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.

and it is hard to make predictions. However, as I mentioned before, it seems the crisis is doubly evolving. In the beginning, its main drivers were severe health concerns and the lack of consumer mobility, and these remain a problem. However, we're increasingly seeing the signs of another set of more traditional economic headwinds coming to play. This is not positive, but at least we have more experience with economic downturns. As you might imagine, we continue to look at our entire business in an effort to optimize it for the changes taking place today and for those that seem to be on the way. And we will continue to work hard to evolve our company to meet the moment and to come out in better shape on the other side.

And with that, we can open the call for questions. Operator?

Thank you. The question and answer session will begin at this time. If you'd like to ask a question during this time, simply press the star, then number one on your telephone keypad. If you would like to withdraw your question, press the pound star two. 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 added time to allow the maximum number of callers to ask their questions. Again, that is star one to ask a question. And we'll go first to Ben Thurer of Barclays.

Hey, good morning. Thank you very much for taking the question. I hope you're all safe and sound.

Eduardo and, well, Eugenio, welcome aboard. So my one question would be on the more recent performance in Oxfam. You've elaborated how it went through the quarter, but if you could shed a little light on the current performance over the most recent weeks into July where we've seen more states going into the orange phase, some of the re-openings, and if you could also share with us on the temporary store closures

how many you currently still have closed, and how do you think the reopening is going to evolve considering some of the tourist restrictions as well as office restrictions that are still in place? That would be my question.

Thank you. Thank you, Ben. Let me tell you, we are making progress. As I said in the quarter, 50% have restrictions. Now I would say 35% have restrictions. The sensor cells have improved a little bit. Mobility is coming still, but there's still, you know, if we just pay attention yesterday to the Google Mobility Index, and the Google Mobility Index in Mexico is down around 40%. And that really, I mean, also really lives by the people are on the go and moving. and this is really being the major cost. We think that people are beginning to understand and adapt to this new environment. Mobility is coming up little by little, and not only car mobility but pedestrian mobility too, and I think it all depends on what is going to happen with school systems the next quarter, what's going to happen with offices opening, or keeping it closed. So I think optimistic in the way that we are understanding the pandemic better. You know, I could tell that the lack of contagious of this pandemic in the stores is very low, very, very low. Basically, the problem that we have had with our personnel is more because the lockdowns that live in their house and the lack of care they have with connection with some family members. Most of the people that have had the pandemic goes through the house, not really from the traffic to the work or the store. We are optimistic, but the thing is that we're feeling now the pain that the economic downturn is staying here And we are adapting the offerings too, but we are cautiously optimistic.

Yep, that's what we have to be. Well, thank you very much.

Our next question will come from Bob Ford of Bank of America.

Hey, thank you.

Good morning, everybody, and thank you for taking my questions. Eduardo, in your opening comments, you mentioned the 24 closures. Is it really for a wider assessment of the store base, and how do you think about the footprint right now in terms of maybe reallocating those resources to other locations, or maybe just in anticipation of these more traditional headwinds in terms of the slowdown in the economy?

Well, as I said, the A lot of the lockdowns that we had had the restrictions of alcoholic curfews or lockdowns or the possibility of open stores in certain commercial areas. And that was the number that we had. Around 50% had these kind of restrictions. As I said now, Out of the 19,000 stores, there are around 7,000 that have had some kind of restrictions. For instance, in the state of Tamaulipas, the previous weekend, we were not allowed to sell. We have to close. Not only not sell alcohol, but to close completely the store. And again, I think local authorities are trying their best to adapt and have countermeasures against this pandemic. Some are effective and some are not, I would say. But the thing is we try to lobby and understand what the authorities are trying to do and help them to accomplish the objectives, not necessarily by obstaculizing the way we work with the stores. I think another problem is really through the lockdown, the lack of social mobility and the social distancing, night shifts are very, very weak. And we have had some besides the lockdown restrictions that we have some authorities or selling of alcohol in some stores. Also, we are really closing some of the night shifts because, again, there is no consumers around. So, but again, we think that will be temporary and we are adapting the best we can.

Thank you very much. Thank you, Rob.

And again, as a reminder, that is star one to ask a question. And if you find that your question has been answered, you can remove yourself from the queue by pressing star two. We will now go to Miguel Tortolillo of GPM.

Hi, good morning, everyone.

Thanks for the question. Considering the timing of this crisis that came right after you bought or invested in a couple of companies, which of them would you say that has had the most challenging start now in the financial direction?

