Fomento Economico Mexicano SAB de CV (FMX) 2014 Q3 法說會逐字稿

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

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

At this time, I would now like to turn the conference over to Javier Astaburuaga Sanjines, Chief Financial Officer. Please go ahead, sir.

Thank you. Thank you and good morning, everyone. Welcome to FEMSA's third quarter 2014 results conference call. Juan Fonseca from FEMSA and [Rafael Fernandez] from KOF are with us today, as well.

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

As you know, given our broad presence in Mexico and the fact that our consumer base cuts across segments and across geographies, we're usually seen as a good bet bad weather for the Mexican consumer. In that capacity, our third quarter data seen does not provide enough evidence for decisive improvement in consumer dynamics.

The consumer is still having to allocate his or her dual disposable income across categories and making decisions of where to maintain consumption, where to trade down and where even to reduce or eliminate a purchase.

We are also feeling the pressure from increased taxation and slow economic growth. And we must remember that some of the new excise taxes impacted our businesses directly as in the case of soft drinks and some indirectly as with calorie-dense products sold in our stores in addition to the higher VAT levels across the key border regions. So, our performance should be analyzed keeping that in mind.

Having said that, our results in Mexico are encouraging. At FEMSA Comercio, we saw a modest improvement in same-store sales growth in spite of lingering pressure from the telephony category, particularly relative to industry growth as well as healthy profitability.

At Coca-Cola FEMSA, we continue to implement pricing and packaging strategies that drove revenues and partially offset the negative pressure from the new taxes together with generally the nice raw material environment and our continued emphasis on efficiency and cost containment.

In terms of the macroeconomic environment in our main markets, conditions remain sluggish still for the most part. In Mexico, we continue to see encouraging indicators like growing manufacturing activity and remittances. However, GDP growth is still low and inflation has picked up recently.

In Brazil, the main concerns continue to be low GDP growth and consumer sentiment as well as this combined with stubborn inflation. With challenging conditions in Venezuela and Argentina, Colombia stands out as the one key market that is showing healthy GDP growth.

And now, moving on to our consolidated results -- during the third quarter, total revenues increased 13% and income from operations increased 16%. On an organic basis, excluding the integration of the beverage operations of Fluminense and Spaipa as well as restaurant operations of Dona Tota, total revenues increased by 8% and income from operations increased 11%.

For the third quarter, the line labeled participation Heineken results represents FEMSA's 20% participation in Heineken's third quarter net income which was reported in Wednesday and we're using the average exchange rate for the euro during the third quarter.

Our net income for the quarter increased 10% mainly as a result of the growth in our income from operations combined with the lower income tax rate that compensated higher financial expenses related to bonds issued recently by Coca-Cola FEMSA. And in terms of our cash position, during the third quarter we went from having a consolidated net debt position of MXN39 billion at the end of June to now a net debt position of just under MXN36 billion at the end of September, reflecting cash generation of both our core businesses.

Moving now to discuss our operations beginning with FEMSA Comercio, we opened 191 new stores in the third quarter. This number is in line with the comparable figure for 2013 and if we look at the first nine months of the year, we're on track to deliver more than 1,000 net openings this year as we anticipated.

Revenues increased 13% during the quarter and on an organic basis, excluding the acquisition of Dona Tota, they increased 12%. Same-store sales were up 3.1%. And when we break the number down, we see that the increase was driven by our average ticket while traffic contracted slightly. These trends are directionally consistent with what we have seen for some time now for the sustained decline in telephony continues to pressure traffic.

For the third quarter, gross margin expanded 90 basis points. And let me spend a minute on this. During the summer, we saw certain key suppliers materially increase their marketing programs on promotional activity with the corresponding commercial income accrued to us. We believe the timing of some of this activity was brought forward by our suppliers as these resources would normally have been deployed later in the year.

This fits well with our long-term efforts to smoothen the core of commercial income throughout the year as opposed to having a very steep pickup in the fourth quarter. As we stand today, nine months into the year, we are showing a healthy gross margin expansion of 40 basis points.

During the third quarter, certain expenses increased slightly ahead of revenues driven by the strong growth in new stores, the continued rollout of new initiatives as well as the integration of Dona Tota. In spite of this, operating margin expanded by 30 basis points.

