Fomento Economico Mexicano SAB de CV (FMX) 2014 Q1 法說會逐字稿

Good morning, and welcome, everyone, to FEMSA's first quarter 2014 earnings results conference call. (Operator Instructions).

During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance, and should be considered as good faith estimates made by the Company. These forward-looking statements reflect management expectations and are based on currently available data. Actual results are subject to future events and uncertainties which can materially impact the Company's actual performance.

At this time I would -- I will now turn the conference over to Javier Astaburuaga, FEMSA's Chief Financial Officer. Please go ahead, sir.

Thanks. Thanks and good afternoon. Welcome to FEMSA's first quarter 2014 results conference call.

As always, Juan Fonseca is with us today, and we also welcome Alfredo Fernandez from Coca-Cola FEMSA back to our quarterly calls.

As we usually do, today we will focus the call on the consolidated figures for FEMSA and on FEMSA Comercio's results, as many of you probably had the opportunity to participate in Coca-Cola FEMSA's conference call earlier today. As you have also likely seen our detailed results, we will use this opportunity to share some of what we see as highlights and main trends in our business.

In order to best understand our first quarter results, first we need to be cognizant of the very challenging conditions we faced. In our key Mexico market, consumers were already sluggish coming out of 2013, and this year they are facing an even tougher situation, with significant tax and price increases that put incremental pressure on their disposable income. As you know, some of those new taxes hit our business directly, in the case of soft drinks; and some indirectly, as with snacks and confectionery products sold in our stores.

Then, we had significant devaluations in several of our South American markets and a generally adverse foreign exchange environment across the board, impacting our results.

And top -- and to top it all, the calendar effect from the timing of Semana Santa was very negative in the month of March, which had significant implications for us, particularly at FEMSA Comercio.

In the face of such a challenging backdrop, we set out to do what was needed to protect both our core businesses and to adapt to new realities. This required major cost and expense reduction efforts, especially in Mexico, and including significant head count optimization and a general streamlining of our operations. It meant scaling back investment plans, and a major redesign of Coca-Cola FEMSA's price package architecture.

The initial results of these actions are encouraging. Coca-Cola FEMSA's volumes in Mexico certainly fell, as expected, but their efforts paid off by protecting profitability.

In South America, we achieved growth in the face of adverse foreign exchange dynamics, and FEMSA Comercio managed to deliver slight same-store sales growth, and only a modest margin contraction given such an adverse scenario, including the higher VAT rates, and -- in the important northern border markets, and the tough comparison base from the timing of Semana Santa.

In terms of the macroeconomic environment in Mexico, GDP growth remains muted, and we are still not seeing a meaningful improvement in the key metrics or in general sentiment, particularly as consumers are facing a more adverse scenario, as I just described.

On a more positive note, some indicators, like growth in remittances and levels of public spending, are slowly improving, which is encouraging as we approach the middle of the year.

In Brazil, the main concern continues to be sluggish GDP growth, and consumer sentiment is very low. However, the World Cup taking place in a couple of months and upcoming presidential elections in October, should make this a particularly interesting year in that important market.

On the foreign exchange front, Argentina devalued its currency in January and Venezuela introduced the Sicad exchange mechanism recently. These moves have reduced uncertainty, but they will continue to weigh on our results throughout the year.

As you probably know, Coca-Cola FEMSA has started and will be using the Sicad rate for financial reporting of its Venezuelan operations going forward. For the first quarter numbers, the rate being used is 10.7 bolivares per dollar.

Moving on to discuss our consolidated quarterly numbers, total revenues during the first quarter increased 14%, and income from operations increased 16%. On an organic basis, total revenues grew 4% and income from operations increased 7%.

For the first quarter, the line labeled, participation in Heineken results, represents FEMSA's actual 20% participation in Heineken's first quarter net income, which was reported last Thursday.

