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

Hello and welcome to the FEMSOS second quarter 2023 results conference call. My name is Laura and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand you over to your host, Juan Fonseca, to begin today's conference. Thank you.

Good morning, everyone. Welcome to FEMSA's second quarter 2023 results conference call. The plan today is a little different than usual because we are joined by José Antonio Fernández, our Executive Chairman of the Board and CEO, who will open the call with some important messages. After that, Paco Camacho, Eugenio Garza, and I will carry on with the second quarter results as we usually do, followed by Q&A. José Antonio, please go ahead. Thank you, Juan, and good morning to everyone on the line. Before we begin, I would like to thank all of you who have recently reached out to us with messages to support for Daniel after the news of his stepping down as CEO of FENSA to focus on his health. We truly appreciate your kind words and well wishes, which we have relayed to Daniel. We are grateful to Daniel for his many meaningful contributions to strategic direction and high-performance standards of our company, always with a steady hand and clarity of purpose. Daniel always makes it easy for his team to rally behind him, follow his lead, and achieve excellence. And beyond strategic acumen of business success, Daniel embodies the values that define FENSA. Thank you for everything, my friends. I wanted to be here today to take a few minutes of your time, given the unique circumstances of this recent leadership transition, to convey a few important messages. First, I am now fully engaged with our senior leadership team to continue implementing our strategic priorities, including FEMSA Forward. We have already executed several important steps, and we are totally committed to the strategy to continue unlocking shareholder value. You should therefore expect full continuity, focus, and a smooth transition. That is very important for us that should have very clear. Second, my dual role as executive chairman and CEO is not permanent. At FEMSA, we believe that those roles should be separate, and we plan to go back to that when ready. We know you have questions regarding timeframes, but please bear with us while we carefully go through this important process. We will let you know when we have news to report. Finally, I want to recognize our team. I am fortunate to be surrounded by a truly remarkable group of leaders and advisors that are working hard every day to keep growing and keep delivering on the potential of our great company. The opportunities ahead of us are very significant and compelling and every business unit is executed at a high level. In fact, The strong quarterly results we announced today are a good example of what we can achieve. So with that, I will let Paco, Eugenio, and Juan to discuss the results in detail. Thank you very much for your trust and confidence. Paco, please go ahead. Thank you, Jose Antonio. Good morning, everyone. Let me begin by updating you on where we are regarding FEMSA Forward. During the second quarter, we achieved two important milestones. First, we were able to divest FEMSA's remaining investment in Heineken, retaining only a residual amount of shares to meet our obligations under our existing exchangeable bonds, and second, we signed an agreement to divest our minority stake in Jethro Restaurant Depot. These milestones have come ahead of plan and under favorable conditions, allowing us to keep our momentum as we continue to pursue the FEMSA forward structure. As you know, FEMSA Forward is fully aligned with FEMSA's customer centricity and our broader strategic priorities of driving long-term growth increasingly enabled by digital capabilities always within our core business verticals and with a disciplined approach to capital allocation. With that in mind, we can report that our second quarter results showed a continuation of the positive trends seen at the start of the year, fully consistent with those strategic priorities and making progress towards the target set by each business unit's long-range plan. Moving on to the results and beginning with proximity, it will be helpful to talk for a minute about their own long-range plan and the four priorities around which it is built. Number one, strengthening the core. Second, developing new growth avenues. Third, developing multiple successful formats. And four, growing the footprint beyond Mexico. Looking at DOCSIS second quarter results through this lens, We see they made great progress strengthening the core as same store sales growth was again stellar, surpassing 15%, split evenly between average ticket and traffic, and reflecting a structural improvement in segmentation of the store value proposition. We again saw a particularly robust performance in the first and gathering consumer occasions. further supported by favorable weather during the month of June. Continuing with the positive news of a stronger course, new store growth accelerated and was robust once again, with Mexico and Latam providing the highlight with adding 444 new stores during the quarter and almost 1,400 during the past 12 months. Once we included stores opened by Grupo NOS in Brazil, we added more than five office stores for every day of the second quarter. Moving on to the long-range priority of growing beyond Mexico, during the quarter, Grupo NOS continued to advance ahead of plan. with revenues increasing over 200% year-over-year, allowing us to increase OXOS footprint in Brazil at a dynamic pace of almost 300 net new OXOS stores during the last 12 months. Still in proximity to America, but along the priority of developing multiple successful formats, Bara proved a highlight, achieving 23% same-store sales growth. For its part, proximity Europe again saw good local currency top line growth and overall positive profitability trends, driven by a stronger pricing, growth in food traffic, as well as the higher contribution of Valora's food service outlets. Just as importantly, we continue to advance on exchanging best practices across organizations with the focus of settling of setting the right conditions for future growth and value capture. Our health operations continued the stable trends we saw at the start of the year, reflecting foreign exchange headwinds from a strong Mexican peso, but again delivering robust margin expansion at the gross and EBITDA levels, capitalizing on the benefits of having an integrated Latin American platform working as a single organization. Additionally, during the quarter, our health business continued to drive to consolidate its competitive across markets, but particularly in Mexico, where it increased its store footprint by 12%, against a challenging competitive landscape. For its part, our fuel business also had a stable performance, with a strength in the corporate wholesale business of setting softness in its retail platform. Regarding digital, the number of active users for Steam more than doubled year-over-year to reach 5.7 million, while active monthly users for our premier loyalty program also more than doubled to reach 15.8 million, while 24% of Fox of Mexico sales are now associated with the program. We continue to privilege the acquisition of higher quality users while we make progress fine-tuning the use case. Value propositions, unit economics, and monetization strategies for each of these products as well as we look to ensure long-term value creation for the ecosystem. In terms of financial implications, during the quarter we deployed close to one billion pesos on growing this business. roughly in line with the previous quarter as well as budget as we have indicated. Finally, Coca-Cola FEMSA's volume grew across all its territories and surpassed one billion unit cases for the first time during a quarter. That, combined with cost optimization and expense efficiencies, allowed margins to expand sequentially. In addition, COF accumulated more than $1 billion of sales during the first half of the year through their omnichannel platform, Juntos Plus, which represents a significant milestone in COF's digitalization journey as it strengthens and deepens the connection with their customers. Before I turn over the call to Eugenio, I want to touch briefly on capital allocations. A topic that we are aware is very much on the minds of many of you today and a key component of our FEMSA forward strategy. As our cash levels continue to rise, we are accelerating our analysis to determine the optimal capital requirements to support the short and medium-term growth of our operations, organic and inorganic, because that will help us fine-tune the levels of capital that we could then return to shareholders. This is high priority for us. and we will keep working on it together with our board to have a more specific framework for you as soon as possible. And with that, let me turn it over to Eugenio.