So, as we stand today, a couple of months from wrapping up the year, we are a little bit more optimistic after what was by all accounts an encouraging quarter for FEMSA Comercio. We do not see anything major happening between now and the end of the year so we will probably finish 2014 more or less in line with the current trends. But as I said before, we are more optimistic about 2015 in light hopefully of a better outlook for economic growth in Mexico and once the disruptive new taxes and related price increases are in the base.

Moving on briefly to Coca-Cola FEMSA, total revenues grew 11% and organically they increased almost 3% during the third quarter. As you know, in Mexico price increases were taken during the first half of the year in order to offset the new excise tax as well as inflation. Volumes were already stable in the third quarter as it seems that consumers have adjusted their budget to adapt to these new taxes which is encouraging evidence of the strength of our brand and the skill of our operators.

The combination of these good pricing and the more raw material environment allowed our products to slightly improve profitability in Mexico. Meanwhile in South America, we again saw a challenging operational environment in several markets such as Brazil and Argentina. Putting it all together, consolidated income from operations of Coca-Cola FEMSA increased 15% and 8% on an organic basis.

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.

And so, while we are in the final stretch of a complicated year, we recognize that every year brings a combination of challenges and opportunities. I think that I speak for many of my colleagues when I say that 2014 has had more challenges that opportunities. And yet, we are on track to deliver annual results that are better than we expected a year ago when we were putting together our budgets. So, our colleagues our doing a tremendous job this year as they tend to do and things are looking a bit better now.

And as we approach the finish line for this year, there are reasons to be optimistic as the outlook for 2015 looks more promising, particularly Mexico, and hopefully with a better balance of challenges and opportunities.

And so, with that, we can now open the call for your questions. Operator, please?

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

And your first question comes from the line of Robert Ford with Bank of America.

Hey, thank you, and good day, everybody. Have you had -- I was hoping you could expand a little bit on the third quarter gross margin improvement. Particularly as you mentioned in light of the impact of telephony, which was margin enhancing as well as foot traffic enhancing, if I'm not mistaken, are you seeing -- anecdotally, it feels like we're seeing promotions grow generally, no? And I'm not convinced that this is simply just a pulling forward of some of that calendar.

Could you comment a little bit on exclusivity agreements or the interest in exclusivity agreements, slotting fees, and maybe the promotional calendar as it looks to you right now for the end of the year, please?

So, hi. As I said in the opening remarks, we saw an increase in the promotional activity in a number of categories. And that's at least partially explaining the expansion of the gross margin of the quarter.

I think that if you look at the accumulated to nine months, it's a much better figure to look at when looking at the trend for the year, as I said, as well. And again, we are -- if you mean by the exclusivity concept, the position that we took at the process we're implementing in expanding the number of stores that now carry a full line of carbonated soft drinks and non-carbonated as well from different suppliers in Mexico, that is also helping in the short-term a little bit on the margin expansion because of the mix of products now being, let's say, wider and richer.

But I wouldn't say that that's necessarily driving the performance on the quarter. It's much more driven by again both commercial promotional activity by a number of suppliers in some categories which I would say were a little bit more skewed towards the end of the year than some others. So, that's basically the explanation that I can provide on that.

Is there any change in your mix with respect to -- I'm sorry, Juan.

No, I was just --

With respect to prepared --

I was just going to say that I think suppliers -- when you have a channel or a retailer that is growing a little bit better than others or better than most, I think they tend to increase the allocation of resources that go to that particular supplier. And I think that may be at play here, as well.

Okay -- no, that's helpful. And is there anything different in terms of the mix, in terms of prepared food versus the shelf stable stuff or is there any categories in particular which represent a disproportionate share of that margin improvement?

No, not on much. That category is not necessarily moving the needle yet. It's making progress but still the size of it within the whole mix, it doesn't really allow really to create a big impact on the full numbers of the Company, Bob.

Thank you both very much.

Thank you. And your next question is from Antonio Gonzalez from Credit Suisse.

Hi, good morning, Javier and Juan. Just a quick follow-up on the previous question. Do you think the fourth quarter, then, is going to see some sort of moderation in the gross margin?

And then I wanted to ask very quickly two things first. Can you give us a little bit more color on why CapEx is down the OXXO level roughly 6%? I don't know if you're lapping any particular initiative from last year that was non-recurring and whether -- because obviously the store openings has not declined. And whether you're seeing trend for the last nine months as a more sustainable trend going forward or should it pick up again?

