Fomento Economico Mexicano SAB de CV (FMX) 2011 Q2 法說會逐字稿

Good morning and welcome everyone to the FEMSA's second-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 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, operator. Good morning everyone. Welcome to FEMSA's second quarter results earnings conference call. Juan Fonseca, Jose Castro are with us today as well.

As you all aware and has been the case for the last four quarters, our results reflect the different impacts of the Heineken transaction on our income statement and balance sheet. And we will, of course, be happy to address questions on this subject during this call and at any later time through our Investor Relations team.

In terms of the operating results, we will focus on the consolidated figures for FEMSA and on FEMSA Comercio's results since many of you most likely had the opportunity to participate in Coca-Cola FEMSA's conference call on Wednesday.

As we usually do, let's begin by spending a brief moment on our perception of the environment and the drivers for consumption particularly in our key Mexico markets.

GDP and manufacturing activity as measured by the IR, up mid-single digit year over year and the Mexico consumer confidence index is at its maximum level for the past two years. But still unemployment rates have ceased to come down at least in the short term.

We continue to see strength in our top line numbers driven by certain categories and certain consumption occasions that respond to specific factors such as warm and dry weather and the affordability of many of our products.

However, as you know, this momentum is not yet present in certain other consumer categories that represent more significant cash outreach for the consumer or are affected by things like the lack of availability of consumer credit. So we see a diverging trend relative to other sectors of the economy and even within retail.

Given our favorable position in this respect, our overall view is one of cautious optimism as we look forward to the second half of the year.

Moving on to disclose our consolidated quarterly numbers, we are very encouraged by the results. On a comparable basis, that is without the beer operations, total revenues increased 15.5% and operating income grew 17.7%.

These results were driven by double-digit growth in revenues and operating income at both Coca-Cola FEMSA and FEMSA Comercio. And so, we are building on an already strong first quarter which brings us to the halfway mark of the year with double-digit growth rates.

As you know, during the past several quarterly conference calls, we have taken some time to explain line by line the changes to our consolidated numbers derived from the Heineken transaction that closed in April of last year.

In order not to be so repetitive, we would like to highlight just a couple of points for the second quarter. The first point is that Heineken's information for the second quarter was not made public ahead of today and we must therefore use the data from the first quarter in arrears as a proxy.

This means that for the second quarter we are using the same Heineken number as we used for the previous quarter, except that for the first quarter we converted from euros to pesos at the average exchange rate for that first quarter. And now, we're using the average exchange rate for the second quarter.

Also, as you know, the first quarter is usually a light one relative to the rest of the year. So, you should take that into account in your projections. And as we have said it before we will always use the most recent available public information to incorporate Heineken's quarterly numbers into our net income figures.

The second point is that the line net income from FEMSA's former beer operations continues to be relevant and corresponds to the month of April of 2010 before the transaction closed. If you have questions on this subject, please don't hesitate to call Juan or Max.

Before leaving the subject of net income, we see that net income from continuing operations increased 7% in the second quarter. However, it grew 15.7% for the first half. Here it is useful to mention that the growth in the effective tax rate for the second quarter came against a tough comparison versus 2010 when a tax provision was cancelled at Coca-Cola FEMSA.

Moving to our cash position, during the second quarter, we went from having a consolidated net cash position of MXN3 billion at the end of March to now having MXN3.1 billion as of the end of June. The marginal increase was one that took place even though we paid dividends during the second quarter.

And on the subject of potential uses of cash and the pursuit of strategic opportunities, we continue to make progress. Obviously, the transaction with Grupo Tampico announced by Coca-Cola FEMSA a few weeks ago represents a great strategic move.

As you know, this transaction was a first one that we structured with a significant equity component. We certainly hope it won't be the last. So it doesn't diminish our flexibility to pursue other opportunities. We will keep working on the subject and we will inform you when there is news to report on these fronts.

Moving onto 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 342 net new stores during the second quarter which means we opened a new record high of 1,132 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 efforts to smooth out the curve of the new store openings across the four quarters and away from the backend loading of a few years ago.

Revenues increased 20% during the quarter for FEMSA Comercio. Same-store sales were up a healthy 10.7%, reflecting improvements in traffic as well as average tickets. Traffic rose 4.3% reflecting progress in our management of category and purchasing location mix.