You know, we're very happy with our partners and with the companies we acquired. They are in the Janssen business, and as you imagine, Janssen has a great demand for the products. Out of the two, Waxee is more focused to Janssen, and North America has a more diverse platform. And in fact, North America has had to sell to some... hospitality customers, and I think probably that is the one that has suffered the most. But I think both companies have adapted tremendously to the new environment. They've been able to protect their employees and at the very same time try to serve the customers. So we're extraordinarily happy with them. We have great partners, and I think that we are going to build an extraordinary platform with the help of them. And we look forward with a very optimistic future.

I think I would add, Miguel, this is Juan. Even on the Jetro Restaurant Depot, which is also one of the recent investments, which being as exposed as they are to the restaurant sector, one would think, or at least one would have thought a few months ago, that this would be a complicated period for them. And I'm not saying it hasn't been. but certainly they have been adjusting and navigating the situation, quite frankly, exceeding at least my personal expectations, which kind of confirms our view that this is a very well-positioned and very well-run company. So they have been doing, as I said, better than expected, adjusting, and I think their customers as well, the little restaurants adapting to curbside delivery, and things begin to open up in many of the markets that they serve. So overall, I would say on the restaurant depot front, you know, a positive surprise.

Great. Thank you, Bart.

And now we will take a question from Marcelo Rocheta of Credit Suisse.

And Maricela, if you could check your mute function, we're unable to hear you.

Hi. Are you listening now? Yes. Please go ahead with your question. Okay. Hi, Juan. Hi, Eduardo. Hope you are well. Just two quick questions here from my side. The first one is about DNA. I saw that basically your DNA increased across the business division. So just to understand what's driving such increase, And secondly, very briefly, if you can give your impressions about the maximum pension reform in terms of potential impacts for FEMSA. Thank you very much.

Well, I will go to the second one, and I think let Juan answer the first one. The pension reform, I think, is this whole web there, and I think it's a good thing that we all together try to solve it because it will be very difficult for the government to solve, and what we would like to have to solve it in a desperate way and that could disrupt the economic environment in Mexico. I think what we have for the future is kind of painful, but I think it's the right thing to do, and I think between the the private companies and the government, I think it's a good sign that we are together here to fix the hole for the long run. And the other one, Juan, why don't you go and try to answer the very first question, please.

Yes. Hi, Marcelo. So we are having some amortization of IT investments. I think on the OXO front they have continued to invest in their new versions of some of the software. as well as developing the digital platforms across the board. We have had some closures of stores, and we've had some asset write-downs both at CodeFEMSA and at FEMSA, so I think that would be playing a part on that. Obviously, we can also follow up offline in terms of making the numbers match, but I think off the top of our heads that those are concepts that come to mind.

Okay, thank you. Thank you very much, guys.

Thank you.

And next we will go to Gustavo Oliveira of UPS.

Hi. Good morning, everyone.

Thank you for taking my question. It's on oxo gross margin. You mentioned that your numbers are actually very good. There was a very little contraction there. You mentioned that the beer shortage, obviously. affected profitability, but that was offset by the service category. On the recovery, do you think that you could actually see an expansion in your gross margin? I don't know if the service category will remain strong and the beer clearly could recover. Could you please elaborate a bit on the trend for the gross margin for OXO?

Well, let me give you a bit of our suppliers and us are concerned with the lack of consumer economic strength. But what we're trying to do is to come up with different offerings to really estimate the demand. And here we have our suppliers and our partners and trying to do something great for them, for the consumer in current times. But I don't know, Juan, where do you go and go for the detail of the numbers, please?

Sure. I think on the gross margin, I mean, historically, or at least for a long time now, the two main drivers of gross margin expansion have been the financial services category and, you know, the commercial income that we receive from our supplier partners. Right now, as Eduardo has said, I think a positive surprise has been the resilience and even the faster growth of financial services during the downturn as consumers have made sure that they're keeping current with their memberships and their utilities and realizing or taking advantage of the fact that it's a lot easier to go to OXO than to go to the bank and it's less time consuming and so even though financial services had been contracting or at least it had been growing less in recent quarters, in the last two or three quarters, this quarter it actually, the growth came in in the high single digits, which was a positive surprise and I think contributes to the high growth margin. The other question on commercial income is a little bit trickier because some of those agreements, as Eduardo also referred to, are tied to volumes. And so it's hard to predict. I mean, we do need volumes to come up, transactions to go up, for commercial income to go up, you know, in consequence. So I would say visibility for growth margin is not as clear as we would like. I wouldn't necessarily predict at this point that we will continue to expand it, you know, more than trend. But at least during the second quarter, it did kind of hold its own.

