Fomento Economico Mexicano SAB de CV (FMX) 2015 Q3 法說會逐字稿

Stand by, we are about to begin. Good morning and welcome everyone to FEMSA's third 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 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 may change, which can materially impact the company's actual performance. At this time I would now like to turn the conference over to Daniel Rodriguez, CFO. Go ahead, sir.

Thank you. Good morning everyone and welcome to FEMSA third quarter results conference call. [Ralph Conseca] and [Roland Kerry] are also with us today. As we usually do we will focus the call on the consolidated figures for FEMSA, and for FEMSA's [market] result.

As many of you probably had the opportunity to participate in Coca Cola's FEMSA conference call yesterday, a few have maybe seen our detailed results, we will use this opportunity to share some of what we see and highlight the main trends in our business.

Beginning with some comments on consumer demand in Mexico, the news continues to be encouraging. Favorable trends such as growth in real salaries from the US, and manufacturing activity seems to be [creeping] down towards consumption, resulting in healthy comparable growth rates for the [whole] sector. Specifically, same store sales were also increased over nine percent in the quarter. As has been the case throughout this year, EBITA is benefitting from [un] demand in costs, so we must keep that in mind. But it also appears that the Mexican consumer is now in relatively good shape.

In Mexico, however, as has been the case for several quarters, the situation is more challenging. In [rapid] consumer sentiment and the market [backdrop] remain negative and we are still creating an adverse with any change environment, across several of Coca Cola same-sales markets. That in turn puts pressure on their results.

Think for a moment on the factor of [fill able things]. As you know, Coca Cola FEMSA is using its money exchange rate to translate the results of its operations in Venezuela. This rate was one hundred ninety-nine point ten bolivars per dollar over third quarter of 2015, compared to the [SECAP] rate of eleven point twenty-one bolivars per dollar used in the comparable period of 2014. Across the [page] in the first and second quarter, while this goes a long way in eliminating the uncertainty surrounding the contribution and valuation of the Venezuela operation, most of Coca Cola FEMSA's [in sale] levels impact on the numbers is again significant.

Moving on to discuss more closely data quarterly numbers, [gross] revenues during the third quarter [achieved] eight point eight percent. And income from operations increased two point three percent. On an [organic] basis, that is excluding the results of the Oxxo [craft] business, and our newest Mexican [blackstone banner], total revenues increased point seven percent. Income from operations increased one point nine percent.

As we mentioned before, these consolidated numbers have significant impact from Coca Cola FEMSA Venezuela. We also want to point out that we will be consolidating the profit and loss result from our Western subdivision of [Circle Four] in the fourth quarter. For the third quarter the line [be able] participation of Heineken results was three percent FEMSA actual, and twenty percent participation in Heineken third quarter net income, which was reported yesterday using the Avamar exchange rate for the Euro, during the period.

Staying on the subject of net income, we note that it decreased nine point eight percent in the third quarter. As we explained in our press release, this was driven by first, a foreign exchange loss related to the effect of Coca Cola FEMSA US dollar-denominated [pet] position as impacted by the depreciation of the Mexican peso during the quarter. Second, a [back] comparable base on income stocks due to one-time benefit received in Q3 2014 from the settlement of certain contingent tax liabilities across all of FEMSA. And third, a swing in our non-operating expenses for the same reason, given the settlement of the contingent tax liabilities was recorded as a gain in the other non-operating expenses line.

These factors were partially offset by an increase in FEMSA's reported twenty percent participation in Heineken's result. Over fifty tax rate of thirty-one point four percent for the quarter within the expected rate as I just mentioned, last year's tax rate affected our one-time benefit resulting from the settlement of contingent tax liabilities across FEMSA, and the tax amnesty program offered by the Brazilian tax authorities.

In terms of our-consolidated net deposition during the third quarter, it increased nine point eight million pesos compared to the previous quarter, which fifty-eight million pesos at the end of September.

