Fomento Economico Mexicano SAB de CV (FMX) 2012 Q4 法說會逐字稿

Good morning, and welcome everyone to FEMSA's Fourth Quarter 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. Thank you and good morning, everyone. Welcome to FAMSA's fourth quarter 2012 results conference call. Juan Fonseca and Jose Castro are here with us, as always.

As is usually the case, during this call we will focus on the consolidated figures for FEMSA and on FEMSA commercial's results since many of you probably had the chance to participate in Coca Cola FEMSA's conference call yesterday.

As you have also likely had the chance to go over our detailed results, we will take this opportunity to focus on the highlights and main trends in our business. As we mentioned in our press release during the fourth quarter, we saw both of our corporations perform very well, wrapping up a solid 2012.

While Coca Cola fans experienced some margin pressure earlier in the year, in the second half we were able to capitalize on stable volumes, solid pricing and improving raw materials on foreign exchange dynamics that finally led to achieve double digit operating income growth, now only including new territories, but organically as well.

For its part, FEMSA commercial delivered on the expectation of surpassing 1000 net new stores and also posted double digit operating income growth on the back of balance same store dynamics and a consistent level of execution.

As you know, at the end of March we reported our 2011 quarterly and full year financial information on the IFRS, the facilitate comparability.

During the year 2012, there were minor adjustments to this comparable set of numbers as we transition fully to IFRS. If you have any questions about these changes, please get in touch with Juan and our investor relations team who will be glad to follow up on this.

In terms of the macro drivers and our perception of the consumer environment, particularly in Mexico, we see that inflation is under control and consumer confidence is very, very high. While GDP growth and manufacturing activity have come down from recent heights, generally however the business moves remains positive aided by expectations of structural reforms materializing down the road. Conversely, the picture is decidedly less clear in other markets where we operate.

In Venezuela, as you k now, we are dealing with the recent devaluation of the currency and we continue to see high levels of inflation with low growth, that is also the case in Argentina.

In Brazil and Columbia, (inaudible) seems to be stabilizing but at low levels. Generally speaking the micro backdrop is not very constructive in many of the markets where we operate, however we have faced similar environments in the past and we believe we have the tools to navigate such waters successfully.

Moving on to our consolidated quarterly numbers, during the fourth quarter total revenues increased 12% and income from operations grew 25%. On an organic basis, that is excluding the integration of the beverage operations of [Rudico] Tampico, [Simsa] and [Pocket], total revenues and income form from operations increased by 9% and 22% respectively.

For the fourth quarter, the line labeled participation and Heineken results represents FEMSA's implied 20% participation in Heineken's fourth quarter net income. Importantly, for the full year, the line represents FEMSA's actual 20% participation in Heineken's net income. Derived from Heineken's full year numbers, reported approximately two weeks ago. Net income increased almost 68% in the fourth quarter.

As we mentioned in our press release, this increase reflects the growth in terms of income from operations as well as the net effect of non recurring items, including the sale of [kines productos] mentioned in the third quarter. The number also incorporates the variation in terms of 20% participation in Heineken's fourth quarter net income versus the figure reported for the comparable period of 2011.

Importantly, Heineken's fourth quarter 2012 net income included a non cash exceptional gain, related to the revaluation of certain equity interests held by Heineken in Asia.

In terms of our consolidated net cash position, during the fourth quarter we went from having MXN3.1 billion at the end of September, to a position of MXN1.7 billion at the end of December. Reflecting outflows related to certain back ended loaded capital expenditures at Coca Cola FEMSA as well to our second dividend payment for the full year, all of which were partially offset by strong cash generation at both our businesses.

And staying on the subject of dividends, our board of directors agreed yesterday to propose a dividend of MXN6.7 billion to be paid in 2013. This subject to approval by our shareholders at our meeting to be held in March. This amount includes basically a full pass through of the dividends we receive from Coca Cola FEMSA Heineken as well as a relevant portion of the cash flow generated by FEMSA to [medicine].

This is consistent with our long term objective of increasing our return of cash to shareholders, while retaining our financial and strategic flexibility and the dividend of this year will represent more than four times the amount we paid in 2009, the year before the Heineken transaction took place.

Regarding capital expenditures, we usually take this opportunity in our first conference call of the year to talk about expected levels for the year. As you probably know, Coca Cola FEMSA is going through a high investment phase, driven by the recently acquired territories in Mexico as well as by capacity expansion in several markets, particularly in Brazil and Columbia where we are building new state of the art bottling plants.

Therefore, CapEx at Coca Cola FEMSA could reach $800 million in 2013, this is a record level of which maybe $150 million to $200 million will be invested in the two new plants.

However, we must stress that this is not a steady state number, and that the annual figures should come down in a couple of years, once the heavy investment pace is done. For its part, FEMSA [co-medicine] should deploy approximately $400 million in CapEx in 2013. Remaining within a stable range of the percentage of revenues while our support logistics and refrigeration operations should invest in the aggregate approximately $50 million more. This for a consolidated total of $1.25 billion of CapEx for 2013.

