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

Good morning and welcome everyone to FEMSA's first quarter 2021 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 FEMSA's future for performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations 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 conference over to Juan Fonseca, FEMSA's Director of Investor Relations. Please go ahead, sir.

Good morning, everyone. Welcome to FEMSA's first quarter 2021 results conference call. Today, we are joined by Eduardo Padilla, our Chief Executive Officer, Eugenio Garza, our Finance and Corporate Development Director, and by Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations effort. Paco Camacho, our Chief Corporate Officer, is traveling this week and was unable to dial in today. So let me turn it over to Eugenio for some opening remarks.

Thank you, Juan. Good morning, everyone. Thank you for joining us today. We hope your families and yourselves are doing well. The first message that jumps out from the data for the first quarter is that things are getting better. Most importantly, they're getting better on the health front. Gradually, in some cases, painfully so. And there have been setbacks, of course, such as the big COVID wave we recently saw in Brazil. But little by little, and following the trends on the health front, our numbers also tell a story of sequential improvement. Not just quarter over quarter, but month over month. This is happening across all of our business units, and it's encouraging. Another thing to keep in mind as we look at the numbers is comparability. While the first 10 weeks of the year we faced demanding comps from a strong start in 2020 and an extra calendar day in February, after that, as you all know, we went into severe lockdowns across all our markets that remain in place one way or another for a full year. This will make for a low comparison basis in the next few months and quarters to come, so we must not get complacent. In fact, internally, we are using 2019 numbers as a useful reference to measure our progress across business units. On the disclosure front, we're also happy to present the logistics and distribution segment, providing much-needed visibility into this part of our company. And I take this opportunity to reinforce our message that we now have a solid presence in the business verticals that we have identified as attractive and that, importantly, offer a clear and compelling fit with our current capability set. The task now is to keep growing in every vertical and to drive incremental returns. Before we dive into the numbers, I just want to mention the 1.2 billion Euro bond issue we announced yesterday. As you probably know, this was the first sustainability-linked bond ever issued by a Mexican corporate, the largest one ever issued by a Latin American corporate. We also achieved the lowest all-in yields ever for a Latin American issuer in the Euro bond market at 0.55% and 1.07% for the seven and 12-year tranches respectively. This issuance will allow us to comfortably refinance our currently outstanding 23 euro bonds, improving our maturity profile and further strengthening our balance sheet while generating a positive MPV of approximately 20 million euros on the reasonable assumptions. And just as importantly, it reinforces our commitment to deliver an ambitious ESG target that are an integral component of our long-term business strategy. Starting with consolidated quarterly numbers, Total revenues for the first quarter increased 1.8% while income from operations remained flat. On an organic basis, total revenues decreased 3% and income from operations decreased 2.4%. For this quarter, the difference between reported and organic figures reflect the results of our operations in the U.S., all of which came on board during the last 12 months. Still, our figures continue to pull sequential improvements which are encouraging. As we mentioned before, keep in mind that the full effect of the pandemic and the mobility restrictions started in the late part of March 2020. Thus, the comparison basis is still high for this quarter. FEMCIS net income decreased 31.3%, reflecting a demanding compass in the first quarter of 2020 that benefited from a non-cash foreign exchange gain related to FEMCIS dollar denominated cash position. This was partially offset by lower interest expense, and an increase in our participation in associates, which mainly reflects the results of our investment in Heineken. In terms of our consolidated net debt position, during the first quarter, it decreased 5% to 72 billion pesos at the end of March, reflecting high cash generation at Coca-Cola FEMSA that offset a slight increase in our debt balance during the quarter. For its part, CapEx was down 37%, as every operation continued to rationalize non-critical investments. Moving on to discuss our operations and beginning with FEMSA Comerica's proximity division. We opened 140 new OXO stores during the first quarter, which are a net of 30 permanent closures that will carry over from last year's store pruning exercise, as well as 30 stores that are temporarily closed for maintenance. While we are not yet fully up to speed with our expansion pace, we are on track to achieve our full-year targets. In terms of the operating environment, a significant percentage of our store base remained subject to COVID-related restrictions and measures for a good part of the quarter. However, many of these restrictions were gradually relaxed during March and resulted in better traffic and resilient ticket growth, which together benefited OXO's overall performance. OXO's same-store sales were down 6.5% for the first quarter, reflecting an 18% decline in store traffic and an increase of 14.4% in average customer tickets. Gross margin remains flat at 40%, reflecting positive trends in our services category, which offset a decrease in commercial income activity and promotional programs with our key supplier partners. Income from operations decreased 21.1%, and operating margin contracted 110 basis points, reflecting operating deleverage. Moving on to FEMSA Comensos Health Division, during the first quarter, we expanded our drugstore count by 37 net additions to reach a total of 3,405 units across our territories at the end of March, and 209 total new stores for the last 12 months. Revenues increased 16%, while same-store sales increased an average of 15.5% in Mexican pesos. We continue to see good momentum at our operations in Mexico, coupled with resilient conditions in South America. Gross margin expanded by 50 basis points in the quarter, reflecting improved efficiency and more effective collaboration and execution with our key supplier partners across geographies. Operating margin expanded 210 basis points, reflecting increased operating leverage. Moving on to FEMSA Commensur's Fuel Division, we note that vehicle mobility remained below pre-COVID levels. In that context, we again saw some sequential improvement, even as many of our locations skewed towards residential neighborhoods that have recovered more slowly than commercial ones. During the first quarter, we continued to see pressure on our same-station sales, which decreased 22%, gross margin, which took 12.7%, while operating margin was 2.7% of total revenues, reflecting tight expense control that partially offset operating deleverage. Now let me talk a little bit about our logistics and distribution business. As you know, we are reporting its results as a segment for the first time. In the U.S., we are making good progress integrating the four distinct entities that we have acquired into a single efficient platform that is primed for growth. We have capitalized on the very strong teams that ran the legacy companies and integrated them into a single highly experienced and motivated organization. However, the U.S. is reopening at different speeds in different regions, and some end-user categories, such as hospitality and entertainment, are still lagging. Therefore, we expect trends to improve further in the second half of the year. For its part, our 3PO logistics operation is also making good progress across its main Latin American markets of Brazil, Mexico, and Colombia, even as economic recovery is expected to be slower in those countries than in the U.S. Finally, moving on briefly to Coca-Cola FEMSA, Mexico and Central America delivered double-digit operating income growth, while currency headwinds in Brazil tempered the benefits of solid volume trends and gains in omnichannel capabilities in South America. You can listen to a webcast of the quarterly call held last Tuesday. Wrapping up, my final message today is one of cautious optimism. The pandemic has forced us to become a more flexible and agile organization, and those learnings are here to stay. Uncertainty levels in our consumer environment remain high, but relatively last year, it seems every day we take a small step in the right direction. We have strong operators that excel at execution, and we believe that we have the right strategy for the team to execute. This should be a better year. It should be a year of recovery and growth, and we thank you for coming along with us. And with that, we can open the call up for your questions. Operator?