Thank you. I think it's very clear. Thank you.

Thank you. I will also add that probably there were a small increase also in the lack of beer also shift demand to some of the alcoholic beverages. And that does compensate the margin a little bit too.

And that actually brings up an interesting point, Eduardo, because obviously you're right. Consumers did shift to higher consumption of spirits during the quarter. And interestingly, I think what our OXO colleagues were observing in recent weeks was that even as the beer came back, that the volume for spirits was still holding up strong. So maybe, you know, in the effort to look for the silver lining or the glass half full, you know, if consumers realize what the assortment and the pricing is for spirits at the OXO stores, that this becomes a category that is, you know, that is stronger than historically because historically we haven't sold as much spirits as we are selling right now. So hopefully this remains after the pandemic is gone.

And we'll move on to our next question, and that'll be from Alan Alanis of Santander.

Thank you so much. Good morning, everyone. Well, Alan. No. Did we lose someone?

And it looks like we may have lost Alan. We'll go next to Ulysses Arcate.

Hi, everyone. Thanks for the space for questions. So here I wanted to get your thoughts a little bit on any potential product portfolio rationalization there in OXO. And maybe if you can share any color on what you're seeing in terms of the shift in mix more recently now in July, maybe going back a little bit more to the more profitable categories that you guys have there. Thank you.

You know, unless we think that this lack of mobility will stay for a very long period of time, which we don't think it is the case, I think we have to adapt better and we have to adapt more to the lack of consumer economic power. And by probably with a different assortment, probably the looking for cheaper or less expensive products. Our returnable soft drinks is not as strong as we should have it now. And those kind of shifts we can foresee for the future. But not necessarily in the types of consumer demand of first, or trade fest or people gathering, depending on, we think that eventually those type of consumer demand will stay. It is more the lack of economic power of the consumer that we're more concerned than the real shift of consumer locations.

That's perfect. And a bit more on the short-term kind of thinking now on June, July, after the beer category is back and et cetera, do you have any color that you can share with us kind of there on the shift back, let's say, in mix?

Yeah, one? Yeah, I think one thing to kind of highlight, and I think Eduardo touched on it in his opening remarks, was that the quarter itself was a little bit of a I don't know if a V-shape is a little bit of a strong descriptor, but certainly the trough of the trend was the month of May. And we believe that, we hope and believe that will mark the lowest point of this downturn should be the month of May. And then as a beer comes back, it helps everything, right? It helps operating leverage and it helps margins and generally begins to to turn this into a more traditional downturn, so to speak. And so, you know, as Eduardo said in the beginning, we are seeing improving metrics and improving traffic and really the one concern I have is not to convey the view that, you know, once the mobility restrictions are gone, that we go back to normal immediately, right? Because we are seeing this symptoms and signs of a more traditional economic driven downturn but again when you go dry and this had never happened before on the beer side obviously you have both of our suppliers on the beer front working hard to restock the shelves consumers themselves are probably buying a little bit more beer than they normally do to make sure they don't go dry again and so You're seeing positive trends on some of these important categories, especially beer. I would expect that to continue. We will obviously make the adjustments. Eduardo referenced some in terms of packaging and mix for some important categories. I think we need to be careful and work hard at understanding how quickly and what the new normal eventually ends up looking like in the sense that we will, I'm sure, adapt our value proposition to that, whether it means some incremental SKUs or a shift in the mix and that sort of thing. So we're still not at the end of this, but we know more about how the consumer is adjusting habits than we did a couple months ago, and we are acting in consequence.

Perfecto. Muchas gracias, Eduardo Juan. Gracias.

And we will now go back to Alan Alanis of Santander.

Let's see if this time works. Thank you so much. Thanks for taking my question. And again, good morning. Hope you guys are, your families are safe. Eduardo Juan, I guess, I mean, we on the sell side, most of us have a buy rating on this talk. I mean, because of the valuation of OXO implied here. Now, the result of this quarter, I guess the question is, is this result putting to question the business model of OXO in the long run? This is the first quarter ever that we closed stores. So I guess the specific question is what, and sorry if I missed it, what's the expectation regarding store openings going forward? And second thing, and this is a question we get a lot, and I'm sure Juan also gets it a lot, is why the reluctance to stay away from e-commerce? And that's really a joke with me, saying every time you guys mention the compilers with Amazon or so forth, the stock reacts positively. Why not invest in a basement or in a second floor, in as many options as possible, to use them as distribution for e-commerce and leverage that, especially given the changes that the pandemic will cause. And the third and last question has to do with capital deployment. I mean, I think that the pushback has been visibility in terms of capital deployment. Eduardo, you mentioned about patience and discipline. I think that it's very clear for investors that you're very patient. But what can you expand on in terms of giving comfort to investors that you will remain disciplined in terms of that capital deployment, giving the very strong balance to the cash flow generation that you generate? Those will be my questions. Thank you so much.