Our average ticket increased 6.1%, a solid number. This number reflects favorable weather trends across Mexico, price increases by several of our suppliers for important categories such as soft drinks, beer, pastries, cigarettes and others, as well as OXXO's continuous fine-tuning of its value proposition within the store. We believe we are gradually improving the fit between that value proposition and a growing range of consumer needs.

For the quarter, gross margin expanded 80 basis points, driven mainly by positive mix shift due to the growth of higher margin categories and more effective collaboration on execution with our key supplier partners, combined with a more efficient use of promotion related marketing resources and 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 margin, this quarter FEMSA Comercio posted an expansion of 40 basis points, driven by the 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 expense line as the new stores generate expenses from day one, while revenues take a while to get up to speed.

Finally, Coca-Cola FEMSA revenues for the quarter increased 12.9% versus the comparable period of 2010 with Mexico showing strong trends and Mercosur continuing with good momentum. Operating income increased 12.4%.

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

So, summing it up with the first half of the year now in the books, we are on the right track, but we must keep our focus on our energy and continue to strive to exceed the goal we have set for ourselves.

And with that, I would like to open now the call for the questions. Operator, please.

(Operator Instructions) Gonzalez, Antonio, Credit Suisse.

Congratulations on the results. Javier, I wanted to see if you can develop a little bit on the return on invested capital at OXXO. We've heard in the last couple of conference calls that OpEx per store at OXXO has come up consistent with the idea of investing a lot behind your IT platform. I wanted to see if you can help us understand how much of an impact have you seen in OXXO's return on invested capital over the last, say, 12 or 18 months on the back of these investments and how do you expect return on invested capital to improve in the next year or two as you benefit from these same improvements in IT.

Sure, Antonio. Good morning. First half of the question, we haven't really seen an impact on return on invested capital in the past, I would say, not only in the last 12 months, but maybe 24 to 36 months.

We started to expand the organization within OXXO to, I would say, adapt to what we see coming next in the value proposition going forward. We have spoken plenty of times about the push in trying to develop emerging categories such as fast food and services and the likes, and also spending a fair amount of time in trying to adapt the value proposition using segmentation techniques in order to give each store its own flavor of what the environment is looking for.

So, in the past, I think we have been able to manage in a good sense investing behind the business, but still getting incremental returns on invested capital. So we haven't seen an impact going backwards.

And going forward, I would say that again, these incremental spending, which is directed to trying to strength, has strengthened the value proposition of the store in front of the consumers, the trick is precisely getting the bang for your bucks in terms of being successful in bringing more people into the store and making them to buy a little bit more every time they go into a store. So, we're not assuming that return invested capital would be impacted by these incremental spending if we're successful in strengthening the value proposition and therefore having incremental same-store sales and incremental sales as an overall chain. So that's basically where we are, Antonio.

Thank you, that's very helpful. And secondly, if I may, you talked a lot recently about capturing a new consumer occasions at OXXO in which you maybe did not necessarily have a very high market share, such as Daily or gathering occasions or replenishment. And can you help us, maybe you can give us some color on how you think about the size of the opportunity at these different consumer occasions, do you feel comfortable by now with sharing maybe what's your market share in some of these different consumer occasions in which you were not as strong maybe two or three years ago and how do you see these evolving over the next couple of years?

Yes, [directly], we don't really like to share any information on categories or even at -- on occasions on these categories, but what I can tell you is that this is not -- I mean, the game is not being played by saying, we're going to go after particularly one or two. We think about the store of a place in which consumer needs can be satisfied. And we hope that we can satisfy those consumer needs in a better way, that some other alternatives in the retail landscape in Mexico.

So what you see is that if you would sit down with the guys in charge of the commercial area of OXXO, you will really have a large number of people, all of them thinking on the consumer and, of course, coordinating a lot efforts among themselves in trying to bring up ideas that make sense in order to build the strength of each category and consumer [occasion] coupled with at least another one. And we have a number of examples on that, so we can start to leveraging the lot, for example some of the services that we have started to allow people to pay in our stores, coupled with bringing that need for people to take advantage of maybe grabbing a sandwich or having a soft drink.

And at the same time, there are other examples of now people are having the ability to go to an OXXO store and buy a magnetic card to pay for their transportation in cities for example, like Monterrey, which also builds a lot of traffic and the incidents of people that goes to a store and buy the magnetic card, shows that we are have in some cases with some services even higher incidents of those people are going to buy airtime or the likes.

