales decreased an average of 9.8% in Mexican pesos, reflecting the negative impact of the strict mobility restrictions implemented in our South American markets, including curfews. Partially upset, by assorted performance in operations in Mexico. Growth margin expanded by 80 basis points in the quarter, reflecting, number one, a positive sales mix effect driven by consumer behavior shifts in connection to the pandemic. Number two, more effective collaboration with key supply partners in our operations in South America. And number three, better margin performance in our business in Ecuador. We're applying Socofar's operational best practices is very, very improved. Operating margin contracted 130 basis points, reflecting lower operating leverage in South America. As we anticipated last quarter, Pemsa Commercial's fuel division was the most exposed to the current environment of lockdowns and reduced mobility. And the impact is visible in our quarterly results. While we were able to add one new station to our limited work, same-station sales decreased an average of almost 50% in the second quarter. Growth margin reached 13.3%, but operating margin was 0.8% of total revenues, reflecting considerable operating deleverage. Operating expenses decreased 15% as a result of tight expense control and increased efficiencies. As a silver lining, in relative terms, it seems this business is the one that is recovering more quickly in relative terms, showing the sequential improvement in recent weeks, but rising from a deeper contraction. Finally, moving on briefly to Coca-Cola FEMSA, as John highlighted yesterday, the results show a resilient volume performance in Mexico, improvements in Brazil and Colombia, and continue this trend in Guatemala. They made further progress in development of digital and omnichannel initiatives in key markets and managed to deliver solid profitability in Mexico and Central America, even in the context of the current pandemic.

For more details, you can listen to the webcast of the inquiry conference call. Looking ahead, uncertainty remains.