Well, let me tell you, we are very optimistic of Oxfam in the near and long run. I think we have a good product platform, and it's just that we have the right consumer adjustments and the lack of mobility that will help us to be on track again. In terms of your question about the e-commerce industry, We are doing things that we are not prepared yet to disclose, but I think in the financial sector we see the evolution there and we have to be prepared. Also, the loyalty program is related and connected with the financial platform. The current, if you want to see, those are the ones, the linkages that we're making with the current platforms like Amazon and everything, we're very optimistic with those two. What we don't know yet is the home delivery. Home delivery, still, we don't see how the, in fact, the ones that are doing home delivery in small purchases not groceries, but small purchases, the ones we deliver, nobody makes money. Nobody makes money, and they are still trying to catch up and find a better way. So if we were in the grocery business, without doubt that we would be delivering a lot of things for homes because economically those make sense. And the other ones we haven't seen yet, although we have some tests to deliver in a very efficient way, with some backstores and everything, but I think there's still some learning and efficiencies to come into place to perform better. I don't know if you want to add to the question, Juan.

Thank you. Thank you, Eduardo. Yes, I do. I think Alan's first attempt at the question didn't work, but the second attempt, he made sure that he covered a fair amount of big topics, so I will try to add to some of these So on the storefront, Alan, I think what we're seeing is we have for a number of years, we've been opening more stores every year than the previous. We got as high as 1350, I think, at the top. And what we're doing right now is we're taking this opportunity to look at the – there's a layer of stores that are probably marginal in terms of what they're contributing to the numbers. And we're figuring out which of those stores actually should not be open, kind of pruning the base of a small number of stores that should not be open. And just generally, I think the budget for stores this year before the pandemic kind of reared its ugly head, we were thinking about 1,200 stores for Mexico. So that is a level that is a little bit lower than the top that we reached a couple of years ago. But we were already kind of moving into a phase where you're becoming more demanding about what you expect of your new stores in order to ensure profitability and productivity of the new stores. And at the same time, the budget for this year had us with about 150 stores outside of Mexico. So I think we are in the early stages of that process where international will begin to add more meaningful numbers to the number of stores. And obviously, once you get some scale in Colombia, Chile, eventually hopefully Brazil, that this becomes not just a Mexico story, but more of a continental story. So we are at that stage, and I think this year with the pandemic, with the dynamics, we decided to start closing a few of those kind of marginal stores. I'm also optimistic on the storefront that for central and western Mexico, Now that we have both portfolios of beers, that there will be a large number of locations in places like Guadalajara, León, Querétaro, even the Valley of Mexico, where the fact that you now have the ADI portfolio kind of takes a lot of those locations that were just short of being viable, makes them viable again. and, again, kind of ensures that we can continue to open large numbers of stores in that part of the country. I think on the e-commerce front, I mean, Eduardo touched on it in terms of also obviously realizing the potential and the power of the OXO platform to bankerize people or to get people to adopt new technologies or new products. I mean, I think we certainly have the Saldazo experience That gives us a lot of comfort in terms of our ability to get people to sign up and adopt new means of payment or new means of saving. But one thing we don't want to do is to over-promise and under-deliver. So we are working hard at the three-legged stool of our digital platform at OXO, which involves last-mile delivery, and I think more importantly, the loyalty program and the e-wallet, and hopefully we'll have something to show the market, you know, toward the end of the year. And then finally on capital deployment, I mean, you know, you've seen us for over the years. FEMSA basically has a couple of ways that we grow. We either take what we do well to a new geography, or we take what we do well and we expand it by a couple of degrees, and examples of this abound. whether you're talking about or Santa Clara or the drugstore business where you took kind of OXO and expanded what it does by a few degrees and decided to go into drugstores. So I think what we're doing right now, and I think the market, to your point in terms of how you framed the question, is still kind of getting its hands around why it is that we made a couple of investments in the U.S. or how does the Janssen business fit into the overall strategy I think you're seeing us do kind of what we usually do, which is figuring out what we do well and then taking it to another country, obviously with the benefit of very strong partners as we have in the U.S. So we understand that we are adding a little bit of complexity to the org chart. We will try to address that to the extent that we can by increasing the disclosure. And when we've spoken about how we're going to start opening up the numbers for the logistics business as well as for the Janssen business first quarter of next year. So, you know, capital deployment, these investments, and addressing the complexity that it brings to the equation are very much top of mind for the team, and hopefully we are in the process of addressing it. Got it. Got it.

