Fomento Economico Mexicano SAB de CV (FMX) 2012 Q1 法說會逐字稿

Good morning and welcome, everyone, to FEMSA's first quarter 2012 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 would now like to turn the conference over to Javier Astaburuaga, FEMSA's CFO. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to FEMSA's first quarter 2012 results earnings conference call. Juan Fonseca and Jose Castro are with us today as well.

As discussed from earlier calls, today we will focus on the consolidated figures for FEMSA and on FEMSA Comercio's results, since many of you probably had the opportunity to participate in Coca-Cola FEMSA's conference call last Friday.

As you have also no doubt seen our detailed results, we will use this opportunity to share some of what we see as highlights and main trends in our businesses. As we mentioned in our release, we started the year with a good amount of momentum carrying over from last year. FEMSA Comercio continued its success, particularly in terms of same-store sales and also advanced in our understanding of our consumers' needs.

Coca-Cola FEMSA for its part delivered strong top line growth, tempered by some raw material pressure as well as a front loaded cost and expenses related to the integration of the new territories in Mexico and the pursuit of synergies. On that subject, we are encouraged by our initial progress and by the upside bias that we see in the synergy potential.

As you know, at the end of March we reported our 2011 quarterly and full year financial information under IFRS, and if you have any presentation or accounting questions about these changes please get in touch with Juan and our Investor Relations team, who will be glad to follow-up.

In terms of our perception of the environment and the drivers for consumption particularly in our key Mexico market, two months ahead of presidential elections, we continue to see encouraging trends. Manufacturing activity continues to be healthy and consumer confidence remains high, while unemployment and inflation are under control.

Looking briefly at the macroeconomic environment in other markets where we operate, in the first quarter of 2012 we saw continued positive trends in Colombia and improving data in terms of Brazilian inflation. However, sentiment has deteriorated significantly in Argentina, where inflation remains high and concerns are rising regarding recent developments and their potential impact on growth going forward. In Venezuela inflation approaching 30% remains an issue.

And moving on to discuss our consolidated quarterly numbers, we are off to a solid start in 2012. Total revenues increased 25% and income from operations grew 44.4%. On an organic basis, excluding the integration of the beverage divisions of Grupo Tampico and Grupo CIMSA, total revenues and income from operations increased by 20% and 10% respectively.

For the first quarter the line labeled participation in Heineken results represents FEMSA's 20% in Heineken's first quarter net income, which was reported approximately two weeks ago. And before leaving the subject of net income, we see that it increased 13% in the first quarter. As we explained in our press release, this increase reflects growth and income from operations and the variation in FEMSA's 20% participation in Heineken's net income, which more than compensated a lower integral result of financing.

Our effective tax rate was 31.7% for the quarter, very much within the expected range in the low to mid 30s. In terms of our cash position, during the fourth quarter we went from having a consolidated net debt position of MXN1.5 billion at the end of December to now having a consolidated net cash position of MXN2.6 billion at the end of March, reflecting cash generation at both our core operations.

Moving on to discuss our operations and beginning with FEMSA Comercio, we opened 138 net new stores during the first quarter. While this represents a slower start than we -- than what we did in the first quarter of last year, we expect to begin narrowing the gap with our store openings plan during the second quarter. This should put us well in position to reach our objective for the year, which is line with last year that is approximately 1,100 net store opening in 2012.

Revenues increased 18% during the quarter, with same-store sales up a healthy 8%, reflecting improvements in average traffic as well as ticket. Our traffic increased 6%, continued to reflect progress in our management of category and purchasing occasion mix and the continuous fine tuning our value proposition within the store. Our average ticket rose 2%, aided by price increases taken in the first quarter by several of our suppliers for important categories.

For the quarter gross mix expanded 90 basis point, again driven mainly by a positive mix shift due to the growth of higher margin categories, a more efficient and effective collaboration and execution with our key supplier partners, combined with a more efficient use of promotion related marketing resources. While structurally we have often been able to deliver some margin expansion at the gross level this 90 basis points are above recent trend and we would be cautious and recommend against assuming such a number for the full year.

In terms of operating margin, this quarter FEMSA Comercio posted an expansion of 30 basis points even in the face of incremental expenses related to new marketing programs to support our consumer need driven initiatives, the rising electricity tariffs and the continued strengthening of FEMSA Comercio's organizational structure. Also, as it's 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.