Moving on to discussing operations and the meeting with FEMSA Commercial, we opened two hundred seventy-six new office [poles] during the third quarter. Looking at the first nine months of the year, or the last twelve months we are on track to deliver more than eleven hundred net openings this year in line with 2014 and consistent with our expectations. In terms of the newer formats during the quarter we added twenty-four gas stations to reach two hundred seventy-three at the end of September. While on the [Quattro] front, we close the third quarter with eight hundred eighty-three stores in Mexico, where its part of [participation] approximately thirty-six hundred forty drugstores and one hundred beauty stores in Chile. And more than one hundred fifty drugstores in Colombia.

Revenues increased thirty-seven point four percent excluding OXXO gas and [pharma com] revenues increased seventeen point one percent. OXXO sales were up one point nine percent, reflecting a healthy mix of five point nine percent growth in our [ex ticket] and three percent growth in store profit. Regarding traffic we are increasingly being able execute short-run, in-and-out promotions on behalf of our supplier partners, there is specific time window [fast track] weekends, together with the sustained growth of our services industry, these initiatives are increasingly supporting healthy profit dynamics.

For the third quarter, gross margin contracted four hundred fifty basis points, driven by the increasing of lower margin OXXO gas into FEMSA Comercio's numbers. Excluding OXXO gas, gross margin would have expanded by thirty basis points, reflecting healthy mix of commercial income trends in underlying retail operations. In terms of operating margin, this meant FEMSA Comercio contraction of fifty basis points. Excluding OXXO gas operating margin was expanded by seventy basis points, reflecting better operating spreads as well as solid expense control, a lower electricity price that continues to help us.

On the [writing] though, last quarter we did not provide you with the adjusted rate for this [ex] gasoline growth operating margin, exposure calculations, and therefore you were unable to [educate] our numbers. So why do we exclude the gasoline-related income from Q3 2014 results, the objective rate is as follows - ten billion pesos for gross profit, and two point twenty-nine billion pesos for operating income. If you calculate the margin expansion in those figures, you should arrive at numbers in line with ours.

Moving on briefly to Coca Cola FEMSA, total revenues decreased nine point nine percent, but on a currency neutral basis, and excluding Venezuela, they grew eight point two percent during the third quarter. Across the gauge in the second quarter Coca Cola FEMSA achieved market share and profitability gains in many of its markets. Strong [hour] price per unit gauge 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. In particular, results in Mexico were encouraging and are consistent with a more confident consumer and solid execution, even as we continue to see the center itself of the country underperform the more dynamic economy of the rest of Mexico, which benefits more directly from the US we noted improvement in manufacturing and export.

Elsewhere we are still facing challenging environments in several of our key South American markets. While we continue to work on the variables that we can control, such as pricing and packaging, we are seeing positive results. If you were unable to participate in Coca Cola FEMSA's call yesterday, you can access a replay of the web [just] edition of the results.

And so, we continue to see great opportunities for growth ahead of us. And several measures continue to strengthen its competitive position in a Mexican market that keeps gaining its footing while the company makes progress in the development of incremental growth avenues, in pharmacies and gasoline stations. Here in Mexico we are ready to get to work with our partner on the new [Circle Four] platform and incremental opportunities that may stem from it in Chile, Colombia, and elsewhere in the region. And Coca Cola FEMSA keeps making strides as itself by streamlining its operating structure, focusing on [driving section] across geography 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?

Thank you. The question and answer will begin at this time. If you would like to ask a question simply press star, then the number one on your telephone keypad. If you would like to withdraw your question you can do so by pressing star then two at any time. Your question will be taken in the order it was received. In the interests of time we do ask that you limit yourself to one question at a time in order to allow for the maximum number of callers to ask a question.

Our first question is from Robert Ford, from Bank of America.

Thank you and good day everybody. I had a question with respect to gas, right, and I was wondering what the implications were with the decision to liberalize gas prices in Mexico earlier, with respect to the [band] and the move from the current tax to the proposed quota as well as the implications it may have for your decisions to invest in infrastructure with respect to storage and pipelines.

