Fomento Economico Mexicano SAB de CV (FMX) 2013 Q4 法說會逐字稿

Good morning, and welcome, everyone, to FEMSA's fourth quarter 2013 earnings results conference call. (Operator Instructions). After the presentation, there will be a question-and-answer session.

During the 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 current available data. Actual results are subject to future events and uncertainties which may 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. Thank you, and good morning to everyone. Welcome to FEMSA's fourth quarter 2013 results conference call.

Juan Fonseca and Jose [Castro] are with us today, as always.

As we normally do, during this call we will focus on the consolidated figures for FEMSA and on FEMSA Comercio's results, as many of you probably had the chance to participate in Coca-Cola FEMSA's conference call yesterday.

As you have also likely had a chance to go over our detailed results, we will take this opportunity basically to focus on the highlights and main trends in our business.

Every year, the February conference call provides us with an opportunity to discuss with you not only the results of the fourth quarter, but also share some of our views on the full-year trends and performance, and talk a little bit about perspectives for the new year.

During the fourth quarter, trends of our two businesses followed separate trajectories. On Coca-Cola FEMSA, in Mexico top line was resilient but profitability numbers reflected a very demanding comparison base, while the consumer environment remained tough in Brazil and local currencies continued under pressure in most of South America.

And for its part, at FEMSA Comercia, sequential top line trends improved slightly and expenses remained contained during the quarter, helping us to drive positive margin dynamics. In addition, we were able to deliver on our expectations of opening more than 1,000 new stores in a calendar year yet again.

On the strategic front, 2013 was an important and busy year during which we took opportunities to increase our bottling presence in our two largest markets, Mexico and Brazil, with three key acquisitions -- Yoli, Fluminense and Spaipa. These transactions should allow us to create value in the medium and long term, and we are well advancing our integration efforts in both countries.

We also made our entrance into the Philippine market a reality, with very encouraging early results. And for its part, FEMSA Comercio took the initial steps of leveraging its capabilities by entering new small-format retail markets in Mexico, through acquisitions in the drugstore and quick-service restaurant segments.

In fact, early results from our drugstore operations support our thesis that we can use our skill set to create value in such adjacent lines of business, encouraging us to stay the course.

And so, we continue to privilege the execution of our long-term strategy even in the face of short-term market noise.

In terms of the macroeconomic environment in Mexico, we have yet to see a meaningful improvement in the key indicators, but we do not perceive further deteriorations in the trends.

In Brazil, the concern continues to be the pace of growth, [for unemployment] remains low, and again, we do not see the trends worsening. Having said that, we need to keep our eye on foreign exchange pressures across the region, but particularly in Venezuela or Argentina where, as you know, the situation has been fluid.

Moving on to our consolidated quarterly numbers, during the fourth quarter total revenues increased 11% and income from operations remained flat. On an organic basis, total revenues grew 3% and income from operations declined 5%.

For the fourth quarter, the line on our P&L labeled participation in Heineken results, represents FEMSA's implied 20% participation in Heineken's fourth quarter net income. Importantly, for the full year the line represent FEMSA's actual 20% participation in Heineken's net income, derived from Heineken's full-year 2013 numbers reported approximately a couple of weeks ago.

Net income decreased 44% in the fourth quarter, driven mainly by a reduction in FEMSA's participation in Heineken's fourth quarter 2013 net income, largely reflecting a tough comparable base. As you may recall, in the fourth quarter of 2012 Heineken reported a non-cash exceptional gain resulting from the reevaluation of equity interest related to the APB transaction, which helped drive net income growth of 68% during that period for FEMSA.

The decrease in net consolidated income reported today also reflects higher financing expenses related to bonds issued during the year by FEMSA and Coca-Cola FEMSA.

In terms of our [consolidated] net position, it increased from MXN13 billion at the end of September to MXN48 billion at the end of December, reflecting the purchase of Spaipa in October as well as dividends paid during the fourth quarter. These effects were partially offset by strong cash generation from our operations.

And staying on the subject of dividends, we should remind you that FEMSA's 2014 ordinary dividend of MXN6.7 billion was paid in December, as approved by the shareholders. So, in total, ordinary dividends of MXN13.4 billion were paid during 2013, and we do not anticipate further ordinary dividend payments being made during this year.

We usually take the opportunity in our first conference call of the year to talk about expected levels of capital expenditure for this year. As you know, Coca-Cola FEMSA is currently investing slightly more than usual, because they are advancing the construction of new, state-of-the-art bottling plants in Brazil (inaudible) and Colombia, increased capacity in several markets, and integrate the recently-acquired franchises of Spaipa and Fluminense.

Therefore, CapEx at Coca-Cola FEMSA could reach USD850 million in 2014, of which approximately USD200 million will go to the new two plants.