Moving on those calls, our operations and beginning with FEMSA commercial. We opened 434 net new stores during the fourth quarter, reaching 1040 total net stores opening since 2012, for a total of 10,601 convenience stores. This number was in line with our expectations which were to surpass 1000 net new stores for the year, representing a level of store growth, which our foreign system is well equipped to manage.

Revenues increased 16% during the quarter, same store sales were again up a healthy 7.5%, reflecting improvements in both average ticket and profit. Our average ticket rose slightly above 4%, aided by price increases taken earlier in the year by several of our suppliers for important categories.

Our traffic increased 2.5%, driven again by our management of category and purchase and location mix and the continuous fine tuning of our value proposition.

For the quarter, gross margin expanded 40 basis points, again, driven mainly by appositive mix shift due to the growth of higher margin (inaudible) and by a more effective collaboration and execution with our key supplier partners, including our achievement of certain sales objectives with some of these partners and the corresponding benefits accrued to us.

Importantly, we succeeded in smoothing these benefits throughout the year instead of having them lumped in the fourth quarter. As a result, the margin expansion actually decelerated relative to the first nine months of the year.

In addition, as has been the case in recent periods, there were additional positive effects in the fourth quarter from the more efficient use of promotion related marketing resources and the better execution of segmented pricing strategies across markets.

In terms of operating margin, this quarter FEMSA commercial posted an expansion of 10 basis points in the face of incremental expenses relating to among other things, additional marketing resources deployed behind certain consumption occasions, the continued strengthening of FEMSA commercial's organization and (inaudible) infrastructure and the development of specialized region routes aimed at enabling our preferred food initiatives.

As you can see, for the full year, 2012, FEMSA commercial results moderately exceeded our stated expectations of mid single digit same store sales and growth between 10 and 20 basis points of expansion, however, as we have said before, this does not signal an increasing expectation going forward.

Moving very briefly onto Coca Cola FEMSA, revenues for the quarter increased just over 10% versus the comparable period of 2011, as a result of double digit total revenue growth in our Mexico and central America division, driven by the integration of our new territories in Mexico. Increasing revenues on an organic basis was a healthy 6%. For its part, operating income rose 30%, driven by double digit growth in each division and including the integration of the new territories in Mexico.

On an organic basis, operating income increased 26%. This compared to the fourth quarter of 2011, reflecting improving raw materials of foreign exchange dynamics. If you are unable to participate in Coca Cola FEMSA's call first call yesterday, you can access a replay of the webcast, traditional details on the results.

Let me now taka a minute to recap some of the events that make 2012 not just an eventful one for FEMSA, but quite a unique one and to briefly revisit the strategic rationale behind these events.

As you know, we seek profitable growth by taking our skill set to new suitable geographies, such as Coca Cola FEMSA's recent transactions for bottling assets in the Philippines or in the Mexican state of [Guerra]. And we seek profitable growth by taking that same skill set and broadening its scope by a few degrees, as was the case with FEMSA commercial entering the drug store business through a small measured transaction in south east Mexico. Or also with the Coca Cola system acquiring the high end Santa Clara dairy operation in Mexico as well.

These are steps that leverage our system capabilities and move us along our long term strategy and they gradually put us in a position to put incremental capital to work in opportunities that have favorable risk reward profiles and offer a good probability of generating attractive returns over time. Therefore, we should expect to still continue actively analyzing and pursuing those opportunities, both on our own existing businesses, such as our logistics operations for example, as well as on a small box (inaudible) in close geographies.

And so, the combination of our solid fundamentals in our four businesses together with this attractive opportunity makes us very optimistic about our prospects for 2013 and beyond. And with that, I would like to open the call for your questions. Please operator?

Thank you. (Operator instructions). And we'll take our first question from Bob Ford with Merrill Lynch.

Hey, thank you and congratulations on the quarter, Javier. I have a burning desire to ask about the sharp decline in other amortizations as well as the increase in the liabilities, but maybe I should just restrict myself to something that's bigger, and that is, when you look at small box opportunities to grow in Mexico, what attributes are you looking for and where would you place limits on the range of concepts that you guys are evaluating.

Sure, Bob, hi. Thanks for focusing on the second question. I'm sure Juan will follow up on a separate phone call on your first question. But on this topic, maybe what I can convey is this let's say criteria that we have been using when we are analyzing and exploring opportunities is -- we're really -- the (inaudible) point is really having a good assessment of the skill set of the FEMSA commercial organization, which his, I would say the strengths are pretty much, I would say, based on a company which is managed in processes, procedures, synchronization of the operations is key, but I would say that the founding base of the business is pretty much a very strong culture of collaboration and frank openness in discussing issues and collaborating as well in terms of again, creating a very, very powerful business.

And when you think about small box format, you can find things which are closer to those kind of capabilities and some others which are I would say a little bit farther away.

So, for example, even though regulatory environment is quite different on drug stores and given I would say the management of warehousing and logistics is also quite different from the managing -- the kind of warehouses we do to manage the convenience stores.

We found that there is a lot of similarities in at least general and board frameworks on how these operations should operate and of course, we are acquiring some of those capabilities form the companies that we are looking for and we feel that particular these opportunities very, very close and going to a second one that might illustrate what I'm saying is for example, we are doing a lot of stuff within our stores in prepared food at the store. We have a number of pilots, we have a number of initiatives that include building food processing centers and creating specialized routes to serve precisely that category.