Staying on the subject of net income, we see that it decreased 4.1% in the first quarter. As we explain in our press release, this was mainly as a result of higher financing expenses related to bonds issued by FEMSA and Coca-Cola FEMSA during 2013, and to a lesser extent by decreasing FEMSA's 20% participation in Heineken's first quarter 2014 net income. This was driven by exceptional items.

These factors were partially offset by the growth in income from operations. Our effective tax rate was 32.8% for the quarter, very much within the expected range.

And in terms of our cash position, during the first quarter we went from having a consolidated net debt position of MXN48 billion at the end of December, to now having a consolidated net debt position of MXN43 billion at the end of March, reflecting cash generation at both our core businesses.

Moving on to discuss briefly our operations, and beginning with FEMSA Comercio, we opened 135 net new stores during the first quarter, in line with the previous year. It is important to note that we are not adjusting the pace of store openings to reflect the challenging consumer environment.

Revenues increased 12%. On an organic basis, revenues increased 8%. Same-store sales were up 0.4% in spite of a very difficult comparison base, driven by the negative calendar effect of the timing of the Semana Santa holiday period, combined with higher excise taxes on key categories and incremental VAT in border cities, as we mentioned at the top of the call.

Adjusting for the calendar effect, we estimate our same-store sales performance continues pretty much in line with last year, consistent with the macro and consumer environment in Mexico that has yet to show signs of improvement.

On a positive note, it was encouraging to see that average traffic was positive for the second quarter in a row.

For the quarter, gross margin contracted 10 basis points, reflecting several factors, such as the inclusion of lower-margin drugstores into FEMSA's -- Comercio's number, the impact of higher VAT rate in Mexico's northern border markets, as well as the lack of leverage given the muted growth in same-store sales.

In terms of operating margin, this quarter FEMSA Comercio posted a contraction of 30 basis points, reflecting, among other things, the incorporation of the new drugstore operations, incremental expenses relating to the new store openings, and the lower leverage as mentioned before.

Moving on to Coca-Cola FEMSA, total revenues grew 15% and organically they increased 1% during the quarter. In terms of its operating units, they faced very different sets of dynamics.

In Mexico, Coca-Cola FEMSA took significant price increases throughout the quarter to offset the new excise tax as well as inflation, and volumes contracted accordingly. However, they were able to protect profitability, and operating income for the division increased 5%.

On the other hand, in Brazil we got off to a good start in the context of a slightly more constructive consumer environment and an undemanding comparison base.

The rest of the South American regions performed well, even as the new exchange rates in Argentina and Venezuela had a meaningful negative impact on the numbers as reported in Mexican pesos. If you were unable to participate in Coke FEMSA's conference call earlier today, you can access the replay of the webcast for additional details on the results.

So, at the start of a challenging year, our first quarter results did not disappoint. Our colleagues across FEMSA's operations delivered a solid set of numbers that makes us optimistic about the rest of the year ahead.

Having said that, and consistent with our comments from last February's call, we need to wait and see if the consumer environment in Mexico improves in the coming months, because that is indispensable to support our optimistic view of the second half of the year.

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

(Operator Instructions). In the interests of time we ask that you please limit yourself to one question at a time, in order to allow for the maximum amount of callers to ask their questions.

Lauren Torres, HSBC.

Javier, I think you did answer my first question with respect to same-store sales, if you adjust it for the Holy Week. And when you said that it's comparable to what you saw last year, are you comparing it to the fourth quarter, which was up, like, 2 1/2?

Yes, roughly, that's correct, Lauren.

Okay. And I guess, with that assumption, then, if we're keeping our full-year same-store sales guidance of mid single digits, I'm just trying to gauge from your comments last quarter, directionally if -- you seem a bit more cautious on the consumer, or at least (a bit) cautious on the recovery coming in the second half.

So, I was just curious if that is still your outlook, and kind of what's going to help you get there, if you are incrementally more cautious than you were a quarter ago?

To tell you the truth, I was more optimistic on how consumer demand in Mexico -- I think the quarter ended up being a little bit on the bright side on the soft drink operation in Mexico.

