Fomento Economico Mexicano SAB de CV (FMX) 2015 Q2 法說會逐字稿

Please stand by. We're about to begin. Good afternoon, and welcome, everyone, to FEMSA's second quarter 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the presentation, there will be a question-and-answer session.

During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the Company.

These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the Company's actual performance.

At this time, I will now turn the conference over to Daniel Rodriguez, FEMSA's Chief Financial Officer. Please go ahead, sir.

Thank you very much. Good afternoon, everyone, and welcome to FEMSA's second quarter results conference call. Juan Fonseca and Roland Karig are also with us today.

As usual, we will focus the call on the consolidated figures for FEMSA and on FEMSA Comercio's results since 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.

Beginning as we always do by commenting on the consumer environment in Mexico, the news is encouraging. While we would not say that the consumer is totally confident or that we are finally out of the woods, there is no question that the data at least as reflected and also same-store sales continue to gradually improved and have now reached levels consistent with our long-term expectations.

Certainly, the data is still benefiting from easy comparables. So, we must keep that in mind. But, it also -- but it is also clear that the macro drivers, such as dollar remittances and manufacturing activity, are still supportive.

However, beyond Mexico, in Brazil, consumer sentiment and the macro backdrop remain challenging, and we are still facing an adverse foreign exchange environment across several of Coca-Cola FEMSA's markets that in turn puts pressure on their margins.

Staying for a moment on the subject of foreign exchange, as you know, Coca-Cola FEMSA is using the SIMADI exchange rate to translate the results of its operation in Venezuela. This rate was VEF197 per dollar for the second quarter of 2015 compared to the SICAD rate of VEF10.6 per dollar using the comparable period of 2014.

As was the case in the first quarter, while this goes a long way in eliminating the uncertainty surrounding the contribution and valuation of the Venezuelan operations, both at Coca-Cola FEMSA and FEMSA levels, the impact on the number is again significant.

Also, before jumping into the actual results, it is important to note that FEMSA Comercio's consolidated numbers now include the full second quarter of the results of our OXXO gas service stations, which reached a total of 249 units at the end of June.

As we have stated before, this is a business with less margins but high returns and attractive growth potential.

Moving on to discuss our consolidated quarterly numbers, total revenues during the second quarter increased 5.9%. And income from operation increased 4.7%.

On an organic basis, that is excluding the results of the OXXO gas business and one month of our newest drug store banner Farmacon, total revenues decreased 1.2%, and income from operations increased 4.4%. As we mentioned before, these consolidated numbers reflect a significant impact from Venezuela.

For the second 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 April using the average exchange rate for the euro during the second quarter and excluding the extraordinary gain booked from the sale of Heineken's packaging business in Mexico.

Staying on the subject of net income, we see that it increased 18.7% in the second quarter. As we explained in our press release, this reflects lower financing expenses and an increase in FEMSA's reported 20% participation in Heineken's results for Q1 2015.

Our effective tax rate was 33.6% for the quarter, within the expected range.

In terms of our consolidated net debt position, during the second quarter, it remained virtually flat at MXN48.6 billion at the end of June.

Moving on to discuss our operations and beginning with FEMSA Comercio, we opened 258 net new OXXO stores during the second quarter. This number faced a tough comparison, and it came in slightly below last year's number. However, we continued to ramp at a pace of more than 1,000 openings in the last 12 months, in line with our objective.

In terms of the newer format, during the quarter, we added 17 gas stations, while the recently closed acquisition of Farmacon helped us add 215 drug stores to our portfolio during the period.

Revenues increased 31.4%. Excluding OXXO gas and one month of Farmacon, revenues increased 13.5%. OXXO same-store sales were up 5.3%, reflecting a healthy mix of 4.2% growth in average ticket and 1.1% in growth in store traffic, as the sustained strength of our services category increasingly offsets the weakness in telephony.

For the quarter, gross margin contracted 420 basis points, largely driven by the inclusion of OXXO gas into FEMSA Comercio's numbers. Excluding OXXO gas, gross margin would have expanded by 30 basis points, reflecting healthy mix and commercial income trends at the underlying retail operation.

