Fomento Economico Mexicano SAB de CV (FMX) 2014 Q2 法說會逐字稿

Good morning and welcome, everyone, to FEMSA's second-quarter 2014 earnings 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 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 will now turn the conference over to Javier Astaburuaga, FEMSA's Chief Financial Officer. Please go ahead, sir.

Thank you. Thank you and good morning, everyone. Welcome to FEMSA's second-quarter 2014 earnings results conference call. Juan Fonseca and Antonio Fernandez are with us today as well.

As we normally do in our calls, we will focus on the consolidated figures for FEMSA and on FEMSA's Comercio's results. As many of you likely had the opportunity to participate in Coca-Cola FEMSA's conference call on Wednesday, as most of you may have seen our results already, we will use this opportunity to share some of what we see as highlights and main trends in our business.

Let me begin by addressing the current state of the consumer in Mexico, which is a subject very much top of mind for many of you. From our perspective, the fact is that the consumer is still not doing very well. In many ways, the environment we faced in Mexico during the second quarter was a continuation of what we saw in the first quarter. The significant tax and price increases across many industries continued to put incremental pressure on the consumers' disposable income.

As you know, some of these new taxes impact our business directly as in the case of soft drinks, and some indirectly as with high calorie-dense products sold in our stores. Additionally, during the second quarter we faced adverse weather conditions as the hurricane season came early, bringing more rain to Central Mexico than usual.

So against this challenging backdrop at Coca-Cola FEMSA, we continued to implement pricing and packaging strategies that drove revenues and partially offset the negative pressure from the new taxes, together with a generally benign raw material environment and our continued emphasis on efficiency and cost containment.

In Mexico, we are also facing challenging operations, conditions, in certain markets such as Brazil, while other operations like Colombia are delivering more encouraging growth.

At FEMSA Comercio, comparable sales for the quarter showed some improvement, but once we adjust for the calendar effects of Semana Santa, the growth year to date is just above 2%, more or less in line with the trends from the second half of last year. It is encouraging that we can be growing at these levels in the face of such an adverse environment, but it is still below our long-term expectations.

In terms of the macroeconomic environment in our main markets, in Mexico GDP growth remains low, and we are still not seeing a meaningful improvement in the key metrics or in general sentiment. However, some indicators like the growth in remittances and automobile exports keep improving, and inflation is under control, which is encouraging. In Brazil, the main concern continues to be sluggish EBITDA growth, very low consumer sentiment combined with [dripping] inflation.

Let me move on to talk about our consolidated results. During the second quarter, total revenues increased 14% and income from operations 9%. On an organic basis, excluding the integration of the beverage operations of Fluminense and Spaipa * and one month of Grupo Yoli in Mexico, total revenues and income from operations increased by 7% and 6% respectively.

For the second quarter, the line labeled Participation in Associates Results represents FEMSA's 20% participation in Heineken's first-quarter net income, which was reported last April using the average exchange rate for the euro during the second quarter. Net income decreased 12%, reflecting a higher interest expense related to bonds issued recently at Coca-Cola FEMSA, a reduction in or reported participation in Heineken results, and a tough comparison related to a foreign exchange gain at FEMSA in 2013.

These effects were combined with a higher effective income tax rate of 37%. As we mentioned in our press release, this higher effective rate was mainly driven by a larger relative profit contribution from operations with higher tax rates, as well as changes to the deductibility of certain employee benefits in Mexico and some one-offs. Going forward, we will expect our effective tax rate to be in the low to mid 30%s range.

In terms of our cash position, during the second quarter we went from having a consolidated net debt of MXN43 billion at the end of March to a net debt position of MXN39 billion at the end of June, reflecting cash generation at both Coca-Cola FEMSA and FEMSA Comercio.

Moving on to discuss our operations and beginning with FEMSA Comercio; we opened 348 net new stores during the second quarter. This number shows an improvement versus the comparable figure for 2013, reflecting our continued efforts to open stores earlier in the year in order to have a less backend loaded store opening score.

On a related note, our store number 12,000 was opened recently in the state of Jalisco. We want to take this opportunity to congratulate our colleagues at FEMSA Comercio for reaching this landmark. As you may recall in many of our conversations with you during recent years, we had stated our objective of reaching 12,000 stores by the year 2014. So there we are right on schedule.

Revenues increased 12% in the second quarter in FEMSA Comercio. On an organic basis, revenues increased 11%. Same-store sales were up 3.6%, reflecting the low comparison base driven by the positive calendar effect of the timing of Semana Santa. Isolating the calendar effect by looking at the first six months of the year, we see that same-store sales were up a little over 2%, in line with the second half of last year but against a significantly tougher consumer environment.