No, thank you so much. I mean, you guys are extremely good, not the best in the region in terms of large-scale logistics of moving things. It's just, I guess, it's a puzzle for a lot of investors and analysts why, I mean, that logistics expertise hasn't been moved to, like, all the way to small delivery, like Eduardo said. And to Eduardo's point, I mean, I know I'm going to say something very humbly and things that you already know, but Amazon, Tesla, Facebook... All of these companies started without making money initially. And they just gained the scale. And these Colombian guys are happy. It's a question mark. They're going to be able to control the small drop-side delivery. And I think a lot of investors think that you have a great opportunity. You have the balance sheet. You have the expertise. And I think that, yeah, initially nobody will make money. And probably you get in, you probably won't make money either. But once you get the scale, eventually I think consumers will pay a premium for using Uber, for using Facebook, for using Amazon, and so forth. And with a long-term vision, the trend for us, I think that a lot of investors are asking, why aren't you getting into that with more strength and using your muscle and your expertise? But anyway, thank you so much for taking my questions. Stay safe and have a great day. Thank you.

Thank you, Adan. I mean, I just want to ask that question. You know, the concept or the notion of the super apps, and how in other geographies, obviously, things have evolved very quickly. But we do have the aspiration with the right platform and the right partnerships to hopefully become one of those or part of one of those ecosystems down the road and leverage, quite frankly, the 20,000 bricks and mortar stores that we have, which are a differentiating factor vis-à-vis other folks.

Okay. Thank you so much.

And now we'll go to Rodrigo of Scotiabank.

Thank you, guys. Thanks for taking my question. I just wanted to hear your thoughts on the state of pop stores in Mexico. I mean, on the one hand, it's hard to imagine many will not go on there, of course. And on the other hand, Higher unemployment may push many to set up shop in the informal economy. So any thoughts on what you're seeing on the ground would be appreciated.

Well, I think the moment folks were hardly hit, unfortunately, because of the lack of beer.

And also the lack of cigarettes, because it was not only beer. Cigarettes, I think we were able to prepare ourselves with good inventories. But again, so those two were major, they had major effects on us. On the other hand, I think the traditional modern pubs are closed where people leave. So I think I would say there are different modern pubs where mobility was a major role. Yes, they've been hardly hit. But on the other hand, I think the ones that are in the neighborhoods, I think they're coming up with a good performance. I would say also they were better prepared in the returnable bottles, the returnable soft drinks compared with also. So that was a small advantage. But, yes, again, I think they will recuperate because I think the Coca-Cola system, Bimbo and the like, are very much willing to support and help them to compete. So I do see that the pandemic, those neighbors, I think it's helping them to sustain. But yes, they were very hardly hit, the ones that have lack of beer during these initial periods of their downturn.

Great. Thank you. And just related to the last question, I guess, you have taken some stakes in certain startups, and I've seen that one of those, Hustle, has been growing quite a bit. Any insights or things that you have learned on the delivery in these stakes that you can share?

Yes, we've been trying to support with some venture money to support those suppliers that are very much in line with us that will help us to enhance our value proposition. And I don't know specifically the one you're talking about, Juan, who might have a better idea, but yes, we're working not only with technological suppliers but also with normal suppliers where we could help them to become larger. In fact, we did that with a great supplier that we have, which is Caffeineo, which is the one that supported all the coffee operations. I think with that knowledge, we could be of great support to them. Through this pandemic, all the small vendors, we are helping them to pay them very quickly so they don't have this cash crunch problem that this pandemic will cause to them. And so those are the – yes, our small-scale suppliers are very important, and the strategic ones, we want to invest with them so they can grow better and faster to become a major competitive advantage to us.