And then just finally, I wanted to ask whether you can give us any sense, at least qualitatively, on a same-store sales breakdown. Have you seen the categories that have had higher excise taxes this year significantly underperform the other categories? Or is it pretty much an impact that you saw across the board throughout the year in terms of same-store sales pre category? Thank you so much.

Sure, Antonio. Good morning. First -- on the first one, as I explained, looking at the full first nine months, it's a much better way to look at kind of how the business is trending. And just to keep everybody in mind, remembering fourth quarter of 2013 being a very, very strong quarter because of a number of reasons, but partially because of the way, again, the promotional calendar was developed through last year, if you remember we grew more than 20% and expanded more than 100 basis points margins in the fourth quarter last year. So, we're going to have a very challenging base for this quarter in which we are currently operating. So, that would be my comment on your first question.

And the second one, 6% down -- you're right. I would say there's not really a fundamental change in the structure or the magnitude of the CapEx program. We are going to be I would say pretty much in line with the numbers we anticipated at the beginning of the year, maybe slightly down. So, I wouldn't expect nor a major change on the upside or on the downside compared to the amount of CapEx that we said we're going to be investing in 2014 in FEMSA Comercio.

And in the third question, there's definitely a higher impact in those categories which are heavily impacted by the taxes. The carbonated soft drinks category has particularly shown a very, very strong resiliency; some others have suffered more. But even though we are seeing let's say declines in a number of categories, the decline is more -- is higher in those categories which were impacted by taxes and somehow those taxes were transferred to consumers through pricing. So, that's pretty much what we're seeing happening, Antonio.

Excellent. Thank you, Javier.

Thank you.

And your next question comes from Alan Alanis from UBS.

Thank you so much. Good morning, Javier, Juan; hola. Quick question -- why is the ticket still growing at a slower pace than inflation, Javier? And if you can also give us an update on the [Saldazo] -- the banking accounts that you've been opening at the OXXO and if it has had any impact on the numbers?

And the third and last question would be any of the integration of pharmacies and how are you planning on integrating the pharmacies into the overall OXXO chain?

Sure. Hi, Alan, good talking to you. On the first one, I think it has a lot to do with in some categories, we're seeing some trading down; that's one explanation, not necessarily the largest one.

Okay.

And the second part, we are also -- as we keep on expanding the number of stores, particularly in some cities, we're seeing also people going -- and again, you are looking at the national average traffic numbers and the national ticket. So, we have very different phenomena in different cities and cities in which we have a very high density compared now with the U.S. with around one store per 2,000, 2,500 consumers. We're looking people that are going more frequently to the stores and that reduces the average ticket.

And if you look at the numbers, we're not necessarily on the ticket significantly below inflation. So, all in all, I would say those are the main drivers we're seeing on the average ticket numbers. And I think I've already said that traffic is more impacted by this phenomena of minutes on the air time are now being more cheaper and people are not having to go to the store to recharge their phones as frequently as they did in the past.

And on the last question on the integration of pharma -- and I will let Juan talk a little bit more about Saldazo. But integration of pharma, we are still very happy with our efforts. I think 2015 is going to be a critical year in the sense that we will be finalizing and start to redeploy what we call our operating business model supported by a strong backbone on the IP platform that we are working very hard to put together.

We will also be working and keep on fine tuning the value proposition that we have been testing during the year, testing different sizes and different layouts and offerings. And we are very, very enthusiastic about results so far. And as well, we will start facing this dilemma of continually having banners based on the regional chains we have been buying or trying to start develop a transition period into a kind of either one multi-banner or at least a banner that really communicates in a much better way to consumers what our value proposition is all about.

So, we have a lot of things ahead of us. As we've said in the past, we will continue also to look at growing the business through a combination of both inorganic and organic strategy and we feel very good about the way we have been able to both acquire and integrate these businesses and our people are making a lot of progress in bringing some of the strength that also has around processes, culture, purchases of course and management processes to the deal with the operations.

So, all in all, I would say that we are investing a lot behind people and infrastructure also, as well. So, we are -- I would say that preparing this business for a number of hopefully high growth and good profitability years to come, Alan.

Got it. That's clear, thank you.

This is Juan, hi. On the subject of Saldazo, just to give you an update, I think it continues to be an unqualified success in terms of the metrics that we can track at this point. In other words, the number of plastics that have been rolled out, we are up to a million plastics. So --

Okay.

Consistent with --

How many months, Juan?