For the quarter, gross margin expanded 30 basis points, reflective of 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 benefit accrued to us, as well as a more efficient use of promotion-related marketing resources.

Conversely, operating margin contracted 30 basis points, reflecting among other things incremental expenses related to accelerated new store openings, the incorporation of lower-margin acquisitions, and the continued rollout of new initiatives.

Our second-quarter results include one month of the new drugstore business, as well as a full quarter of the recently acquired quick-service restaurant operations, which are undergoing a transition as we integrate them into our business.

Moving on to Coca-Cola FEMSA, total revenues grew 14% and organically 3%. In terms of its operating units, in Mexico price increases were taken throughout the first half of the year in order to offset the new excise tax as well as inflation.

Volumes contracted as a result were also reflecting very bad weather in Central Mexico particularly. However, the combination of good pricing and mild raw environment -- a mild raw material environment allowed our colleagues to generally protect profitability, and operating income for Mexico and Central America contracted by only 2%.

In South America, the challenging operational environment in Brazil in spite of the World Cup was compensated by other markets in that division. If you were unable to participate in Coke FEMSA's conference call on Wednesday, you can access a replay of their webcast for additional details on the results.

So these months into a challenging year, this continues to look like one of transition, particularly in Mexico where we are making some progress, but are technically not out of the woods yet. Our colleagues across most of FEMSA's operations delivered the solid set of numbers, especially considering the sluggish consumer environment in Mexico.

Looking ahead, we are still cautious about the speed of a potential recovery. We do see more reasons to be optimistic than not for the rest of the year, but (inaudible) that any improvement will likely come gradually. And as we mentioned in our previous call, we need a pickup in consumer dynamics before we can deliver a meaningful improvement in our performance.

Operator, can we now open the call for questions, please?

(Operator Instructions) Lauren Torres, HSBC.

Good morning. I am not sure if it's a question or a comment, Javier, but some of your prepared remarks -- and I appreciate your frankness here -- but it does seem a bit more cautious with respect to the environment, particularly in Mexico, for this year and maybe even into next.

I think you framed out for us your sense of being cautious, but I don't know if there's anything else you could provide us with that that is holding you back. Like I said, maybe I am just comparing it to some of the other Mexican companies that we've heard so far this week talk about their outlook.

Is it related to what you are seeing at the OXXO stores with respect to store traffic, or what people are buying or how much they are buying? I'm just trying to get a better framework behind that to understand where this maybe more cautious outlook is being put in front of us.

Sure, Lauren. Thanks for the question. Maybe the difference here is on one side, we have been now almost 6 -- I mean 7 months in the year after having the impact of the tax reform. And as you may well know, a number of the products or the high proportion of the mix of the products we sell in our stores have a huge impact. And also the profile of some of our consumers were pretty much hit by the tax reform as well in some other fashions.

So after looking at the trends of the first semester and again having this expected or expectation that a recovery will come as time progresses, and not having seen that, that's why I think I am sending this message of we still think that there is much more reason to be optimistic.

But having seen the second quarter not really coming as we had expected it, we are basically pricing the recovery hopefully, which is now closer to be a gradual one as opposed to be an inflection point that would really change dramatically the things that we have been looking at.

So I would say my comments are more influenced by again the fact of having a business which because of particularly tax reform and because of the change in the expectation of the growth in the Mexican economy, because of particularly our liaison with the US, again, which is an economy with expectations of growth has been adjusted downwards as well, that is a little bit of maybe the tone of my initial remarks saying we still are positive that better times are coming.

But we more likely will see that being on a gradual basis as opposed to an inflection point that will change things dramatically from one quarter to the other. But positive bias but on a gradual basis, that is kind of my takeaway here, Lauren.

Okay, and if I could just ask a quick follow-up then. The decrease in store traffic that we saw in the quarter, I guess it was a little bit slower than what we even saw on the first quarter. So I don't know if I'm just being too picky here, but is there a possibility that that number could get a bit worse?

I guess we're talking about a gradual recovery, but are you concerned that the flow of traffic is even lessening compared to what we saw in the first quarter, or is it just seasonality or timing-affected?

If you look at the previous quarters, we had maybe at the middle part of -- in the middle of 2013 and maybe even into the third quarter, we were having some slow or small reductions in traffic. Then we had a couple of quarters in which it picked up a little bit but nothing substantial.

