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

Hello and welcome to FEMSA's first quarter 2024 results conference call. My name is Melissa and I will be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call, your lines will be in a listen only mode. However, you will have the opportunity to ask questions at the end of the presentation. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be operator. I'll now turn the call over to Mr. Juan Fonseca, Head of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to FEMSA's first quarter 2024 results conference call. Today, we are joined by José Antonio Fernández Garzalagüera, CEO of our Proximity and Health Division, Martín Arias, our incoming CFO, and Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations team. As you know, one of SAMHSA's strategic priorities involves engaging more directly and proactively with our key stakeholders, and that includes providing more opportunities for you, our investors and analysts, to hear from and interact with the heads of our cold business verticals. You already have that possibility with Ian Craig, given the public nature of cold SAMHSA, and we will increasingly work to provide broader access to Jose and Juan Carlos Guillermetti in the roles as heads of the other two core operations. proximity and health, and digital, respectively. Therefore, as a first step, the plan is for Jose to open today's conversation with his vision for proximity and health and the key elements of the strategy to move towards that vision. Going forward, Jose will for two quarterly calls a year. At a later date, we also plan for Juan Carlos to present his vision for the digital business, with the expectation that he will also join our calls once or twice a year. After Jose's remarks, Martin will provide an update on the business and our quarterly results. Finally, we will open the call for your questions. Jose, please go ahead. Thank you, Juan. Good morning, everyone. It is my great pleasure and privilege to be able to be here today to begin what I hope will be regular conversations with all of you. As we move beyond the FEMSA forward transformation and focus on the future of our company, I relish the chance to help pursue and capture the substantial opportunity for growth and value creation at Laia HEMSA, particularly as we continue to develop and strengthen our leadership in proximity and health retail. As many of you know from following us for many years, HEMSA has always had the pursuit of long-term profitable growth hardwired into everything we do. And we have a clear and focused blueprint to keep achieving that objective as we build on PEMSA's successful track record in proximity retail. The comprehensive long-range plans that we were developed during the past couple of years provide us with a useful roadmap. We aim to accelerate earnings growth at our retail division, relying mainly on organic expansion and on continuously adding layers of value for consumers across formats and across markets. As you all know, OXO Mexico is a mainstay of PEMSA's retail operations. For the past 45 years, we have been evolving and improving its value proposition while expanding its footprint and growing its scale, always focused on understanding more of our customers' needs and finding new ways to serve them consistently better. As OXO's store economics have improved over time, we have been able to increase our footprint in Mexico to the current level of more than 1,000 stores, while maintaining and even increasing store productivity. We have built capabilities to develop consumer insights that in turn are continuously applied in our segmentation efforts, and we are confident that we can keep the current pace of Oxxo expansion in Mexico for many years under the current value proposition. In the process, We believe we have become more effective retailers, and this is now allowing us to find promising opportunities beyond the core OXO Mexico format. As you know, we are thoughtfully accelerating our organic expansion efforts with OXO in several markets in South America, having already reached the 500 store mark in Brazil and soon in Colombia. We believe OXO in South America could, on a combined basis, reach a scale compared to Mexico over time. Moving on to other different formats, we are taking advantage of the Mexican consumer increasing appetite for the proximity discount format with our Vara store. After many iterations and years of fine-tuning its value proposition, Vara is showing that it has the right unit economics and is ready for an accelerated rollout. We are also ramping up the development and deployment of other promising adjacent proximity formats, such as coffee drive-thrus with our joint venture. Beyond Latin America, we also continue to advance with Avalora platform in Europe, where despite high inflation last year and general macro headwinds, we are building on improving momentum and focusing on driving all three business platforms, our retail, food service, and our B2B business. While we will pursue and capture these opportunities mainly through organic expansion, we believe entering the United States could open a new and compelling avenue for growth, value creation for PEMSA, leveraging our capabilities, our closeness to the U.S. market, and a broad recognition of the OXO brand among key demographics. This initiative may require a moderately sized inorganic component to achieve certain scale up front. focus on border or near-border states, and on assets with certain characteristics that would serve as a launching pad for an OXO-US value proposition, among other possibilities. We still have work to do as we fine-tune our potential entry models, always with a clear objective of long-term value creation for PEMSA. However, we know this topic is top of mind for the markets, so we will keep you posted as we continue to develop our strategy. Beyond the various opportunities across the proximity spectrum, we also continue to make progress in our health operations, where we're increasingly being able to leverage our multi-country platform and scale to optimize purchasing, pricing, supply chain, and several other aspects of the business. However, we continue to operate in distinct, diversified, and sometimes challenging macro operating and commercial environments. something we're quite familiar with in our neck of the woods. In certain markets, our health division is currently navigating complex, competitive, and regulatory environments. But in every case, we're taking clear steps to address the challenges by adjusting and evolving our operating approach. To put all our retail opportunities into perspective, I can share with you that today, if we consider all formats and all markets, we're opening more than six stores per calendar day or a new store every four hours on average. By the end of the five-year period covered by our current long-range plan, to the extent that we have further proven and improved the economics of our various formats in various countries, we could eventually increase that pace by up to 50%. These plans are certainly ambitious and while ultimately dependent on improving the economics of certain formats in certain countries, we believe they are achievable. On the topic of growth and investment, I would like to highlight a couple of points. First, although these plans will require considerable capex in the coming years, the organic and modular growth inherent in our business model puts us in a good position to capture high returns. Second, these investment plans are reviewed rigorously on an annual basis, thus as we advance on each one of these organic growth initiatives, we may find that some opportunities become more compelling over time and some fall short of expectations, and we will adjust our capex accordingly. Therefore, I have asked our team to relentlessly focus on unique economics cash flow generation, and achieving ROIC levels above our cost of capital to drive and guide our growth decisions. Finally, we should talk about the digital opportunities that exist in and around our retail platforms and which complement and expand the opportunities being developed by our digital division.

As you know, I had the chance to take a short break from our proximity business to help launch PEMSA's digital efforts a few years ago. And it is very rewarding to see how the spin ecosystem continues to thrive and develop by leaps and bounds. with leveraging the physical store network, multi-capabilities for our customers, our suppliers, our partners, and ultimately our company.