Ten months, so that's 100,000 per month. Yes, I know.

Okay.

It's a remarkable number and I think also the percentage of people that have the plastic that are actively using it is something like twice as high as the industry norm. So, remembering that this is for the most -- this is the first packing relationship for most of the users of this product. So, in a way, this is kind of unchartered territory.

I guess we also need to kind of temper expectations in the sense that this is supposed to be -- I mean, one of the largest benefit that we expect to get from this is in the form of data. And obviously we're getting troves of data and it takes a while to develop the capabilities to mine it and to convert it into bundles and promotions and things that you can really monetize.

As you know, there are a few fees -- there are some. We don't make a lot of money from fees from the product; it's really about kind of generating the traffic, the loyalty and then the data. And then you can really monetize this by tailoring promotional activity to your particular consumer.

So, again, I think off to a great start. The numbers are pretty remarkable and we don't see any slowdown yet. So, we expect the numbers to get significantly bigger.

Good. One million banking accounts in 10 months, no? Congratulations. Thank you.

Thank you, Alan.

Thank you.

Your next question comes from the line of [Alex Roberts] from Citi.

Hi, thanks. Two questions -- really wanted to start out with traffic at OXXO. And it relates to this idea of the new normal level of traffic growth. And I guess you've made -- you've given us a heads up about fourth quarter which is a valid point.

And so, if we assume that traffic is similar to recent quarter levels, you'd basically complete eight consecutive quarters with flat to minus 1% traffic growth. Now, the previous seven, eight quarters, you were running traffic between 2.5% and 5%. So, I guess as we think about 2015 and I think it's safe to assume that you'll have a benefit of lapping year one at fiscal reform and secondly you're expecting more traction from the banking services.

But do you think we could contemplate and what do you have in your kind of -- in your budget for next year -- is a range of traffic? And do you think it's fair to assume that we get back up into low single digits next year? So, that's question one.

And then question two is just on cash deployment. If you could comment a little bit on some of the ideas that you've been contemplating -- cost share buyback, acquisitions in the pharma -- that would be great. Thanks very much.

Sure, Alex, hi. On the traffic, you're absolutely right. If you look at the past performance, it's been a very tough 2013 and 2014. But if you just do the math quickly as well, just looking at the gap between the pace at which the economy was growing before 2013 and the barely one-point-something average of these two couple of years, I think you will find in that gap a big part of the explanation of how the performance in general of retail and particularly in US which we continue to outnumber the industry, I think you find a lot there.

Soft mix on the consumer is here and it's been here for a long time -- basically all past year and this one. Hopefully what we're seeing is a sign of a much better future. It is very hard to put numbers going forward on traffic.

What we know and we have to do is to continue evolving our value proposition to fine tune our promotional activities, to communicate better with consumers. We are able to hopefully capture more of their consumer needs and we're better than satisfying those than anybody else in the retail landscape in Mexico which is evidently a moving target because all retailers are basically trying to do the same. So, that would be my comment on the traffic performance going backwards and going forward.

And regarding the capital redeployment, I would say that nothing has changed on what we've been communicating in the past in the sense that we are constantly and actively looking for opportunities. I already mentioned that looking at pharmacy space is something that we will continue to do in time. And we continue to feel good about what's going on in pharmacy in Mexico. Of course, as we are doing that, we hope there will be a time in which we will most likely look outside of Mexico, as well.

Same thing with the fast food. We're starting here in Mexico but the intention in the medium, long-term is hopefully to complement through a number of banners and hopefully looking outside to some other geographies.

I've already said in the past also that we are interested and I would say enthusiastic as well in some -- in finding some opportunities around our logistic business which is a very, very small business by any means looking at Coca-Cola FEMSA and FEMSA Comercio, but that it's also a business in which we have already a very nice footprint, a very good line of services and that we think we can find some opportunities to continue to grow both organically and inorganically. And in that regard, you know that we made an acquisition last year in Brazil which is going tremendously well.

And so, I would say that we will continue to look at opportunities in the Coca-Cola FEMSA space throughout the region and we will keep on monitoring very, very closely the developments of the USA refranchising process, as well. As we've said in the past, that's a market which is very close to us and that might fit well to our capabilities and it'll be just a function of what the Coca-Cola Company decides on how to move on that refranchising process.