On Coca-Cola FEMSA revenues for the quarter increased 30% versus the comparable period of 2011 as a result of double-digit total revenue growth in each division and the integration of Grupo Tampico and Grupo CIMSA in our Mexican territories. On an organic basis revenues for the quarter increased 21.6%, operating income increased 13%, driven by double-digit operating income growth in each division and including the integration of the new territories in Mexico. On an organic basis operating income growth was similar at just above 13%.

If you were unable to participate in Coca-Cola FEMSA's conference call on Friday, you can access a replay of the webcast for additional details on the results.

And as we build on this encouraging start to the year many familiar things should keep us very busy. At Coca-Cola FEMSA in addition to the permanent efforts to keep the business growing and improving, we have to focus on integrating and capturing the potential synergies from our recent acquisitions, which, as I mentioned at the outset, could exceed our initial expectations. And we have to keep making progress in our evaluation of the Philippines opportunity as well.

At FEMSA Comercio we have to get up to speed and then maintain the rapid pace of store openings, while continuing to fine tune our value proposition to keep driving same-store sales. And at the corporate level we have to continue to evaluate our strategic opportunities and keep finding the best ways to deploy our capital.

And with those remarks, I'd like now to open the call for your questions. Operator, please?

Thank you. The question-and-answer session will begin at this time. (Operator Instructions).

Alan Alanis, J.P. Morgan.

My first question has to do with the pace of store openings in the first quarter. I know you mentioned that you're still aiming to open 1,100 stores during the year. However, I also recall that there were initiatives in OXXO to try to reduce the seasonality of openings, and apparently the number of store openings that you had this quarter indicate that we might be going back to those practices that will push for much more openings towards the second half of the year.

So what explains this change, will be my first question, and is there any risk that this will be the first year -- or what are the chances that this will be the first year that you didn't open more stores than the year before, Javier?

I would say that we're pretty comfortable about opening at least the same number of stores as last year. The only comment I might make is that the number you're looking for the first quarter, I would say, it's a consequence of a number of small details, some factors that provoked that the store opening for the first quarter was slightly below last year. But nothing really -- a serious problem there.

As I said, a number of small details, including the fact that the Holy Week period was very, very close to the end of the quarter was one factor. A number of other small reasons are behind that. But as I said in my opening remarks, we are pretty comfortable that we will be closing most of gap against last year in this second quarter, if not completely. And we feel very, very comfortable. The pipeline is in a very, very healthy shape going from the just screening potential outlets all the way to last phases of construction. The pipeline, as I said, is pretty strong, so I would say nothing to worry about that Alan at all.

Got it. That's very clear. And one last question, could you remind us the CapEx of OXXO for the full year, and could you explain a little bit what are the drivers that caused such a strong traffic during the stores -- much, much higher than tickets? That would be my last. Thanks.

Sure, Alan. The number we have in mind for OXXO for 2012 is $350 million, and traffic is, as I -- I mean, as we have always talked about the consequence of solving customer needs in a much better way and that is one of the obsessions of the FEMSA Comercio organization. And I would say that the improvement in the communication regarding how OXXO can provide the different solutions now to different segments of consumers, housewives and also teenagers and the likes. I would say that coupled with features such as the expansion of the number of services that you can pay within the store and also promotional activities, which, I would say, reflect in a much better way those needs and wants from consumers I think, all in all, those are the main drivers.

We think we have been keeping up the good job in again opening stores in the right locations where consumers might need us; we would like to be there. But I would say that the value proposition of the store is a much more compelling to a broader segment of consumers, and I think that's what's driving profit.

Got it. Okay clear. Congratulations. Thanks much.

Thank you.

Robert Ford, Bank of America Merrill Lynch.

I wanted to ask a question with respect to the Wal-Mart's bribery fallout, and if you've seen anything that might suggest that there could be more scrutiny on the permitting process from any regulatory or issuing agency?

No. Really, to be very blunt about the [warning], we really haven't talked to anybody. We just know about this affair from what we see in the media as you do guys. So we are not aware of any intention from anybody to impose a higher level of scrutiny. What I maybe can share is that we have our own internal framework and protocols for making sure that we comply with all requirements and regulations within the format in which we operate, which is convenient store. And that's maybe just what I can share.