In terms of operating margin, this quarter, FEMSA Comercio posted a contraction of 60 basis points. Again, excluding OXXO gas, operating margin would have expanded by 50 basis points, reflecting better operating leverage at OXXO as well as solid expense control and lower electricity targets that continue to help us.

Moving on briefly to Coca-Cola FEMSA, total revenues decreased 11.8%. But, on a currency neutral basis and excluding Venezuela, they grew 8.3% during the second quarter.

As was the case in the first quarter, Coca-Cola FEMSA achieved market share and profitability gains in most of its markets. Favorable raw material dynamics and strict expense control more than offset pressures from generally weaker exchange rates, resulting in a solid set of numbers once we isolate the impact from Venezuela.

While we undoubtedly faced some challenging operating environments, including Brazil, our colleagues at Coca-Cola FEMSA are making great use of the tools at their disposal, such as pricing are portfolio strategy, which are allowing them to deliver strong results under very difficult conditions.

If you were unable to participate in Coke FEMSA's conference call earlier today, you can access our replay of their Webcast for additional details on their results.

Looking forward, our view continues to be constructive and exciting. FEMSA Comercio continues to strength its competitive position in a Mexican market that keeps gaining its footing, while it makes progress in the development of incremental growth avenues in pharmacies and gasoline stations.

And Coca-Cola FEMSA keeps making strides as it helps itself by streamlining its operating structure, focusing on driving transaction across geographies and increasing market share as it waits for the consumer environment in some of its key markets to improve.

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

(Operator Instructions). Bob Ford, Merrill Lynch.

Hey, good afternoon, everybody, and congratulations on the quarter. Daniel, I had a question on gas, which has multiple parts. So, excuse me, but it's my way of getting around the limit. But, I was curious if you could give us your same-store sales for gas.

And then with respect to the additions of the new stations, I was curious with respect to the geography, maybe some general terms, whether these are leased or acquired or purchased, and if so, kind of the CapEx that's involved, whether it's to acquire or to upgrade them.

And then there was just a little bit of administrative expense pressure, or there appeared to be. And I was curious if you're happy with the central administrative structure to execute on gas and pharma and some of the new store categories and services or if you see some need for additional investment and capabilities.

Okay. Well, Bob, thank you very much for your question. Let me first try to start on -- in terms of your question regarding CapEx and for the OXXO gas business. And that is something that we have mentioned in the last call that there are several ways that you can participate in the business. And that means in terms of the asset intensity.

Even though that we can move from a very, I would say, asset-light model, where we -- the only things that we do is to list the asset and reach a kind of an arm-length agreement with the owner or the person that owns the PEMEX franchise up to the level that we can buy the land and also buy the -- all the facilities.

So far, our focus has been much more on the asset-light model. We are not excluding the other one. But, as I said, the focus has been on that area.

So, in that sense, the facilities that we have found so far are I would say in relatively good shape. So, the CapEx has not been very relevant. And we don't expect the -- any pressure in terms of CapEx going forward. Okay?

In the case of pharmacies, I would say it's more or less the same. Obviously, the main focus so far in the case of pharmacies, which is more linked to your last question, is that we are really developing a plan in order to have a kind of a backbone system and processes for the pharmacies business going forward.

So, in that sense, we are continue growing, but developing this backbone in terms of the system. And I would say that there are the way or the main areas where we are working.

In terms of the structure, maybe which is related to the question about admin expenses, what we are doing is really leverage from the experience of OXXO. Most probably going forward, we will need to implement some dedicated structure for each of the businesses in terms of support function. But, so far, we have been able to, as I said, leverage on the current capacity of OXXO. And we haven't seen any need to expand much more over expenses on the admin side.

Regarding the -- your question on same-store sales for gas, I would say that that is slightly ahead of OXXO. Okay? So, we're talking about middle single digits. And that is -- it's not that different from the ones that we have seen at OXXO.