So, we think about fast food in Mexico and we see that there is also a reasonable proximity to the skill set we already possess and most importantly the one that we will need to build also going forward.

And as I stated, our intention is to -- let's say kind of start putting capital in a very cautious way with let's say small transactions, in order to be able to be sure that we put together our capabilities with a company that we're looking for to acquire in order to be able to ramp up the business and scale it up in a significant way.

Once we feel comfortable with a number of things, starting with being the right proposition, we have found that the number of targets that we have been looking are very successful, in let's say, small geographies, but it is hard to think that maybe we -- with existing value proposition we would be varying to really scale it up in a significant way before we fine tune value propositions.

So, my answer would be, we'll go as far as we think there's a good fit of our existing capabilities and the capabilities we are acquiring from the targets. Then we're going to take it from there and try to scale it up when we think is the proper time to do it.

Just to get a sense of where you see the opportunity with prepared food or fast food or whatever you want to call it. Can you give us a sense of how -- what the dimension of that market is today in Mexico?

Well, if you look at the informal market its' huge and if you look at the way the -- I would say maybe the only multi (inaudible) company in Mexico that operates, which is [Alcea] representing brands from companies basically in the US, it's maybe the only sample of an organized company which is trying to tap this opportunity. So, the informal market is huge, the existing players are small. So we think the opportunity is there.

And, if I understand you correctly, you're looking at something that maybe bridges the price points between these two offerings with much better food safety and consistency. Is that correct?

Yeah, I think if you look at the offerings form again this player that I mentioned, you will find very different offerings but with I mean average tickets which ranges very wide from maybe four or five to all the way to 15. So, we're looking at targets that play more on the -- what I should call the fast food offering, as opposed to the fast casual dining offering and we'll take it from their vote.

Thank you very much.

Thank you and good to talk to you.

And we'll now -- and we'll now take our next question from Alan Alanis with JPMorgan.

Hey, Javier. Hi, everyone. My question ahs to do with the cash of FEMSA. I understand a little bit more your thinking Javier regarding dividends and keeping more cash in the balance sheet and so on. If I'm reading the numbers correctly, you reduced the percentage of net income that you paid this year versus the previous one to around 32% of net income.

We know it's a big increase in absolute terms, so my first question is most of the increase in dividend seems to be coming from offshore. Should we relate any of this increase in dividend payout from [Oksho] because of any -- of initial finding places to deploy capital? That would be the first question for Oksho.

And second, if that is the case or that could be the case, you're still remaining -- if I'm running the numbers correctly here with more than $800 million -- almost $900 million of net cash at the FEMSA level, excluding Coca Cola FEMSA post paying the dividends. So you're keeping a big amount of cash to still. What's your thinking in terms of how that cash should be used and how it will evolve? Those would be the two questions, Javier, please.

So, thank you Alan. Good to talk to you as well. On the first one, as I mentioned in my operating remarks, we tend to look first on the dividend payment from FEMSA as a combination of a -- basically a pass through of the dividends we get from Coca Cola FEMSA Heineken and then a proportion of the let's say to excess cash generated by FEMSA commercial and will we use a number of metrics to determine what's the appropriate level in order to again create a policy that is self sustained going forward, and the reduction on the amount of dividends paid as a proportion of the net income really has to do a lot with the extraordinary profit that we are collecting through the equity method by Heineken. So that is really non cash item, so we tend to look at our numbers the same way they do it, that is before exceptional items.

Okay.

So, if you do the math, considering that, you'll get to basically very, very stable numbers within the very close range of our net income , which is being distributed as dividend, which is consistent I would say with maybe in the past year ratio.

So, and if you then strike out again using this -- I mean concept of pass through from Coca Cola, FEMSA and Heineken and look at the amount of dividends we're paying which are being funded by the free cash flow of FEMSA commercial, the range also states in the very, very similar ration as last year.

So, I would say that our recommendation to the board and their recommendation to the general shareholder meeting in March is pretty much consistent with past year. You might -- you might make the case that well it's -- the dividend is growing less than the growth on the net income, but again, the net income is growing exceptionally because of what I just described form Heineken side.

And of course, we got to a point in which we feel comfortable with the balance between paying a substantial dividend, compared with what used to the be the policy form the company for the past few years and as a proportion of our free cash flow, EBITDA net income, all those ratios seem to be in the right place for companies with the profile of FEMSA, which is still a growth company. So, all in all, that's where we stand on that, I would say, point of your first question.

On the second one, yes, we still have a lot of cash at hand. We have some financing, which some of it is due at the end of this year, but some, it goes all the way to 2017 then I'm referring to the (inaudible) in Mexico and we think considering the cost of debt at these days and the amount of initiative or alternatives that we're exploring and building our own pipeline of opportunities going forward, we think this is a reasonable balance on, again, paying a reasonable amount so far, let's say, 2012 results, both net income and free cash flow, as a dividend, increasing it by close to 8%, while at the same time remaining, I would say, a lot of financial flexibility on our side, we think. These are appropriate times to be liquid and these are appropriate times, also to, I would say, tap the credit markets and we are, I would say, pleased with the financial position of the company as of today.