And in terms of OXXO, I think it's very early to [either] change dramatically my view as I discussed in February, Lauren. But definitely it was a very tough quarter; but again, there's a lot of noise in the numbers because of Holy Week, and the best we can do on that is to estimate kind of the impact, which is not easy to do.

So, all in all, as I said at the end of my introductory remarks, is, I think we will need to wait at least to see May numbers -- to look at April to May, to see, again, a more, let's say, consistent set of numbers developing.

Traffic numbers, at least for us, seems to be in good shape. But looking at overall consumer sentiment and the disposable income, and to really understand how bad consumers are going to be hurt and for long, because of the tax increases, I think it's going to take me a little bit longer to really get a much better view on that.

But I think by mid-year we will have a much better view on -- again, on one side, the shape of the economy as a whole -- if we are able to start growing or not, as we are -- all anticipate and wish for; but most importantly, to really understand what behaviors or patterns of consumptions for consumers have been changed, and -- in light of all these facts -- impacts that they are suffering early this year.

So, I wouldn't change anything I've said in February. But I think that the most important thing I said in February was, we will need to go through the first semester to hopefully find a second half of the year which looks better, to maybe [graph] up a better 2014 than last year.

So, if I could take away from that comment, I guess the traffic number seems okay, but the number at risk would be the ticket sales, or that -- where the concern would be?

Yes. I mean, that (inaudible) again, March is a month which compares with last year's, it's -- because again, typically, the tickets in the Easter time -- Holy Week -- tend to go higher than normally. So, that's why I'm saying it is -- I would say we have a cautious view. We are pleased with the numbers of the traffic; but again, there is again consumer, which is struggling these days, very fast -- very high.

Hi. I'd just add on that -- hi, Lauren. It's Juan. Many of you recall from last year, there were a lot of comments and concerns at the beginning of the year because of traffic, right? And we talked and we discussed the whole telephony phenomenon. Which, of course, this year it's certainly much less of an impact.

And I think that the comment on traffic being now, for two quarters in a row, positive, goes to precisely try to illustrate how the situation is different this year from last year. So, that would be one point.

Now, another that I would make is, the month of April last year was the worst month. It was a horrible, horrible month, partly because its -- of its own Semana Santa comparison. So, obviously, now we look at April this year -- you know, the comparison basis is not that demanding.

But, to Javier's point, once we have a full semester, we will have a much clearer picture, and we'll be able to see, or at least estimate whether the same-store sales trend will indeed trend up, or we will -- if we will continue to kind of just hover around the low single digits where we are today.

Okay. Very good. Thank you.

Karla Miranda, GBM.

Thank you for taking my question. Javier, I was wondering if you could give us a little more color about the performance of the pharmacy division. I know that you don't give a lot of information; but maybe if this consumption environment is affecting the pharmacy division too?

And in addition, I -- any opportunities to continue expanding inorganically the segments? Thank you.

So, Karla, what I might share, as opposed to being too specific on the subject of pharma -- what I can share is, maybe a little bit repeat myself, what I said in February. We are very pleased with the performance of the business. It's -- both businesses are performing, I would say, better even than we thought.

Because I would say a number of things, as I described in February; but mostly because of -- we, I think, have found a number of opportunities in leveraging some of the capabilities, infrastructure, and I would say processes from OXXO into pharmacies; but at the same time, being very respectful of the differences of the formats.

So, all in all, I think we are very, very pleased, and the businesses are performing well, slightly ahead of our plans.

And on the second front, as we said when we entered this new format in Mexico, we have a clear intention of building a relevant business. The strategy is comprised, as I explained before, in trying to acquire kind of regional beachheads from where we can start then growing organically. And I wouldn't say that we're sitting with only the two companies we just bought; but of course we continually keep on monitoring opportunities in the market.

Whenever there would be, I would say, a good alignment with our strategy on how we would like to grow, that -- in the sense of what kind of formats, the nature of the businesses, and of course requiring willing sellers at reasonable prices, we will continue to explore inorganic opportunities in this sector, Karla.