Great. Thank you very much.

Thank you, Bob.

Luca Cipiccia, Goldman Sachs.

Hi. Thank you. Thanks for taking my question. Just a clarification really on -- can you specify where you said gross margin was without gas because I think I got to a slightly different number? I don't know if I'm doing the calculation correctly. But, for -- was that for OXXO specifically or for -- or including the pharmacies as well?

Yes, what I said when I made the comment regarding the margin, that was for the FEMSA Comercio, which includes pharmacies but excluding OXXO gas. So, the numbers that I mentioned, what we said is that, if we exclude OXXO gas, the margin would have expanded by 30 basis points. But, that expansion of margin are for both OXXO stores and also for pharmacies. But, clearly, the most relevant part of that expansion is coming from the OXXO stores.

Okay. So, gross margin would have grown by 30 basis point. Okay. And then -- and secondly, maybe just if you can comment on -- sorry, I know I had only one question, but just this was a follow up on what you said before. But, on the traffic improvement, maybe if you can comment on that if you see that continuing as well because it's been a while that we haven't seen a positive number there. So, it was encouraging to see that change. So, if you can maybe expand on the trends that have resulted in the slight improvement in this quarter.

Yes, sure. The traffic, as we said, expanded by 1.1%, which I think is very, very healthy. And as we mentioned, we feel very comfortable because the expansion was in part almost 4% and based on the increase of the ticket and, as I said, 1% by the traffic. And that means that we are in some way coming back to the levels that are in line with our long-term expectation of middle single digits.

So, obviously, we still need to wait for the next quarter. But, so far, we are very happy with the level that we achieved and very much in line with our long-term expectations.

I think -- hi, Luca. This is Juan. I think -- .

-- Hi, Juan -- .

-- I will just add to what Daniel said. If you look at the past couple of quarters, you saw slight improvements in traffic. I think we had 0.1% last quarter and 0.5% in the last quarter of last year. And we've said all along that telephony was the main culprit behind the weakness in the traffic. And even though telephony continues to fall, it's of course less relevant to use now. We're in probably the third year of telephony weakness.

And as Daniel said in the opening remarks, services and in particular financial services continue to grow very consistently. So, right now, it looks like the conditions are in place for traffic to continue to be a contributor rather than a detractor of same-store sales going forward.

Perfect. Thank you. Thank you, both.

Antonio Gonzalez, Credit Suisse.

Hello, Daniel, Juan, and Roland. Thanks for taking my question. Just two quick ones. First, on the point that you just made, Juan, regarding services, I wanted to ask, could you please update us on what's the number of debit cards that you've issued so far? And where do you think this number can get to in -- I don't know -- the next year or two?

And is there any other specific service that you would highlight? I don't know if, for instance, payments from e-commerce retailers such as MercadoLibre that I understand are offering their MercadoPago debit card, is that also something significant for you, e-commerce as a whole, obviously not mentioning any particular vendor? So, that's the first question.

And then secondly, I just wanted to know if you can update us on what's the EBITDA margin of the drug stores currently. And where would you expect that to be a year or two from now? Thank you.

Thank you, Antonio. Sorry, can you repeat your last question? I couldn't hear you well.

Sure, sure, Daniel. What's the EBITDA margin of the pharmacies currently? And where would you like it to be a year or two from now?

Okay. Thank you. Well, in terms of the financial services, the number of cards that we have today is 2.2 million cards. Okay? And in terms of growth, we expect to be -- .

-- I think we're growing at a pace of about 150,000 per month, Daniel. So, assuming that continues, that should give you the number.

And in the case of e-commerce, I would say that, so far, we are just doing some tests, very small tests at OXXO stores. But, to be honest, we have not deployed anything relevant. As we do with other opportunities that we can see we can develop at OXXO, as I said, so far, e-commerce is only a very small pilot. And we don't expect to do any kind of rollout in the short term. Okay?

So, most probably in the coming quarters, we will be in a better position to comment if that is -- we see that as a real opportunity. Okay?