So, I think we have a number of potential opportunities that, as I said, we will continue to look very actively and proactively in order to try to, again, find the opportunities to redeploy some of the capital we have at hand and to use the financial flexibility that we now have as a company.

Alex, I'd like to add one thing on the traffic question. I think we cannot say enough about the impact over time of telephony, to complement what Javier said. I mean, if you look at the time series, if you look before 2013, there were a number of years where our numbers were significantly aided by telephony. They were -- as the big telcos were providing these, electronic top-ups become commonplace and smaller and smaller increments and people could just come into the store and do MXN20 and MXN30 and MXN50 top-ups. It clearly made the numbers look very, very good and it helped us a lot.

And now I think we are in the opposite of that. I mean, as the prices of the minutes have come down and the consumers have continued to move into more of a data as opposed to voice usage and this is pushing them into more postpaid plans as opposed to prepaid, which used to be the norm. So, right now, our numbers are looking worse than they really would be without telephony. So, if we could strip out telephony out of the last four or five years of data, which of course internally we can, you would see less of a sign wave, if you will, of how the traffic has performed.

So, this question -- when you talk about a new normal, I don't think the numbers today represent the new normal. I think telephony -- the negative drag on our numbers is increasingly lower because it's a smaller base and it's a smaller percentage. So, we're not out of that impact yet.

But as you correctly pointed out, I mean, financial services, we're now in the upturn on those. I mentioned the million plastics that we rolled out and now we are taking deposits from Banorte customers. And so, that's clearly still in a very positive part of the sign wave. There may be a time when that becomes less important and then something else will become important. So, just to again highlight the impact of telephony and the fact that it is making our numbers look worse than they otherwise would.

Got it. No, that's very helpful indeed. But just to kind of clarify, I noticed in your laundry list of cash deployment options that the KOF shares were not mentioned. But is it safe to assume that that is one of the several initiatives, I mean, buying back some KOF shares? Does that remain still in that kind of general list of potential opportunities? Sorry.

Yes, it does. It's been on the list and it still is on the list. And I think it will continue to be on the list of potential uses of cash from the FEMSA perspective, Alex.

Got it, okay. Thank you.

Thank you.

And your next question comes from the line of [Andrea Tochera] from JPMorgan.

Hi, good morning everyone there, Javier, [Marx], Juan. Just what -- I mean, I was confused with Javier's comments on the US refranchising. I guess, I mean the Coca-Cola Company that are, you know, they have been very vocal about the way they might take on. And I wanted to see what would be the conditions that would make you interested.

I mean, I hear a lot of obviously some pushback on the fountain business and also some separation of production and distribution. And if that decision would be more of a lack of opportunity in LatAm given that a lot has been done already or what -- if you can kind of walk us through the rationale or ways that would make this attractive for you, I would appreciate.

Sure, Andrea. First on the relative attractiveness of the US against any other thing in Latin America I would say that we will look at any opportunity on its own merits. I would say that of course every opportunity is different.

I mean, sometimes the attractiveness of a potential opportunity is more related to an easier integration or a more business-as-usual kind of modeling. But sometimes it's mostly driven by potential value creation going forward which sometimes has a lot to do more with turnarounds maybe such as one in the Philippines, for example.

The case in the US, I would say that the main element that we will be looking is a clear alignment with the Coca-Cola Company in the objectives that are being pursued and in the relationship model that will be established and the scope of the activities that the Coca-Cola Company would look for a bottler to perform in the US. And I think that's still something which is being refined by the Company.

So, we will -- I would say more than anything else, we'll be interested in finding opportunities in which we have a clear alignment with the Coca-Cola Company or partner and in which we think and they also believe that we can bring value to the table based on what we know how to do well. So, I would say those would be the guiding principles of any exploration that we might do or not going forward on the US potential opportunity, Andrea.

Okay, but you're still looking a lot?

Of course, of course. We live and breathe here every single day and we know the place and we think we can bring a lot of value to the table to a number of our colleagues in the system in Latin America. And we will continue to pursue any opportunities that make sense in Latin America.

Yes. And last thing about the margins. And I appreciate your comment, Juan, you said obviously the fourth quarter of last year, you had a tremendous job -- a tremendous expansion on the gross margin. So, now you have a tough comp.

But is there anything that has changed most recently -- I would say we've been hearing from the CEOs of the other companies that there has been a down-trading happening. I shouldn't say down trade -- but you know, like a shift into private labels and obviously you benefit from that on the margin front.