I think the decline in the second quarter of this year is just, I would say it is within the range in which we feel that there's nothing structural happening. Still traffic numbers are being driven largely by, again, people having the ability to go to the stores and buy airtimes in a less frequent basis because of trials coming down, and they are getting more minutes for the same amount that they are recharging their airtimes. So we didn't see anything in the second quarter that really showed a trend that is a concern, short-term at least, Lauren.

Okay, thank you.

Antonio Gonzalez, Credit Suisse.

Good morning, Javier. Two quick questions. First, I know it's a significantly smaller business, but I was just looking at, let's say, the residual EBITDA that you get not coming from KOF or from 0XX0, which I presume is mostly FEMSA Logistica and those smaller businesses. And I see a decline on a year-on-year basis of something like 27%.

So I just wanted to ask very quickly if there were some one-off benefits or anything extraordinary last year, or there was any other reason why we are seeing a decline here.

The second question very quickly that I had was on OXXO as well. I think over the last three, four quarters or probably even longer, you have been referring to OXXO outperforming the same-store sales growth of supermarkets in Mexico. Obviously, if I look at ANTAD numbers, that might continue to be the case, probably because ANTAD is, let's say, contaminated by some underperformers in some very specific cases like Soriana or Sam's or stuff like that.

But when we start looking more into the detail, we see Walmex excluding Sam's or Chedraui or Comercial Mexicana now growing this quarter above the growth rates of OXXO. So I just wanted to ask if you see any change in trend here, probably early change in trend, or you think this is more related probably to the World Cup or any other seasonality factor here?

Is there any comment that you can make on this relative performance, OXXO versus the supermarkets that you are seeing? Thank you so much.

Sure, I'll take the second one and I'll let Juan answer the first one. I think that, again, the numbers you are looking as you are saying, we are still way above ANTAD numbers in average. And there are some selected more regional retailers that are showing good numbers for the quarter. We have not really had a good, clear-cut picture of what's driving that performance, which in their case seems to be I would say better than the trend they were having.

On our case, I think that what I've said is we have got to a point in which because of sluggish economic growth and consumer sentiment at the end of last year, basically second quarter last year and this full first half, combined with the tax, the impact, both for the products we sell and for the consumers that buy our products coupled with some very specific, let's say, consumer occasions which are [linked] for sectors which were pretty badly hit by changes in the way policy was being established in Mexico, particularly in the construction sector. I think we are having most of those effects placed on the business that we operate, which serves some consumer occasions.

So you might be seeing this year, I would say, a number of those effects hurting a little bit more a business like OXXO than some others. For those particular retailers you just mentioned, again, there might be some particular situations taking place that I'm not really fully aware what's driving the performance.

But all in all, we still do feel comfortable that we are under the very, I would say, challenging environment. We are performing, I would say, according to what you can expect from the performance of our business within this challenging environment. Those will be my comments, Antonio.

Antonio, this is Juan. On your question about the other part of the business, you're right that that largely includes the logistics and the refrigeration businesses. I can tell you that if you look at each one of those businesses, they are actually growing very well. In fact, particularly the logistics business has been growing very, very interestingly.

Now both of those businesses have significant sales to FEMSA affiliates. As you know, Coke FEMSA, OXXO, and even Heineken. And, of course, you have shifts in the intercompany eliminations and some other stuff going on in there.

If you look at the time series, yes, a year ago was a particularly good quarter for that [stub], if you will, but there's really nothing that we should flag other than actually those businesses are growing very nicely. And as we have discussed when we talked about other things, when you look at the FEMSA ex-Coke and OXXO, there's usually a little bit of noise in there that's hard to look at from the outside, but you're right that there was -- it's kind of a tough comparison versus last year.

Okay, perfect. If I just may super quickly, Javier, do you think -- just to clarify, excluding the impact that we are seeing in 2014 because of excise taxes and the exposure to OXXOs that are in the regions that have higher VAT and so on, let me put it this way; you see no reason when you think about 2015 and the following years for OXXO not to continue to outperform supermarkets. You continue to think that way?

It is very hard for me to think in relative terms versus some other retailers' formats in Mexico into the future. What I am pretty sure is that we are being severely hurt by some of these short-term effects, and if we are able or not to outperform as in the past other retailers in Mexico, it will be a function of our ability to continue developing our value proposition and satisfying even better consumer needs.

We still think that we have kind of a good position because of, again, the value that consumers more frequently assign to this proximity value that our format offers to consumers. But again, relative performance to everybody else would be a function of our ability to continue satisfying consumers in a better way than the rest of the guys in the retail space do.