I thank you very much for your question. I think I mentioned before at this stage we are very much focused on the gas stations, really on the weakest part of the business. That is the area that we want to continue working. Having said that, obviously after energy [forms] evolve, we will continue accepting other opportunities - I mean its part of what we call the mid-stream, so far we have not made any decision, and really as I said for the most part continue creating a platform in terms of the gas stations, but I don't know if any of you would like to add any comments?

Yes, hi Bob, I think I would - in regards to the reorganization of the price I think what's really happening here is that the government wants to set a floor for the excise tax, right now it's a [lowering] tax, and with the expectation that prices will come down in the near future. I think that the government wants to make sure that the tax revenues don't go down too much and so the take-away we have at this time is that it's really about setting a floor for the excise tax, not so much changing materially the time in which things are going to open up and we're going to start being able to buy from other people at whatever price we deem appropriate.

I think there was little bit more noise than it probably deserved. There are some practical reasons for it as I just described on the part of the government.

Additionally, I would ask that this is not a common practice that we've also seen in other markets.

Our next question comes from Antonio Gonzalez from Credit Suisse.

Good morning. First, a very quick follow-up. With the numbers that you gave on the FEMSA Comercio figures [ex] gas for the previous year, if I am doing the math correctly I just wanted to verify that. You have a gross margin in expansion in FEMSA Comercio ex-gas of roughly forty beats, and basically a flat [SENA], so I wanted to verify a] that these numbers are correct, and b] I think that we did see some operating lever action the last quarter or the last couple of quarters and this might not be the case this quarter so I just wanted to see if you can add any comments on that, especially with these very strong same-store sales I would have expected operating [rev] as well.

And then secondly - very quick, I understand that you can't make too many comments but - I guess we still need to ask - is there anything that you can share that the ABI/Miller news that preliminarily changed the way you think about Heineken - do you think you will be more active on the [MNA] base with respect to whatever you are doing on the retail side, more on the beverage side, or not much that you can share at this point? Thanks.

Thank you. Let me take the first part of the question. I think in terms of the gross margin and the operating margin expansion, ex-gas, we rounded the numbers here a little bit but the numbers that we come up with are thirty basis points expansion at the growth level. And seventy at the operating level, so clearly there is some improvement between the growth and the operating line.

I think it's been a while since I've seen seventy expansion at the operating level, so we can talk a little bit more about why we think that is - we mentioned the electricity charge still being a bit of a tailwind, which we don't really know how much longer that's going to be there - but a lot of the things that the guys do at the stores are having a benefit on the [AGNA standpoint] expense control.

So I would say that there's a pretty good quarter in terms of operating revenues. I'll let Daniel take the strategic question.

Thank you Antonio. Regarding the question about the deal I would say - you correctly say the deal is not close, and we wouldn't want to speculate any conclusion. I would think that I can share with you that we are very happy with our investment in Heineken, I mean that has not changed at all. You have folks that have mentioned that the operation performance of Heineken I think very good, the software went yesterday to the market and if you have seen - they had a very good quarter so - overview at this time has not changed, but I think we also know that we have [civility] that the part of the [local piece ex-part] we can have civility no comment.

And our next question is from [Maricio Sarena from JPMorgan].

Hi, good morning, thanks for taking my question. Just a couple of things on the OXXO side. Very impressive same-store sales you delivered, if you could explain a little bit more what would have been the major drivers to the acceleration both in terms of ticket and traffic - I know the economy is doing overall well but maybe talk a little bit more about internal factors, and on the competitive environment, and also maybe if you could provide some sort of guidance for this new drugstores acquisition you are doing in Chile, and Colombia, is there any guidance you can give us on growth of these performance in the short term?

