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

Good day and welcome everyone to PHMSA's fourth quarter and full year 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 for certain forward-looking statements concerning PHMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management expectations and and 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 will now turn the call over to Juan Fonseca, FEMSA's Director of Investor Relations. Please go ahead.

Good morning, everyone. Welcome to FEMSA's fourth quarter 2020 self-conference call. Today, we are joined by Francisco Camacho, FEMSA's Chief Corporate Officer, Eugenio Garza, our finance and corporate development director, and by Jorge Collazo, who heads Coke Fence's investor relations effort. The plan for today is to have Francisco comment on some higher-level trends and more strategic considerations, and to have Eugenio walk us through the numbers for the quarter. And we will follow the remarks with Q&A, as we always do. So with that, let me turn it over to Paco Camacho. Thank you, Juan. Good morning, everyone. Thank you for joining us today. We hope you and your families are in good health. In today's call, I will start by reflecting on the year 2020, including some specific comments about the fourth quarter. I will then share a few thoughts on how we will continue to navigate throughout the short-term volatility. Eugenia will then get into the details of the performance, and I will come back to share a few thoughts on why we remain confident about the future. I guess I do not have to tell you that the year 2020 was a difficult one because of the global pandemic. The volatility and the overall changes faced throughout the year certainly tested everybody's abilities. With no doubt, our company proved its resilience, flexibility, and agility across the board in these trying times. As an organization, we had to prioritize, collaborate, become more agile. and put the decision-making to the operations and the teams on the ground like never before, all while trying to stay and keep everybody safe. Moving on to discuss our performance, during 2020, each of our businesses quickly adapted their operations, applied learning from the different stages of the pandemic, and were fast to recognize shifting local needs. In OXO, The challenge was to make sure that our almost 20,000 stores remain stocked and operational while facing supply imbalances, regulatory restrictions, and drastic reductions in mobility across the market. In Coca-Cola FEMSA, the teams moved quickly so that their millions of clients across our geography were always served with the right beverage portfolio. This, even as consumers shifted preferences looking for more affordable options, different shopping venues, and moments of consumption. In our distribution business, the teams ensured that thousands of clients across the Americas were serviced properly and the products shipped and received in a timely manner regardless of the situation, be it a pharma company in Sao Paulo, a global CPE player in Mexico City, or a large hospital in Chicago or San Diego. This was successfully done every day throughout the year despite every changing condition and requirements from our clients. Moving on, I'm focusing on the fourth quarter. While we were dealing with operational challenges I just described, we still managed to make progress on the capital deployment front. At FEMSA Commercio, we announced an agreement to acquire OK Market, a proximity store chain with more than 120 locations in Chile. This transaction, which is still advancing through the customary regulatory approval process, will allow us to improve the way we serve our Chilean customers while we continue to grow our Oxford platform in this market. Importantly, in our specialized distribution operation in the United States, we made further progress right before the end of the year by making two acquisitions that give us a strong presence in the central and southeastern regions of the United States. We're steadily driving our strategy of creating a relevant national platform. This will allow us to improve the value proposition for our clients who will provide us with the benefits of increased scale. Let me take this opportunity to take a moment and elaborate a bit on our capital deployment strategy and about complexity. We are aware of market questions regarding some of our recent investments and the fact that there might now be more moving parts to the FEMSA story. The key message for you on this topic is that we now have a solid presence in the business vertical that we have identified as attractive and, very importantly, offer an unequivocal and excellent match with our capability set. As Juan likes to say, we are past our peak complexity, and now the task will be to grow this vertical to increase our scale and profitability. In so doing, we intend to provide you with more visibility. Moving on. As you can see, 2020 was not an easy year, to say the least. But we emerged stronger out of it. We learned, we adapted, we treated. We achieved an encouraging set of results, and I am convinced we are a better and stronger organization. It was only possible because of the dedication, resilience, agility, and engagement of the more than 300,000 colleagues in France. A big thank you goes to all of them, particularly those in the front line. With that, I will now turn the call over to Eugenio, who will go over the full quality results. Thank you, Paco, and good morning to everyone online. Starting with census consolidated quarterly numbers, total revenues during the fourth quarter decreased 1.5%, while income from operations decreased by 3.5%. On an organic basis, Total revenues decreased 5.3%, and income from operations decreased by 3.8%. For this quarter, the difference between reported and organic figures reflect the results of AGV in Brazil, as well as those of Waxy and North American Corporation in the US. Census net income decreased 88%, driven by lower income from operations, as I just described, a negative impact due to census participation in Heineken's results, a non-cash operating exchange loss related to FEMSA's U.S. dollar denominated cash position, and high-end interest expenses. In terms of our consolidated net debt position during the fourth quarter, it increased 4% to 76 billion pesos at the end of December, reflecting payments for the acquisitions carried out during the quarter. For its part, CapEx was down 26% as every operation continued to rationalize non-critical investments. Moving on to discuss our operations and beginning with PEMSA Convention's Proximity Division. Let me start by updating you on OXO store openings. During the fourth quarter, we opened 93 new stores and we reopened 80 stores that were being remodeled or receiving major maintenance. At the same time, six stores