Antonio, I mean the percentage of our sales as you know that really overlap with what the big boxes and other retailers sell is actually quite low. And so for 80% of what we sell, the dynamics and the drivers are different.

So I think to Javier's point, our ability to continue to drive people through the door, to continue to innovate on the services front, on the preferred food, obviously to grow in kind of the big categories as we have in the past. But really we tend to look at ourselves and look at the other guys and compare the numbers, but really the reasons why people go to one or the other are quite different.

Now the structural advantage that OXXO presents in terms of the proximity, the fact of being open 24/7. all of that I think is a pretty secular trend that differentiate the smaller formats from the larger formats, so we think we have that advantage going forward. But we need to keep in mind how different our formats are to the big boxes.

Perfect, fair enough. Thank you so much.

Karla Miranda, GBM.

Good morning, everyone. Thank you for taking my question. Javier, I had a couple of questions. First of all, I know you already paid a dividend last year in advance for this year, but it seems that you are still generating a lot of cash. So are there any plans in the future, in the near future, to distribute an additional dividend?

The second question was related with the drugstore division. I was wondering if you can give us some update on how is the integration process going and if there are another possible acquisition target? Thank you very much.

So, Karla, on the first one, no, we are not thinking on doing anything for the rest of the year. On the second one we are, as I said in April, we are very happy with the way things are going with the drugstore business. We are making progress not necessarily in integrating the chains that we have bought already, but in improving some performance metrics in both business and taking advantage of capturing low-hanging fruit opportunities in both of them, and connecting better some of the back-office processes in supporting these new businesses. And we are very happy with it.

There will be a time in which we will need to go into a phase in which we will be hopefully managing different regional chains into one combined unity, but that's not necessarily the case as we speak. And as we have said in the past, we will be very active and continue looking for opportunities in the Mexican market.

We think we will be able to hopefully capture some of those opportunities to keep expanding our footprint on a combination of nonorganic and organic. But we are right on target on the pace of openings of new stores on an organic basis, which as we have said in the past is a substantial increase on what the previous trend of the independent chains before we bought them had in the past. So we are pleased also with that progress.

And, of course, we will as I said continue to monitor opportunities in the Mexican market to continue operating those chains that make better sense for us to continue building our footprint in Mexico.

Thank you very much.

Robert Ford, Bank of America Merrill Lynch.

Thank you and good morning, everybody. I was hoping you could elaborate on the expenses. Specifically, there was a step-up in the other operating expenses. And then if you could, you mentioned in your remarks or the press release pressure from the pharmacies, the QSRs, the rollout of new initiatives. And then I was hoping you could outline some of these new initiatives that you are rolling out in terms of the initial expense and the initial experience that you are getting from things like money transferred domestically and whatnot.

Sure. In the other expenses line, I think the biggest effect is an importation that was only in Venezuela by Coca-Cola FEMSA last year, which because of the process they followed, Bob, they were not able to access CADIVI or even Sicad II exchange rate. So they are creating a provision, assuming they are going to be having to pay that fully in the upper market rate, which is a significant impact.

I would say that is the bulk of what explains basically that. And a little bit the pickup equity that we have on the Philippines, which is also reflected in that line.

And on the second one, I think that the service category effort that we began maybe five years is continuously growing at double-digit rates, being a very profitable source of not only revenue but income for the Company, and that's going very well. All the effort that we have done in order to operate as an independent branch of banks in Mexico has proven to be very successful. We're basically now operating with almost any other major bank with the exception of two. One is in the coming months in the making.

And also an additional, I would say, launching service that we have been experiencing, which is a debit card call called Saldazo which allows people to use it not only as a debit card but also it allows people to then transfer money within Mexico as well in a less expensive way than some other alternatives. And of course, taking advantage of our very popular network all across Mexico, we're very pleased with the progress we've made in that. With only six months after launch, we have a significant amount of debit cards already with more than 600,000 of those. And we think we are going to be closing the year with maybe more than 1 million.

That is also proving that when people are, I would say, presented with alternatives that are now leveraging technology, even to some socio-economic levels which are not used to really deal with banks at all, we are having very, very nice experiences not only of the number of cards we are issuing, but also the percentage of people which are using they on a weekly and monthly basis compared with the normal use people have on these kind of tools.

So I would say I will highlight maybe again all the services that we are trying to provide in the store that tends to facilitate the problems that our consumers face on a day-to-day basis. I think we are, I would say, hitting a sweet spot in the sense of making a clear connection with consumers, trying to help them to again have a more efficient use of their time.