Fair enough. And then with respect to the cash on the balance sheet, it seems that you are holding a substantial portion in US Dollars and I was wondering what the rationale was for that?

Yes, you're right, we've made the decision to manage the mix of currencies in our cash position more skewed to dollars, and the rationale has a lot to do with the most likely potential use of those resources might be transactions which somehow might be linked to dollars. So that's why we converted some of our peso position.

We still hold a large peso position. But you're right; we now have more dollars in cash. And the rationale is again the likelihood of the potential uses of cash being much more linked to the dollar -- easier. And we would like to be in a position in which we have a strategic transaction, and suddenly because of volatility in these days, we're facing an adverse exchange rate at such juncture. So that's the reason why we are now much more exposed to dollars, and that's simple as that, Bob.

Thank you very much.

Gustavo Oliveira, UBS.

The question is with respect to the gross profit margins in OXXO. I think the results were excellent, showing a 90 basis points expansion. And you mentioned in the release that part of it was due to better execution between your suppliers and your partners. I wonder whether any of it is kind of a non-recurring event that happened in the quarter, and if so, what would be the more normalized margin expansion that you would have had in this quarter?

Sure, Gustavo. Good morning. I would say that when we talk about the more effective collaboration on promotional, I think there's also a continuous journey on trying to fine tune what the right elements for a promotion is. And this is a continuous learning process and of course we have not mastered it, but we have improved a lot. And I would say that both the -- I would say the efforts that are being made in order to be much more agile in terms of the pricing changes combined with the promotions, the design and execution of promotions and, I would say, the support from the different suppliers that we have been getting I think are behind a lot of the margin expansion.

The first quarter particularly was very successful in precisely driving high growth categories in -- I would say a little bit over the trend over the past quarters, and that's why we are cautious about these not necessarily being a trend that can be sustained, because results were very good. And that's basically the reason why the gross margin expanded close -- I mean, 90 basis points.

Going forward, as we have expressed in the past, we all the time aim for a moderate margin expansion of the gross to a flat to a marginal expansion on the operating margin as a ratio to sales. So that's I think what I should -- might give you as a guidance in terms of what the long-term trend might be for the business. And you have to also take into account that going forward we will, as we have done in the past, continue to reinvest in the business in making it stronger and stronger. So from time to time we might also take decisions of putting some of the gross margin generation into the building of the right infrastructure for this business to continue growth in the future. So those will be my comments, Gustavo.

It's very clear. And just on the -- also on the part one of your explanation and you briefly touched on it, and the gross higher margin categories. This is not yet the food category, right? That is still not growing very fast. So that would be more like services that are growing faster and contributing to this margin expansion at this --

One relative to the other, you're right. Services is growing faster. But fast food is also improving its growth and we are starting to see early results of some of the strategies that we have put into the stores. So also fast food is growing, I would say, above the average. But largest contributor of course is services, and of course this is, I would say, even magnified by the fact that there is not really a cost associated with a fee that you charge for some of those services. So margin expansion looks even bigger when you are talking about services as opposed to fast food.

Okay, thank you.

Thank you.

Antonio Gonzalez, Credit Suisse.

I have two questions, first on the income that you get from Heineken. Are there any changes to the policy that you have in terms of hedging, particularly the FX risk? When I look at the --of course when I look now on a year-on-year basis, you are still pretty much getting a benefit in terms of where the euro is relative to the peso. But if we look at the second half of 2011, where the euro was almost up MXN19 per euro, are you thinking about hedging that exposure going forward just in case the peso continues to be stronger and you get a less favorable FX rate in the income that you get from Heineken going forward, or are there basically no changes to your hedging policy in that matter?

Hi, Antonio. We think a lot about this issue you're mentioning. We have not done anything. We still are treating this as a long-term investment. So we don't see any reason to do any short-term hedging in order to, let's say, lockup net income in the short-term that's going through P&L. So that's basically where we stand. It's not a matter which we don't discuss, reflect and discuss about the convenience of doing something or not. But so far we have not done anything at all.

Okay, thanks. And secondly, I wanted to follow-up on the CapEx figure that you mentioned for OXXO. I guess as a percentage of revenues it's still pretty much in that 5% to 5.5% range that we have been looking at previously, and I wanted to get a sense from you of how do you think about this figure going forward, two, three years from now?