For its part, FEMSA Comercio should deploy approximately USD450 million in 2014, remaining within stable range as a percentage of revenues. Adding an estimated USD50 million for our smaller logistics and refrigeration businesses, we will reach a consolidated total of approximately USD1.35 billion, in line with 2013 levels.

And moving on to discuss briefly our operations, and beginning with FEMSA Comercio, we opened 511 during the fourth quarter, reaching 1,120 net store openings in 2013 for a total of 11,721 OXXO stores. This number was a bit ahead of our expectations, which were to surpass 1,000 net new stores for the year, which is a level of store growth which our current system is well equipped to manage.

During the fourth quarter, revenues increased 13.5%. On an organic basis, total revenues increased 10%. Same-store sales were up 2.5%, in line with the first 9 months of the year.

However, it was encouraging to see that even though it was the average ticket that again drove the growth, average traffic did not contract but actually increased, likely for the first time in several quarters.

Gross margin expanded 60 basis points, again driven mainly by a positive mix shift due to the growth of higher-margin categories and by an effective collaboration and execution with our key supplier partners, as well as a efficient use of promotion-related marketing resources.

In terms of operating margin, this quarter FEMSA Comercia posted an increase of 100 basis points as gross margin expanded and operating expenses remained contained, growing below revenues in spite of the growth spurt in the number of stores.

All told, FEMSA Comercia put together a strong quarter, particularly in light of the less than stellar consumer environment -- a record number of net new stores opening, same-store sales well above our industry, and margin dynamics that exceeded our own expectations.

For its part, Coca-Cola FEMSA had a mixed quarter and a challenging one. Mexico and Central America showed a resilient top line but profitability was pressured by a very demanding comparison with 2012, while in South America, Brazil continued to show particularly slovenly demand, and negative currency translations continued to impact the results across the region. If we isolate these currency effects, total organic revenue growth surpassed 12%, but profitability remained under pressure in most markets.

Before we open the call for your questions, let me talk a little bit about our general perspectives for 2014. For FEMSA Comercio, we expect net OXXO openings to once again exceed 1,000 units, but this will be in a typical year, during which the consumer will need to assimilate a higher tax and higher price environment for many staples; and even more so along the northern border, which is an important region for us.

So, this makes it tricky to talk about expectations. However, assuming the consumer regains confidence as the year goes on, and general economic activity also improves towards the second half of the year, then we can talk about our same-store sales gradually trending toward the mid-single digit range, keeping in mind that the late timing of Easter next April will make the comparisons difficult for the first quarter results, given that Easter helped the numbers in the first quarter of last year.

For Coca-Cola FEMSA, there are also several moving pieces that will impact our performance in 2014. In Mexico, the new taxes are already putting pressure on our volumes, but we are optimistic that our tools and strategies will help us mitigate the impact, and we expect trading conditions to improve as the year goes by.

In Brazil, the comparison base is not very demanding, and we are off to a good start, so we are optimistic for what should be an interesting year in that key market. (Inaudible) they will remain front and center in Venezuela and Argentina, they will again play an important role in how our numbers develop.

So, from the perspective of FEMSA, in the short term we several reasons to be optimistic, but we see just as many reasons to be cautious; and, as always, completely focused on the job at hand. And just as importantly, or perhaps even more, the medium- and long-term opportunities continue to be ahead of us, and we will continue to move in their direction.

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

(Operator Instructions). Lauren Torres, HSBC.

My question's on OXXO. First question on OXXO relates to the margin improvement that we saw in the fourth quarter. You've (inaudible) guided to about 10 to 20 basis points per year of improvement, but we saw some notable improvement in the fourth quarter. I was just hoping -- and if you could break down why that was the case, and any expectation on margin improvement for this year?

And secondly, if you could address average -- the traffic, getting a bit better. I'm not sure if you're going to note that's a reflection of the consumer getting a bit stronger. I know it was very modest, but directionally I was curious just to wonder why you think there was that improvement. Thanks.

On the first one, the -- as you look backwards into 2013, we began the year with an expectation of Mexico GDP growing north of 3%. As the economy proved us wrong and it severely closed down, particularly in the first couple of quarters, the business was somehow operating on a business plan based on this assumption.

So, part of the margin expansion, coming into the third and fourth quarter, is a little bit the result of combination of, gradually, a marginal improvement as we just saw on the traffic and same-store sales number, as comparing the fourth quarters of the year; and some decisions were taken during the summer. Some of them started to be applied in the third quarter, but more importantly, into the fourth quarter, in cost containment.

So, the combination of, I would say, fine-tuning our plan for the year and working both with suppliers, particularly in putting much more focus on those promotions that are more price-sensitive, and trying to bring more traffic into the stores, I think were very, very successful in a number of categories, particularly in the later part of the year.