And of course, that creates a loyalty and repeatedness in them not only hopefully buying services from us, but also a beer or two or a soft drink every time they go to an OXXO. So we feel very good about the progress, but again, this is a very dynamic sector. So we need to, as I was saying maybe in my last answer to Karla, we need to keep -- this is a moving target. This is a very dynamic gain.

We saw a huge increase in the use of telephone cards and then airtimes, and these are, I would say, a line of services have a developing core when they mature and they start to reduce. Also, the trick here is to keep moving ahead of the curve and to be ahead of the rest. I would say that in service that that is exactly the thinking.

We are developing this business; we are already thinking what's going to come ahead of us next three to five years, so we're ready when that takes place because these things are going to constantly keep changing. But so far, I think it has been a good contributor in tough times having the ability to now grow the service line, which as I said is not only now more important but also contributes in a good sense to profitability on a store level.

That's very helpful. I think I may have made a mistake, though, or I wasn't clear when I asked the question, Javier. I was just looking at the expenses at FEMSA Comercio. In there, there's a 73% increase in the other operating expenses to MXN45 million, which in and of itself isn't a big number, but it's a couple of percentage points of the EBIT. And then the selling expenses are up 15% overall, right?

The admin looks very good, very lean, given the inflationary pressures and whatnot, and the increases on the payroll because of the tax changes. But I was hoping you might give us a sense there of how much of this is coming from kind of the incubation period or the investment cycle in these new businesses, whether they be QSR, pharmacy or correspondent banking services.

As you elaborate on some of the correspondent banking activity that you are doing, is that profitable for you now? And when do you expect some of the other services to become profitable?

To tell you the truth, Bob, being something like a $1 million change in that line, I don't have the faintest idea what that might be. I really -- this is the first time I look at really that line because it is really not substantial.

But on the other question as I said, the way we are integrating pharmacies, it's on a separate basis. The way we are integrating QSR is also on its own. As you can imagine in tough times when discretionary spending is not just for consumers, particularly the segment that Dona Tota serves, we have been having very tough times from same-store sales to gross margins because of quality prices of protein being high.

So we are facing tough times, and as well we have some one-offs which are charges which are one-offs because of the integration process that we are carrying on. So I would say we are -- in these first six months, we are struggling with the integration. We are having again some hits, which are one-offs, but if you ask me about the trend of how this business is performing whilst we have taken our arms around it, it is improving on a monthly month-by-month basis.

So we are very confident that we are pulling this business. There were a number of things that this business required. It was not a very institutionalized way of running it, as you can imagine, being a familiar, being small, having a mix of owned and franchise models. So we are working very hard on a number of different fronts.

And what I can tell you is, of course, the business is suffering because of the environment and because of the integration process. But on a month-by-month basis where there's not a single month in which we have not seen progress being made all across the P&L. So we are very confident that we are going to put this business right on track where we think it should be, very, very fast.

I would just add to that, how you obviously spent a little bit of time talking about the restaurant operations. I think on the drugstore operations, structurally they do have a lower profitability and that is well understood. But again, we are seeing improvements in the P&L trends and they are profitable from day one.

Then anything that has to do with services, of course, is profitable immediately because those are -- there's no cost associated with that. So any one of these initiatives that you launch, you begin to get whether it's a flat fee or a small commission plus the associated traffic. So those should not put a drag on margins.

And final comment here will be if the comment goes not so much into the other operating expenses but to operating expense as a whole also. I mean the fact that we were able to increase the number of stores during the quarter significantly above the one we did last year, as you know, we are now basically facing all expenses and rolling those stores. And those are stores basically just being opened, not mature enough.

So there's also on a quarter basis and impact of again having close to 100 more net new stores as we had second quarter last year, which again has an impact on the amount of operating expenses we are incurring, which are not being correspondent today by enough sales to make those stores profitable because of the early stage of development in which they are.

Great, I appreciate that. Thank you very much.

Thank you, Bob. Good talking to you.

Alex Robarts, Citi.

Thanks. Hi, everybody. Two questions, and I just want to go back to the traffic outlook and trend in OXXO. I definitely can appreciate the service piece of the portfolio at OXXO is more volatile. Telephone increases and it gets less attractive, and the Saldazo now is helping and such. But can we kind of just turn to the prepared food? In my mind, that has kind of been an innovative area where you've worked on particularly in O'Sabor getting kind of new reasons for people to come into the stores.

Can you talk a little bit about what's going on in prepared food? Can we still think about O'Sabor reaching kind of in-store outlets. I understand kind of 700 was one number that you had thought about earlier this year for the year-end this year.