But we have the responsibility of linking our strategic thinking with our financial readiness to really tackle these opportunities. So we are planning on, again, to keeping a strong financial flexibility on the company side, but at the same time, returning a reasonable amount of cash to our shareholders.

Got it. That's clear. So is it fair to assume that there's no transformation -- or transformational acquisition imminent in there? And you're exploring a lot of things, but should we be ready if there's anything big coming in the near future or not?

I'm sure you are -- I mean I'm sure you know that the -- if there was something imminent there, I wouldn't have saying like that. But having said that -- having said that, as I said, I don't like to talk about small, medium or large things.

Okay.

I like to talk about reasonable and things that make fit with our skill set and our capabilities. And of course, having financial flexibility can make the case for somebody arguing well, these guys are going to be -- I mean, they're thinking something -- do something big in the next quarter or so. I really cannot really send the message that that's going to be the case or not. I really encourage people to look at, again, at the financial structure of the company, as hopefully you are with us, in terms of having the trust that -- having the financial flexibility on the company side at these times, it is a good thing for shareholders for the long run.

Yeah, I agree. Congratulations again on the results, Javier. Thank you.

Thank you, Alan.

And we'll now take our next question from Karla Miranda with GBM.

Hi, good morning, everyone, and thank you for the call. Congratulations on the results, Javier. And I had a couple of questions regarding OXXO. I was wondering if you can comment a little bit on the expansion in South America, if you are -- if you are seeing more opportunities in there and if you have expanded the number of stores in Columbia?

And moving back to Mexico, in the previous question you answer that you were looking for fast food operators to speed up the process. Would you -- would this mean that you could be increasing the average size of each store in order to include, I don't know, some seating space to eat in the stores? Thank you very much.

Sure, Karla. On the first one, we actually have 34 stores in Colombia and we opened roughly 10, 11 this year, and we feel good that this as, I would say, a reasonable amount of stores to still be able to keep on [twisting] the value proposition.

What you might expect in 2013 is a -- maybe a similar or lower number of stores even for 2013, in which we have an important list of initiatives in order to test some ideas to keep improving the value proposition.

So, we are still at a stage that we signaled when we entered Colombia three, four years ago and we have said that it would take time for us to develop the value proposition that would work in Colombia. So, that's pretty much what we're doing there for the year.

And yes, we are looking at some opportunities in other places in South America. I wouldn't like to sign out any specific country but we're not only analyzing, again, retail landscape as a whole or specific performance offerings, but we're also looking at specific opportunities in some places, again, in a cautious and moderate way. And we have said this in the past, that we are not only single focused on opening Greenfields in different places in South America, so we're very open to acquiring or even partnering with somebody down there.

So, but we are still in places in which we are looking at things as opposed to being close to doing something.

And on your second question, as we progress in, let's say, better understanding consumer needs -- on customer needs in Mexico, we have started to -- and we have spoke about this in the past, we have started to segment the nature of the stores based on its location and the habits of consumption of people in the surroundings, and that might call for future openings of some stores taking into account out to precisely facilitate a little bit more -- or a little bit less of space for some of those different nature of stores depending OXXO location.

So, you might find some place in which it might be a good idea to increase the seating space that we already have in a number of our stores. But in some others, you might find that we won't really be developing the prepared food in store category, because it really doesn't have a lot to do with the needs of people that go inside those specific stores. So, the answer is not general yes or no, but a segmented yes, definitely yes. But again, going to make bigger boxes or -- bigger boxes or even small boxes as well.

Great, thank you very much.

Thank you.

And we'll take our next question from Lore Serra with Morgan Stanley.

Good morning and thanks for the call. I guess I wanted to ask two questions, maybe actually it's three. The first is just, you set out this medium term guidance of OXXO growing about 1,100 stores, having sort of 20 to 30 basis points margin a year. As you start the year, you have a couple of things in place, like the fast food initiative or the prepared food initiative. Do you see this as a, I don't know, typical year OXXO? Or is there a reason to think it's going to be above or below sort of those medium term guidelines you set out?

And then, on a longer term basis, I guess, here's where the two questions are. I mean, you bought the southeast chain, it's the first time you've bought something on the retail side, and I'm curious, as you've sort of been there now a couple of months, any initial learnings on the pros and cons of kind of that kind of an acquisition?

And then, sort of related to that, as you invest more in the sort of small box space, how deep is the bench in OXXO? And how do you make sure that OXXO kind of does their day job while you get these other initiatives built around it? So, I guess, that's three questions, but I'd really love your insight on those.

Sure, Lore. First on the medium term guidance, we still feel comfortable for a number of years, at least three to five, of being able to open above 1,000, maybe 1,100 or a little bit more, a little bit less. But we feel comfortable with the machine we have put in place to really open those stores but not open them, but really opening them with high quality in terms of the batting average that we measure the accuracy of our forecasting on how these stores are going to start paying their cost of capital very, very fast. So, we feel good about growth. In terms of margin expansions, to tell you the truth, we have not been low balling here people in the past two, three years.

The business has been performing better than we have been, all of us inside, expecting. It seems that, again -- and it's very hard to calibrate margin expansion going forward, not only because of market dynamics, but because your changing the value proposition in a significant way on some categories in which you're now building -- you're bringing people into a store that in the past, were not coming in as frequently.