Yeah, I think on the justo investment, I mean, certainly we're trying to – to help these new ventures through our FEMSA Ventures arm, but also learn about things that would help us in our own value proposition or the way that we operate, and certainly distribution, the use of dark warehouses or dark kitchens, dark stores, the handling of perishables. These are all things that we would love to be better at and to know more about and this investment in particular obviously has turned out to be an interesting one. I mean, the amounts involved are not huge relative to the size of FEMSA, but certainly it's a startup that is doing very well, and, of course, I know that you stay close to these companies and the different rounds of financing and how quickly they're growing, and this is so far a very nice success story.

Great. Thanks, Eduardo, and thanks.

And now we will go to Alvaro Garcia of BPG Pectual.

Good morning, Eduardo, Juan, Eugenio. My question, I have two questions. Sorry, I have two questions. One, on Heineken, I was wondering if you could comment on whether or not your position on the stake on owning, you know, This 15% has changed. You're not given a new tax agreement with the Mexican government. And two, on M&A, fair to say we're in integration mode. It would seem to be a nice time to sort of take a breather and integrate a lot of the different assets you've bought over the last couple of years. Those are my two questions. Thank you.

Well, the Heineken shares, yes, it's a temporary investment.

We just have to find a way to deploy that capital in a better way. And it is not as optimal as it was in the past, as you were referring. But we just have to find the right time and the right path. to deploy that capital and have that use of those proceeds. The second question, I forgot the second part.

Are we ready to take a breather after a lot of activity on the M&A front? I think that the answer to that is yes. For the most part, you should expect us to start integrating capturing synergies and delivering on the promise of all of these investments. I would say there's probably one exception. The Janssen platform, a big part of the attractiveness of that business involves a growth through acquisitions and eventual integration. It's hard to tell at this point whether there will be transactions coming along in the coming months and quarters, but if they were, I think we would be interested in taking looks. But other than that, for the most part, and understanding that M&A is hard to predict, generally speaking, our stance is one of, as you say, kind of sitting a little bit more on our hands and digesting the number of bites that we took over the last 18 months. Yes.

And, Alvaro, thinking about the fourth platform that we are looking at, I think we already have it. So we don't think to open a new vector, a different vector for growth. The one we have is already well established, the proximity, health, and now this Janssen platform, I think we will be very much focused into the platform that we already have.

Great. That's very clear. Thank you very much.

And now we will take our next question from Sergio Matsumoto of Citi.

Yes, hi, good morning. Thank you for taking my question. I have two questions. One is I want to go back on the portfolio and the assortment question at OXO. You spoke about how you can change some of the assortments given the the economic slowdown. But could you explain more on the assortment changes you can make in the face of the reduced mobility, and especially over the long term, if this changes the consumer habits, like if the mobility stays low for a long time? That's the first question. And the second question is, in Brazil logistics, which are the biggest industries that those businesses serve?

Sergio, I think we have better abilities and competencies to suit the assortment for an economic downturn. Lack of mobility, it will be different because really it's also designed to serve people who are on the go, are on the street. We have had in the past the daily and replenishment category, and that is the groceries, but not really buying the groceries, and also is really the one that you are left out in your pantry. and that's really the occasion that we have been serving. I think through this pandemic, we've been able to compel the consumer that we have a good assortment for that pantry, well, to find the produce that they are left out in the pantry, and I think by They are finding that we have good prices. But I think that category, lack of mobility will be in place. We'll have to expand that category compared with the quench or some other categories that are more designed to serve people that are on the go. But I think that would take more time and effort than to adapt to the economic downturn.

Juan? I think on that front, it will be interesting for all of us to see whether the consumer begins to privilege proximity even more in terms of these traditionally supermarket-type categories and whether our assortment and our pricing is compelling enough, which probably we will expect that it will be, for some of these consumers to decide to not just buy the cooking oil or the rice that they forgot or that they ran out of between trips to the supermarket, but that they will use also as a more frequent source of this type of product, and then we will make the necessary adjustments as we go along. I mentioned earlier the comment about spirits as another potential category where we hopefully will become more top of mind for the consumer in terms of how good an assortment and how good our pricing is for that category. I think you also touched on the second part of your question on the categories for Brazil logistics. I think generally as we have been moving towards the LTL, the less than truckload business and specialized warehousing, certainly pharma is an industry that is very well suited for the type of logistics that we do, not just in the distribution part but also on the warehousing side. In fact, if you look at AGV, the company that we acquired a few months ago, Their biggest category actually has to do with health, certainly a big component of animal or veterinary health, but also human health. I think when you think about the equation or the relationship between the size of the products, the weight, the volume, and the cost, and the type of conditions that they require for the transportation and their storage, it's an attractive industry, it's a profitable industry, and it's a very good fit with what we do. So I would say you should expect us to continue to try to grow in that front. Obviously, there are others, there are CPG products and categories and companies, electronics companies, but certainly the health for both our human and veterinary stand out as probably one of the biggest, if not the biggest.

