Fomento Economico Mexicano SAB de CV (FMX) 2011 Q1 法說會逐字稿

Good morning and welcome everyone to FEMSA's first-quarter 2011 earnings 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 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 Javier Astaburuaga, FEMSA's CFO. Please go ahead sir.

Thank you. Good morning everyone. Welcome to FEMSA's first-quarter 2011 results earnings conference call. As always, Jose Castro from Coca-Cola FEMSA, and Juan Fonseca from FEMSA IR are with us today.

In terms of the operating results, we will focus on the FEMSA Comercio and Coca-Cola FEMSA results for many of you likely had the opportunity to participate in Coke FEMSA's conference yesterday.

As was the case in the last three quarters, our results reflect the different impacts of the Heineken transaction on our income statement and balance sheet. I will, of course, be happy to address questions on the subject during this call and at any later time through our Investor Relations team.

As we often do, let's begin by spending a brief moment on our perception of the environment and the driver for consumption particularly in our key Mexico markets. GDP and manufacturing activity as measured by the [IR] up mid-single digit year over year. Unemployment rates continued to improve and the Mexico consumer confidence index is at its maximum level for the past two years.

So we're optimistic that consumer demand is slowly up catching with the macro data. Still not a robust consumer demand but as I said slowly catching up. Clearly some industry data points for retail activity show the effect from the timing of the Semana Santa Holy Week period which made for some tough comparables for the month of March.

However, our known numbers are encouraging and our overall view is one of optimism as we get into the key summer season. And now let's move on to disclose our consolidated quarterly numbers.

On a comparable basis, that is without the beer operations, total revenues increased 12% and operating income grew 9.4%. For the first quarter, the line labeled participation in Heineken results represents FEMSA's 20% participation in Heineken's first quarter net income.

There will be times when Heineken's quarterly information will not be made public ahead of FEMSA's results and in those cases, as we've said in the past, we will need to use our information one quarter in arrears as a proxy as we have mentioned before. However, in those cases where Heineken does come out with their net income numbers in time for us to incorporate them into our results, as was the case this first quarter, we will do so.

And so we will always use the most recent quarterly information to incorporate Heineken's numbers into our net income figures.

The next line, net income from FEMSA's former beer operations, is also relevant and corresponds to the first three months of 2010 before the transaction closed. On the balance sheet as was the case since we closed the transaction, for March 2010 you see that the assets of the beer operations are no longer there. For comparison purposes in the 2010 column the figures of the beer operation were subtracted from each line and are being presented grouped in four specific lines in accordance with accounting standards.

On the asset side, we're showing lines for current and non-current assets of the beer operations and we're doing the same on the liability side. Those four lines don't consider for 2011. Conversely, the line investments in shares now reflects our position in [Heine].

In terms of our cash build up, during the first quarter we went from highly consolidated net cash position of MXN2,350 million at the end of December to having now MXN3,000 million as of the end of March reflecting cash generation at both of our operations.

On the subject of potential uses of cash and the pursuit of strategic opportunities, while we continue to make progress exploring and developing certain initiatives, there will be some much missed report from our last conversations two month ago. As we have said before, this processes take a while, but we are moving in the right direction.

Moving on to disclose our operations and beginning with FEMSA Comercio, we should highlight that the rollout of new store openings continues to move forward according to plan. We opened 195 net new stores during the first quarter which means we opened a new record high of 1,129 stores in the last 12 months, slightly ahead of our objective for 2011.

As has been the case in recent years, this is driven by our continued effort to smooth out the [curve] of new store openings across the four quarters, and away from the backend loading of a few years ago.

Revenues for the quarter increased 19.5%. Same-store sales were up by 9% for the quarter, reflecting improvements in traffic as well as average tickets. Traffic rose 5% reflecting progress in our management of category and purchasing location mix.

Our average ticket increased 3.7%, a solid number but not much above last 12-month inflation. This number reflects favorable weather trends across Mexico as well as price increases by several of our suppliers for important categories such as soft drinks, beer, pastries, cigarettes and others and mix.

For the quarter, gross margin expanded 20 basis points, driven mainly by a positive mix shift due to the growth of higher margin categories, a more effective collaboration on executions we have with key supplier partners, combined with a more efficient use of promotion related marketing resources and also by changing the structure of commercial terms for certain supplier partners.

While the impact of these terms also used to be skewed towards the fourth quarter, it is now more evenly spread throughout the year.

In terms of operating margins, this quarter FEMSA Comercio posted an expansion of 20 basis points, mainly due to an expansion in the gross margin which offset incremental expenses such as the strengthening of FEMSA Comercio's organizational structure, mainly IT-related.