Regarding your question on OXXO, I think as I mentioned during the call I wanted to keep in mind that the cost is benefiting us. Obviously we are very happy with this trend but in fact, this is not the new normal. We still keep our view that in the long term will remain a mixed-income gross, so I think that it is important to keep in mind - having said that obviously in the economy, particularly in the north of Mexico, is doing very well so we are benefitting from that. Also I mentioned that we have increasing ability to execute short run in-and-out promotion and I think that together, with the fast-growing service economy it's really helping us. I think there is not one element only, there are several elements. One is execution, second the good performance of the market, and also I spoke particularly to the north part of the country.

As I said, this is not something that we expect to be the situation or the new normal in the future and most probably next year obviously the counts will change significantly from what it was this year. So that is what I can mention regarding OXXO performance.

We had in the second question on the drugstores in Chile and Colombia, I think obviously we cannot [broke island] but I think I can mention to you that we know that that decision to buy that platform took several alternatives in the region. So one, obviously particularly in the case of Chile, we can access opportunities [out of form], second, you see the [black] platform that will provide us good opportunities in the future to growth in this period in our market.

Particularly in the case of Colombia the size is relatively small but the market is very fragmented. So we also see opportunities there in terms of course of growth organically, potentially in the future doing some small acquisitions - I mean a real [taste] but that is what I believe I can mention regarding the situation in Chile, and on top of that I also think the equity structure that we have in place - having sixty percent of the ownership but the open partner with forty percent also give us some assurance that the operation, execution will continue to work well and mostly that we are asked to have a more safer platform in order to seek our opportunity

and on top of that to achieve that gross that we know is - we are also adding structure to the business. We are for example adding structure at the real level in order that we can have the proper network in order to allow us to continue growing. I think we are in that period in which we are investing in order to get that gross, and what you see in time we reach the normal operation levels in terms of price - to answer your question - I would say that for next year I would agree with your view - I don't have anything else to comment. I don't know you ...

Certainly when we're looking at the budget for 2016 - our base case does not contemplate any change to the price at the pump. I think you're correct in your read that the price to the consumer is starting to be in line with what we have right now, and what the government is doing in terms of protecting their excise tax doesn't really affect the price to consumer, to end-consumer right now.

And your next question comes from [Andrea Baysheda] from JPMorgan.

Thanks, good morning there. I just want to follow up on the questions we had last - go back a little bit from the financial service business and basically you had a tremendous growth there. I was wondering if you can measure the traffic on - tremendous traffic pickup that you had in the quarter - if you can measure people who actually go for financial services only, which would be interesting, but if not if you still see the momentum or if that's [safe] out or accelerated by any means. I mean the one hundred and fifty thousand you initially - number of cars - and then I think we are all asking a lot of questions about the gas stations but is that change on the second question - does that change, the excise tax change, would impact by any means your state at which you would consolidate next year? Or the rebranding or anything that you had indicated before? And lastly on the drugstores - I'm surprised we haven't been asking a lot on the drugstore side. Do you still see there is opportunities for inorganic acquisitions in Mexico or if there is anything that takes a back seat? Thank you.

Andrea, just one - I'm going to take the first one of your questions. I think in regards to the financial services we continue to see very good numbers in fact. This is a little bit counter-intuitive. We've actually seen an acceleration - so for example last month I think we opened two hundred thousand accounts - an improvement over the one hundred fifty K we had opened the last numbers that I have for [San Paso] is two point six million accounts. I think we are on pace to wrap up the year with three million accounts.

So that's going ahead of expectations. Now to the second part of your comment, I think you touch on something that is very true which is oftentimes these visits that are related to financial services are - the crossover is not huge. They will on occasion pick up a pack of cigarettes or something else but the crossover factor of services tends to be a little bit lower than others and especially there are some like telephony recharges that have been lowest crossing of all. Not all traffic is built equal. We welcome it all of course and each action that they do leaves some fee, but some are better than others.