But also, it combines very well with, and very nicely, with the efforts of cost containment, which include improved -- I mean, included a number of initiatives, some of them that we talked about in the October conference call, and prioritizing in a much better way some of the key projects that we didn't want to really slow down at all, as opposed to those which we feel comfortable don't -- having a different scheduling time and having some of those rolled back to the -- 2014. So, I would say that's a little bit the explanation I can provide on your first question.

And on the second one, it's always good to see, even though, as you are qualifying it as a small -- a better improvement on the traffic numbers -- again, this is, we think, a consequence of the combination of a slightly better economic environment, and also because of what we are trying to do to bring people back to our stores.

So, we feel good about the number, even though it's still, again, the smallest component on driving same-store sales. But it's always good to see a positive number, even though it's still small.

Going forward, as I said in my opening remarks, we will need to wait a little bit to see how consumers are being able to integrate the impact of tax reforms on their pockets as well as the different landscape for pricing for some of the more important staples that Mexicans consume here in the country, because of the tax reform as well.

Yes. I would just add -- hi, Lauren. This is Juan. On the margin question and to reiterate what Javier just said, I mean, as a growth level it looks pretty much par for the course, right? We normally get a little bit of expansion at the growth level, where you really see the differences in the SG&A.

And this, going to Javier's comments on expense and cost containment, which even included taking a look at the head count and making some adjustments there. So, I think the idea would be that we continue to benefit a little bit from this in the next few quarters.

So, the 10 to 20 basis points guidance you've previously given would be also true for this year?

I mean, yes. I think Javier's point on this being an atypical year, and some uncertainties remaining in terms of how consumers are going to make adjustments to the tax environment and the inflation environment -- but, as you know, we do aspire to have moderate margin expansion, pretty much year in year out. Sometimes we do a little bit better than we expected. But this year we're very cautious, at this point, of trying to put a number on that.

Okay. Fair. Thank you.

(Inaudible) that were put in place, second half of last year, are still going to be in place the next few months, of course.

Okay. All right. Very good. Thank you.

Sure.

Antonio Gonzalez, Credit Suisse.

I just have two quick questions. First one on capital allocation. We asked yesterday, Coke FEMSA, whether they would be willing to do buybacks, basically taking advantage of the obvious sharp correction in the share price, and especially keeping in mind the multiple at which M&A happened in the soft drinks space in Latin America, not just for Coke FEMSA. And Hector was telling us that it'll be -- the constraints, I guess, mostly on the deleveraged side that a buyback at the Coke FEMSA level would mean.

So, I wanted to ask -- to make you the same question, guys. Would -- do you think that at FEMSA -- at the FEMSA level, it makes sense to buy back shares? Either FEMSA or Coke FEMSA shares, I guess, the leverage constraint is a little bit less of a problem for you. And obviously, you guys have a track record as tremendous capital allocators.

So, with Coke FEMSA shares down, I don't know, 40%-plus, from peak to trough, does it make sense to start buying back shares a little bit more aggressively? I understand there's always been a liquidity constraint, but I guess the window of opportunity valuation was probably a little bit more attractive than in the past.

And then I just have a quick follow-up question on OXXO same-store sales, but I'll make it afterwards. Thank you.

Sure. No. On the first one, the clear and short answer, Antonio, is, we look at share buybacks. We analyze that as an alternative to allocate capital. As you just mentioned, we have more financial flexibility than Coca-Cola FEMSA does at -- these days.

So, that is -- that's -- and potential acquisition of Coca-Cola FEMSA shares, as I've said in the past, are always open options that we continue analyze. And I'm sure you can sympathize with me by not telling any more about this. But it's always a probability of potential uses of cash going forward.

Yes. I think speculating on what the right level or what the right timing -- it's something that we definitely cannot comment on. But it's something that's always on the table.

Okay. Thank you. And then just secondly, super-quick, on OXXO same-store sales. I -- if my understanding is correct, I understand the argument of the impact that excess taxes will have on OXXO same-store sales this year, is probably going to be positive, and that's mostly based on the assumption that the impact on soft drinks and the so-called junk food, is going to be similar to what we saw in previous years in cigarettes, for example.

Now, the question I wanted to ask is, first, whether you're seeing that year-to-date; and secondly, whether you think that, irrespective of the impact on same-store sales, which -- I tend to believe it's going to move in that direction -- whether you think there's a positive impact on gross profit as well? Of course, I think there might be a little bit of a negative mix there, that might be not so beneficial at the gross profit level, given excess taxes. Thank you so much.

Sure. I think you're reading it right. At the end, prices being at the levels at which they are, mostly because of new taxes and as well by inflation, would help, let's say, drive same-store sales number.

In terms of margin, yes, there might be a potential negative mix shift because, again, price sensitivity for the different categories, and not only for categories but consumption locations -- it's quite different.