Also as is always the case, the rapid pace of store openings put some pressure on the selling expenses line as the new stores generate expenses from day one while revenues take a while to get up to speed.

And finally, Coca-Cola FEMSA revenues for the quarter increased 9.5% versus the comparable period of 2010 with Mexico showing very strong trends in Mercosur continuing with good momentum. Operating income increased 10.4%.

Margins expanded 20 basis points at the gross level and 10 basis points at the operating level. On the back of good operating leverage in Latincentro achieved in spite of the strike that curtailed our production early in the quarter in Venezuela.

If you were unable to participate in Coke FEMSA's conference call yesterday, you can access a replay of their webcast for additional details on the results.

So summing it up, I believe we are off to a solid start in 2011 and we look forward to another interesting year. And with that I would like to open the call for your questions. Operator, please.

(Operator Instructions) Lauren Torres, HSBC.

My question relates to the Comercio business and I guess there has been some recent activity with respect to regulation or efforts in Mexico City to protect public markets or the more informal markets. Just curious how this -- or will it affect you as we have these OXXO stores continue to open, if you feel that you're becoming more limited as a result of this regulation.

Yes, sure. And good morning, Lauren. Well, I guess most of you know what the regulation states and as you know OXXO is part of the ANTAD and the [National Modern Trade Association] here in Mexico. And we're basically at this point of time addressing the Norma 29 as it was issued as part of the ANTAD process.

If you may have any specific questions about it, please contact Juan or (inaudible) for more details about this. But what I can tell you is that we are basically coordinated with all retailers within the ANTAD and we feel positive about that this Norma is not going to affect our business in Mexico City.

So meaning your planned openings for this year from what you understand right now you could basically still hit that target?

Yes.

Okay. And also can you just elaborate too on your build-out outside of Mexico? I know we've heard some things about Colombia. Any update there?

Colombia is still in the phase in which we said we will enter the country and establish a (inaudible) there and grow slowly the number of stores and take time in fine-tune the value proposition of the store to Colombians. We're basically still in that phase and we have plans to open maybe a dozen stores during this year.

Still again we're finding the value proposition and understanding consumer behavior in different places within the -- still the same city. And I would say that that's basically where we are and our game plan for 2011 is continue developing the value proposition to expand moderately the store base and to continue learning about how to better serve Colombians with the Colombian OXXO what we call it.

Can I just finish up by asking if you'll open more stores this quarter versus last and outside of Mexico?

I didn't get that. Again, Lauren.

Did you open more stores in the first quarter outside of Mexico versus what you discussed in the fourth quarter?

No, no we didn't.

No additional. Okay, thank you.

Thank you, Lauren.

Alan Alanis JPMorgan.

My question has to do trying to understand this -- the same-store sales growth in OXXO seems substantially higher than that in the other supermarkets there. You mentioned in your prepared remarks that it's largely driven by traffic. Could you elaborate a little bit more on what's driving or what drove this traffic growth during the quarter, Javier?

Sure. Hi Alan, how are you? I would say that as you know the category that OXXO serves and the occasions of consumption that OXXO serves are quite different from other retail formats in Mexico particularly the ones you described such as hypers and supers. So I would say that most of the traffic it's coming from a number of things. I would say that in the quarter weather was a significant one.

And again talking about categories and consumption occasions that OXXO serves within that, weather was a significant boost for the quarter in terms of traffic. But also as we have said in the past, the better we are at bringing into the store solutions for consumers to take care of their needs, problems, and desires, the more traffic we are going to be able to keep bringing to our stores. And in that regard in different regions and through different mechanisms I think we have been successful in building better promotions for consumers to be interested in coming to our store.

Another one would be that we have been also able to structure some arrangements with, for example, public transportation services in certain cities, important cities throughout Mexico in which now consumers are more inclined to go and acquire electronic cards to pay their public transportation services as opposed to paying every time they get up into a bus.

And we think that we have greater lift also from that. And I would say that the number of things of what we are doing inside the store, how we're communicating with consumers and, of course, with the nice help of the weather in this quarter, I would say that those are the main drivers behind the growth of 5% in the traffic we are presenting today.

Just to put Javier's comment on weather in perspective, Alan, if we look at average temperatures in the country generally February and March were almost 16% above normal. That's meaningful in terms of the generation of thirst. And in terms of rain if we look at an example -- for example (inaudible), it rained almost 40% less during the quarter than normal. So it's certainly not trivial, no.

No, I completely agree with you. I mean to add to what you are saying, the first quarter in Mexico City was the warmest first quarter in 10 years. So yes, all the data supports that. If I may ask a second last question also regarding OXXO, but specifically regarding working capital, we see a big improvement here in using the numbers that you report in the quarter in working capital.

