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

Good morning and welcome everyone to PHEMSA's third 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 PHEMSA's features, 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 can materially impact companies' actual performance. At this time, I'd like to turn the conference over to Mr. Juan Femseca. Please go ahead, sir.

Good morning, everyone. Welcome to FEMSA's third quarter 2020 results conference call. Today, we have an expanded team with us. So, Eduardo Padilla is here, as usual, as is Jorge Collazo from Coke FEMSA. But we also have Eugenio Garza, and we are welcoming Francisco Camacho. As you may remember, Eugenio has been in charge of strategic planning and M&A for the last couple of years, and he has now been given broader responsibilities for corporate finance, including treasury and tax. For his part, Francisco joined FEMSA very recently as chief corporate officer, bringing with him decades of experience in global CPG companies, including a long trajectory at Danone. You can read a little bit more on his bio in our press release. And so with that, let me turn the call over to Eugenio. Thank you, Juan.

Hello, everyone. Glad to be with you this morning. The third quarter was, again, challenging across tens of operations. But it appears we did hit the lockdown-driven bottom in the middle of the second quarter. And from there, we are seeing consistent of a gradual improvement across our business units. At Oxum, same-store sales for the third quarter were still lower than last year, but sequentially they show a better picture and trend over what we just saw just three months ago. This reflects a strong average ticket, but still a double-digit contraction in average traffic as mobility remains suppressed, and regulatory restrictions are still broadly in place across Mexico. Our health division had a strong quarter, including a standout performance from our Mexican drugstores, and Oxogas saw sequential improvement in recovery from a deep trough. For its part, Coca-Cola FEMSA also saw better sequential performance across its operations. delivering growth in its consolidated operating income, and showing improved profitability in several key markets. Moving on to discuss FEMSA's consolidated quarterly numbers, total revenues during the third quarter decreased 3%, while income from operations decreased 10.1%. On an organic basis, total revenues decreased 7.1%, and income from operations decreased by 14.9%. For this quarter, the difference between reported and organic figures reflects a full quarter of in Brazil, as well as the results of the Janssen distribution operations in the US. While we're on that subject, we should mention that the integration of WAX in North America is advancing right on schedule. We recently brought in a new CEO to lead the combined company and execute on the ambitious long-term growth strategy we have for that platform. Back to FEMSA's results, net income decreased by 51%, driven by lower income from operations, as I just described, Higher other non-operating expenses may be driven by impairments for certain assets at Coca-Cola FEMSA and a non-cash foreign exchange loss related to FEMSA's U.S. dollar denominated cash position. In terms of a consolidated net debt position, during the third quarter, it remained stable compared to the previous quarter at 73 billion pesos at the end of September. This reflects our disciplined approach to treasury management, always a priority, but even more so in the current environment. Along similar lines, our capex was down 28.4% as every operation continued to rationalize non-critical investments. Moving on to discuss our operations and beginning with Chem-Psychomedicine's proximity division, let me begin by updating you on OXO store openings. During the third quarter, we opened 139 new stores and we reopened 126 stores that were being remodeled or receiving major maintenance. At the same time, 82 stores remained temporarily closed, and 108 stores that were underperforming for a short time were permanently closed. As a result, our net number for the third quarter was a plus 75 stores for a total of 793 net additions in the last 12 months. This is a better number than what we saw in the previous quarter, which, as you recall, was minus 40. More importantly, if we continue to see an improvement in the mobility and consumer demand fronts, This could set the stage for a gradual return to a more robust store expansion in the coming months and quarter. We will certainly keep you posted as our analysis and thinking evolve on this. Having said that, as we mentioned on our previous call, a portion of our store base remains subject to COVID-19 restrictions and measures that put further pressure on our sales, such as limited time windows to sell alcoholic beverages. As of the end of September, more than 30% of our stores were still under some sort of restriction. Getting into the numbers, also since our sales were down 9.1% for the third quarter, a sequential improvement of almost 330 basis points, reflecting a 22% decline in store traffic and an increase of 16.5% in average customer ticket. This is still far from optimal, but at least it shows a gradual and consistent improvement from the deep levels we saw in the middle of May. Moving down the income statement, for the third quarter, gross margin contracted by 50 basis points, reflecting a decrease in commercial income that is often linked to sales targets that are not being met in the current low mobility environment. Partially upset by the resilient performance of our services category, income from operation decreased 44%, and operating margin contracted 370 basis points, reflecting significant operating deleverage, but again, showing a meaningful sequential improvement. Moving on to Temsa Comercio's health division, during the third quarter we expanded our drugstore count by 60 net additions to reach a total of 3,249 open units across our territories at the end of September, and 119 total net new stores for the last 12 months. Revenues increased 6.4%, while same-store sales increased an average of 7.5% in Mexican pesos, reflecting strong performance of operations in Mexico, as well as positive trends in our Colombian institutional sales, and in Chile, where economic activity has picked up recently as consumers have been granted access to a small percentage of their pensions to alleviate lockdown-related pressures. Gross margin expanded by 100 basis points in the quarter, reflecting a positive sales mix effect driven by consumer behavior shifts in connection to the pandemic, more effective collaboration with key supplier partners across all of our operations, and better margin performance in our business in Ecuador, where applying Socofire's operational best practices is already bearing fruit. Operating margin expanded 140 basis points, reflecting increased operating leverage and the gross margin expansion I just described. Moving on to FEMSA Commerce's fuel division, we note that vehicle mobility remains well below normal levels. In that context, we are seeing some sequential improvement, even as many of our locations skew towards residential neighborhoods. Those are recovering much more slowly than commercial or industrial ones. During the third quarter, we continued to see pressure on our same station sales, which decreased almost 32%. Gross margins reached 13.6%, while operating margin was 3.7% of total revenues, reflecting tighter expense controls and better management of our supply chain. Finally, moving on briefly to Coca-Cola FEMSA, as John highlighted last Monday, even in the context of a moderate revenue contraction, They were able to grow operating income and improve profitability in several markets like Mexico and Central America, while South America continued to recover, driven by solid volume growth in Brazil. For more detail, as always, you can listen to the webcast of the quarterly call. Looking ahead, as a result of incipient recovery trends, we begin to see, and after focusing on defense for the past couple of quarters, we are again beginning to think in terms of medium and long-term growth opportunities and are cautiously putting together some plays on offense. These include rekindling our store expansion strategy at OXO, accelerating our digital initiatives across our platform, and very selectively considering small bolt-on acquisitions in our existing business verticals, always with a focus on prudent capital deployment and value creation. As we continue to move forward towards a new normal, the environment is still fluid, and it's not yet clear what normality will eventually look like. We will all have to adapt and we will need to adjust our approach to market segments following evolving consumer habits and patterns, emphasizing our exposure to some of these segments and rationalizing others. In the meantime, we will continue to work hard to keep our people and our customers healthy and safe. Once again, we want to highlight the superb job done by our employees and management teams in navigating such a profound and disruptive crisis so well. We are not out of it yet, and we expect to face the prolonged economic downturn across markets in the coming quarters, but we take this opportunity to recognize the commitment, resilience, flexibility, and agility shown across our organization in the past seven months. And with that, we will open the call up for questions.