In general I think in addition to the financial services you are beginning to see a little bit of effect from prepared food. We roll out to more stores that are drawing an incremental consumer, so not the same consumer that was needing a [chicken] roll or a sandwich. We're getting a new consumer that is going for the tacos and the other myriad services that OXXO is continually working on. You have probably heard about the very new incipient [chess] with Amazon which is still tiny and it's just in Mexico - Mexico City - there are a number of things but I do think the number of the OXXO accounts is really remarkable so I wanted to do put that out there.

And I'm going to let Daniel take the other two questions.

Yes OK. Regarding your question on the gas stations, Andrea, the overview - and I know [we] mentioned that we don't expect any significant changes unless - at least in our plan in terms of price. Based on that, our plan continues to be growing in that business. We have as you know well we are in the middle of a very structural energy. We are strong in Mexico and we are very much in the long term here, while we continue our plan, as we have mentioned in previous calls, so no changes regarding that.

On the pharmacy side, I think particularly in the case of Mexico, we see now we have a platform which allows us to develop an organic growth [a leg] and during the quarter we have already opened thirty drugstores with a current batch that we own. Having said that obviously if new opportunities appear, we always say to analyze them and if we see that we can create value and that can help us continue to grow in the space of the pharmacy business here in Mexico we will do so.

Yes, but that is probably not as - with the economy the way it is probably not as solid as our [picking up lever] now. The growth - if you could give us the sense of how the drugstores are performing relative to your nine percent drugstore sales? Are they performing similar fashion, or much larger?

actually drugstrore sales are running ahead of the nine point one, but I think there is also a reason for that in the sense that there are many - I call it low-hanging fruit - there are many things we are improving in terms of some of the assets that we have acquired and there are a number of pretty major things are taking place in terms of the value acquisition of the stores, so there is a lot more to fix or improve in our drugstores than there is at OXXO.

Ultimately if we maintain the right valuation, discipline, I don't know that there is a shortage of targets. We've discussed in the past when you look at the map of Mexico we now built some critical mass in the extremes of the country, both in the northwest and the southeast, but there are still a glaring vacuum in the center so we would like to begin to develop critical mass there. We are going to be active on the [MNA] front, and watch us in the organic - if you look at the state of Veracruz - Veracruz is a state where we had zero drugstores when we acquired [NISA] and being contiguous to the eastern territories now we have a lot of stores in Veracruz and that's an area where the drugstore operation leverages the OXXO know-how and the people on the ground that OXXO has across the country, it make it easier for our drugstore guys to find the right locales and to go through the permitting processes and the construction processes.

Certainly the state at which we are being able to grow organically on the pharma front benefits from the OXXO infrastructure.

And that is due, Juan I think you mentioned, to the integration of the systems that you roll out next year, right, the implementation that is on track ...

That is very, very early days we are in the beginning stages of that. That is going to be powerful in terms of eventually having all of the [pre] change operating as one. We've also talked about a project for the brand, currently we're still operating with the three legacy brands and it's something that we ultimately aspire to have a unified brand, but these are all things in the future so hopefully there is a lot of improvement in the operation coming in the future.

That's very helpful, thank you Juan and Daniel. And good luck on the results.

Thank you for mentioning that.

The next question is from [Jeronimo de Guzman] from Morgan Stanley.

Hi, good morning. What I wanted to ask a question on OXXO sales - you mentioned some of the things that are helping traffic. I wanted to understand the ticket growth, five point nine percent, that's running at more than two times inflation, so just wanted to understand what is helping drive this acceleration in tickets, and how should we think about it going forward, and then I also wanted to follow up on [Circle Five]. Wanted to understand the longer term perspective and the next year or so, what are some of the the next things with the integration of [Circle Five] and wanted to know if you have plans for organic growth within the next year with this franchise.

OK. Thank you. Regarding your first question I would say that growth is mainly due to the mix of product that we sell, and also services. It is not like only one element that explains that. We are also benefitting from some commercial income. There are several elements - commercial income and the mix of [continuing] that really are increasing that part of the margin.