In the case of the EBITDA margin for pharmacies, we are today in the range of 4% to 5%. And I think -- and in our expectation, despite the consolidation in the way that we can integrate the activities and obviously increase our purchase capacity that we were expecting to see some improvement in terms of margin, I would say, in the range of mid-single digits. Okay?

So, I think we should end up most probably -- I don't know -- a range of 5% to 7%. That is our expectation. But, as I said, it still requires a lot of work in terms of consolidation. I already mentioned before that we are working in the development of the backbone from this business, integrating the different banners that we have purchased. That work is proving to work very well. But, obviously, it needs to evolve. And it will require some time to achieve the synergies and improvement from the margins that we expect to deliver over the next 12 to 18 months.

Yes, I think I would also just highlight the fact that, two years ago, when we started talking about drug stores, we were talking about margins that were maybe a third of the OXXO margins or roughly 3%, 3.5%. And now as Daniel is saying, we're closer to the 5%, so more like half OXXO margin, in a very quick period of time, and really without having the benefit of scale because, to Daniel's point, the two and now three small pharma companies in many ways are still being run as a separate company.

So, we haven't really captured the bulk of the scale benefits. We haven't really developed the backbone yet. So, I would think that the best is yet to come. But, even though that's the case, we've already extracted more than 100 bps of margin in less than two years.

Yes, and I think also that two other things that I would like to add to that is we are very happy with the acquisitions that we have made. They've proven to be very, very strong brands in the regions that they are in.

And second, I think that our, if you want, strategic view that -- trying to bring the strengths of OXXO I think is starting to prove that really it's a very good match in terms that we can bring over capacity to manage small boxes, our capacity to do the procurement, and obviously continue to developing the growth I think so far has proven to be a successful story. And really, we're very excited about the future of that business for FEMSA.

Got it. Thank you so much. And congrats on the quarter.

Thank you, Antonio.

Benjamin Theurer, Barclays.

Hey, good afternoon to everyone. I have actually one question. I'm little out of the whole business thing. But, going through your balance sheet, there was a significant decrease in your accounts receivables. I would like to understand what was driven -- what was driving that decrease in accounts receivables here. Has it to do with the changes in the Comercio side, or where does that come from that you basically have less receivables outstanding, which was meaningful but down by about a quarter? Thank you.

Thank you, Benjamin. I think we will need to do some work to answer probably that question. But, one of the things that we have seen is the fact that, when you analyze the devaluation that we have seen both in Brazil and Colombia and obviously as well in Venezuela, when you do the comparison with the last year, those have been higher devaluations that the case of the Mexican peso.

So, I think one portion of that reduction should come from the effect of the devaluation. But, as I said, we will take your question, and I really would like to prefer to provide you the question -- that answer offline. Okay?

Okay. Perfect. Thank you.

Thank you, Benjamin.

Jeronimo De Guzman, Morgan Stanley.

Hi, Daniel, Juan, and Roland. I had a question, maybe just start with a follow up on the pharmacies. Have you already established or defined a banner that you will start growing with in the pharmacies, or are you still growing with the three different names in the different regions?

Yes, that -- thank you, Jeronimo. I think that's a very good question. So far, we are continuing to grow with each of the banner. Obviously, we are doing some work and analysis with the consumers in order to decide if it's really a good idea to consolidate that under one banner. That decision has not been made yet. We are still doing some analysis. And I'm not worried that it will take a couple of months before we will make that decision.

Having said that, I think, even though that potentially we can keep some banners going forward, and definitely that would be the case in the short term, our focus has been much more to integrate the operations. Okay? So, you know that that all -- but it's not seen by the customer is something that we are develop on an integrated basis. Okay?

And we are, as I said before, leveraging -- doing more leverage of our purchased capacity, of our supply chain capacity, distribution capacity. And clearly, what you start to see is that the customer offer and the customer proposition is much better. And the banner is something that we are going to decide going forward.