So, people, very rapidly in tight times -- they are just habits of consumption. And we think we have seen some of that taking place in the fourth quarter, and we are starting to see that. And I'm talking about going to returnables. I'm talking about going to smaller sizes. I'm talking about down-trading a little bit in some categories.

So, we feel that in the same-store sales number, if we are able to keep up the traffic coming into our stores, some of this new pricing will help the top line number; but on the gross margin, the question still is out there. And it will have a lot to with, again, the sensitivity of consumers for different categories and consumption occasions, and how well they're doing.

And in an overall picture, the most important thing, I think, is how the economy performs in -- I mean, we are looking at the first quarter, which is going to be very challenging. Because, again, these new price levels being now -- are put out there for consumers.

And as long as the economy doesn't start to get more traction [of] what we've seen in the previous year, it's going to be a tough beginning of the year, and maybe even to the second quarter. So, that's why I mentioned in my opening remarks that we are more optimistic about the second half of the year.

But, again, this is a very atypical year, and going back to Juan's comment about our long-term aspiration of building up margins from 10 to 20 basis points, I would say that this is a year in which we're going to have a lot of challenges, not only because of what I just mentioned, but also because of the impact that the new added value tax level on the border towns is going to have on us.

And that's going to have a clear impact. And we're already seeing that taking place. So, all in all, I would say that will be my commentary on your second question, Antonio.

thank you so much, Javier.

Thank you.

Alan Alanis, JPMorgan.

A couple of questions. The first one has to do with working capital in OXXO. We saw a deterioration of, like, MXN4.5 billion. I mean, that's not a small number, on USD340 million in the fourth quarter. We have not seen this kind of deterioration in OXXO before.

Could you tell us what's behind -- number one, is this OXXO or some of the other businesses -- the logistic or the refrigerator business? And if it's OXXO, is it related to the expansion or the acquisition that you have now in pharmacies and in fast food, and would -- should we expect that -- this to stabilize and go back, or this is a new level that we -- should we include them in our model, Javier?

Let me take that one. The (inaudible) one. This is a question that comes up from time to time. When you try to just do the ex-KOF -- you know, strip out KOF and do that as a proxy for OXXO, it's a little bit noisy, because there is a number of inter-company eliminations in there that you don't see.

And as you've mentioned, correctly, there's the logistics and the refrigeration business. And this time around, in addition to that, we have three new assets that were acquired by FEMSA Comercio, which, even though they're small, you know, you have to incorporate their working capital as well.

So, I mean, let me just say, the number that you reach -- I'm just mentioning you're question -- it's obviously a big one. But what we can do -- it's unfortunate that we don't provide you the detail line by line about an OXXO balance sheet, but let's -- maybe, offline, we can get into a little bit more detail.

But it's really -- it's not a very accurate way of estimating the OXXO working capital number, because of all the other stuff that is in there. There's a lot of volatility in there.

I hear you.

(multiple speakers). I mean, the OXXO numbers, looking just as, you know, payables, inventories and receivables -- they're in line with what you should expect.

Okay. So, basically, there's -- okay. We can take this offline. No worries.

And a second question -- I mean, this is the first conference call you guys have with a new CEO for the last 18 years, correct? Can you tell us -- I mean, even though Carlos Salazar is -- just got into his seat in January, and we know that he's been with FEMSA all of his life before -- decades of professional experience that he has -- what should we expect that might change, now that you have a new CEO?

Carlos knows the business. He's been around for years. We all know him well. We've been here, lots of time around, as well.

And what I can just basically summarize, Alan, here is, as we explained when the Board decided to accept Jose Antonio's recommendation on splitting the role of Executive Chairman and CEO, the fundamental reasons behind there -- of why, are very clear.

And what I can tell you -- things are starting to evolve precisely, in now having the ability to have a stand-alone CEO which has all 100% of his attention on running the business on a day-to-day basis, and on spending 100% of his time in looking at opportunities, as opposed to, again, the combination of those two roles.

So, what has been changing? Again, much more time of the CEO, looking at the businesses and opportunities. And some of those have to do with how the Company should be organized and staffed, in terms to get the right effectiveness in how we're managing the businesses. But also, to reinforce some of areas in which we think it is important to have more brainpower, manpower; to look at opportunities for the short- and medium-term [total] Company.

So, a basic change in the internal dynamics is much more CEO time dedicated to running the day -- running the business on a day-to-day basis. And with keeping the -- let's say, the benefits of not going through a transition from a CEO on the outside, and having somebody which has basically been at the Company for all his professional life, and being able to look at -- not only to look, but also to manage, the different businesses in the Company, for some years already. So, that's my answer.

I hear you. Thank you so much, Javier. Thanks a lot.

Thank you, Alan. Good talking to you.

Karla Miranda, GBM.

Thanks for taking my question. Javier, I had a follow-on regarding the stores in the border region of the country. I was wondering, would you give us some color on how these stores have been performing during this -- the first 2 months of the year? How is the traffic going, and what should we expect going forward? Thank you.