Great. Thank you very much, Javier.

Alex Robarts, Citi.

I wanted to -- I was hoping we could visit the portfolio at OXXO, maybe by segment, kind of like, loosely speaking. If we think about beverages; if we think about prepared food; if we think about the services -- maybe just kind of those three. It'd be great to hear how you felt those subsegments of the OXXO portfolio performed in the quarter, kind of against what you were all expecting.

And I guess the last part of this one is, I get the impression that the prepared food, particularly with O'Sabor, really is probably the best-performing segment, if you would, or subsegment, of the portfolio right now.

And how is O'Sabor impacting it? Do we feel that we could get into a more accelerated rollout? I mean, it seems like you've been talking 500, 600 O'Sabors by the end of the year. Is that still a fair assumption to have as a target? So, that's the first question. Thanks very much.

Sure, Alex. On the first front, without going into -- I mean, a lot of small details on that, performance within different subcategories in the store are, I would say, performing differently. Because, again, some of them have a very heavy taxing pattern. Some of those -- I mean, some others, depending on the price segment in which they compete, a different one.

But, all in all, I would say, again, if you look at our same-store sales measured in pesos, basically breaking even, you can imagine what's been going on with volumes, since most of these products had significant price increases. So, I would say that's a first message, maybe, that I would like to communicate.

And then, of course, there are different performances because of -- some of those products have very different price sensitivities in the eyes of the consumers. So, in terms of the -- I would say beverages, and snacks -- even fast food, fast food in beverages -- things like that have, I would say, a tough time in early -- in the beginning of the year.

Other categories such as, I would say, telephony, have continued basically pretty much with the same trend, which is not necessarily a very nice one, because of all the [phenomenas] involved there.

And finally, the other concept you just asked is services. And in services, we keep on rolling out -- I would say, every single quarter we expand either by the inclusion of a new bank, or by the inclusion of a new service.

We just launched the new card called Saldazo, which is linked with -- to Visa and Banamex. And it's a debit card, which is, I would say -- now we are able to do cashbacks to consumers of -- at a certain amount, we're starting. We would like to be sure that we're doing it -- this in the right way.

So, services is growing, still, very, very nicely for us, and that's good to have in an environment in which most of the other subcategories are having a tough time. So, on that regard, I -- that's kind of the impression that I can give you, on what's been going on in the first quarter.

And in terms of O'Sabor, which is our -- one of our solutions; not the only one. We have many, depending on the nature of the store and the region of the country in which we are trying to tackle this opportunity.

We are rolling it out accordingly to our plans. There's not a change there. The rollout in place, [both] starting to get a little bit of critical mass in selected stores. But at the same time, it also does include still a lot of learning and fine-tuning on how we would like our fast food offering being implemented fully in the years to come.

So, we're sticking to our plans also in O'Sabor, and of course it's going to be something that hopefully keeps us on the right track in this value proposition that we are trying to bring into our stores.

But is it safe to say, when we think about what you gave us in terms of same-store sales for this quarter, that probably the best-performing subsegment of the portfolio was prepared foods? Or is that not a fair statement to say -- to make?

Hey, Alex. This is Juan. I don't think you can see a clear difference among categories. You really see a pretty weak trend across the board. It wasn't a spectacular quarter for any one of these.

Obviously, to Javier's point, I mean, price sensitivity is different for one or the other. But -- and yes, I mean, our preferred food initiatives are low-price, right? I mean, you can basically have lunch at OXXO for greater than $3 on average. But still, I wouldn't say that prepared food clearly outperformed other categories. That would be my view.

Okay. Listen, thanks a lot. I just wanted to clarify that.

And I guess the second and last question I had is just, as we think about more medium-term, right, the drugstores and Dona Torta -- these businesses that are now, I guess, 5%, 6% of the small box business in Mexico, and growing.

How should we think in terms of just organic profit growth over the next couple of years? I mean, is there kind of going to be this hockey stick type of thing, if you start to get certain scale with new outlets? Is it going to be a gradual movement?