Thank you, Paco, and good morning to everyone on the line. Beginning with FEMSA's consolidated quarterly numbers, total revenues during the second quarter increased 18%, while income from operations increased 8% compared to the second quarter of 2022. On an organic basis, total revenues increased 9.5%, and income from operations increased 4.5%. Net consolidated income was 8.926 billion pesos, reflecting higher income from operations, a 9.4 billion pesos non-operating income, mostly reflecting the divestment of PEMSA's minority interest stake in Jethro Restaurant Depot, and a decrease in net interest expense during the quarter. These were all partially offset by a non-cash foreign exchange loss of 6.5 billion pesos related to FEMSA's U.S. dollar denominated cash position has impacted appreciation of the Mexican peso and a net loss of discontinued operations of 3.9 billion pesos driven by the market value fluctuation of the Heineken shares underlying our outstanding exchangeable bond. Moving on to discuss our operations and beginning with Proximity Americas. We added 444 new units during the second quarter to reach 1,391 net new stores for the last 12 months. This quarter's strong expansion set us ahead of our yearly expansion target, and it underscores OXO Mexico's strong growth potential. Having said that, we will stick to an objective of 900 net new OXO stores just in Mexico for the time being, and the expansion curve for the rest of the year should be smoother than usual. OXO same-store sales were up 50.3% for the second quarter. This was driven by an increase of 7.4% in average customer ticket and a strong 7.4% growth in traffic. This underscores the solid performance we saw across OXOS categories throughout the quarter, but especially by the strong showing of the gathering and thirst locations. Gross margin was 41%, reflecting a lower contribution from financial services, which more than offset healthy commercial income dynamics. Income from operations increased 18%, while operating margin decreased 20 basis points compared to the same period of 2022 to reach 10%, reflecting an increase in labor expenses stemming from the labor reforms in Mexico. At Proximity Europe, as Paco mentioned, revenues increased 8.4% in local currency to reach almost 11 billion pesos, reflecting a recovery in traffic and ticket driven by improved customer mobility. Gross margin was 42.1%, reflecting a mixed effect driven by the positive performance of Valora's food service and B2B businesses, while operating margin was 2.9%, reflecting better operating leverage, partially offset by an increase in expenses driven by inflation pressures. Moving on to PHMSA's health operations, during the second quarter, we expanded our drugstore count by 81 net additions to reach a total of 4,267 units across our territories at the end of June, and 369 total net new stores for the last 12 months. Revenues increased slightly, while same store sales decreased an average of 3.7%. However, as was the case last quarter, it is important to note that on a currency neutral basis, revenues grew 14% and same store sales almost 8%, driven by good performance at most of our operations but partially offset by a demanding comparison base in our operations in Chile and Mexico. Gross margin increased 170 basis points in the quarter, mostly reflecting positive margin dynamics across our operations, especially in Mexico. Operating margin decreased 10 basis points, reflecting an increase in labor expenses in most of our markets. At OxoGas, revenues increased 9.3%, and same-station sales grew 3.2%, reflecting a dynamic competitive landscape across our footprint. Retail volumes were again complemented by robust pickup in corporate and wholesale activity. During the quarter, gross margin was 12%, while operating margin was 3.9%, reflecting tight expense control offset by increased labor expenses. Moving on, Coca-Cola FEMSA also delivered a strong set of results in the second quarter. Total volume grew 7%, driven by growth all across its territories. Total revenues increased 7.2% and operating income grew 13.4% as operating margin expanded by 50 basis points to reach 13.9%. You can listen to the replay of the conference call held yesterday. Finally, our Envoy Solutions total revenues increased 23.1% while relative to the second quarter of 2022, reflecting some of the acquisitions we did last year together with solid execution, while operating margin contracted 120 basis points impacted by extraordinary expenses related to synergy capture across the platform. That's it from my end. With that, we can open the lineup for your questions. Operator, please.