And speaking in the case, particularly, about, for example, women which, we have been very, very successful in bringing a larger proportion of women to our stores because, again, of our value proposition.

So long term, when we discuss this is -- I mean, 10 to 20, not 20 to 30, but 10 to 20 seems to be reasonable. It's a challenging, but achievable, we think, trend. If we look at 2013, it was a year that we were slightly maybe above that, but mean we were not off the charts. So, we still tend to believe that, again, the number of initiatives we have in the pipeline, which some of them take time to mature and even more time to really generate an impact on the bottom line. But all in all, we think that consumers in Mexico are valuing more and more, and traffic reflects that. How they can solve their needs in OXXO. So, I would say medium term we're still comparable with the guidance.

There's going to be a balance between the cost of really deploying all these initiatives, the prepared food processing centers, the POS. We have a number of initiatives. We feel comfortable that if we're able to continue growing our same store sales in one single digit, may be more on the low side than in the high side or medium, we can balance equation to keep on delivering growth and moderate margin expansion.

On the long term, we have not really closed the transaction of the drugstore. We are hoping that any day now or any week now, the competition commission in Mexico is going to grant the authority and we have been in close contact with them, because this is a new portion of FEMSA. They have been, of course, requesting a lot of information from us. We have satisfied all their requirements. And we think that that approval should come any time now.

But, even without us taking control of the business, we have now put some people in place and we have worked a lot with the management and with our partners in order to start thinking about things that we from OXXO can bring to (inaudible) and the other way around as well.

And again, we have already put in place a kind of a 100 day plan and priorities of initiatives that we will pursue for 2013, and for the next couple of years as well, trying to bring in the quick hits that we have identified and trying to prioritize the things in which we can create EBITDA impact.

And what I can share with you maybe is, that so far of what we've seen, we have been confirming what we did on the due diligence in terms of a very well run business, with significant opportunities in -- I would say, in broadening the capabilities that will be required for making this a high growth business are going to different geographies, that's going to be key for us. And we have been discussing our own hypothesis and they're thinking on how the value proposition should be tweaked going forward to make it an even more powerful value proposition.

So, so far, we are very enthusiastic about the potential value creation opportunity for us here looking at the chain the way it is. The trick here will be to really make it a unique value proposition to being able to really scale it up to make it a difference at FEMSA commercial, looking at the scale of the business we're acquiring as opposed to the business we already run managing 10,000 stores.

And then the third one, definitely this is an area of concern. The efforts in trying to build up bench and thinking about the organizational structure work really began a couple of years ago, to tell you the truth. On a parallel basis, while we were looking at some of those small box format opportunities we were analyzing, we were already thinking two years ahead on how we will be doing this. So, what we're doing today is pretty much just putting in action plans that were designed almost a couple of years ago.

FEMCO recently just announced a reorganization precisely to, let's say, manage appropriately this new creation of opportunities in new businesses. So, our very seasoned and experienced guy, which used to run the operations of OXXO, the national chain, has been assigned that job. And a very, very strong leader, with more -- I mean, close to 30 years in the company, which used to manage the largest region on the country, was appointed -- now the man responsible for the operations on the nationwide basis and we're basically put in a place, on the structure, as I told you, that was designed a couple of years ago would now it's being staffed with people which actually were brought from the operating areas into the staff areas for the past 18 months or so in order for them to, let's say, gain the experience not only in running the day to day, but also in driving businesses from [mole] and a strategic point of view. So, we feel good. This is something that we've discussed with the board actually yesterday. We presented them how we're doing this and I'm happy to tell you that the board was very happy with what they saw.

Good, thanks so much.

Thank you, Lore.

And we'll take our next question from Armando Perez from Credit Suisse.

Hi, good morning, Javier and team, this is Antonio Gonzalez, and I'm here with Armando as well. I just wanted to ask you if you could revisit a little bit for us the topic of uses of cash ahead of the expiry or the first expiry of the lockup with respect to your stake in Heineken.

I know you can cover some sort of limited disclosure with the market for obvious reasons with respect to the specific April 2013 date, but maybe more broadly speaking, one of the options that has been explored in connection with this expiry of the lock up or at any other point in time, is opportunity to increase your stake in Coke FEMSA, no? And I wanted to hear what were your latest thoughts about it?

We've heard from a bunch of bottlers actually, not exclusively from Coke FEMSA, but given the valuations of publicly traded Coke bottlers, they're probably willing to do acquisitions that are a little bit more expensive than they were in the past.

And I just wondered what does that mean for FEMSA and FEMSA's intentions to acquire bottlers -- its own bottler in this case, no? Is there a threshold above which you wouldn't be willing to go? Are there any kind of parameters or more qualitative thoughts maybe that you can share on that respect? And again, more generally speaking, can we revisit that topic of uses of cash? Thanks so much.

Sure, here Antonio, good morning. Maybe I can start by repeating what I've said, which is we're very happy with the performance of Heineken for the past three years and we made a transaction, that includes our Mexican business, which we keep on taking a close look and enjoying what's going on down there because we think it's been a successful integration.

