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

Ladies and gentlemen, you are currently on hold for today's PHMSA second quarter 2022 financial results conference call. At this time, we are still admitting additional participants and will begin shortly. Thank you for your patience and please continue to stay on the line. Please stand by. Good morning and welcome to everyone to PHMSA's second quarter 2022 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 PHMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management expectations that 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 turn the conference over to Mr. Juan Fonseca, Director of Investor Relations. Please go ahead, sir.

Good morning, everyone. Welcome to FEMSA's second quarter 2022 results conference call. Today, we're joined by Daniel Rodriguez, our CEO, and Eugenio Garza, our CFO. As always, we also have Jorge Collazo on the line, who leads COPE FEMSA's investor relations team. Today, the plan is to have Danielle start with some higher-level strategic considerations, followed by an overview of performance trends during the quarter, and then Eugenio will provide more granular comments on the quarter results. After the remarks, we will open the call to Q&A, as we always do. Danielle, please go ahead.

Thank you, Juan, and hello to everyone on the call. I hope you and your families are doing well. As you already saw in our results released earlier today, FEMSA delivered another strong set of numbers for the second quarter, reflecting sound plans and solid execution at every business unit and continuing with the good momentum that began at the end of last year and has accelerated through the first half of this year. Most of our operations continue to show strong growth and profitability trends, during the second quarter as consumers continue to resume pre-COVID behaviors while making modest adjustments required by the shape of our new normality across our different markets. Before diving into our recent performance trends, let me share some reflections on higher-level considerations. We have established three clear strategic priorities for the coming years. First, deliver accelerated growth. This means not only increasing our growth trajectory in both revenues and earnings, but also ensuring that this growth is reflected in shareholder value. Second, that as we grow faster, we selectively expand our geographical footprint. This is consistent with a balanced investment approach that further strengthens our presence in Latin America while also allocating incremental resources to new markets where we can find pockets of growth and bring to bear the strengths of our core business, verticals, and create value. And finally, that this growth is enabled and enhanced by becoming more digital. This is already beginning to happen. For example, at Coca-Cola FEMSA, as an enabler of the commercial and multi-category initiatives, but our aspiration is that digital will become a core element of our customer-centric value propositions and permeate every aspect of our activities as it becomes a competitive advantage for FEMSA. Expanding on the subject of growth and value creation, we are making progress on our long-term strategic planning review across the company. This is a month-long process that started by challenging each business unit and FEMSA as a parent company to come up with the strategies, both organic, inorganic, and structural, that will put them in a position to catapult their scale while achieving an attractive level of risk-adjusted returns over a sustained period. Historically, there have been several periods during which this objective has been met, as well as some where we have come up a bit short. But I'm happy to share with you that the long-term plans we are putting in place now are compelling and realistic, and they all include selectively expanding our footprint and becoming more digital. At the strategic level, I would like to talk about two big topics that are on the minds of everyone on this call. The first one is the very material gap that exists between our share price and what we would consider fair value. Historically, we at FEMSA have focused on driving operational success and the share price has taken care of itself over time. For the past couple of years, however, that has increasingly not been the case. Right now, the divergence is especially stark given the strong momentum and outlook at every one of our business units and the sound performance of the investments we have made in the last couple of years. This makes it clear that this topic requires special attention from all of us, not only at the management level, but from our board of directors. The strategic planning review currently underway involves significant analysis to help us define the strategies to achieve our ambitious long-term growth objectives, but also how best to work towards reducing and eventually eliminating that valuation gap. In the meantime, we are working to improve our disclosure further, particularly around the newer or less understood parts of our business, such as Envoy Solutions, our health division, Ops International, and our digital initiatives. We will keep you posted as these efforts advance. The second big strategic topic I want to discuss now is the tender offered to acquire Valora Group AG that we announced a few weeks ago, which is, of course, related to our long-term growth priorities as I just described. Valora is the leading