Okay. Thanks. And then just moving to the gas stations, I had a few questions. One of them was, do you still expect to grow by about 50 this year, or are you changing that expectation kind of given where you are right now?

And then also on the gas stations, could you talk a little bit -- it seemed like the margin was a little bit lower this quarter. Is this kind of year-to-date margin, EBITDA margin, of about 2% what you expect going forward, or was there anything that drove the slightly lower margin?

And then also, if you could talk about returns in the gas station so far, like asset returns, you mentioned the returns have been good. So, just wanted to know if you had any number on kind of what you've seen so far.

Yes, thank you. Well, in terms of the gas station, also something that we mentioned before, we are very excited about this business. But we are continuing to grow at a moderate pace. Obviously, there is a good opportunity. Most probably, we will take it.

But, I think the growth will be more or less in the neighborhood of the 50 gas stations. That is our current view. And obviously, that can change going forward.

In terms of the EBITDA margin, I think, when you do the comparison between the second quarter and the first quarter, you should keep in mind that, during the first quarter, we only booked March. So, actually, you are comparing one quarter, which is the second quarter, with only one month. Okay?

So, that is -- I would say that, most probably, the second quarter is a better reflection of the business in terms of margin. We don't expect to have much more higher margin. As I said, we are very conscious when you do benchmark with other companies, particularly for this business, that that margin is very reasonable.

Clearly, obviously, the more that we grow, most probably, we will be able to continue improving that. But, we don't expect big increases. And in terms of the return, we are talking about in the range of the neighborhood of 20%.

Yes, and also, I think the one thing to keep in mind, Jeronimo, is, if everything goes as planned and then in -- by 2018, pricing is freed and you're free to buy gas from other suppliers and scale becomes relevant, then we could definitely expect more meaningful improvements to the margin. But, under the current framework, it will probably look a lot like what you're seeing.

Okay. Sounds good. Thank you very much.

Thank you.

Andrea Teixeira, JPMorgan.

Hi, good afternoon. Thank you for taking my questions. So -- and congrats on the results.

Just on the -- as I -- if I understand it, correct me if I'm wrong, talking about M&A, your main priority it seems to organize the kind of like message for the gas station, organize the branding, and then perhaps also organize the branding on the drug stores. And should we see [like a year] of accommodation on that end, or you're going to be open to doing M&A and even -- it seems from your last comment that the 50 mark is probably what you can do for now.

And related to that also, what we're seeing is a tremendous opportunity for your cards. And so far, you can -- I understand you can only do remittances inside Mexico. When should we see remittances from abroad coming into Mexico and you making an agreement with -- I don't know -- any other player in the US specifically to kind of monetize this more? So, my question is on the M&A front. Thank you.

Thank you, Andrea. Well, in terms of the gas stations and as is the case as well for pharmacies, clearly, we are working in two areas. So, one is we are trying to put the structure -- particularly I would talk about pharmacies because it's where we have acquired several (inaudible). And obviously, those are different companies.

So, in that case, our strategy, as I mentioned before, is try to develop the backbone, to have a solid and, if you want, integrated platform, which allow us to continue growing. But, at the same time, you should keep in mind that our organic growth has been very aggressive, double-digit growth. And we will continue to look for opportunities on the M&A side.

So, that definitely is the case. But, based on the fact that we have achieved at this stage, we also need to take care about the stability of the business going forward. So, that is particularly the case regarding gas station.

On the pharmacy -- sorry, on the -- that's for the pharmacy, sorry. And on the gas station, we are working hard, obviously, to continue growing that business. We are in the process to see for opportunities. But, so far, it's not that we have reduced the pace. It's more about to be realistic about how much we can do because we need to reach agreement with the third party.

And definitely, if we are able to improve or to have a pace a little bit much faster, we will do so. But, at this stage, based on the question that was raised, we think we feel comfortable that we can achieve what we have mentioned at the beginning of the year. But, we're working hard in order to increase that number.

So, that is regarding your question on both pharmacies and gas station. On -- in the case of card, I would like to ask Juan to answer that question.