But also for Heineken -- I mean, for FEMSA shareholders, taking apart the rationale behind the strategic transaction we did three years ago, also the performance of Heineken share wise, in the market, has been also very, very good, and we're happy with that.

The gradual expiring of the lockup because, as you know, the lockup allows us after April the 30 to, if we decide to do so, divest gradually part of our position in Heineken. It's pretty much a, let's say, a point in time that was required since we negotiated the transaction because, of course, we required to have the flexibility to do so. And three years is, I would say, a very reasonable time frame for both Heineken and us. So, it really doesn't mean anything in itself. It's a -- I mean, it's a paragraph in a contract.

What we're much more interested in is, again, maintaining our continuous assessment of the perspectives of the business and, again, the benefit that FEMSA shareholders have with keeping this position as it is today. And, as we said in the past, this analysis also includes potential alternatives for the company to put debt capital on some other things.

The timing for, let's say, making decisions on one or the other, either divesting partially or thoroughly, or investing partially or thoroughly in other ventures are two exercises that somehow, in the end, connect but are, I would say, analyzed on a separate basis.

So, we have been continually doing assessments on both things for the past three years and we intend to continue doing that. We feel very good with the, let's say, profile of the Heineken after the APB transaction and we think that, again, the company has been doing things very, very well in terms -- not only on running existing businesses policy also developing its strategic agenda. So, you shouldn't be expecting anything happening on April the 30th at midnight or something like that.

We will continue to look at this as we have done in the past three years as a long term investment for FEMSA, as long as it creates the right financial returns for FEMSA, and it will, as I said, we judge the merits of this investment in lights of itself and also in conjunction with potential opportunities that we might have in order to put capital at work.

If you look at our balance sheet today and going back to Alan's question, we have a very strong balance sheet as of today. So the opportunities that we might be looking for in the short, medium term more proactively might be even -- the balance sheet might be more than enough to really finance some of those. But again, the opportunities -- some of the opportunities you look after and some of the opportunities come to you, so we have the obligation to not only keep our eyes open, but also to look for ways in order to create shareholder value for the long term and that's precisely what we keep on doing all of the time here, Antonio.

So again, my reflection to everybody in the call would be, it's only a couple of months to April the 30th, but please do not expect anything happening on that date.

And, I guess, with respect to that particular opportunity of increasing your FEMSA's stake in [KOS], there is nothing that you can announce in terms of what kind of valuation you would feel comfortable with, right?

No, no, valuation is an issue. You have mentioned, in your question, again, kind of the thinking in the market for some bottlers, both acquirers and sellers, in terms of looking at valuations at the very high levels and -- but again the perspectives of the business being very good, and consolidation, for sure, has created a lot of value for both acquirers and sellers.

So, the question of, again, imposing ourselves certain limits on a general way doesn't really make the job. I mean, we have very, very different market conditions and particular situations in which you have transactions which are very, very synergistic and some others which are not that much synergistic.

There are things that have very, very attractive financial returns on the short term, and there are others which have very high strategic value that it might take time to convert that strategic value into financial returns for the medium or long term. And we have, we think, because of our profile, we have the obligation to look at opportunities that make sense for our company to keep expanding the footprint. And of course, Latin America is a place in which we're going to see everything that is [come play], we will be looking at for sure.

And I've stated in the past that we have not ruled out any alternative and everything is on the table, including the possibility of FEMSA acquiring some Coca Cola FEMSA shares from different sources. So, we will keep our option open there.

I'm sure you can appreciate I cannot really share much more about this, but that's definitely a possibility for FEMSA uses of cash going forward because, as you know, we have been diluting ourselves from 53 to below 48 in doing all these mergers in the past. So, that's also an alternative that when we look at the capital allocation is always on the table.

That's extremely helpful. Gracias, [Juares].

Thank you, Antonio.

And we'll take our next question from Lauren Torres with HSBC.

Hi, everyone. My question is broadly a follow up on the margin expansion question earlier. Coke FEMSA is guiding to basically stable margins this year, a modest improvement at OXXO. Javier, I thought you could talk a little bit more about the initiatives? I was just wondering if it's kind of more of the same, I know you've talked about the prepared foods.

But just curious, is there more initiatives then what we've heard about to help drive this improvement or is it just continued to do that expansion at the convenience store level? I'm just thinking of this relative to how margins maybe could get a bit more pressured on the soft drink, on the bottling side, and if we see further opportunities to kind of get that expansion on the OXXO side.

I think Hector was clear yesterday of the challenges we have both macro economically in some countries in South America and some market strategies that we'll put in place to really drive volume, as it should, in some other as Colombia. And I would say, that is pretty much explaining some of the challenges we're going to have, particularly in Coca Cola FEMSA in South America next year -- I mean, this year.

In OXXO, I feel comfortable about the perspectives for the year. The number of initiatives, which are a large number of them, again, being able to deploy them in a very, very fast way all across 10,000 stores is not an easy thing to do. So, again, margin expansion is more a function on short term of being even more effective and efficient in managing the levers that we have built already into the critical mass of the business, that is the 10,000 stores.