remained temporarily closed and 234 stores were permanently closed. As you might recall from previous calls, during 2020, we took a hard look at certain stores that were already performing marginally even before the lockdowns. Throughout the year, we made attempts to further reduce their expense base to drive up returns, but some of them we eventually decided to close for good to avoid them becoming a bigger drag on OXO's overall profitability. The last group of stores, of such stores was closed around the end of the year, so there will still be about 30 closed stores that will show up in the January numbers, but this will be the end of the pruning of the tree exercise in our OXO division. The net result of these openings and closings was minus 67 stores for the fourth quarter, for a total of 236 net additions in the last 12 months. While this is not the type of number that we're all used to seeing from OXO, We should highlight the fact that we managed to open 652 gross new stores during 2020, not quite at the historical run rate, but still a remarkable achievement in the context of COVID, and one that bodes well going forward. On that note, we would expect to open approximately 800 net new stores in Mexico this year, much more in line with historical trends. In terms of the operating environment, a significant percentage of our store base remains subject to COVID-related restrictions and measures that put further pressure on our sales, such as limited time windows to sell alcoholic beverages. These restrictions increased in nature and geographical reach during the fourth quarter, so that as of the end of December, around 45% of our stores were under some kind of restriction. These numbers are expected to come down as the overall picture of COVID cases and outcomes begins to improve in the coming months. OXO's sensor sales were down 4.3% for the fourth quarter, a sequential improvement of almost 480 basis points, reflecting a 17% decline in store traffic and an increase of 15% in average customer ticket. Gross margin expanded by 60 basis points, reflecting a pickup in commercial income linked to the December holiday season, coupled with a dynamic performance of our services category. Income from operations decreased 16.5%, An operating margin contracted 180 basis points driven by operating deleveraging, but again showing a meaningful sequential improvement from last quarter. Moving on to FEMSA Comercio's health division. During the fourth quarter, we expanded our drugstore count by 119 net additions to reach a total of 3,368 open units across our territories at the end of December and 207 total new stores for the last 12 months. revenues increased 15.4%, while same-store sales increased an average of 15.3% in Mexican pesos. This reflects good momentum at our operations in Mexico, as well as a low comparison base and brisk economic activity in Chile, fueled by consumers able to cap a portion of their retirement funds. Gross margin contracted by 90 basis points in the quarter, driven by an increase in the demand of lower-margin COVID-related products, and higher institutional sales in our operations in Colombia. Operating margin expanded 50 basis points, reflecting increased operating leverage. Moving on to FEMSA Comercio's fuel division, we know that vehicle mobility remained well below normal market levels. In that context, we saw some sequential improvement, even as many of our locations skewed towards residential neighborhoods that have recovered more slowly than commercial ones. During the fourth quarter, we continue to see pressure on our same station sales, which decreased 31%. Gross margin, which 13.3%, while operating margin was 2.5% of total revenues, reflecting tight expense control that partially offset operating the leverage. Finally, moving on briefly to Coca-Cola FEMSA, They took advantage of favorable raw material dynamics and achieved broad expense containment, achieving double-digit growth in operating income despite significant foreign exchange headwinds. And speaking of Coke Fremsa, we should note the very good news announced last Wednesday on the redesigned partnership between the Coca-Cola system in Brazil and Heineken, bringing clarity to the relationship and setting the stage for continued fruitful collaboration for years to come. And with that, let me turn it over to Paco for some final comments. Thank you, Henrique. Thinking about 2021, it is clear that near-term, there will still be volatility and uncertainty related to the virus in most of our markets. However, directionally, our expectation is that mobility and bus consumption will improve as the months go by, particularly as vaccination efforts gain traction and more normality is brought back towards the second half of this year. We know that the vaccination pace will be different by country, and we are prepared to adjust and adapt to this different recovery rate. Relative to 2020, the comparison days for most business units will get easier in the summer and then level off towards the end. Our expectation is that also and also that we continue to improve through 2021, gradually closing the gap and reaching performance levels in the four quarters that begin to match the pre-pandemic ones. For each part, the Health Division set a new benchmark in 2020, and we will seek to build on that. The pandemic has accelerated the digital momentum. We are poised to capitalize on this opportunity as we embrace and accelerate our digital initiatives across the board. For example, in OXO, efforts are led by the launch of our digital wallet, Spin by OXO. We are doing an initial deployment in San Luis Potosi as we speak, with the objective of a national rollout in the coming months. we will keep you posted on our project. In terms of dividends to be paid during 2021, the Board of Directors will determine its proposal to shareholders when it meets in a couple of days. So we do not have the number yet, but we will share it with you as soon as we can. And for capital expenditure expectations, we are modeling a consolidated total capex of around 5% of revenue for 2021, of which approximately two-thirds will be deployed in Mexico. This, of course, will be subject to how the year progresses. We are confident about the future of our company and energized by the prospects behind our clear and defined business vertical. I would like to thank you for your continued support and trust in Census. 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 would like to ask a question this time, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two. Your question will be taken in the order it is received. In the interest of time, we ask that you please limit yourself to one question at this time in order to allow for the maximum number of callers to ask their question. Your first question will come from Ben Thur with Barclays.