So the more services we're trying to bring into the store and the more product lines we are trying to also offer at the right price points, and at the right package size, and coupled in most of the times with what we think are intelligent promotions in the face of consumers. I think that's kind of the game that we are trying to play.

If you look at OXXO, proximity still is one of the first drivers that is giving the reason to be. And of course, having these large number of stores, it's not our proximities, basically something that we have achieved in most of the places.

And what we need to be very good at is to delivering the promise that we are giving to consumers or customers in the sense that if they are going to an OXXO, they are going to find their Coca-Cola, their Carta Blanca and their bread or their milk and their candies every time they go to a store. So having the ability to have the right assortment, but not having stock-out and again having these idea of being a good alternative for people to satisfy consumer needs at the right price, I think that's basically what we are focusing on.

The result is that we are making progress in growing some categories as the one you just mentioned, which is Daily and [Reposition] for the pantries of the Mexican households, but at the same time we are growing the rest of the categories, which have been the backbone of the OXXO since it was born that is anything that has to do with thirst and with food and the likes.

Thank you. Thank you very much Javier and congratulations again on the results.

Thank you, Antonio.

Torres, Lauren, HSBC. Please proceed.

Javier, you mentioned this in your prepared remarks, but I was hoping you could talk a bit more about consumption trends and I guess the consumer trends in Mexico. It's interesting, though, because as earnings season has kicked off, we are hearing from a lot of consumer products companies about actually trends weakening. Maybe this is more reflective of the US market.

Just curious from your perspective, it seems like directionally things are getting better. I don't know if there is any facts or, kind of, anecdotes you could talk about which respect to what you are seeing at OXXO that's really driving the same-sort sales growth. I think last quarter, we saw 9% growth. This quarter we saw almost 11%. So with that, so I am just trying to get a sense of how sustainable do you think these growth rates, is it reflective of things that you are doing or is it just reflective of the general market getting stronger and not necessarily weakening?

On the first part, we -- that's why I mentioned we're cautiously optimistic going to the second half. We are concerned about the diminishing economic activity maybe going forward. We are not happy about the unemployment being a little bit higher even than what we have seen in the last months. We are not very happy, but also even though consumer confidence numbers in Mexico are up there in good shape, we are seeing behavior of consumer in some categories, some of those which we are not very strong on at the OXXO, but we are looking at some of those behaviors and we feel a little bit nervous to tell you the truth.

We do still think that we have made progress and that's where we stand today in terms of being [cautiously] optimistic for the second half. But, in overall, within the broader economy, we still see some of those yellow lights that some suppliers are looking at. Pricing power might not be as strong as in the past and, of course, there were some reasons for some of these suppliers to really be more aggressive on the pricing and we benefit from that. And I think that the trick here is not to pass directly price increases to consumers, but trying to be clever in terms of how to move your product mix and bring your promotion activity in line with the times.

So, I tend to hear what you are saying and I tend to agree with some of the suppliers that we shouldn't be resting comfortably on what's coming, but we should work harder going forward.

And, in terms of, again, of the explanation behind our performance, I need to give credit to our guys at OXXO in the first place because I think they have been doing a great job and again, in understanding what works better, what doesn't and bringing products into the store and taking products out of the store, those don't really do the job.

But also, I would say and I would point that we were very, very lucky of having such a wonderful weather for the second quarter. And when you look at not only the retail landscape on the categories that we are very strong, but you look at suppliers in Mexico that are more benefited by these good weather, you will find both beer and soft drinks basically growing double digits or close to double digits. So, I mean, I think it is fair to say that we were doing the things that we should do in the right way, but also we were benefited by the environment.

Another factor that I think is playing out is that again, this is kind of a virtuous cycle in the sense that consumers are, I would say, now for some categories at least and Antonio mentioned Daily as an example. For some categories within the OXXO store, I think we have been doing a great job in trying to change consumers' perception on how fair the price we charge for some of our products if we are competitive or not against which other alternatives in the retail landscape. And I think that also is playing a part, I don't think that's moving the numbers and I'm sure it's not.

But, in essence, if you think, OXXO was not the destiny to buy some categories and now it is, even though you buy very few stuff of that category, you buy something else and if you are not -- and I think that is reflected in the traffic that we are now being able to bring into the store. We are capturing a little bit more women on our mix and I think all in that is working in our favor, I think.

That's helpful. If I could also ask with respect to your CapEx guidance, I think last quarter you mentioned around MXN900 million obviously more weighted to Coke FEMSA Is that still the case or is there any change there?