When I mentioned that border towns are important to us, is basically around 15% of our store count. And the dynamics on pricing the -- in the border towns, are, I would say, performing well, according to what we expected. That is, suffering; but not in a way which wasn't expected.

So, so far, so good, I would say, Karla. Numbers are developing basically in line with what we are expecting with the change in the price architecture.

But what I'm a little bit more concerned with are -- going forward, are on the potential impact on the consumers' pocket and on disposable income because, again, of [phenomenons] that will keep on taking place, such as the more expensive durable goods going forward, and things like that.

But, so far, I think that most staples adjusted their price strategy, recognizing that in the past they have this advantage of having a lower VAT, and now they don't.

And I think everybody's being reasonable -- both consumer product companies as well as retailers. So, I see an environment which is, I would say, [absorbing] the challenges in a good way.

Great. Thank you very much.

Thank you.

Bob Ford, Merrill Lynch.

Javier, you made some references to the initial earnings in pharma being very encouraging, and I was hoping you might elaborate on that, please, as well as discuss pilot concepts and experiences across your different efforts in hard discount, convenience, grocery, fast food, and hybrids of those, please.

Sure. (Inaudible). What I meant when I said the initial earnings are, let's say, confirming our thesis that we can leverage our skill set -- I mean, there's a number of areas in which collaboration between the acquired companies on our OXXO team has been working on -- and, I mean, I basically can go through a long, long list, but I just provide some very basic examples of that.

I think one area in which we have been working, I mean, very easily and fast, is of course looking at cross-categories in which we [have certain forces] empowered that we can deliver to the new chains, of course.

Second, there's also a big effort in terms of bringing our own perspectives of how we manage supply chain, going from distribution centers, working with suppliers, and refining this direct store delivery model. And there's lots of important learnings in there.

Leveraging our network or our organization within 56 bases, all across the country, for expansion knowledge, is also helping a lot. It's not like we're expanding dramatically the footprint of the drugstore chains we have acquired, but we are already leveraging some of those capabilities and trying to, again, improve even better the location model that the drugstore companies used to use in the past.

Also, in terms of management processes on how to supervise the business, prioritize initiatives, work on conceptual ideas, going to test piloting, and then rolling out initiatives in a massive way, is also an area of work which -- we think it's a very strong area which also distinguishes itself.

So, it -- again, it is a number of initiatives in which we're working. But also, we're working a lot in terms of human resources, in terms of starting to introduce some of the cultural elements that OXXO possesses into these businesses, which start with being a very collaborative organization and improving communication all across. And, of course, if you improve communication and coordination, the spirit of collaboration comes with it.

So, there's a number of initiatives. And I referred, in the opening remarks, particularly on our drugstore learnings, because this is the businesses which we have had for almost a year. In the quick-service restaurants, we're basically focused on integrating the businesses.

Of course, these are tough times for fast food offerings in Mexico because of the shape of the economy, so we're concentrating on integrating the businesses, not as much in now putting in place initiatives in which the two organizations can work together.

And on our other format, we are -- as always, and we've been working on a number of years on trying to find the right value proposition for this format, and we continue to basically do exactly that. And we are not still in a situation in which we can think of increasing the store base until we find a working value proposition for that business [to follow].

And then, Javier, just as a follow-up to that, can you talk a little bit about what you're doing in the OXXOs with grocery and produce -- some of the hybrid concepts that you have there, and whether or not there might be interest in a bigger-box opportunity to improve scale, particularly in those categories?

Sure. You're referring, I guess, to OXXO Super, which is basically a bigger OXXO. And we think that's an interesting format. To tell you the truth, I don't think it's a huge, let's say, opportunity in terms of the store base.

But it pretty much takes care of some, again, set of consumers that are finding the OXXO -- the stop, a good way to fulfill some other consumption occasions that the OXXO regular doesn't really take care of.

So, we are pleased with how we have developed that. We think we have also learned a lot of things that apply to the OXXO store, and that we're also trying to take advantage of it. But it seems to us that it's -- again, it's an opportunity that, it's out there, and that we would like to grab it.

Yes. I think -- Bob, this is Juan. Hi. One way that I think about the OXXO Super is, you know, we started some time back with some segmentation initiatives within the regular OXXO. And we came out with some stores that kind of skewed to the home market. And so, we kind of loaded the SKUs that would be attractive for a housewife, with staples and things like that.

And then at some point, you realize that you have more SKUs than you have space for. And so, you go a little bit bigger. And you go into some of these categories that you've mentioned, that begin to make the store look like a little supermarket.

But I think of it more as kind of an extension of the segmentation strategy, which also, I think, puts it in perspective in terms of how many of these things we could aspire to have. So far, I think the results from that have been good.