And obviously Dona Torta has higher margins than the drugstores. But should we be thinking about these other businesses -- these non-OXXO store businesses -- as a multi-year kind of margin improvement store? Or is there going to be a tipping point, perhaps, where at the 1,500 mark, that's where you start to get scale in your purchases?

Just, again, kind of thinking about more of the medium-term kind of blended impact of these non-OXXO stores on the business -- any color you could provide as we come into the year would be great.

Sure, Alex. I'm not sure about the hockey stick figure being a good reflection of maybe what we should look here. And you may be right, but I haven't really grasped the different scenarios that we have here on our planning sessions on that regard, which resembles [a lot] that hockey stick you've mentioned.

But let me react this way. The striking point of both these businesses comparable to the scale of OXXO -- I mean, they are tiny. You have mentioned 5%, 6%. I would say it's less than that. So, that's the starting point.

Then it comes -- the job that we are -- have our hands full with, which is again what I've repeated, which is, we need to really be sure that we have the optimal, hopefully winning and dominant value proposition on these new formats that we are now participating, in different industries; and then scaling them as fast as we can, and being wise about taking advantage of potential M&A activity on these fronts.

So, more -- easier to look at that in the pharma than in fast food, because of the nature of the -- both industries, here in Mexico and also in the rest of Latin America. So -- and also, by taking scale, you should expect also that we might be able to improve our margins, such as we did with OXXO in the good old days when we were basically operating on a low single-digit, and now we're more on the high single-digit.

So, all in all, that should, I would say, play out, to then look at what total numbers of FEMSA Comercio would look like. And -- but again, because of the small starting point, I would say that it will take time for these businesses to really start, let's say, being much more important in the FEMSA Comercio numbers because of the scale of OXXO.

We have said this in the past, and we feel confident that we have a number of years ahead of us in which we can still continue opening 1,000 stores a year plus.

And if that keeps taking place, I mean, that's a nice expansion rate for the big business. So, there might be a time in which, then, because of saturation or because of -- we feel it's the right thing to do, that we might slow down that pace of opening stores in OXXO. And it combines with maybe being much bigger in the other businesses.

But I wouldn't reflect -- I wouldn't dare to put a timeframe on that, and I wouldn't dare to reflect this as, or position this as a hockey stick graph, in terms of how it should develop. So, again, that would be my reaction to your question, Alex.

I would just add, Alex, I mean, (inaudible) this is obvious, so it's probably unnecessary for me to point it out. But the fact that we went from not having any drugstores at all, to having close to 500 year over year -- obviously, that's -- I think that's why we're talking about this so much, in terms of the drugstores having an impact on the overall profitability of the Company.

Obviously, as these stores become part of the base later in the year, yes, you're going to have a difference in profitabilities, and maybe the slightly faster organic growth in the drugstores which we would expect; and if we find some additional drugstore assets to acquire, then you would again have a bit of a step up.

But I think on a -- kind of, a steady state situation, where you just have the two businesses growing at their optimal organic rate, the margin trends that are going to continue to really dominate by far are going to be the OXXO margins, right?

Okay. Fair enough. Thanks. That's clear. Thank you.

Antonio Gonzalez, Credit Suisse.

Thanks for taking my questions. Just three very quick questions, if I may. First, on OXXO depreciation and amortization, I think it increased way above revenue. So, I just wanted to ask if there's any specific reason for that.

Number two -- I wanted to ask if you've seen any disruption in terms of the supply chain, specifically of the pharma, over-the-counter and personal care products that you sell at OXXO, given obviously that the largest pharma distributor in Mexico was sold to a private equity firm.

And if so, have you changed the way you think about potentially vertically integrating into that value chain, especially, obviously, in light of your investments in the drugstore side of the value chain?

And third and final -- we've heard some other consumer staple companies mention that after the fiscal reform, they've seen some volume shifting more towards the Mom and Pops as opposed to the formal retail channel, because they're seeing more Mom and Pops. Maybe after the fiscal reform or whatever, there might be some Mom and Pop formation.