So, some of these -- when you say negotiate supplies, is some of that also that your mix is going to more private labels and then therefore there is still a little bit more room going forward? Or that's wishful thinking? If you can help us try to estimate.

Sure. I wouldn't say -- there might be some other retail formats that have been experiencing that. But it is not necessarily the case in our business. What I said also in some other question a little bit of down trading -- we've seen that a little bit in some categories. But I would say the general trend is more skewed to either less frequency of purchase or smaller sizes. And I think suppliers have been good in reacting precisely to that.

So, some cases which seem basically people looking to keep pricing but make packages a little bit smaller -- and I think that's I would say the more common trend we're seeing, at least in our stores; not necessarily the one that some other retailers are seeing in terms of down trading into private label offerings, Andrea.

Sure, okay --

I think I would also add. I mean, if you look at some of the important categories like snacks and beverages, also has a number of different alternatives with different price points. So, there is the possibility that you move from one brand to another without getting necessarily to the private label which is normally the lowest price point of all. But for the most part, as Javier said, this has had to do with other people's products.

Yes, no, absolutely. You would see that in your tickets if that would be like too much of a big movement, right? But it doesn't seem it is. But I appreciate your comments. Thank you very much, both.

Thank you for your question, Andrea.

And your next question comes from the line of Luca Cipiccia from Goldman Sachs.

Hi, good morning. Thanks for taking my question. I have a quick follow-up on the capital allocation discussion. Just to understand, given what was mentioned about Coke FEMSA, what was mentioned about the refranchising in the US and that debate, how should we frame that in relation to the Heineken lockup coming up next year in the sense that should we assume that on this front, everything -- anything may be pending until there is clarity or there is a decision on how that situation may resolve? So, that's my first question.

And the second is assuming that you may liberate once or different stages a significant capital firepower, with the comment that you made and with the type of trends that we see in Mexico, would you rather reinvest or reallocate that capital to participate more broadly in Mexico or rather you will see more a -- you will continue to see more of a preference to put that capital to play outside of Mexico?

Hi, Luca. Yes, on the first one, we're still maintaining our position that we need and we will continue to look at our investment in Heineken by sole merits. As you well pointed out, the lockup will basically extinguish itself fully by April next year. But it has started to extinguish gradually since a number of months. And that is just I would say a thing that was built into the contract when we made that transaction that we knew was going to happen and we're basically now in the middle of it and very close to the finish or the expiration of the lockup.

So, we don't tend to say -- to connect necessarily the decisions regarding a potential continuation or divestment of the Heineken shares in connection strictly with potential business opportunities. We have said that; we have the obligation and we will continue to comply with that obligation to look at the perspectives of that investment by its own merits. And of course to continue looking for opportunities which we might find more or not more attractive than continue being a long-term investor in Heineken, which is the way we tend to still look up to ourselves. So, that's on the first one.

And on the second one, if you look at the profile of the Company, we have got to I would say get to a point in which the profile of the Company is I would say well-diversified in terms of industries and geographies. If you take into account the whole let's say market value of the Company by its different components, we have a nice split between carbonated soft drinks, retail and beer. And if you look at that from the geographical point of view, we're now exposed to a little bit less than the value of the Company coming from Mexico and the rest coming from both South America and the rest of the world through our Heineken investment.

So, in that regard, I think the profile looks good. Depending on, again, what you do in terms of how you're going to fund growth if through the balance sheet or through the potential, partial or total divestment of some of the assets we now have, then that question will come in the sense of where would we like to invest more, if in Mexico or someplace else. In that regard, I think that we are very knowledgeable.

We feel good about having a profile which is much more inclined to growth in emerging markets; this is our turf. We know how to deal with things and grow businesses here. But also, we are I would say a company which, by definition, is I would say expanding on different business characteristics. And so, we will continue to look at opportunities.

When I mentioned the US through the eyes of a potential refranchising process of Coca-Cola bottling system there, that's only one example at which we can maybe look north and look for potential opportunities in the US. And I would say that still the Americas as a place is our first priority. But as we've said in the past, as well, we didn't go to Philippines almost a couple of years ago to basically stay there. We've think the Philippines offers us a very, very big window to the rest of Asia.