So, the initiatives that we're working on tend to have a much important role, medium to long term, in driving, again, growth of underdeveloped categories. And in the short term, it's all about how you deal with market dynamics and of course, if there's a benign environment for growth, employment, salary increases, stability in Mexico, even optimism from the consumer point of view, the categories and the places we serve are benefited by that kind of environment.

So, we feel good about the guidance we've been giving you today and -- but I don't think, again, hopefully, there are surprises on the upside on both businesses at the end of 2013, but we feel good about the plan and what we will do is put up a challenging but achievable plan in front of our board and they always demand that precisely from us, so I feel that we are on the right track. But in the short term, I think, that both Hector Trevino's comments yesterday and mine are, I would say, a good -- a good directionally guidance that you can take from us.

Okay, that's clear. And if you could also just clarify, I'm not sure you were giving somewhat medium term guidance on same store sales growth. Now obviously, we've seen maybe better growth than you were expecting initially and going forward -- I'm not sure if you mentioned low or mid single digit growth coming from same store sales. Is that more at the low or mid end? I'm just trying to get a sense of how you're gauging the consumer for the next year or two?

Mid single digits is the right thing to think about this, considering the levels of inflation in Mexico. And of course, bringing more people into the store and making them buy a little bit more and still being careful about the price positioning that OXXO has built in the most important categories is key for us. So, that's pretty much a balancing act going forward. And of course, the higher you raise the bar, the more difficult it's going to be to match it or to surpass it. But, I would say medium term, we feel comfortable about mid single digits, Lauren.

Okay, and then if I could just final ask, as you bring up the affordability and the pricing a in OXXOs, obviously, you're doing well with higher margin brands. But are there opportunities just on the pricing front or you just want to stay the course on keeping that affordability at OXXOs?

Well, I think the nature of the consumer needs we are satisfying are pretty aligned with the pricing architecture we have built in relation with both mom and pop's and [modern] trade, and we feel very good about that. We think we're on the right or sweet spot, if you want to call it that way, in terms of maximizing revenues both at the same time maximizing traffic into the store.

Okay, understood. Great, thanks.

Thank you, Lauren.

And we'll now take our next question from Alex Robarts with Citi.

Thanks, want to go back to some of the block and tackle issues here with OXXO over the more shorter term. You've talked, in the past, about your services, both in banking and in telecommunications and such. Can you give us an update on how that services component of the OXXO business is growing and some of the initiatives there?

Secondly, the pace of the new store openings was quite unusual last year, 40% coming in the fourth quarter. And I think earlier last year, you talked a little bit about some communication or coordination issues of why it kind of got back ended. How do you think about the pace of the rollout this year? That would be the second.

And then, I guess, also from a geographical standpoint, it seemed to me that there was a lot of kind of more accelerating growth in the central part of the country, partly reflecting kind of lower base and more penetration opportunities. If you could talk a little bit about how you look out this year in terms of the geographical opportunities within the country.

So, those kind of relate to the block and tackle stuff. And I guess my question on the use of capital or use of cash is that how do you think about, and I know it's very early days, but how will you go about from your perspective of taking out the Coca Cola stake in the Philippines? I mean, there's been a few comments about that from [cops] calls, but it'd be great if you could maybe share a little bit of the thinking from your side. Thanks a lot.

Sure, Alex. First, on the new initiatives related to services, we continue the effort of rolling out, particularly with financial institutions. We have already roll out the services we're providing with the two leading banks in Mexico and we will continue to do so this year with several other banks to really create the full offering for customers all across the board, no matter what bank they're linked with.

And that -- this an initiative that worked -- that has worked very well with, I would say, very different levels of usage or penetration depending on the habits and the -- even the level of service or the density of offering of branches, banking branches in different cities.

So we have, again, basically with the same offering, with the same level of service, we have been getting different results depending again on some mid or small cities, people like to go to bank branches to talk with their friends or to maybe just use some of their morning time. And in some others, it's a blast to be able to go to an auction to do their banking processing payments and deposits in a much more efficient and fast way.

So what -- the truth of the matter is that a number of initiatives on the service side are built on the premise of being margin enhancing by themselves, but at the same time, to bring again people, which at some time never enter an OXXO store and sometimes enter an OXXO store with less frequency than they do, and hopefully while they're doing their banking, they can buy a soft drink or chip or whatever other product they might need.

So, we feel very good about the initiative. We are pretty much in track with the effort to deploy these initiatives, and we will continue to do so. This is a category that has a three year plan, which we have been executing very consistently, and we feel very good about it.

And, also, in our surveys to understand consumer reaction on OXXO brand and on the different consumption locations that we serve, we have been looking at very, very nice results, having a high appreciation of consumers in OXXO, facilitating their daily life with this kind of services. So, that is also very good for, again, reinforcing brand loyalty for us, which is a third benefit that we're looking with this initiative.

In terms of the opening of stores, yes, 2012 was a year in which we opened, in the fourth quarter, a little bit more stores than we were looking for, maybe close to 100 maybe. But again, we think the batting average, which is the ultimate measure we provide information about opening of stores externally, but internally we combine that indicator with a batting average that is the accuracy of how good our stores are and how fast they will mature and pay their cost of capital and we basically had another very, very successful year in terms of the batting average internally.