And can prepared food be something that helps you get back into positive traffic in the second half of the year? So that's kind of the first question.

Twofold answers here, Alex. Hi. On the traffic, as I said, if you look at -- the numbers of traffic last year averaged basically a decline of 0.5. If you average out the first two quarters this year, we are basically there. It's 0.4. So again, I don't see really a significant shift in traffic trends while we are going through very, very sluggish economic growth in Mexico coupled with the rest of the effects I have been speaking repeatedly this morning.

On the fast-food offering, the numbers I have in my mind is more like getting to 500 at the end of this year, which not 700, which I think we are going to hit that landmark. And you can imagine it is less than 4% of our store way, so it is very hard from what's happening in those few stores really having an impact on the full numbers.

Going back to your question, what we are experiencing in those two stores are very good results. And again, are very good because I think the value proposition we are bringing is good, but also because we are selecting stores which fit the right profile in which the consumption occasion for fast food is well because of the environment that runs the store and because where it is located, because of the profile of the consumers that are going there.

So it is very hard still with the stage of development of our strategy in fast food to really have kind of a big bang deployment. We will not do that, but we said since the beginning basically bringing a new product into the store that will be back-ordered, scanned at the cash. It's very easy, but really preparing or assembling food in the store is a very, very complex. And it took us a number of years to deploy, to use an example coffee, and that in stores, and I think it will take us longer in fast food.

So we are pleased with what the things we have been achieving in the places in which we have testing, O'Sabor as you say, our fast-food offering for the people that doesn't know what O'Sabor means. But again, it is following its own path and pace of development which by definition because of the complexity of the executional requirements is going to be slow.

I think one way to think about it, Alex -- this is Juan -- you mentioned as you made your question, and then I think Javier has also addressed it. On the services front, there's pros and cons, and I always think about services and prepared food kind of together because these are the two things that we talk about the most.

These are things that are kind of sexy initiatives that we are working on, but there's some differences. In the case of the services, they are relatively easy and I quote/unquote, because obviously it's not easy, but at least you can do a big bang type of rollout across the country. You hear us say how when we get a new bank agreement with a new bank, immediately you go to any one of the 12,000 stores and make a deposit to that particular bank.

Or we talk about Saldazo, which again you are talking about 100,000 new plastics deployed every month. But there are lifecycles to those businesses, so it will give you for a few years. And then either because the market, other agents begin to replicate what you do or because technology has changed, it has a relatively short lifecycle and you have to keep innovating.

On the prepared food/coffee front, it is much harder to roll out and it takes a lot more time, and we have been talking about this for years. As you say, maybe this year we're going to open 200, 300, or enable 200, 300 stores, but it's a minute percentage of the overall base. But once you do it and you get it right, it has a much longer lifespan. Coffee has been a huge success and probably will continue to contribute to our numbers for many, many, many years.

So in that sense, I think there's some structural differences to these two initiatives or sets of initiatives, even though we talk about them kind of in the same breath.

Right, very helpful. Thanks for that. The second question then is just on thinking about the organic rates of growth that we see in the top line, and we appreciate you giving that to us. And I want to think about -- the question is really about that incremental sales, that non-OXXO sales bit.

If we do our math right, it seems that the non-OXXO sales were about MXN380 million in the second quarter. And then that compares -- that's about 15% down from what it was in the 2Q last year. I am wondering does that sound right? In other words, are your non-OXXO sales at top line coming down? And could that be that -- in the interim, you have had La Moderna and some acquisitions.

Have you been cutting down -- have you been kind of closing some of these newly acquired pharmacies such that to try to get kind of a good base on which to grow from, or have I kind of not captured this correctly?

Alex, it's Juan again. When you are looking at the organic numbers, you have to keep in mind that because of the dates when we closed the transactions, this quarter we are showing just one month of the drugstores versus last year. Quite frankly, I think last year we were not really opening the organic yet, right?

So you have to keep in mind that, and then a full quarter of Tota. So that's important on the revenue front. And then when you look at the margins and the operating income, I think back to Javier's comments from a few minutes ago, there is this situation with Dona Tota, which is kind of in a transitional period where there are one-time expenses being incurred as we bring it in in-house. And that's showing you then kind of a lower profitability with the new acquisitions. I think that's what you are seeing.

Okay, fair enough. I guess what I'm trying to get at here is that when we look year-on-year, same-store sales of the non-OXXO units, so Yza, Moderna, is the rate of same-store sales faster or slower than what would be just the traditional OXXO stores right now?