So, I just wanted to ask, from your angle, are you seeing more competition for OXXO in terms of the number of points of sale with which you're competing, just increasing? Thanks so much.

Hey, Tonio. This is Juan. Let me just take the first question. I mean, on the [DNA] for Comercio, obviously the one that really moves the needle is depreciation. You're talking about MXN120 million.

That has a lot to do with the drugstores -- with the acquisitions themselves, right? You increase your asset base, basically, through these acquisitions, and that's what's behind that. I mean, the shift in amortization -- it's not even $2 million. So, percentage-wise, it looks big, but it's -- I would say, really, it's about the transactions that we did.

Understood.

And second question -- no, we have not seen really a disruption because of this sale that you just mentioned. But we source from different providers; different drugs distributors in Mexico; and in some cases even very, very few, still, but directly from some laboratories. And -- but we have not seen any disruption there, Antonio.

And on the vertical integration, this is a means of -- the nature of the products that we sell, we do manage, we move from our distribution centers to an OXXO stores, through our more than 15 distribution centers in Mexico -- those products are in nature quite different from the prescription drugs and things like that.

So, we might be able, and we are starting to do some direct distribution of some products -- the ones that make sense. And there might be a time in which we might be interested in assessing an opportunity and trying to see if it would be convenient to do the same for our own drugs for the pharmacies.

But, because of the profile or the footprint of today, and the scale that we have, we don't think that's one of the priorities that we have, for at least this year, at all.

So, the future will tell. It will have a lot to do with how the footprint develops and the scale develops, and then there might be an opportunity in the future for us. But this is not something that we're spending time in analyzing at the present time, Antonio.

Thank you so much. And just finally, on the Mom and Pop question, are you seeing, just anecdotally, more Mom and Pops in the market competing with OXXO, or not --?

No. To tell you the truth, nothing. This is the first mention that I just had. And not from our OXXO guys; not from our Coca-Cola FEMSA guys. This doesn't seem to be happening. But I might be wrong.

I mean, I would add to that, Tonio. I mean, we've discussed in the past how creating a Mom and Pop is -- historically been a form of self-employment for Mexican families, right? And it's relatively straightforward. You make a few phone calls, and you start selling out of your living room.

So, in an environment where the consumer is squeezed a little bit, or looking for incremental income, it would not be unheard of, that you see more of these families creating a Mom and Pop out of scratch.

But by the same token, they disappear on a daily basis as well. So, I mean, we talk about kind of a mass of one million Mom and Pops on a more or less constant basis. To Javier's point, we haven't seen any type of a spike on that. But we just assume that it's a pretty constant number.

Thank you so much. Very useful.

(Operator Instructions). Jose Yordan, Deutsche Bank.

I just have one question. About a year ago when you raised the bond -- the Yankee bond -- one of the use of proceeds that you had talked about was potentially going back to a 51% stake in Coca-Cola FEMSA. And in the month that followed, I -- nothing happened, but it was easy to see why, because Coke FEMSA was going up $10 a day.

Now that it's back to a more reasonable valuation, what's holding you back from doing this at this point? Is it reluctance from Coca-Cola to sell you some other shares, or -- just any color you can give us on where you are in that thought process, would be great.

(Inaudible). I mean, you're right. We said that was one of the options. It's still one of the options. And of course it's cheaper to buy the stock today than it was mid-last year. But we have not decided that that's the right thing to do with the liquidity we have in the holding. So, that's the only reason we have not exercised that.

We feel that -- we decide that's the best use of our resources, we will be able to do so. So, it's just a matter of not really having still a decision being made that that's the right thing to do for the Company for the long run. And of course, this is a decision that should be done for the long run. So --

And I would just add -- I mean, again, for clarity, and just so everybody on the call -- and I'm sure you guys are very aware, but we would be talking in the scenario of acquiring incremental KOF shares, not from the public float but in a transaction with the Coca-Cola Company. Which, of course, they would need to be thinking that it is the right moment for them to sell as well. So -- just so that we don't put any -- it wouldn't -- it would not reduce liquidity from the L shares.