Thank you.

And next question will come from Carlos of HSBC.

Good morning, everyone. Hi, Eduardo. John and Constantino spoke of a concentrated price readjustment yesterday. As the controlling shareholder and with really important rights in your equity agreement with Coke, What role is FEMSA playing in this negotiation, and what can you tell us about the long-term clarity of profit splits with the brand owner? Are they adequate for you at this point?

This agreement was signed like four years ago. And, yes, we would love to have a more stable and certain long-term relationship model. And that is something that is important for us and important not only for the pensions controlling shareholders. It's very important for management because the way we compensate management, they have to have some certainty because that is very important for the long run and also for the minority shareholders. The Guacala Company understands this, and I think it really is – We just have to be very creative and empathetic from both sides to understand that we are the same ship. That is very important because probably in the past we were not as empathetic to understand the income statement of the Coca-Cola company and probably we were not as empathetic to understand our income statement. And I think through these conversations that we have had with them, we are very much aligned and they have a common understanding that we are exactly the same boat. and the current economic circumstances and the current consumer behavior, we have to be very much aligned. So we're trying to build as much alignment as possible and certainty so we can invest and develop and tackle the consumer the worst we can. And as I said, we love, and I think the main two objectives are to be fully aligned, fully aligned, and build certainty. and trust in the relationship for the long run.

So the tenure of the last agreement was a 10-year agreement. This one, you just got a negotiation four years ago that you just finished making your last payments on it. Do you know what the tenure of this agreement is going forward, or are we just really negotiating a long-term agreement now?

No, we have this established, and... But it's something that they have the time, and we cannot disclose this to you without them being fully aware. But don't worry. We're very happy with it. And, in fact, we would love to have this kind of agreement everywhere else. We have given this certainty for the long run and alignment. Alignment, certainty, and trust.

That's helpful. Thank you. Carlos, if I could, a few weeks ago in one of the group calls that you've helped us set up with investors, you asked me the question of is it possible to have a long-term relationship with Coke where both partners realize a reasonable spread of ROIC versus WAC. And my answer was, yes, yes, yes, we can, right? I mean, yes, it is possible. And I think the point I would make right now is that this is definitely not at odds with what, you know, what John and Constantino said yesterday. I mean, the alignment that Eduardo is talking about, the expectation that there is a formula where both partners can make the right level of returns is what we are looking for.

Thank you.

And now we'll take a question from Ricardo Alves of Morgan Stanley.

Good morning, gentlemen. Thanks for the call. Most of my questions have been answered, but if I may just insist a little bit more on the Jensen asset. I appreciate your comments earlier. Now, perhaps a bit more of a strategic question. I mean, how are you going to be unlocking value on these acquisitions in the long run? I mean, One just mentioned the M&D potential, but as you merge the two companies, you come up with eventual synergies and so forth. What's the plan here in terms of how it fits to the overall FEMSA platform? Or perhaps it's just that the growth profile of these assets just improved a lot with the pandemic, and then M&A would really be the key driver for future cash generation. So just a few thoughts there would be helpful. Okay. And then just a quick update on the JV in Brazil as well.

Yeah, I think we have very good platforms for the medium and long run. I think this pandemic has caused some damages, but I think in the medium and long term, we are optimistic. We have the health edition, and we have the opportunities there for growth. We have the proximity edition, and then we have – We're very optimistic of the performance we're making in South America and the JV we made in Brazil. And also with our partnerships that we have here in the United States, we're very optimistic. We have two great platforms. We have the JETRO restaurant, Depot, without doubt. JETRO has been eating share out of the competitors. This is a major competitive strength that they have, and we're very happy with it. On the other hand, in the Janssen business, I think we made the right decision with the companies in the West, with the partners that we have, and the platforms that have been established and the opportunities for integration and going forward for a more national footprint. As I said, we don't plan to open up a new vector for growth. I think the ones are there, and we just have to be very keen and probably this short-term pandemic disturbance, cope with it, align better, make efficiencies, and probably make some decisions to adjust ourselves to this new environment. But we have great platforms for growth in the future. Juan?