Well, drugstores by design are less subject to kind of the discretionary vagaries of how people are feeling and how confident they are. If you are sick, you are sick and you have to go get your medicine. So in that sense, they are more stable and they are doing fine.

On the restaurant front, as Javier said, because of the segments that this is aimed at, because it's heavily skewed to the north where people have been hit in their pockets more than elsewhere in the country, yes, it's very discretionary. Going for some gorditas is definitely a decision that you don't have to go there, as opposed to you have to get your cough medicine, right?

Okay, okay. I will follow up offline, but thanks very much. That's great.

Andrea Teixeira, JPMorgan.

Good morning, everyone, and thanks for taking the question. I just -- I'm sorry to go back to, I guess, the traffic and the margins at OXXO, but I guess first on traffic. It will be interesting to see some -- you saw in the World Cup likely a negative event, a negative impact over the dates that Mexico was playing. And I was wondering if you are seeing different trends now since it's over, and we are seeing traffic rebounding, independent of the initiatives that you are doing, of course, in the mix.

Then going back to the last earnings call, there was a lot of discussion also if you would be using -- if you would be buying more KOF or if not. So I wanted to review that. Also the discussion about margin, I understand obviously you have a lot of missing -- a lot of moving parts. But I was wondering if the OXXO margin itself is expanding and what are you seeing in terms of the newer stores, the maturation effects of the newer stores kind of playing out?

I am assuming, obviously, as every other business in Mexico had a huge deceleration, like if you are seeing anything getting better now, especially -- obviously, you accelerated store openings in the last quarter. But if you can tell us like what's happening with the newer stores, thank you.

On the correlation between traffic and behavior of promotional periods in which we were focusing on the world soccer cup and now the normality of not having such a big event, the traffic around the promotional activities as we did in World Cup soccer performed, I would say, in line with what we were expecting. And as I said in the beginning of my opening remarks, we have had a good program with our suppliers, which are leveraging that event, and I think that we did good. But there's nothing really fundamental different taking place in the absence of that.

And as I said, basically traffic has been pretty much steady on either stable or marginal declines in average for the last 6 quarter on average. So there is really nothing, not -- I couldn't signal or highlight something structurally different that it's taking place regarding traffic.

And in the margin side, again, looking at the nature of our retail business which has a huge component to fixed cost to run the stores and let's say a one digit margin at the bottom line; basically most of what you are looking at the changes on the margin at OXXO are due to again things like now consolidated businesses which have lower margin and opening of new stores which are not mature enough; and opening them in a significantly higher amount than we did in the same quarter last year.

So I will also highlight. So I think that goes well for management even in tough times being able to structurally, I would say, long-term being able to maintain the health of the business. And again, you are looking at a sum of different phenomena, some of those bringing new business, which offer great perspectives for free to grow, which are definitely other scale, other level of profitability.

But it's good to remember, it's only about a year since we have entered this business, and we already have more than 500 outlets and we are looking for having much many more going forward, both inorganically and organically. So I would highlight also as well on the margins of OXXO something that's taking place within the core of our business, we are looking at margins, Andrea.

I think I would add last quarter, the first quarter, we did not expand the margin at the operating level. And we explained part of that had to do with the changes to the tax code having to do with the VAT in the north. I think it's very encouraging that this second quarter, we go back to kind of a more normalized structure of our P&L at OXXO where you see expansion at the growth level in spite of the new taxes and then giving it back in the SG&A.

Certainly this quarter, we are giving more of it back than we would like, and we've talked about kind of the contribution of the new businesses and in particular the restaurant business in that phenomenon. The growth of stores and the associated expenses with faster growth, which I think is also kind of a structural positive that we are being able to flatten the curve and potentially increase the number of stores that we can open.

So I think that is encouraging that the margin behavior is kind of more going back to a more normal pattern. We have said that on kind of a medium to long-term range, our operating margin should be from stable to slightly expanding. And I think we are confident that that should continue to be the case.

Finally, you had made a question about buying more KOF shares. This is something that we have talked about, as you know, since we placed the bond a little over a year ago. It is definitely on the table in terms of, as I stated, a potential objective. Obviously, it competes with others in terms of investments that we are thinking that we could potentially make, so it may or may not happen and it's hard to really spectrally on timing or valuation on that front.

Then maybe the flexibility that the cash would (inaudible) you for M&A in drugstores. And perhaps -- we haven't discussed really like Super OXXO more recently. Is that something that you are still in the pilot at this point, or you would be willing now to move ahead and be more aggressive on the openings?