Got it. Thanks a lot.

Luca Cipiccia, Goldman Sachs.

Thanks for taking my question. Just to follow up on some of the previous points, just if you could share maybe, you know, how have you seen consumers reacting to the price increases and to the new taxes too, in the sense of, specifically, are you seeing trends towards certain categories of reduction in packages? Certain, you know, brands of price -- [well], just trying to get a sense on how you've seen consumers adjusting to the incremental price increases from a category standpoint.

Is anything notable that either surprised you, or somehow may affect the performance throughout the year, or may drive some [of] adjustments, after what you've seen in the first few months of the year, now that price increases have gone through, both in beverages and in some of the food categories?

Sure. Sure, Luca. As in any -- I mean, first quarter -- I mean, the slow economy plus tax increases -- it's not very good news for consumption. But that -- as -- if in any other circumstance in which, by different reasons, maybe economic, external shocks, or really a severe contraction of the economy by any other reason -- the patterns are pretty similar.

I mean, there's a lot of downtrading from people. There's a lot of people which goes to smaller packages. There's a lot of activity from the suppliers and brand owners in terms of, again, adjusting, in our case in soft drinks and going to returnables.

There's also a kind of, I would say, a reaction to the pricing strategy of different companies. And in our case, we did not increase the -- all our products at the same rate. So, we did manage the differences between caloric, noncaloric, and small and big.

So, I would say -- but generally speaking, what's going on -- it's, again, people going for smaller things; maybe for -- being much more sensitive pricing-wise because of, again, disposable income not being very healthy, going for, sometimes, not the preferred brand.

But, again, in these times there's a very, very, I would say, clear pattern of people trying to be more, I would say, careful about how they spend and where they spend their money. And of course, a little bit more cautious on how much money they are spending. Because these are tough times for everybody here.

So -- but I wouldn't say that -- I would say there's something going on, quite different from what we've seen in previous downturns of the economy. And things are pretty much in line with the previous experiences we've been successful in managing before.

I think I would just add, Luca -- and, I mean, the -- in terms of the surprise element to your question, which I guess is very consistent with your question to Hector this morning -- I think, you know, when we talked about last year, we talked about how it took us a little bit by surprise that halfway through the year, versus expectations, the consumer situation and environment was clearly not turning out to be what we thought. And then we made some adjustments, especially at OXXO, and it helped us kind of navigate the second half.

I would say right now, the surprise, to some extent, is how long it's taking. You know, we're already almost a quarter into the new administration -- a quarter of the six years that it's going to last.

And we've all -- reforms have been discussed, and this optimism that seems to be coiled, ready to strike -- but time just continues to pass, right? And I think that's been a bit of a surprise, in terms of just how long it's really taking for the situation to improve.

And just to finish on this -- so, is there any reason why the OXXO proposition in this environment is at an advantage or a disadvantage compared to the other channel, whether it's the Mom and Pops or -- my point being, do you feel you will need to maybe reinforce the convenience perception? You -- are you going to be more promotional, or have you been more promotional, maybe to stimulate traffic? Maybe you can share some thoughts on that as well.

I think generally we tend to be pretty defensive. I mean, a lot of the purchases that take place at OXXO are, as you know, impulse, or -- you know, if you're thirsty, you're thirsty, and it's not something you necessarily plan to. Or, you don't -- most of our consumer locations are -- do not imply somebody walking in the door with a set budget or a mentality of saving. So, usually that puts us in a good position in a downturn.

I think that's still very much the case. But what we have is a situation where, as we said, the tax increases hit very close to home, and with soft drinks and with high-calorie products, which are -- you know, we sell a lot of those things.

If you also talk about the VAT in the north, which is something that maybe we haven't talked enough about, we are very, very exposed to that. We've said before, maybe 15% of our stores in the northern borders. So, that's putting additional pressure on our numbers.