Hey, Andrea. How are you? On the cards, certainly, we continue to be very pleasantly surprised at the resiliency of the pace of growth. We're now 18 months after launch of Saldazo. And it's still growing strong, like Daniel said, something close to 150K per month.

I think a lot of the work that has been done in terms of launching the card, which of course, has data benefits and traffic benefits on its own, but it also -- it would be useful -- it is already useful in terms of moving money within Mexico. And it could be useful in terms of receiving money from abroad.

We've also learned a lot in recent months and quarters about the disbursement of cash. OXXO has been developing its own capabilities to have more cash available for disbursement. Obviously, when you think about somebody that's getting a remittance, a portion of that, maybe they're going to be happy to keep in an account. But, a portion of it, pretty likely that they will want in cash.

So, it's been a gradual process because it involves -- how much cash can you have available without raising the security risk? So, that's why I think it's taking a while. And obviously, when you talk about cross-border, you also need to find a solid partner on the US side to capture those transactions and that business.

So, we're definitely looking at it. We're working on it. It's -- at this point, I really couldn't say -- kind of create expectations of when we could materialize an agreement. But, my previous comments, I hopefully go in the direction of telling you that we are getting ready, right? And we are doing what needs to be done to enter that business when the conditions are in place.

Thanks, Juan. And, Daniel, just on the -- when you say the backbone, when do you expect the drug store backbone to be ready? And I understand -- I've seen companies and drug stores taking years, literally a couple of years to get the backbone together and some who never could. But, how do you think -- how long that would take?

Yes, it's a good question, Andrea. I think that there are two [folds] to answer your question. So, one is about processes. And in that sense, we have a very good capacity inside the Company to develop those processes. So, the way that we are developing that world is to mapping all the processes from the different banners and, from there, try to take the best process, recognizing that, in certain cases, we will need to keep some local, if you want, differences if that is required.

And second, in terms of the systems, we feel very comfortable that, in one of the banners that we have acquired, there is a very strong system. And an orientation is that to implement that system across all the banners so it's approved system. And in that sense, we feel comfortable that's something that we can work.

We are developing that as we speak. And we are very positive that something that -- I would say, as from the beginning of next year, we should be in a very good position to have that -- I would say implement it or in the middle of process of implementation.

But, we are also being very conscious about the fact that we need to continue the growth. So, we're trying to keep the balance in terms of having this integrated model, but at the same time, continue the organic growth and continue the growth, the same-store sales.

So, that is the -- if you want, the balance that we're trying to keep. And so far, I think based on the numbers that we have shown, we have been successful doing that.

All right. Thank you so much.

Thank you, Andrea.

Alex Robarts, Citigroup.

Hi. Thanks, everybody. Wanted to I guess focus my question on this commercial income dynamic that, for Comercio, seems to have come up more often than not in the last several quarters. And I guess, if I understood it right, the gross margin expands in Comercio ex-gas mainly because of the commercial income. I just wanted to confirm that that's what you referred to when you said the commercial income trends were favorable.

And if that is the case, what -- how can we think about this going forward, the commercial income? It seems to come up in various quarters. Last year, during the July, heavy promotions, the middle of the year, there seemed to be a bunch. It's also come up, obviously, at the end of the year.

But, as we think about that going forward, including what you've been getting this year with Pepsi, is it safe to assume that commercial income this year will be more than it was last year?

And what might the magnitude of this be? If it's too strategic, that's fine, but maybe directionally, do we see this increasing over time as these other small box formats come online and are new sources of commercial income?

And then kind of the last bit of this multi-part question -- sorry, but -- is, in the second half, I guess I have the impression that you have a tough comp for commercial income. Is that fair to say or not? So, that's the question from us. Thanks.

Yes, well, thank you very much, Alex. I think, try to give you an overview or holistic answer, I think -- first of all, I think that the performance or the improvement of the performance in terms of margin, I think, really proves the strength of our brand, the OXXO brand. And that means that the brand has been very attractive. And we are very confident that will continue to be the case to become attractive for the vendors. Okay?