On your second question on [Circle Five], we are - we can close the deal by the end of September, so we are in the process of working together with our partner, the business plan for next year - we have board of directors meeting next week in Chile, and we will then discuss [acquirer and then discuss] the organic and non-organic side. Our focus today is really to make sure that the operation and the results work well, and we also would like to share perspectives. We learn from OXXO that is always the way that we find to send into the different markets.

We hear from OXXO good practices in that operation, but from Chile as well, there are practices that we can learn from the Chilean operation as well. Like distribution, and they also have the beauty stores, so we do very much in the next six to twelve months trying to see how much we can learn from each other and make sure that we continue the business plan that the [corner] has in that operation in Chile, and also start to think how we can use that platform to continue growth in the region.

Jeronimo de Guzman. OK. Thank you.

You're welcome.

And from Goldman Sachs, we have Luca Cipiccia. Go ahead.

Thank you for talking my question. I want to follow up on the [Circle Five] and the drugstores, just to understand how you think that will help you in structuring or expanding the drugstore business in Mexico itself - how much of know-how or best practices there may be, or is already potentially happening, and secondly on the acquisition, clearly there was an interest in that space, and we see you becoming more active in the drugstores, there is a regional component as well, you mentioned Colombia before, but the bulk of it is Chile, so how do you think about that market in terms of opportunities and how do see your portfolio - what was the appeal from a perspective where you clearly wanted to get critical mass but also you had rapid diversification into a large market that you were not present into before. Lastly, a very small one, are you doing to separate [Circle Five] and drugstores in the next quarter in the same way that you are doing gas now? Just to see what sort of plan, or see how we can exclude that business from the rest of the numbers.

Regarding your first question we should not forget that the decision works from the leader in a very mature market. In that sense we are really adding an operation that is very well-developed. They have a very big knowledge of the industry, the sector, and as I already mentioned from the size of the Mexican pharma operation there are a couple of things that we can learn from the Chile operation.

First of all they have a well-developed beauty stores, that is something we need to learn more and see if there are opportunities for us in that particular forum here in Mexico. They also have a very well-developed pharma distribution, and also they have some production. In that sense I think there are elements from that part of the business that we can learn potentially, bring some of those learning to Mexico.

Additionally from the Mexican end, it's very paradoxical, very very strong in terms of execution at the store, it is something that we can most probably value there in the Chilean operation, so I think there is a very nice balance between the knowledge we can get from the Chilean operation industry-wide, and I think OXXO can bring a lot of expertise and knowledge about the execution at the store level. So in that sense that is something that obviously is very interesting.

On top of that, that company has the operation in Colombia, where we see a lot of potential in terms of growth, it's a fragmented industry as I already mentioned so we see potential there that we also would like to exploit and maybe that will give us a very nice footprint having operations in the Pacific countries like Mexico, Colombia and Chile. That is something that we would like to continue working.

On the split of the numbers, to be very honest we have not made a decision yet. I think even though we have been growing in that business we don't feel comfortable yet in terms of the size that we have achieved that we really need that split, but obviously something that we would continue assessing, and if we - with a view that would be better, a wide view, good information, most probably we are going to - that is a decision that has not been made yet.

OK. Thank you. Thanks very much.

Your next question is from [Daniela Igres], from Pradisco. Please go ahead.

And Daniela, please make sure that your mute button is off.

And we'll move on to your next question from Robert Ford from Back of America.

Thank you very much. I just wanted to follow up - there were sharp increases in administrative costs to OXXO as well as gas, and I was hoping you could detail what that additional spending is on, and then you mentioned that pharma was above OXXO in terms of same-store sales. How is gas? And then lastly, in response to the question of growth in average ticket - Daniel you mentioned that commercial income was a factor and I just wondered if that's being booked on the revenue line. I had the impression it was somewhere else.