So, in a way, I think OXXO found itself in a bit of a perfect storm. But even with that, we think we are -- we're weathering the storm pretty decently. And it bodes well -- very well for us, as it always does, whenever things pick up a little bit.

Thank you. Thank you very much.

(Operator Instructions). Lore Serra, Morgan Stanley.

Thanks for taking the questions. Let me just start by -- I think I missed in the beginning of the call -- you mentioned April same-store sales indicators. Can you just repeat those please?

I'm sorry, Lore. April same-store sales? I mean, the comment I made earlier was that the comp is very easy. Right? I mean, April last year was a horrendous month. It was a contraction. I -- if I recall correctly, the high single digits. But now we have Semana Santa in April, and so that bodes well for the numbers. But that was the comment we made on April.

Okay. Wasn't there a comment about 2 1/2% or something?

No. There, the comment on that was that our estimation is that, if you controlled for the calendar effect, the same-store sales trend -- it's in line with that to change trend. Right? So, it would [print at] 0.4, and we're saying, you remove the calendar effect and you're probably north of 2.

For the first three most of the year?

Yes.

Okay. That's helpful. And -- okay. And then, listening to you and listening to KOF, I guess I have same observation that others do on this call, which is that it seems like the way KOF has had a lot of variety around its portfolio, is helping it right now. Hector talked this morning about the 0.5 returnable really helping. I mean -- and you talked about having downtrading in the stores.

How much flexibility do you have, or can you have, in terms of adjusting the portfolio, given the state of the consumer? Is that something the OXXO guys can work on?

They can do some, I would say. Let's say the -- fine-tuning the products, and the way promotions are structured, is one area in which we work.

The example you just mentioned is another one, in which we work with suppliers to precisely try to adapt the product offering, including more returnables in both cases of soft drinks and beer as well.

And coupled with the previous mentioning of promotions, of course, going to promote those products which we know are aimed at consumers which are much more price-sensitive and need much more help to go through tough times. And I would say those are two examples of things that we tend to do when tough times come.

And if we go back at the -- a number of years, Lore, here, as well, you might find also good examples of things we've done, and we continue doing. Which is, we change the mix of the way we work on, let's say, building brand image and brand loyalty, as opposed to, again, working more in direction with putting those resources to work in helping consumers coming to the stores and hopefully grabbing more than one product or two.

So, yes, there are things that can be done. I would say the -- again, being the supplier of a product, which as Coca-Cola FEMSA, which have a number of SKUs and products for different consumption occasions, it's, I would say, easier, because, again, price package architecture is something which is a very powerful tool in the hands of a consumer product company. On the retail side, things like the ones I just mentioned, are the ones that we are more focused on.

Great. And then just -- I just wanted to ask again about these SG&A expenses. And I remember last year you talked about how the OXXO guys really doubled down on cost focus as it became apparent that the year was going to be tough last year.

And when we look at the first quarter -- and I understand I'm looking at the consolidated numbers with the drugstores and others. But it does look like you had a pretty big increase in selling expenses for the quarter, and some other expenses going up.

So, how may I understand what -- I'm sure the OXXO guys haven't lost their focus on cost control. So, why are we seeing these kind -- why is there a little bit more sort of inflation in the cost base and the SG&A base, please?

Yes. A lot of it has to do with the inclusion of the drugstores for this quarter, as it wasn't in previous. So, you look at the running trend for selling expenses, which -- we don't show organically, I would say are pretty much in line with past trends, Lore.

Yes. I think there was also --

Okay.

-- electricity played a role in the quarter. And just much lower operating leverage, right? Because of the lower sales (inaudible).

Okay. Thank you very much.

And ladies and gentlemen, that's all the time we have for questions today. I'll now turn the conference back to Mr. Astaburuaga for any closing or additional remarks.

[So, if I] just thank you very much for your participation today, and talk to you in the next three months. 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.