You also mentioned previously that the number of stores that you are planning on opening this year is something close to 1,100. So basically, I am struggling a little bit when I think about the rate of investment that you need in the business going forward. The new stores that you are opening on a year on year basis you're not increasing as much as you did in the past. So I am wondering if we should be thinking about a lower CapEx to sales figure going forward as the growth rate in revenues and selling space also moderates a little bit going forward.

Is there any reason other than the investments in IT that you've been doing in the last two years or so to think about these CapEx figure as a relatively high figure in the next two, three years, or should it come down to something closer to 4%, let's say, as a percentage of revenues in the next two or three years?

Yes, two to three years is a short timeframe, which I don't think you will be looking at a dramatic change, nor on the upside or on the downside. The reason being that we feel comfortable about maintaining the pace of opening of new stores going forward, hopefully slightly again higher than last year. But if it's stable, it will be good enough.

But a short timeframe such as two to three years doesn't really change that much the numbers. What you'll see going forward in longer terms is again depending of our ability to keep improving the value proposition a potential number of stores -- and I am speaking more medium to long-term -- which might be as a percentage of the total stores in operation, slightly lower.

But at the same time, you will have also this phenomena of now having to reinvest more into other stores, either in terms of refurbishing or remodelations and things like that, combined with the continuous opening of new distribution centers in order to really fulfill the promise of being much more closer to our stores in order to have a frequency of visit to the stores, which can allow us to again manage fast food and categories which demand a higher frequency in a much better way.

So I would say that depending on the timeframe that you are picking, you might expect a different composition -- longer term, yes. Once this business has got to a point which we still see a number of years in front of us in which we are not able to open such a high number of stores, you might see a moderate decline. But for the next two, three years, Antonio, I think that a number between five and six, as you are mentioning, is still a good number to put in your models.

Perfect. Thank you so much, Javier.

Thank you.

Operator

(Operator Instructions).

Jose Yordan, Deutsche Bank.

A couple of questions. The first one's easy, for you for [Pepe]. Do we have a closing date for Fomento Queretano yet or a good estimation on when that's going to close and how much is going to be included in second quarter earnings?

And number two, I guess in the aftermath and the year following the Heineken or the sale of beer assets, you also sold some of the assets that are under the holding such as Grafo Regia, and I forget what the other sale was. Are you basically finished with the divestitures of these units that are under the holding? Are they core for the future or is there more to come in some place? I just wanted an update on that since we haven't talked about that for a while.

On the Fomento thing, initially we were assuming that we would close and start consolidation hopefully in May. That's not going to happen. We think that June is a year -- is a month in which we might be able to start including the numbers in. So that tells you that we are expecting to close in the month of May, and we feel confident that we will do that. It will imply a little bit less than a month delay, but in terms of bringing the numbers into the P&L of Coca Cola it will imply a delay of a month.

And in terms of divestitures, we still have very, very small businesses under the holding that we might dispose maybe one -- I'm not sure if two -- we might be able to do so in the coming months. And if that happens, we will inform you when that takes place. But it will be maybe just one small business and that will be it.

Okay, great. Thanks a lot.

Thank you.

Hillary Brown, [Lanen Partners].

I have a quick question relating to taxes. What is the expected tax burden that you are looking at for the year?

The high 20s, low 30s.

High 20s, low 30s?

High 20 is a much better number to use.

Okay.

Or low 30s.

Okay. And then what exactly is entailed with the strengthening of the -- of CIMSA's -- I'm sorry of OXXO's organizational structure?

Yes. We mentioned that as an overall concept, which implies that we are true believers that the speed at which we can keep on finding the value proposition and implementing improvements on how we manage some categories has a lot to do with the moral that we have in the Company to deploy to the more than close to 10,000 stores in a very, very speedy way.

So I would say it's a combination of having an organization dedicated precisely to improving the value proposition of the store continuously, coupled with a big project we have in order to implement a new point of sale system throughout the stores. And those two, I would say, drivers are the ones that are behind this so-called strengthening of the organization, Hillary.

Okay. And how long do you expect for the -- I guess, implementation for the new point of sale system to take?

Because of the nature of the project and because of we don't like to disrupt anything on the day-to-day operations, this is a project that might take a couple of years from start to beginning.

Okay, thank you.

Thank you.

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

No, not any additional remarks, just thanking you very much for your participation. Have a great week and good bye now. See you next quarter.

And 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.