No, that's great. Thank you very much, Juan.

And just on a -- part of that question had, like, an embedded reference to, you know, any considerations of an inorganic move that might dramatically increase your exposure to those categories?

Not really. I mean, you should -- I mean, we've said, going back to kind of the comments on the drugstores -- and you've heard us say this before -- that the two acquisitions that we made are not enough. Right? And that we will definitely be looking for more assets that fit well into our strategy.

So, on the M&A front, definitely, it's not off the table by any means. Other than that, going into bigger boxes -- that, you should not expect us to go that route.

Okay. Thank you very much.

Thank you, Bob.

Alex Robarts, Citigroup.

I guess the -- first question, really, on OXXO. And looking at the store openings for the year, and in the fourth quarter, I mean, I guess you kind -- it seems that you've only passed 1,100 in a year once before.

And, kind of thinking about how this 500-plus openings that came in the fourth quarter -- I mean, can we think about this -- the opening -- the pace of openings here, perhaps related to just the slowdown that you saw this year in same-store sales growth?

Could it be related perhaps to just some year-end incentives or some change in that structure? Or is it just kind of simply better location availability? And should we be thinking more about you guys hitting and surpassing the guidance of store openings as we look out?

And kind of the last bit of this is on consolidation. I mean, Couche-Tard has shown that it's interested to consolidate the C-store industry from its perspective in Mexico. And I'm wondering -- obviously, there's a considerable size difference -- if you think there could be further consolidation in the C-stores in Mexico.

First, on the first part of your question and comment, the breakdown by quarter of the opening of stores of 2013, was not necessarily the way we planned.

So, we -- the opening of stores slided a little bit into the fourth quarter because of a number of reasons, mostly of them operational ones, in having the ability to really get all the permits, licenses and building put in place; but not necessarily representing, I would say, either inefficiencies or decisions that we took in order to sacrifice our ability to open 1,000 stores.

So, we don't see -- we have had some years in which even the fourth quarter openings were even more important than this year, but some others in which we were more able to smooth openings to all -- across the four quarters. So, we are not, I would say, seeing here a trend or anything like that.

On the comment on -- again, a reality is that, once you start reaching 11,000, 12,000, 13,000, of course, there are always, let's say, easy locations to look at, just following the growth of cities and things like that. But also, you start to find yourself in a situation in which you have to refine your criteria and make it very sure that you're making the right decision in terms of location.

And that requires, I would say, incremental capabilities and also creativity [inside of] our operators, in order to think of placing -- places where new stores could be opened.

So, in terms of consolidation of the industry, I think, because of our size relative to the others, we are already very big in the country, and then we have basically -- grow organically. And I think we will continue to -- in that route.

I wouldn't speculate on anybody as doing anything different than I -- what just said, is our strategy. But, again, the industry is, I would say, fairly represented by basically three -- I mean, us and another couple of medium-sized players, and a number of other local regional chains. So, I wouldn't speculate of what intentions of some other competitor would look like.

No. Fair enough. Okay. And I guess, as I think about it through another angle, which is that the 511 new stores here in the fourth quarter, showing almost 20% increase on the level that was opened up in the prior-year period.

And I think there was only one other instance where on a year-on-year basis you had 20% increase. So, I'm kind of -- when I think about the gross margin expansion, then, given what the top line was doing, I would think that -- somehow, that there would be incrementally more startup -- I mean, startup, initial expenses, costs and such.

But it sounds like -- it doesn't seem like that was happening. And you had this massive year-on-year opening at the same time with the same-store sales growth in this low single digits.

I mean, was there a phase -- could there have been a phasing, perhaps, of the costs and expenses related to these 511? Or, do you think what we've seen, really, in this quarter's numbers -- that's really what we should expect to see around those 511 new stores?

So, again, the 511 number was not necessarily the number we were looking at the start of 2013. It was higher, because of the reason that I just mentioned. And the gross margin dynamics are totally different against the opening of new stores. So, those are two unrelated issues.

Gross margin behavior relates much more to our ability to bring more people to the store, and [buying a stock] which is better margin than others, and working very closely with our suppliers in terms of, again, looking at the right price points, looking at the right price promotion activities, and also hitting kind of our targets in key categories, which helps our suppliers to move the product in our stores. Which, if you see our performance against some other retailers in Mexico, continued to outperform.

So, in a way, we think by, again, being able to truly represent the interests of our suppliers and managing mix and traffic, we've had a tremendous fourth quarter in terms of gross margin expansion. But it relates to particular circumstances on the quarter, as well as the 511 net new stores for the quarter, are related to particular circumstances on how the year plays out in the sense of the ability to open and -- certain number of stores per quarter.

But I shouldn't signal any -- to you or to anybody else, that these two variables are related in somehow, or that they really represent kind of the way you should look at the business going forward, at all.

