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

Hello, and welcome to the FMSA's second quarter 2024 results conference call. My name is George. I'll 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 the listen-only mode. However, you will have the opportunity to ask questions towards the end of the presentation, and 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. And I'd like to hand it over to your host today, Mr. Juan Fonseca, Head of Investor Relations, to begin today's conference. Please go ahead, sir. Thank you, George.

Good morning, everyone. Welcome to FEMSA's second quarter 2024 results conference call. Today, we are joined by Martín Arias, our CFO, and Jorge Collazo, who heads Copicola FEMSA's Investor Relations team. The plan is for Martín to open the conversation with some high-level comments on our strategic progress and business trends, followed by a more detailed discussion of the results, and finally opening a call for your questions. Before I hand over the call to our team, I want to address the disclosure at the end of today's press release related to changes to our first quarter results as reported. In the press release for the first quarter of 2024, we classified certain results related to non-core discontinued operations on several incorrect lines, and we are reclassifying them today. The changes only impact the consolidated income statement and mainly cause a decline in income from operations. However, they do not impact consolidated net income and do not impact any of the results of the business unit report separately. You can find a detailed table at the end of today's press release, and Martin will briefly explain the main differences before we open the call for your questions. Martin, please go ahead.

Thank you, Juan. Good morning, everyone. Before we review our quarterly results, I would like to update you on the most recent steps we have taken as we continue to execute on the FEMSA Forward Strategy regarding initiatives related to capital returns for shareholders as well as asset divestitures. As you are aware, we remain actively engaged in share buybacks. In the second quarter, we completed our first accelerated share repurchase program for $400 million and initiated a new program for $600 million. During the first six months of 2024, we have bought back approximately $180 million in shares in the Mexican stock market. Earlier this year, we also secured shareholder approval for an extraordinary dividend of approximately $600 million, half of which has already been paid. This brings our extraordinary return of capital to shareholders for 2024 to nearly $1.8 billion, equal to approximately 60% of what we committed to by the end of 2026. These figures do not include the ordinary dividend of approximately $800 million, half of which has been paid to date. This is all consistent with the capital allocation framework we communicated last February, and we will continue to advance towards our stated objectives. In terms of our progress on asset divestitures, We announced last week that we have reached a definitive agreement to divest our refrigeration and food service equipment operations in Vera and Torrey for a total amount of approximately $450 million. This transaction is expected to close before the end of the year. And finally, in the first week of July, we received the remaining payments from our divestment in Jethro Restaurant Tipo totaling $945 million. This means we have now received the full amount from the JETRO transaction. This is not reflected in our financials recorded today, but the cash is now on hand. We will continue to analyze opportunities to return capital to shareholders beyond our ordinary dividend, consistent with our stated objective of a total of approximately $3 billion by the end of 2026. In addition, as we gain greater clarity on all the organic and strategic opportunities available, And in light of developments on the macro front in the coming years, we will analyze the possibility of launching additional capital return initiatives. Let me turn to the general trends we saw in our operations. In the second quarter, we continue to see good momentum and strong performance from our core business units. Once again, most of our operations, including the two that contribute most to our results, delivered a solid set of numbers. Proximity Americas saw deceleration in the pace of the same-store sales growth in Mexico against a tough comparison base due in part to a shift in the timing of Holy Week celebrations relative to last year, as well as volatile weather, but offset by a stellar gross margin and solid store expansion. For its part, Pogacolafensa delivered a remarkable performance, showing double digital increases across its own income statement, driven once again by strong volume and revenue growth in its major markets. We continue to see good results at Valora and OxoGas, with both businesses delivering double-digit growth in income from operations. At our health division, we saw sequential improvement in our fast-growing retail operation in Colombia, combined with stable results from Chile. But we again face competitive headwinds in Mexico, and we are laser-focused, with our plans to change the trajectory in that market to bring it in line with the positive dynamics we see elsewhere at FEMSA. Finally, at digital, we continue to add users and advance towards our ecosystem objectives. Now let me go over the quarter's results in more detail. Let's begin with FEMSA's consolidated second quarter results. Total revenues increased 12.2% and operating income rose 15.8% compared to the second quarter of 2023, driven largely by strong growth of proximity, fuel, and , and despite weaker performance in our health division. Net consolidated income increased 75.5% to 15.7 billion pesos, mainly explained by improved operating income, a non-cash foreign exchange gain of 6.1 billion pesos related to our U.S. dollar denominated cash position and derivative financial instruments, and a higher interest income related to an increase in our average cash balance. This was all offset by a significant shift from a large other non-operating income to a small non-operating expense, related to the receipt of Heineken dividends and the gain from the sale of JRD in the second quarter of 23. And was also offset by higher interest expense reflecting a benefit in the second quarter of 23 from a one-time gain related to the repurchase of debt. Now turning to our operational results. Proximity Americas delivered a solid performance in the second quarter. Oxo's same-store sales increased 4.1% in the first quarter, I'm sorry, in the second quarter, driven by an increase of 4.7% in average customer ticket and a decrease of 0.6% in traffic. The second quarter was an atypical one, where each month reflected a unique set of mixed effects, generally more negative than positive. For example, the month of April had a tough calendar effect, due to the shift in the Holy Week celebrations, while May benefited from extremely high temperatures across Mexico, and June faced a comparison base of approximately 20% growth in 23, as well as some early tropical storms and the restriction of alcohol sales ahead of the national elections. Ultimately, these factors combined to contribute to the deceleration of same-store sales. However, Gross margin expanded by 310 basis points to reach 44.1 percent, driven by strong trends in commercial income, a positive contribution from financial services, and revenue management initiatives. Income from operations increased 7.6 percent, while the operating margin contracted 10 basis points to 9.9 percent. reflecting higher operating expenses as we build our platform in South America, higher labor costs across markets, and investment behind capability building and strategic initiatives such as store segmentation and revenue management. On the store expansion front, OXO added 404 net new stores during the quarter, of which 332 were opened in Mexico, and 72 in South America. This figure includes 14 openings by Grupo NOS in Brazil. Historically, store openings typically have lagged in the first half of the year, complicating our operations in the second half and resulting in lower incremental revenues from those stores for the full year. Therefore, in an effort to improve the shape of our annual expansion curve, we have shifted our focus this year to opening as many stores as we can during the first half. This approach will enhance the efficiency and productivity of the new stores and avoid the operational congestion in the key fourth quarter. This means our full-year target for OXO Mexico remains between 1,000 and 1,100 net new stores, which is the sweet spot for which our growth engine is currently optimized.