So, we expect that trend to continue. Obviously, as you correctly said, the comps will be different. So, we will continue working in that area. But, most probably, we will not see the same growth as we have seen so far. So, there is some combination in terms of that the brand will continue to be strong, will continue to be attractive for the vendors. But, at the same time, the base of comparison will become tougher. So, I think that's something important to keep in mind.

But, having said that, that element is relevant in terms of the margin improvement, but that is not the only one. So, and there are combinations of other things that all add to the improvement in terms of margin. But, particularly regarding that question, I would say that we will continue to see improvement, most probably not at the same pace.

And in terms of the -- your second part of your question about the second half of the year, we expect to keep the same level. And I don't expect to see anything very different. I don't know, Juan, if you concur with that.

Yes, I think, certainly, some of the programs that we have with certain suppliers came into place middle of last year to the end of last year. And so, you could say, okay, that makes for a slightly tough comp.

But, at the same time, as Daniel says, the -- to the extent that we keep growing the way that we're growing, the attractiveness of the channel that we represent to suppliers keeps getting better and better.

So, we believe that, as a value proposition, we continue to get stronger and stronger in terms of what we can offer suppliers that want to launch a new promotion or a new flavor or a new SKU.

I would also I think take the opportunity to make the following comment, Alex. As Daniel said, this quarter, ex the gas business, gross margin would've expanded 30 basis points. And operating margin would've expanded 50 basis points.

This is usually the other way around, right? If you look at a lot of our previous quarters, we expand more at the growth level than at the operating level. So, you could maybe make the case, okay, so, we are facing the tough comp on commercial income. So, gross margin is expanding only -- I'm going to quote-unquote only 30 basis points, but make the comment about the operating margin because, like I said, it's not normal that it can expand by that much.

And I would bring into the conversation the subject of electricity, among other things. And there was, of course, a lot of expense containment, but also the fact that the fall in the price of oil is highly correlated with the prices that the electricity utility is charging to customers.

So, it looks like the low electricity prices are here for a while, which puts us in a very good position to keep expanding the operating margin and hopefully keep delivering results like the ones we did this quarter.

No, that's helpful. That's helpful. And just, though, to understand, it's a fair assumption to expect going forward in the years to come or in the next couple of years the total amount of commercial income that you book at Comercio should increase on an absolute basis year on year.

In other words, you have -- as you said, the brand is growing in appeal and reach and in different formats. You have the discretion to ask for higher prices for this. In other words -- and you can do that on a pretty discretionary basis. Is that the way we can think about it, right?

Well, we like to think of it more in terms of we work with the suppliers. We help them sell more of whatever they sell. And then we do a little bit better ourselves.

Certainly, we keep -- the growth rate of OXXO versus other channels continues to be significantly higher. And I'm not just talking about same-store sales, but just overall square footage growth. And that has to be compelling. But, it's not unlimited, obviously.

And really, we should think about -- you've heard us say before we think, in the long run, we can probably expand the operating level maybe 10 basis points for the retail business, maybe 10 to 20 is what we've said at different points in time. This quarter, we're doing significantly better than that. And it all originates at the growth level. So, I would not change -- if you're building your model, I would not change the assumption on gross margin expansion just because, right now, we're doing a little bit better.

Yeah, okay. Very helpful. Thank you, guys.

Antonio Gonzalez, Credit Suisse.

Thank you for taking my follow up. Just wanted to ask very quickly -- I know the overlap that you have in terms of products with supermarkets in Mexico is not huge, but it has become a theme in recent months that the supermarkets are stepping up price aggressiveness. And I just wanted to ask if you are seeing anything that is hitting you in that respect, and are you reacting in any way? Thank you.

Thank you, Antonio. No, to be honest, we haven't seen any relevant effect. And we have not been forced to make any specific reaction to that. So, our plans continue the way that we have defined at the beginning of the year. So, really, that has not been a major impact for us.