Okay. No, okay. Yes. No, listen, that's helpful. And, sorry. I just -- one small last one was, I too was interested in the management change in the fourth quarter. And perhaps the second part of the question is, if you could comment a little bit on John Santa Maria taking the helm at Coke FEMSA.

Should we expect this to signal more of the same focus and such? Or, might it indicate some shift in the mandate? Any comment there would be great.

Sure. Sure, Alex. No, I mean, John is taking the business, which is, again, facing challenging times -- tax in Mexico; issues in Brazil -- to integrate two very large businesses, which basically grew our business down there 50%.

So -- and he's been around a lot. I mean, he's been with the Company 17 years. He's managed Mexico. He's managed South America. He's been in strategic planning. He knows the business up and down.

And he has a very, very, I would say, strong profile as operator. He has commercial sense. And, of course, he's going to continue to work with Carlos. Now, Carlos on his CEO role of FEMSA, and John managing the Coca-Cola FEMSA business.

So, I mean, you shouldn't expect a radical change, neither in the leadership style, neither in the strategies that the Company's putting in place, and neither in the very strong -- the management team that Coca-Cola FEMSA has. So, I would say, again, not major changes. And the ones that we are introducing, we think are for the best.

Got it. Thanks.

Thank you, Alex. Good talking to you.

Lore Serra, Morgan Stanley.

I wanted to ask two questions, so I'll ask them separately. First, I wanted to ask about your perspective on the outlook for additional investment in related sectors. And one of the things I was thinking about was that some of the deals started to happen in Brazil when times got a little bit more difficult.

And I wonder if, with Mexico turning down, you see any more kind of opportunity in those sort of smaller spaces, given that the downturn has been as profound as it has.

Sure, Lore. You're absolutely right. We like the profile of the Company, because it allows us to look at not only different geographies but also different businesses. By that, I mean that you have seen us look at opportunities in retail, expanding the format here in Mexico; and you have looked us also trying to give it a shot at growing into other countries, with OXXO in Colombia for now some time, and still trying to, again, find the proper way to build the business down there.

And we also have a very interesting footprint on our logistics and refrigeration business all across Latin America, following the footprint of Coca-Cola FEMSA.

So, all of that provides us with, I would say, many of opportunities that we look around. The position we took last year, to really put a significant amount of capital in Brazil in the Coca-Cola FEMSA, that helped us to reach 40% of the volume sold in that country, of the Coca-Cola products -- it's a clear signal of our belief of the long-term fundamental -- the positive fundamentals of the country. And, again, turbulent times are always times for opportunities. And we see, basically, these days, that situation evolving.

So, I can confirm to you that we're looking at things all the time and that we are very aware of what you're saying in terms of, there might be some better timings to look at opportunistics entry into certain countries or lines of businesses.

And what I would like just to reinforce is that, every time (inaudible) we look at that, the starting point for us is, are we good at maybe taking this opportunity or not? And then, second question is, well, is the timing right? But that's the sequence that we always tend to look at these potential opportunities, Lore.

Great. And the second question I wanted to ask was about Coca-Cola. And I guess it's a bit multifaceted, so let me throw out some ideas and you can respond to the ones you want to respond to.

One very practical question is, when I spoke to -- when I asked the question to Hector about raw materials in Venezuela, he made it sound like concentrate was a raw material. But I had the impression that you pay concentrate in Venezuela in local currency terms. So, I just wanted to confirm that.

But I guess the question I wanted to ask was, if you think about the relationship with Coke -- and Coke seems to have a bit more challenges heading into this year than it's had in the past, and you have more challenges going into this year in the Coke FEMSA system, and particularly as it relates to Mexico.

So, you know, as you try to marry this goal of kind of containing costs, that Hector talked about in Mexico yesterday, to prepare for probably weaker revenue -- how does this dialog work with Coke, in terms of the support and the marketing spend? Because, from their perspective, they want more, and from your perspective, you need to watch the line.

And then, broader speaking, I mean, as you think about expansion opportunities, they're trying to re-franchise the US. I guess I thought the Philippines was an important part of kind of your medium-term kind of goals. But how do you think about that, as something to think about? So, a couple of different questions, but all with this theme of kind of Coke.

Sure, Lore. First, on the raw materials, we basically -- I mean, we buy the concentrate. But we pay that in bolivars, as you just said. But since the concentrate is imported in Venezuela, it goes through the (inaudible) regime. So, that's the process we have to take there.

On the cost containment -- think, as you can imagine, tougher times for both companies. It has proved in the past that it has rubbed the companies together, because either we do face it jointly or, again, the nonalignment between the two parties can be very, very bad for both.

So, what's taking place is, I think, an increased level of communication and debate at all levels, on, again, what's good or bad. But what I would like to reinforce here in the idea, is, the Coca-Cola Company knows that we are a Company look at decisions not for the short term but for the long term.