We are still -- we are still talking on the same numbers, around MXN600 million for Coca-cola FEMSA and around MXN250 million for FEMSA Comercio and the rest for the rest of the business.

Okay, all right. Thank you.

Thank you, Lauren.

(Operator Instructions) Alanis, Alan, JPMorgan.

I know you don't want to comment too much on the specific categories of OXXO. And, I completely agree with you and I think that a lot of those -- the COO of OXXO and his team deserve a lot of credit for this. But again, a 10% same-store sales invites for further analysis. And what I want to ask you is specifically -- and the reason for this is because if there is something unusual a year from now we might be hearing from it.

And what I am getting is that there was a surge in the prices of cigarettes in Mexico, starting January 1st of around 30% according to Philip Morris and I want to confirm that with you. Because if that's the case and that's what we are seeing, probably I am getting that about one-fourth to one-third of the increase in same-store sales might be coming from this increase in the excise tax of tobacco and we might cycle that a year from now. Is that the right thinking, is tobacco, this increase in excise tax a material component of the increase in same-store sales that we should not be expecting in 2012?

I think that you described it very well. Definitely, we sell a lot of cigarettes, but not as much as to maybe get to those kind of numbers. But it was much more important than any other period that I can recall.

So it's a factor that again you should take into account with making your projections for 2012. And as I said, you will need to also get your barometer to look at, well, how weather is going to behave next year because if you put together, again first, the good job of the guys at OXXO.

Second, I would say weather. Third this phenomena of cigarettes, which the increase was in the high 20s at least. And not only that, but we keep on growing the cases per -- that we are moving on that. Our product in the start, because we have now the ability to have a very, very extensive line of products. I think that small mom and pops can't really --- cannot afford.

So this is -- you don't get to these numbers on same-store sales a couple of quarters, just by one single driver. So I will need to mention a lot of that. And, of course, you have to take into account also that if you look at pricing on some other very important products as I mentioned in my early remarks, such as beer and soft drinks and the likes.

Also, we are looking at these same-store sales numbers, also having the push from some other suppliers. The more important the price increase was, cigarettes because of the tax imposed on these companies, but we are seeing strong pricing and as I said going through the second quarter or early into 2012, I am not sure we are going to be able to repeat what we are experiencing in 2011.

Understood. No, that's very useful, Javier. Thank you so much. While I have you here last question, any update regarding the strategic thinking and the deployment of capital going forward? Any change in the last [three] months?

We are still looking at anything within the existing businesses that makes sense to put capital behind and we are mainly investing a little bit more in Capex than in the past, but I think that growth rates are behind those decisions. And in the rest of the businesses, we are basically where we have said we are. We are looking at some opportunities that really we feel comfortable that we are going to be able to use and leverage our capabilities. And, of course, we are working on a number of things and further, we would like to be able to give good news to the market in terms of announcing some activity there, but we are still working on that, Alan.

Okay. Thank you so much. Congrats.

Thanks.

Miranda, Karla, GBM.

Javier, congratulations on the results. I know you already mentioned weather as an important factor for same-store sales growth in OXXO for the growth. And I was wondering if you can give us some color. As you already know there has been a lot of rainfalls during July. And I don't know if you have already measured the negative impact that this could have on same-stores sales growth for the third quarter of the year.

No, but I think when looking at July what I maybe can share is that it hasn't been as good as a weather as the second quarter, but nothing dramatic that we can say is going to have a huge impact I think on our existing trends.

Okay, great, thank you.

If you have to remember that in 2010 we had -- we've had also some troubled months with plots in Veracruz and in some other places in Mexico. So the base that we're going to compare against it is all -- also not as high as the one that we had in the second quarter.

Okay, great. That was helpful. Thank you.

Thank you.

Pena, Karla, Actinver.

Congratulations on the results again. I just wanted to go a little bit further on your OXXO operations. I mean, you already mentioned the factors that are making those -- the average ticket grow and all that but I do want to know if you have any insight on how much more space or innovations, I mean, more services or what other initiatives you could have in the future. And if you would have a comfortable level on same-store sales that you could -- that you would like to reach in the future and when would you reach those levels? That would be very helpful.