convenience and food business operator in Central Europe, and it offers a high strategic fit with our proximity operations, as well as an excellent platform on which to build our core proximity business in Europe. We believe we can help Valora accelerate its growth trajectory, bringing to bear not only our larger scale, but our understanding of convenience and proximity models, and our expertise in driving organic growth, leveraging Valora's strong brand portfolio and management team. In particular, within Valora's current markets, we believe Germany presents attractive potential for organic growth. And in time, we will evaluate expanding to additional markets. On the other hand, We will benefit from Valora's opinions and multi-format expertise to further develop the value propositions in our high-potential core markets in Mexico and Latin America. Having said that, as you know, Valora is a listed company in the Swiss stock exchange, and the tender offer process must run its course. So we will keep you posted as the process moves along. Now, moving on to our businesses and beginning with proximity, same-store sales have also continued to show remarkable strength despite challenging macro conditions. As the months go by, it is increasingly clear that the pandemic generated some seemingly longer-lasting changes to consumer patterns and the drivers of like-for-like growth. Our average ticket is now structurally higher in real terms. reflecting an increase in categories like spirits, wine, and some replenishment items, while our traffic keeps improving but more slowly and remains below 2019 levels. There is plenty of evidence that people are consuming more at home, reducing their trips outside the home, and shifting some of their purchasing habits. Consequentially, we're gathering and using data to generate insights that are already informing adjustments to our commercial and segmentation strategies, as well as our expansion priorities, allowing us to gain market share during the first half of the year. On this topic, we are adjusting well to changing dynamics. It is encouraging to see that OXO can grow earnings by double digits and reach record operating margins even with structurally lower traffic levels, as demonstrated again in the second quarter. And regarding the store-based expansion, we are maintaining our full-year target of approximately 100 new stores for OXO in Mexico, even as growth was still below trend this quarter. We should note that our efforts to focus only on the highest potential location is bearing fruit. And the quality of the new stores, as measured by our historical store maturity curves, is the highest we have achieved in many years. We are opening stores at a lower cost per unit and generating materially higher sales and profits per new store than before we made the adjustment to our expansion processes. Furthermore, we continue to replenish our pipeline after the shocks of 2020, and we are putting conditions in place to accelerate the pace next year with a target closer to 1,000 new stores in Mexico for 2023. On top of this, We're increasingly excited about OXOS opportunities in South America in general and Brazil in particular. We're after three years operating Grouponos, our joint venture with Ryzen. We're already ramping up our growth plan to add over 250 stores per year and potentially more. Moving on to our health division, our operations continue to perform well in the second quarter even as the comparison phase is getting tougher. particularly in the Chilean market where high levels of consumer liquidity help us achieve very strong results the last couple of years. Having said that, we again saw good growth trends in Colombia and Mexico, where we continue to drive material gross margin expansion by applying some of the commercial strategies developed at Cruz Verde. For its part, our logistic and distribution business had a good quarter, driven by the continuation of a secular trend at Envoy Solutions in the facility supply business. As people continue to return to office in larger numbers in the U.S., we are also making incremental gains in our cross-selling efforts among the three core businesses vertical, which represent an attractive opportunity to drive growth. I also want to talk a little bit about our digital platforms. Both SPIN and OXO-Premia, our loyalty program, have continued to grow their users, and more importantly, their active user base. Together, they now have more than 50 million acquired users and more than 12 million active users. And we are working hard to expand each product's value proposition and use cases to drive engagement and further accelerate the network effect of the entire ecosystem. As you may imagine, user data is coming in fast, and we are rapidly scaling up our analytics capabilities to improve the data's utility and potential monetization. We will continue to keep you posted on this exciting topic. Before I turn it over to Eugenio regarding Coca-Cola FEMSA, as Constantino mentioned last Tuesday, they achieved a solid second quarter set of results. building on a positive momentum despite the inflationary environment that is affecting industries worldwide, substantially mitigating margin pressures by leveraging their hedging initiatives and doubling down on expense efficiencies, while accelerating the rollout of their OmniChallenge platform, which now reaches 645,000 active monthly buyers. And with that, let me turn the call over to Eugenio.