So, if we are making efforts in terms of cost containment, I think we -- most of the time, I think, have the right arguments to discuss this with our partners, in explaining why this is a good idea, not only to, let's say, dealing with the short-term turbulence, but also it's good for the long term.

So, communication and, again, I've got a clear, I would say, and frank dialog and debate on ideas from both sides of the table -- I think it's a solution to face at turbulent times as the ones we are facing.

And in terms of, again, evolution of whatever might look like the footprint of the franchise in the world, our entry into the Philippines -- we are again -- we are working as hard as ever. And we are very happy with the progress we're making, as opposed to the trends that this business has previously. We arrived January, past year.

And -- but still, I think it's work in the making. It's -- we -- when we represented this transaction was, this is a challenging business; this is a geography in which we can -- think we can leverage some of our skill sets and our capabilities, and I think we are doing that, and we're making a lot of progress.

But we also represented this as a multi-year work. I spoke about 2 to 3 years, really, to look at being out of the woods. And we're still in that phase.

But as I'm saying this, I'm saying, we think we have the scale; we think we have the management debt; we have, I would say, not as ample financial flexibility as we used to have before the acquisitions we made last year. But we have the obligation for our shareholders to look at any opportunity that may arises, that seems to have a little bit sense for us to look at it.

So, we are always interested observers. We know everybody in the system. We have, I think, the confidence both from the Coca-Cola Company, and we're always there, ready to look at opportunities (inaudible).

Great. thank you very much.

Thank you.

Luca Cipiccia, Goldman Sachs.

Thanks for taking my questions. Just a quick follow-up on OXXO and retail trends in Mexico. Just to -- wanted to ask if you could share your views on how the taxes -- the price increases that we've seen coming through since the beginning of the year, may affect the channel preferences for consumer.

That's to say, how do you think traffic will be impacted, in comparison with traditional channels, and some of the other formats -- if there's indication for what you could monitor so far?

And then, complementary to this, maybe if you could share some thoughts as well on the additional services that you've been introducing. We've seen the debit card on the OXXO side. So, maybe if you could comment a bit on these incremental traffic drivers, how much relevant they are becoming, as time when possibly some of the other categories may suffer proportionally more.

We are still looking -- I mean, mostly 2013, and early 2014, again, we are still confident that on the consumption occasions that we play out, and on the new services, or services needs that consumers are looking for, we're still making strides. And we are outperforming the industry.

So, we feel good about it. We don't think the traffic numbers in a way represent that the power of the value proposition of the store is losing traction at all.

Again, traffic in a way will be a function of how consumers mitigate or integrate the effect of higher taxes and higher prices for a number of products all across Mexico. And, again, different categories have different price levels, as of January 1.

But also, price sensitivities across categories are quite different as well. So, early thinking -- it's too early to say, but we feel confident, as I said, that we should be trending upward as the year progresses. That's one of the first -- the first part of your question.

The second one is, we continue to bring new solutions to the store. We just launched, as we just announced a new card called Saldazo in OXXO, which is linked to Banamex and which I think we're also starting to build a new reason why it's going to be much more convenient, even than today, to go to OXXO to do certain transactions.

The service category, as we've said in the past, is not really necessarily a big one, still, in the Company, but it's growing very fast from its base. But it's also a category that helps us to bring traffic into the store. So, if people are going to pay a bill, they hopefully get a Coke and a beer and a snack with them, all along.

So, still, we feel very, very good about -- we have what we think is a sound strategy. It -- this is a category that takes some times to deploy because of technological complexities and negotiations with partners. But once it's installed, it's very good, because it's pretty much all margin, and it's helping a lot to bring people into the store.

Thanks. Thank you. Just quickly as a follow-up to your answer -- so, when I think specifically about the traditional channel, the Mom and Pops, how destructive do you think the taxes may be, comparatively? Do you see this rather as an opportunity to gain share, or rather consumers may revert more to that channel? What -- how could this play out in respect of that channel specifically?

All in all, I think it's an opportunity. All in all, I think it's an opportunity. I think the smaller businesses, again, have this advantage, not only of -- I mean, just the evolution of time goes against them, I think, because, again, consumers are looking for variety, and it's very hard to really offer variety in a very small, not so well-managed, and sometimes lacking funds to really have a good working capital to work with.

And if on top of that we put some pressure both on their finances because of tax reforms for small retailers and businesses in Mexico, together with a new price architecture for most staples in Mexico, I tend to look at it more opportunity.

But again, it's up to us to really make it happen. I mean, it's not going to happen automatically. But (inaudible). I mean, as a starting point, I see more an opportunity than a threat.

Okay. Thank you. Very clear. Thank you.

Thank you, Luca. And, with no more questions, I would thank everybody to participate in the conference call; and looking forward for the next one in April. So, have a good day, everybody. Bye now.

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