And apparently everything is coming from days payable, Javier and Juan. And the question is this new level of days payable -- I mean according to our numbers it goes up from more than 150 days to this quarter to more than 190 days in terms of days payable. Should be this a level that it's sustainable and should you expect this kind of working capital benefit which I know that OXXO is already good, but this benefit to come through for the full year as well?

No, Alan, a good point to be raised. And I would say that the behavior of working capital during the first quarter and even -- not heavily noticed by a lot of people even at the end of December I would say are more things related with special negotiations on how to manage inventories as well as days of credit which are not there to be there for the future. So I would be very clear about this.

We have a -- I would say not an anomaly. In that sense it was a good one for us but it's more like a one-time event in the -- the large majority of the variance on working capital is more a one-time event than something that you should assume it's going to stay there forever.

So no major changes in the working capital terms and conditions?

No, no. I would say that you may find that from time to time we will go into situations as the one I'm describing. But that doesn't really represent a fundamental structural change in the terms on which we operate with major suppliers in terms of days of credit.

Got it, okay. Well, thank you so much. Have a great day.

Thank you, same to you.

(Operator Instructions) Celso Sanchez, Citi.

My question has to do with -- as you think about the strategic alternatives and you go through this process that you said is thorough and then fairly gradual, how do you view where cash rests between the parent Company and the subsidiaries?

I guess specifically I'm talking about cash that might be held at the FEMSA level versus cash that might be held specifically at the Coke FEMSA level. And there was a comment made yesterday that if there are no obvious M&A opportunities, both Hectors said this I think -- I think he alluded to the fact that top managements are on the same page with respect to potentially paying up that cash and increase dividends next year with the Board's approval.

So given your oversight of the Company, how do you view that? Is there an advantage or a disadvantage to having cash at one level or the other from a tax perspective? Is there a fundamental view as to where you prefer to have that cash in terms of flexibility strategically? How should we think about that?

Sure, Celso. Thank you. Good morning. As you know, Coke FEMSA being a public company, we are very careful about being sure that the Company has the enough degree of flexibility to take care of opportunities that may be available in the Coke space, as well as while having such on a levered financial structure not in core in incremental inefficiencies both on the financial point of view as well as from the tax point of view.

So we are basically looking at those two variables as the main criteria for us to make decision on -- if it would be better to have cash sitting at the subsidiary level or at the holding level. And in that regard that's basically how we do it.

As of this juncture, Coca-cola FEMSA as you know just recently tapped the bond market taking advantage of what we think is a very, very attractive environment for having the right level of liquidity we think is good enough for having at this stage. And at this point of time, we are not -- I would say that for the remainder of 2011 at least -- thinking of doing anything additional for to paying the dividends both Coca-cola FEMSA and FEMSA chose to decrease in their last shareholders' meeting in April.

So that's basically where we stand. We don't have a significant difference in terms of the tax considerations if cash is sitting down there or up here.

And of course today, Coca-cola FEMSA still has some net debt position which is not significant but at least that's the case. And we have, as you know, excess cash at the holding level sitting here today. So that's basically how we do it and where we stand.

Okay, thank you.

Thank you.

[Antonio Gonzalez], Credit Suisse.

Thanks for taking my question. I just wanted to follow up on the working capital issue at OXXO. And I understand there's some seasonal peaks, but is there may be a number that you can share with us in terms of what your -- when you look throughout entire year what's your target, let's say a number for both days of inventories and suppliers that you think you can reach, I don't know, probably a year from now or two years from now?

I don't know if the commercial relationship with your suppliers you think is now at the level it should be or there's even more improvement that we should be expecting for the next couple of quarters? And what's taking out seasonality, a normalized number you would expect for both days of inventories and suppliers? Thanks.

Sure, Antonio. Hi, good morning. As opposed to trying to give you a clear guidance from the number of inventory days or supplier days, I will just reemphasize the fact that again because of special negotiations and handling of inventory levels and credit days in the first quarter, the numbers that we're reporting in the first quarter shouldn't be taking as the basis for projecting going forward on a stable basis.

I would say that going backwards in terms of looking at the cyclicity of the business from quarter to quarter which is very, very big as you well know, I would say that past inventory and credit days with a degree of variability for a small one I would say that's the best reference I can give you on how to project going forward.

And by that I'm just reassessing that there is not a fundamental change in the way that our credit terms are established with our main suppliers on a permanent basis. So I would encourage you more to look at -- looking at the cyclicity of the business and looking at the past performance going through 2010. And then that would be the best basis to think through for the remainder of the year and even going into then 2012.