Thank you for those questions and we'll sort it out among the three of us again. In terms of the admin, you had mentioned, it certainly has appeared where we have made investments in terms of spending to accommodate for future growth. Some of that gets put in the sharing but some of that gets put in the admin. We open for example the new region of Chihuahua for the gas business, so our gas station business starts in Monterey and we have some in Coahilla, growing radially from where we sit in Monterey and we are now going after the state of Chihuahua as well so there was some spending related to that. So I would say that both businesses, the pharma and the gas stations, you are going to see more [DNA] just generally during these faster-growth periods and I think for gas stations in particular. We had talked about twenty percent, now we are talking about somewhere between twenty and thirty, we're actually growing at thirty percent these days and if possible we would like to accelerate that.

So that would be a comment on the [SGNA] numbers. You mentioned same-store sales, actually running ahead of OXXO, not just in pharma but also I believe in gas they were also very healthy. I forget if they were even better or not but they certainly were the same ballpark. The improvement is pretty broad-based, and - remind me of your final question?

Commercial income was the last one.

Commercial income is part and part, right? Some of it is above and some of it is below it depends on the supplier and it depends on the promotion.

Correct, thank you very much.

And your next question is from [Jose Jordan], from Deutsche Bank. Please go ahead sir.

Good afternoon guys. In all the conference calls we heard this week from other retailers in Mexico many were mentioning the fact that Walmex, especially in the bodega format , that that's an increased level of aggressiveness in terms of prices et cetera. Not sure, many didn't specify whether it was the big [apple] guys or the express formats that are the closest to you even if not completely competitors to you. but I just in general I was curious as to how you were seeing the development of the smaller formats, how it's affecting your business and how - what you're doing in order to anticipate additional aggressiveness from that format in the future?

Thank you for your question. To be honest with you, we have a very deep study at OXXO and also we have been talking about it during the call, what we are doing, and we should always keep in mind that we don't have - always the same customer. Whether they come in more or less at OXXO. so I think that makes a difference. We haven't seen, locally, that we see as in [input] for us, more aggressive that we are concerned. I can understand that that could be potentially a problem for the big boxes, but the overlap we have between our OXXO stores and them is relatively small, I would say. This is not an issue for us.

OK. Thank you so much.

And your next question is from Rafael Shin, from BTG. Please go ahead, sir.

Morning guys, I was wondering if you could give us an update on the [top four] initiatives, or maybe tell us what you're thinking about that and I know you had a couple of pilots in OXXO and see if you are ready to be a little more aggressive on that side. Thank you.

The gates open on that. This is a very small position. This is a format that as we take from the beginning, something that we would like to learn. We are learning from that operation but it's something that is growing at a slow pace, and we are continuing trying to get a better understanding of that. In that particular regard I would say that we're in the process and once we feel more comfortable in terms of go much faster we will do so, but for the time being we are very much in a learning mode, I would think.

In terms of the continuing [thing] in OXXO, we have seen a very good response from the customers and this is very about obviously not a function that we are going to deploy in all the stores, but something that is taking its space and we are continually evaluating and seeing how much more we can grow. That is what I can comment on that. I'm not sure, Juan if you would like to add anything.

I'm not sure if just in terms of orders of magnitude - I mean if you look at the [Notota] we have about a couple of hundred stores in Mexico. We are going to start growing next year a little bit over this long period of let's call it hesitation we've been discussing where there were a number of things that needed to be brought up to standards in terms of how that company was operated so we will be talking next year about some additions on the [Notota] front but if you look at the (inaudible) in the OXXO stores we are looking to finish this year with something like six hundred of those, so right there you have a factor of three X, and next year we will probably roll out certainly more than two hundred so more likely three hundred, so in any given year we are going to be adding more modules than the entirety of [Notota] so - some of the learnings from [Notota] are finding their way into how we are executing (inaudible) and that was a big part of the rationale for the transaction itself, and I said it could start growing on a stand-alone basis, and we feel comfortable that it is now ready to do that.