As you know, Antonio, we have a basket that we build where we look at all of the relevant retailers. And sometimes, we tweak the -- how we weigh them based on what they're doing. But, to Daniel's point, right now, we haven't really tweaked the basket. And it hasn't -- when we look at the categories that you mentioned, we haven't seen any change in trend. So, I think we're doing okay.

Got it. Thank you.

Lauren Torres, UBS.

Yes, hi, everyone. Now that we're a couple months past the lockup period for the Heineken shares, I was just curious to get your impression and thoughts. I know you've commented previously that you're happy shareholders. And was curious if your mindset has changed in any way. It sounds like you do have a lot of projects ahead of you. Is that all internally funded is the reason why or how you would decide to start to unwind that position at any time in the near term? An update on that would be great. Thank you.

Thank you. No, actually, our position has not changed. We are very happy shareholders of Heineken. We really believe that they are delivering on their strategy. And actually, the market is recognizing that. So, as I said, we are very, very happy with that.

Obviously, the fact that we have now the expiration of the lockup, that has increased our level of flexibility. And that always is a good thing to have. So, we have already mentioned that before. We will continue to do our analysis. If something really important appears, we will consider. But, so far, our view regarding our position at Heineken has not changed at all.

Okay. And if I could ask just one other questions on OXXO expansion, particularly OXXO out of Mexico, I think there was the petition to essentially sell alcohol, at least asking to sell alcohol in the OXXO in the US. I don't know if there's anything new there and anything with respect to OXXO expansion in Latin America, whether it be Colombia or your thoughts of entering other markets.

Hey, Lauren. This is Juan. In terms of OXXO outside of Mexico, as you correctly point out, we are still in conversations in the US in terms of whether OXXO should be considered as a participant in the production of alcohol, given our minority stake at the FEMSA level in Heineken.

So, those -- that's an argument. That's a discussion that we're having, particularly in the state of Texas, where we've also I think tried to make the economic case of how, from a job creation standpoint, from an economic activity standpoint, OXXO would be very good news for Texas.

But, there isn't anything really new to report on that front. And right now, it doesn't look like we're going to be able to change that position anytime soon. So, I would say nothing to report in the US.

In terms of Colombia, I would say there's some improvement in our own perception of the different tests that we've been carrying out the last couple of years, involving slightly smaller footprint boxes, where we can reduce the cost of the real estate without losing a lot of the revenue, so getting to a -- not just a breakeven point, but beginning to feel more optimistic about the possibility that this can become a profitable format that then justifies more aggressive growth.

Definitely, we're sticking to it. And we are, like I said, I think feeling better about it than we have in the last couple of years. And we're going to keep looking. We're going to keep looking at other markets, as we said before, some kind of a transaction or the learnings from Colombia being very clear in terms of greenfields being especially difficult, so some type of a partnership, a JV or an outright acquisition.

We're definitely going to keep looking at assets around Latin America and keeping our eye on North America to see if conditions change.

Okay. Very good. Thank you.

Thank you.

Luca Cipiccia, Goldman Sachs.

Thank you. And thanks for the follow up. And it's a very quick one. Just again on the gross margin, apologies if I'm doing my calculation wrongly or if we should take this offline later. But, on this point about margin expansion, you had a 34.9 I think margin, gross margin, in the first quarter last -- in the second quarter the last year.

And if I back out the gas station from the consolidated that you have this year, I get for gross margin of 34.5, which would imply a contraction. When you refer to the expansion, does it exclude it from last year as well? Just -- sorry, it's a boring question, but I was just trying to figure it out what I'm doing wrong.

I definitely think what we should do, Luca, is get back to our computers. We obviously have the numbers constructed with and without. And we'll be able to identify whether, as you say, it's the base that we're looking at differently or where the discrepancies are. So, happy to drill into that a little bit more, but let's do that offline.

Absolutely. Thank you. Thanks, Juan.

Sure.

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

Okay. Well, thank you very much for your participation today. And apologize for keeping you so late. So, goodbye for 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.