So, we feel good about the level, as I said, of opening a little bit more maybe not 1,000 stores a year. And I think that next year will be a more even quarterly based opening of stores for 2013.

And finally, on the Philippines, it's been only a month since we basically closed the transaction. We already have a number of people there, more than 30 working with training sales, pretty much finalizing the assessments and design of some pilot tests and things like that. And, as we said, when we announced the transaction, the Philippines is a market in which Coca Cola FEMSA is going to have to execute a number of changes that have not been made in the past acquisitions that we have made because of evident reasons and we have said that this is a medium term venture to really make it through.

And that's why the terms that we agreed with the Coca Cola FEMSA, both in terms of the ownership structure that we're starting with, are medium term. Those are not short terms that we are either pressured or obliged to follow. So, we will take things carefully.

And hopefully, we are able to really improve the business condition and hopefully, we're able to -- the sooner the better, integrate 100% to the company. But we'll take the advantage of having a medium term for making these decisions, Alex.

Right, okay. Thank you.

Thank you.

And we'll now take our last question from Alexandre Miguel with Itau BBA.

Thank you. Good afternoon, Javier. My first question is related to the mix, the different mix between traffic growth and average ticket growth that you report in the fourth quarter. So, if you can explain a bit more what happened in the fourth quarter versus the other quarters last year? And if you expect that to be a trend now going forward in 2013?

And also related to that, as you mentioned that they told us some challenges they would probably face next year, so if you can share with us, in Mexico for OXXO, maybe what you see as the most challenging that you might face in 2013, maybe that could prevent you to repeat the strong same store sales performance you did in 2012. That will be my first question.

And my second question will be regarding expansion in Latam. Anything that you can share in terms of region or segments that looks more compelling for you guys in terms of growth and also profitability, so have a more idea of maybe potential next moves that you'll be doing there?

Sure, Alexandre. I'll take the first one, and I'll let Juan answer the second one because he's been so quiet for the whole conference call.

On the first one, if you look at our trend -- and by trend, I mean, at least looking at the whole 2012, the growth in traffic and ticket was, I would say, pretty balanced. 2000 -- I mean, the fourth quarter was slightly higher. The equation buy us into ticket as opposed to traffic, but we're looking at very, very healthy traffic figures. And we tend to believe, as I said, that some of these improvements in traffic have a lot to do with sometimes the timing of some of the initiatives being rolled out and sometimes actually what -- just with things such as weather and the likes as well.

We still believe that going forward, we have a number of opportunities to keep on building the traffic in a significant way. Growing traffic on the low single digits is, I think, a success looking at what's going on in some other retail formats across the board. So, going forward, we are still thinking of a very balanced breakdown of same store sales between traffic and ticket. 2012 ended basically half and half.

I wouldn't dare to say, or give you a forecast of what it's going to be in 2013. It can go a little bit on the upside on one of the two variables or in the downside, but all in all, we feel good about this single mid digit same store sales number for the full year. So, that will be my comment on the first question, Alex.

Hi, Alex, this is Juan. I think on your other two questions. First in terms of challenges, I mean, obviously, there's always the challenges that have to do with your blocking and tackling, right, and your daily activities.

You always have competitors that are trying to kind of encroach in your market and you have to be very nimble and very good about how you manage your pricing and your categories. But again, we can also think about some of the external factor that might represent challenges. We have to be prepared and as you know, and maybe we have even discussed in the past, this whole expectation of reforms taking place in Mexico.

What's going to happen on the fiscal reform, in terms of VAT application, does that change, does that increase to food and medicines? What would this mean not just for OXXO, and as I said before, OXXO -- about two thirds of what OXXO sells already are subject to VAT. So, it would really be about a third of our products that would be now subject to VAT, assuming that were to happen.

But perhaps more importantly, what would this do to the overall disposable income of the consumer and how would we adjust our own strategies to accommodate a consumer that might be, I guess, a little bit tighter on the purse strings. So, obviously, there is plenty of historical information of OXXO navigating through recessionary environments, periods where people are more on a savings mode.

Obviously, we're fortunate not to play in a very discretionary consumption space, so people do tend to defer, or not make purchases of larger ticket items, not necessarily the type of things that you buy at OXXO. So, we feel pretty good about our ability to navigate those waters.

But in terms of challenges, if you kind of push us to talk about some of those, those are some that come to mind.

Finally, in terms of -- your question on segments, kind of in terms of the retail expansion outside of Mexico, I think, you should think of the same comments that we've made in terms of small boxes that would leverage the skill set, such as drugstores or such as quick service restaurants. I think those too apply, not just to Mexico but beyond Mexico. I guess you could sort of think it in terms of a bit of a matrix, always the end -- this is all something we've said before, at some point in the analysis, we look at drugstores in Brazil.

Obviously, that's an industry that's already in a bit of a consolidation mode and some of the big transactions have perhaps already happened. So, I don't necessarily think we would go to Brazil with drugstores. But, more kind of broadly speaking, you should not discount the possibility that we would look at either drugstores or restaurants in other markets. So that would be, I think, my answer.

Sure, perfect. Thank you.

Thank you, Alex.

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

No more additional remarks, just saying goodbye, thank you, everyone. Bye now.

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.