I think the pharmacy is working fine, and we have a plan to expand this at a certain pace. It is not again a huge -- you wouldn't be expecting a huge deployment of openings of the format. I think it is a format which is already profitable enough for us to really expand it, which is not the case for some other places such as Colombia which we have discussed in the past.

But it is a format that is serving a particular purpose well to serve some consumer occasions that we cannot really fulfill with the existing OXXO store, because basically of the space we have on a typical OXXO store. But it's a format that has proven that it works and we are expanding it, but I would qualify the rate of expansion as moderate still, Andrea.

Okay, great. Thanks, Javier and Juan.

Luca Cipiccia, Goldman Sachs.

Thanks for taking my questions. Just a couple of quick follow-ups. First, you discussed before how you have seen or you may see the performance of OXXO relative to the largest chains. But I was hoping you could shed some color as well on the trends you have been seeing relative to the Mom-and-Pops, considering the ongoing weakness in the market.

It wouldn't -- vis-a-vis those formats, how do you think that the OXXO performance is ticking up? If anything, has it surprised you since the beginning of the year with the impact of the taxes, the consumer slowdown, on how that segment in the retail space performed? So that would be my first question.

And then secondly, just very quickly on the drugstores on the organic versus acquisition dynamics. Just wondering, what does need to happen for you to accelerate in either direction on those channels, because we've seen some foreign operators also entering Mexico?

So I'm wondering whether that reduces the availability of potential assets that would be acquired on the one hand, but also should incentivize you to accelerate maybe that project or that plan that you mentioned earlier of using or consolidating the format into one and become more aggressive. So I'm just wondering what is missing for the step change or this acceleration to really materialize? Thank you.

On the first one, we have some select reference points and just for conventional wisdom, and we are pretty sure that Mom-and-Pops are suffering because of the nature of the format and the products, the product assortment they have. And, of course, not only the price dynamics of most of those products but also the consumer again. As we have said in the past, we are pretty competitive in the pricing of our products as compared with Mom-and-Pops.

So with those selected price references, reference points and just conventional wisdom, we are pretty sure that Mom-and-Pops are pretty much suffering. We think much more than we are in OXXO.

On the second part, to really expand in a much more larger way, we will be expanding maybe 90 to 100 drugstores this year, which again is a significantly higher pace than the independent change had before we acquired them. A couple of things need to happen is, again, we are refining the value form, the value proposition, the format itself. We have been testing formats in the past months with very successful results.

We are in that process and we need to feel very comfortable to change the way we are now opening stores to then go to a higher pace of expansion. We are preparing ourselves to, in adjacent territories with leveraging the expansion organizations of OXXO, to leverage on those to really help us to grow the numbers of drugstores in the next two to three years in a significantly different way than the one we have had in the first year of operational -- of the newly acquired chains.

And on the inorganic, basically what it requires to your question, it's a meeting of the mind of willing sellers and willing buyers. And we are basically now, as part of the industry, talking to a number of people. We are exploring a number of opportunities. We are engaging in a number of processes. And again, whenever we get to a point in which we feel potential shareholders make sense to put proposals on the table that hopefully might be also attractive for willing sellers, that would represent -- I wouldn't call it an inflection point, but I would say that would represent a newly acquired regional chain, hopefully, in Mexico for the coming months and years.

We've said since the beginning, we are the new guys in town. Now, there is a newer guy in town or he is soon to be arrived. And, of course, he is starting from a larger position with quite a different value proposition, because of not only the size of the stores because also because of the beliefs and capabilities that he is bringing to the Mexican market.

I think that we will continue to play our game and we will look at how new entrants play theirs. So those would be my comments.

Just very quickly on this point, is there anything that already from either -- from distribution centers, from purchasing level, is there anything that is already being shared between the new businesses and OXXO? Is that something that will all really start once you have a different type of critical mass?

No, it has already started. Basically, they started since day one, I will tell you. Basically, the products that the drugstores already sold, which we had more of larger scale and purchasing power, those things were done very, very quickly. And also the purchasing power in prescription drugs and over-the-counter drugs, again, we had a couple of different operations being run independently, and now we have also an organization that takes care of that.

So we have also been getting a little bit better conditions because of our increased scale. So those are the things that I think we started to work day one, and we continue to do so because this is a never-ending story. But those were kind of the low-hanging fruits opportunities that we were very, very fast at getting them.

Thank you. Thank you very much.

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

Thank you just very much for your participation today, and have a great weekend. See you on October, or talk to you in October. 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.