In terms of eventually moving the needle for the FEMSA Comercio, I think it is a little more relevant in that sense. So that would be my comment.

That was very helpful. Thank you.

You're welcome.

Your next question is from Antonio Rocha, from BTG, please go ahead sir.

I have one and congratulations on the growth and impressive execution of OXXO. My question is on the company's current feeling on the implications of the ABI/Miller merger on the beverage industry?

I already mentioned this transaction has not been closed yet, so we don't want to provide any comment. The only thing that I can comment that we are very happy with the performance of Heineken, an overview on the midterm and long term position on Heineken has not changed at all, and you can see actually with the results that were posted yesterday that they have a great performance. We don't want to comment more until we get more clarity about how will the transaction end and even after that we know it will take some time until this is implemented.

I think maybe one thing we could add is just because it is something we have commented in the past - this is not a transaction that took any of us by surprise. This is something that for a number of years actually we had internally been modeling and war gaming and trying to understand the eventual impact of such a transaction on our business, on Heineken's business, and we feel very good about the prospects of Heineken in a post ABI/Miller world. That would be the extent of the comment.

Thanks a lot.

Sure.

And your next question is from [Alex Robard] from Citibank.

Yes, thanks for the follow up and I wanted to go back to the medium longer term idea behind [Circle Five] and drugstores in Latin America. You've given us some good intel on how to think about this in the shorter term and the opportunities and such, but as we think two, three years down the road, in Chile, is if safe to assume that a next step would be bringing in OXXO in a definitive way and to the extent of the [Circle Five] stores in Colombia, would the OXXO stores provide some impetus to do in fact more in that country over the medium term. And the third and final piece, would the Hispanic, the rest of Latin America - what does the [Circle Five] deal suggest in terms of further acquisitions and future deals. So that would be great if you could touch on the medium to longer term picture of small box retail in Latin America.

Thank you for your question. Assuming correctly said the overview we decided to make entrance to the pharma industry or sector was by trying to think what our own expectation of small box that we leave the rationale behind that sector. And that is how the business [prospects] seems now. We also by analyzing the sector in South America we saw that there were opportunities that we can use by doing some acquisition, and the deal that we structured [Circle Five] in Chile was in the intention is to use that vehicle to develop that business in South America, OK. So thinking in the middle and long term, that is the potential of using [Circle Five]. In that regard this is something that most probably going to be some payback step by step. Over the next I would say twelve to twenty-four months our intention is to learn, as I already mentioned to try assert best practices from both ends and making sure that the integration goes smoothly.

That is where we see in the short term and in the medium term, obviously if opportunity appears in other markets we would analyze as we always do. We will make sure that if we go into potentially a new market, it's something that makes sense for us that we can create value and that is always the way the entrance into different markets.

Particularly in the case of Chile, I would say that the market is mature, we have finally in position there, potentially there are opportunities in the convenience stores. We think in some time we'll mostly analyze but not now. We see that as something that we need to make sure that we can run the duration, that we can learn from the market, and once we get into that level, most probably we will see how to move forward in that particular market.

In the case of Colombia, as you correctly say, now we have two platforms - the convenience store and the pharma stores so I think that definitely should help us to start to create a critical mass in the regional business but most surely will allow us to continue growing organically, definitely. In the case of OXXO obviously we feel the most comfortable - we understand the market, we understand the main drivers of the convenience stores in Colombia, definitely our intention is to continue growing in that particular market.

Unidentified Participant. Thank you.

You're welcome.

Ladies and gentlemen, if you would like to ask a question please signal by pressing star and then one on your telephone keypad.

Ladies and gentlemen at this time we have reached the full time for our questions today. I would now like to turn the conference back over to Mr. Rodriquez for closing and additional remarks.

OK, thank you very much for your participation today and 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, that does conclude our conference for today. Thank you for your participation, and have a nice day. All parties may now disconnect.

END