If you look at the model that we have been following in some of the countries in Latin America after we have the expanding of the Coca-Cola FEMSA operations, then retail has come a little bit behind with also -- particularly in Colombia but also FEMSA Logistica and our commercial refrigeration operations also have now presence in three different countries in South America. And we think that also Asia offers a lot of opportunities for us I would say in the proper time and when we're feeling good about being ready to tap those opportunities going forward.

So, we don't have I would say a strict view that we don't want to invest anymore in Mexico. I would say that the prospects for the country with a number of reforms that have been done in the past 18 months are very, very good. We feel good about this and I think it'll be a function of where the opportunities present as opposed necessarily to what we would like exactly to do and follow a very strict game plan in terms of capital allocation from a geographic standpoint of view. So, that would be my comment, Luca.

Perfect, thank you.

Thank you.

And your last question comes from Jose Yordan.

Hi, good afternoon, everyone. Javier, in the last conference call, you were I think among the most cautious or let's say negative on the current economic or the current operating environment of all the CFOs that we heard in the conference calls. And you were somewhat prophetic at the time, I guess.

What we're hearing this time around is much more doom from your competitors and a bit of a change in enthusiasm from you. And I guess I was more curious to explore kind of where that stems from -- if it's really from the new macro data you've gotten in the last three months or internal things that you see sort of a light at the end of the tunnel. Any color you can give us here in terms of where the business is going would be great.

Sure, [Pepe]. I reflect a lot on what has happened in the past couple of years in Mexico. And again, I'm not bringing to the picture what's going on with the oil price these days still because I hope that things will get back not necessarily to the way they were before but not necessarily stay at the level at which they are today.

But I think that a number of things for the long term in Mexico have been done in the very right way. But still, in the short term, there was a lot of pain to be dealt with, particularly from the consumer standpoint of view. I think that it took all of us, both suppliers and retailers in Mexico, to adapt to these new phenomena.

We were most of the time thinking, well, things are going to improve; and things were not improving as fast as we were expecting in the past. I didn't try really to be negative on the last call. I, as you said well, I tried to be cautious.

I think things, as I said in my opening remarks now, improved a little bit. But again, we have a tough quarter because we had a very, very successful fourth quarter last year. So, we're going to have to compete in a way with that set of numbers we put up there at the end of last year.

But looking into 2015, hopefully I would say some of the phenomena that created the sluggishness in the economy and the consumer sentiment, we start to leave them behind. And some of the things that the government has put a lot of effort in putting in place start to work and pay off for in general all Mexicans.

And if you just look again at the phenomena on the construction sector and the impact of the taxes and I would say a number of things that we experienced through the last year and a half, I'm a little bit optimistic in 2015 in general. But again, for me being a little bit optimistic is already a compliment because as you know me, I tend to be more on the cautious side most of the time. And I don't think that's a bad thing when you have the role that you have in this Company as I do.

So, hopefully I don't sound neither too optimistic or pessimistic. But hopefully I can explain myself well in the sense of how I feel. Hopefully 2015 is a much better year than the last two and 2013.

Hi, Jose. This is Juan. I would add one thing. I think of all the consumer companies that you talk to, very few, maybe none were directly exposed to the tax changes at the beginning of the year. I mean --

Right.

I've said this a thousand times. If you look at obviously Coke FEMSA but also the 50%-ish mix of the sales of OXXO that are exposed to the beverage or the calorie-dense taxes and the VAT and the border were maybe 20% of OXXO's revenues. So, consumers in that region also having to account for the higher VAT in everything that they buy.

So, I think part of what also happened in the second quarter is we were really in the middle of this year where we were facing this adversity on every front. And now we are basically two months away from having all this be part of the base. So, obviously being optimistic just because you're going to have easier comps is not necessarily the highest quality growth that you can get, but it's growth, right?

And so, at the end of the day, we will lap a very hard first half of the year. And just like it was probably tougher for us than anybody else this year, we'll probably get a bit of a break better than other folks next year, just because of the changing in the comp base.

Sure, sure. And the reason I ask is that in some other retail conference calls, we heard some people begin to say recovery in mid-2015 as opposed to earlier in the year; so, that seems to be a tendency to push back the recovery. But I get it that you were punched harder and that perhaps you're starting to feel like it's still a gradual recovery like you mentioned several times in the last call but that you've been through the worst and that from now on it's an upward path. So, very clear on both ends. Thanks.

Thank you, Jose. Thank you and thank you all for your participation today. Have a great rest of the week and see you next time. Bye.

Bye.

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