Yeah, I think just following up on what you just said, Eduardo, on the whole Janssen platform, there's certainly – this is an industry that is very highly fragmented where you don't really have a huge incumbent. The platform that we are forming by combining Waxian North American already becomes – one of the larger players with, you know, WACC has kind of a bias to the west coast of the U.S. North American out of Chicago has more of a Midwest all the way down to Florida coverage. But you really don't have players with anything resembling a big national presence. And so the synergy component, the aspiration to integrate more of these assets at the right time and in the right way, It's a big part of, I think, the aspiration that we have for that business. Scale is a beautiful thing. We have been the beneficiaries of scale in many of our businesses, and this is another one where we think that could work. It's magic. You've done it in the right way. I think you also mentioned at the end of your question something about an update on the JV in Brazil. Obviously, the pandemic... It throws a little bit of sand into the gears in terms of the pace of openings down there. But quite frankly, we are almost on track in terms of openings for both the first new stores on the select side, on the gas stations of Raisen, but also on the standalone OXO side. So we do aspire to start opening stores, OXO stores, towards the end of the year. In Brazil, we're already making progress in terms of setting up our first distribution center down there as well. So things are going very much according to plan. And like I said, I think the pandemic has not forced the team down in Brazil to depart very much from the original plan. Obviously, this is, we've said before, this is not going to be a piece of cake. You know, figuring out the right value proposition for the Brazilian also is going to take a little bit of time. But the size of the opportunity and certainly the partnership that we have make us very, very optimistic that this will eventually be an important part of the portfolio.

And I think the partnership that we have with COSAN and I think we found, I think the proximity division found the right way to go into the field. They are very happy. They are learning a lot. In fact, they are learning and they are going to be adapting some of the select operations to this new scheme. And I think there is a lot of – we see a lot of growth and potential to adjust the value proposition of the select stores and the offshore stores in the field And I think that will be very, but it will take time. It will take time, but I think we're very optimistic.

Got it. Thank you so much.

Now we will go back to a follow-up from Gustavo Oliveira of UBS.

Thank you for taking my follow-up question, if I may. Yesterday at WOMAC's conference call, they mentioned some risks with respect to the introduction of the new labeling regulation rules that will start already in October. Could you please help us to understand what could be the impact of those new labeling rules in your OXO business? Perhaps during the transition time now, as it implemented in October and perhaps in your ability or on your supplier's ability to push for sales growth?

We think that sometimes too much information for the consumer and it seems like what I've been learning I think it's very important to inform the consumer so the consumer can do the better decision for their health and nutrition and everything. Sometimes if the labeling goes a bit too far, the consumer might be blocking so much information that he doesn't want to hear. He's just overloaded by this labeling. We don't know really where we stand, and I think that currently we are working very closely with our suppliers, and I think we'll be in a very good position to adapt to this new environment. We don't see major derailers happening. I don't know if you want to add to this one.

I mean, just the point that I think on beverages, certainly on the Coke-Fremsa side, generally the consumer has been well informed for many years now about the calorie count and that sort of thing, and the industry has been evolving for a while, increasing the percentage of the portfolio that has reduced or no calories at all. And so I think the challenges from the relabeling involve more the costs and the operating conundrums of changing labels or adjusting your packaging, that sort of thing, but not so much in terms of the incremental information that the consumer will receive. There are other categories where maybe the consumer has not been as exposed to nutritional information, and I think for those, there will be a period of adaptation But to Eduardo's point, I think OXO is very well positioned and the flexibility and the level of dialogue and cooperation with suppliers leads, I think, to what should be a relatively smooth transition when this eventually becomes a fact. During this transition, Juan and Eduardo, do you foresee... the risk of a more aggressive markdown just to get rid of the inventory that is with the old labeling or suppliers are going to assume the cost of that operation. I think that could impact your 4Q results or perhaps part of your 3Q results.

No, but I think the turnover of inventory in Oxford goes very fast. And if there will be some opportunities there, what will be the opportunity to make some money? Yes, I think it will be probably an alternative. I don't know when.

No, I agree with you that our inventory levels tend to be small and the turnover is fast. And I'm sure we will work with suppliers and come up with promotional activity as required. And I don't think it's something that is causing us to lose a lot of sleep at this point.

Thank you very much for the clarification.

Thank you.

And ladies and gentlemen, that is all the time we have for questions today. I will now turn the conference back to Mr. Padilla for posing additional remarks.

Well, thank you, everyone. Thank you very much for your participation today. Stay safe and be well.

Thanks, everyone. Ladies and gentlemen.

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