Okay, so --

And of course this is --

Sorry, sorry.

No, and of course this is -- I mean, the credit terms are -- is just one component of the many, many variables that are part of the -- of a commercial relationship that we have with partners. So what I'm saying is just trying to explain the behavior of the first quarter.

And with that I'm not saying that credit terms could not change in the future as margins as are [fond] of marketing cooperative or not as the degree of promotional activity. So I'm just trying to say that just by looking at the first quarter, I don't want anybody to fall into the trap of then saying what if we have this nice free liability sitting on the balance sheet and then I'm going to assume it's going to stay there for as long as the rest of the year.

And I would just add, Antonio, this is Juan, to Javier's point about the different variables that play in the relationship with suppliers, I mean generally speaking I think also have the position that all other things being equal they will rather privilege margin over working capital just as a general position. So just to complement and to give you an idea of how they think.

Obviously, we like to extend our days as much as possible, but you have to keep in mind that depending on the size of the characteristics of the supplier in some cases you don't want to push them too much especially with the smaller ones. So we keep a balance and as I said focus on margins first and foremost.

Okay, thanks Juan. So the change that we saw since last quarter in suppliers has more to do with the seasonality that you're trying to establish in your commercial relationship with them. And if I understood correctly, I shouldn't expect excluding seasonality any big changes or any big improvements let's say in the days of suppliers that you will have going forward, is that correct?

That is correct, Antonio.

Okay, perfect. Thank you.

Thank you. Have a good day.

Celso Sanchez, Citi.

On the OXXO strength and same-store sales which clearly was very impressive and as Alan said in context particularly relative to some of the other formal retailers, do you have a sense for -- if that reflects perhaps some alteration in consumer behavior.

I don't know if I heard you mention it, or maybe you mentioned it in past quarters and I missed it, but in terms of not perhaps having the -- a big enough amount of money to go load up at the supermarket but rather to buy things kind of as they need them. It's a comment we heard reinforced today by PepsiCo on their call presumably relating to the US.

But I wonder if you're seeing that in Mexico as well as a sign of relative benefit of it's a kind of a very slow consumer recovery?

Yes, my figures is (inaudible) that if -- with this, I mean, if I had to describe what we're doing internally with the business in terms of again, the -- both the assortment of the stores and the bright points that we're trying to hit and the incremental knowledge that we have been gaining on consumer habits and preference and how they prioritize their decisions when they are looking for different products and occasions, I think my belief is that -- again that I would say that the reputation in the consumer's mind that also has been building in terms of varying a very balanced alternative in terms of price, affordability and availability and the guarantee that what they're going to -- people doesn't go to OXXO to try to find the novelty of the week.

They go because they want something and they know they're going to get it. And they basically know that they're -- at some points they're paying maybe an extra premium for the convenience of proximity, I would say.

And again, being able to go in and go out quickly and basically solving their needs in a much more faster way and convenient way. I would say -- I would tend to believe it's a little bit more of that as opposed to people having less affordability and having to go more times to the store or not going to the supermarket because the way the categories are developing within the OXXO store tells me what I'm trying to explain to you. That's what's driving traffic into the stores.

And I would tend to believe that's what's taking place. I think that the OXXO guys have been making a lot of progress in precisely understanding again what consumers want, what they're willing to pay, how they make decisions as opposed to how they behave in different circumstances. So I think all of that is being put to serve in a much better way for consumers. And I think in the end that's what's driving consumers into the stores more frequently than in the past.

Okay, so --

And I would add Celso, I mean, we mentioned in -- Javier mentioned in his remarks, you know, another reason that probably comes into play when you split same-store sales into traffic and ticket, normally traffic is the main driver of same-store sales for OXXO and what we've seen maybe three of the last four or now it's probably four out of the last five quarters is an improvement in the average ticket.

And in this case at the beginning of the year, you also have that several -- you know, some of our large suppliers or large categories for their own reasons implemented price increases and you saw the case with Coke FEMSA. And of course, that plays a role in our own average ticket and in our own numbers. Maybe we're more exposed to this staple foods and beverages than other retailers. Not maybe, I'm sure that's the case.

Great, thank you.

Ladies and gentlemen, that is all the time we have for questions today. I will now turn the conference back to Mr. Astaburuaga for posing additional remarks.

Just thank you very much for your participation today. Have a great weekend, everyone. Bye now.

Ladies and gentlemen, if you wish to replay the webcast for this call you may do so at FEMSA's Investor Relations website. This concludes our conference for today. Thank you for your participation and have a nice day. All parties may now disconnect.