We are sharing the [files] that the first priority are also -- is being more good at what we are already good at and then improving our sales in some of the things and categories in which we don't feel we are up to the level of consumer needs. And, there are two or three major categories that we think we can make very good progress going forward and that we have targeted those being fast food, services and the likes, and that Daily and basically being better at leveraging some of those categories against each other. And by that I mean being much more good at the [design] of the promotional activity and the way we merchandize those promotions within the store. Those would be kind of the -- on a category basis, kind of the main thrusts going forward. But again, first priority is being better at what we are already good.

And second element I would say is, again, these concept of understanding better the surroundings of each store to really have the ability to segment, if possible. Of course, this is done by clusters, but is possible on a store level to really make sure that we have within the store whatever a consumer might need. And it's quite a different need to a guy which is driving on the highway as opposed to the guy which is going out of his office and trying to grab something to eat at noon. So I would say that segmentation within on a store level, it is very important as well in terms of what we're trying to achieve going forward.

I would say that -- those are the main, main thrusts that this business is having for the future.

I would just add-- hi, this is Juan. I mean to the specific question about expectations. I mean, what we have said is same store sales should grow in the long term in line with GDP.

Okay.

So, we -- to Javier's earlier point, the out-performance that we're seeing, we're going to try to keep it up as long as we can. But you should definitely not put 10% into 10-year projection.

Yes, (inaudible). And just to go a little more into the OXXO, I mean the expansion plan you have in South America, how have you been addressing these, well, these segmentation and these really specific needs of the consumer. How do you think you're doing there?

Yes, well, as you can imagine. It's a new game for us even though we're good at opening a thousand stores in Mexico. In Colombia, it is quite different because we really need to get into consumers' minds in understanding how they behave and what they privilege against in satisfying their needs. So in Colombia, it's still a place in which we are opening a very, very small number of stores. We might be opening maybe this year 15 stores or so, maybe slightly more, but not that much more. And we're still in the phasing, we're trying to bring things into the store, which we think might work and pulling out things of the store because they didn't work. So, we're still working a lot.

We are, of course, taking advantage of the tools and the expertise we have developed in Mexico to monitor and to that test what consumers are looking when they're shopping around in different retail formats and how they feel and think when they go into an OXXO. And all of that is coming back into the central office to trying to go back to the OXXO store in Colombia and to bring the things that we interpret the consumer is looking in an OXXO in Colombia.

So that's the way we're doing it, but still, as we have said in the past, we're still in the -- in the phase in which we are fine-tuning the value proposition. We continue to increase same-store sales in Colombia consistently at a pace which is, I would say, pretty much in line and maybe even slightly higher than the original plan stated. But we're still definitely in the phase one of building a winning and successful value proposition in Colombia, Karla.

That was very helpful. Thank you. Thank you, gentlemen.

Thank you.

Sanchez, Celso, Citi.

I just jumped on, so I heard the tail end of the Colombia discussion. I just wonder if you have already or not discussed any thoughts you have on Brazil in the wake of some of the partnership questions raised in some of the companies there.

I know you've talked in the past about clearly having an interest in there eventually and I think more recently the discussion has centered a little bit more around the willingness to consider partnership rather than Greenfield. Do the recent events change your thinking in that regard in any way or perhaps push back the potential date of arrival in Brazil as you weigh these issues more carefully and vet partners more carefully? Thanks.

No, in Brazil we are basically -- we are basically spending some time in analyzing the [ripple] landscape and I would say, we're having a lot of conversations with our people at Coca-Cola FEMSA to gather insights on this and that's one part of the element. On what's been going on in terms of our relationship between big box retailers down there, we're just observers of a situation which is curious -- we are curious about the development, that's it.

And I don't think that anything that has happened really changes our movement in terms of -- we will think there's a good entry strategy in Brazil that may imply either buying something big and something small to build on top of it, or partnering with somebody down there. There are very fine retailers in Brazil, which might be interesting to think of. We are not changing our mind that -- we will do whatever is best for FEMSA in terms of maybe tapping that market in the future to be very clear about that.

We're doing basically the first, which is coming up with the around thinking in terms of what are the opportunities if there are -- what spaces or rooms for improvement in some of the retail pharmas that already exist in Brazil.

And the second piece in terms of what will be the right entry strategy for FEMSA in Brazil and when, I think that's still something that we're thinking very carefully.

Okay. Thank you very much.

Thank you, Celso.

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

Now, thank you very much everyone for your participation and have a great weekend. Bye now.

Ladies and gentlemen, if you wish to replay to 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.