Fomento Economico Mexicano SAB de CV (FMX) 2016 Q1 法說會逐字稿

Good morning and welcome, everyone, to FEMSA's first quarter 2016 financial results conference call. (Operator Instructions).

During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance which 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'd like to turn the conference over to Eduardo Padilla, FEMSA's Chief Corporate Officer. Please go ahead, sir.

Good morning, everyone, and welcome to FEMSA's first-quarter results conference call. Juan Fonseca and Roland Karig are also with us today.

Since most of you have already seen our detailed results, as well as those of Coca-Cola FEMSA, we want to use the call to try to add more color and some qualitative elements to the discussion, as well as to hear your views and answer your questions. Hopefully, you will find it useful.

Before getting to the numbers, we should talk a little bit about the changes we are making to how we present information for FEMSA Comercio. As you have seen, we have made additional changes, and we are now showing three separate divisions in a [permanent] effort to improve our disclosure and to keep it consistent with the way that we look at information internally, retail, health, and fuel. So now our pharma operations in Chile, Colombia and Mexico constitute the health division, which should allow you to follow up its performance more closely.

As another benefit, there will be much less noise around information of the retail division, and therefore, you will be able to track OXXO's results more accurately, as they represent the vast majority of this division.

Turning to the results, our Company started the year on a solid note. FEMSA Comercio's retail division continued to see strong comparable growth and profitability gains at the core OXXO business, supported by our in-store initiatives and execution, as well by a robust macroeconomic backdrop in Mexico, while taking advantage of positive calendar shifts around the Easter holidays and the leap year.

Our drugstore operations continued to perform well, delivering good comparable store growth while allowing us to grow our store base and to invest in the integration of our single operating platform in Mexico.

For its part, the fuel division is facing some temporary headwinds driven by a national price reduction and by our sustained rapid expansion strategy, both of which put short-term pressure on profitability.

For its part, at Coca-Cola FEMSA, we achieved robust revenue growth in Mexico, as well as market share and profitability gains in several key markets, even in the face of sustained macroeconomic and foreign exchange pressures.

Moving on to discuss our consolidated quarterly numbers, total revenues during the first quarter increased 31.7% and income from operations increased 16.4%. On an organic basis, that is excluding the results of Socofar and Farmacon operations, as well as the months of January and February for fuel, total revenues increased 12% and income from operations increased 12.2%.

Net income slightly increased, 0.2% in the first quarter, reflecting the growth in FEMSA's income from operations and offsetting lower net income from our participation in Heineken, which had a difficult comparison base leading the sale of the Empaques business the first quarter last year, as well as higher non-operating and financing expenses.

Our effective tax rate was 31.8% for the quarter, within the expected range.

In terms of our consolidated net debt position during the first quarter, it increased by MXN700m compared to the previous quarter to reach MXN58b at the end of March. The balance sheet positions reported yesterday include the debt and the proceeds from the EUR1b bond issuance we placed during the month of March at a yield of 1.8% for seven years. This issuance will provide us with provide us with additional flexibility to pursue our growth strategy at very attractive terms.

Moving on to discuss our operations and beginning with FEMSA Comercio's retail division, we opened 137 net new OXXO stores during the first quarter, reaching 1,191 new store openings for the last 12 months. Revenues increased 15.6%. OXXO same-store sales were up 8.8%, driven by an 8.3% increase in average customer ticket, and a slight increase in store traffic.

On the subject of traffic, we should note that we are seeing a new breakdown for the telephone category, as prices for prepaid wireless minutes are again coming down rapidly in response to increased competition among telephone companies and as apparently more consumers move to postpaid plans.

Even though the category is now smaller than it used to be for us, it is still big enough to impact the overall traffic number. However, the growth of the service category, particularly that of financial services, continues to help us offset the revenue and traffic losses from telephony.

Moving down to the profit, to the P&L, for the first quarter, gross margin expanded 30 basis points, reflecting a positive mix shift due to the growth of higher-margin categories, including services and a more efficient use of promotion-related marketing resources.

In terms of operating margin this quarter, the retail division posted an expansion of 50 basis points, again reflecting solid operating leverage, as well as contained selling expenses, in spite of the growing number of stores.

Moving on to FEMSA Comercio health division, we added 35 drugstores to reach a net 935 (sic - see press release "1,935") units across our territories at the end of March. On an organic basis, revenues increased 20.6%, driven by a solid increase of 10.6% in the same-store sales in Mexico. Gross margin expanded 280 basis points, driven by the category of Socofar that has structurally higher gross margins than the Mexico operations.

However, operating margin contracted by 170 basis points in the first quarter, reflecting a higher operating expense structure at Socofar. On an organic basis, income from operations increased 6.6%, reflecting operating deleverage from our accelerated unit growth in Mexico, as well as higher expenses, as we build infrastructure and prepare for further growth while strengthening our three drugstore operations in Mexico and gradually integrating them into a single platform for operations.

For its part, FEMSA Comercio fuel division added 12 gas stations during the first quarter to reach 319 units at the end of March and reaching 87 net new service stations for the last 12 months. Same-station sales were flat for the month of March of 2016 compared to March of 2015, as volume increased 2.2%, while the average revenue per liter decreased 2.5%, reflecting the national price decrease instituted at the beginning of the year.

Gross margin contracted by 10 basis points, reflecting the impact of lower prices of an existing inventory at the time of the price decrease, and operating margin only reached 0.5% of revenues, reflecting the accelerated pace of station growth and the fact that recently added stations take some time to reach target volumes levels, particularly in new territories, where our brand is not as strong.

The compressed margins also reflect our investment in developing a broader and more robust management structure across territories, as well as a slightly higher regulation cost. These levels of profitability are of course below expectations for steady-state margins, but we are willing to defer profitability in order to maximize growth at this stage and -- have [big important] some territories.

Moving on briefly to Coca-Cola FEMSA, total revenues increased 7.9% during the first quarter. Continuing with recent trends, it achieved market share and profitability gains in many of its markets. Robust pricing and strict expense control more than offset pressures on generally weaker exchange rates, resulting in solid set of numbers.

In particular, results in Mexico continued to be strong. Beyond Mexico, we still face challenging environments in several of our key South American markets, but we continue to use the tools at our disposal, such as innovation, pricing and packaging with encouraging results. If you were unable to participate in Coca-Cola FEMSA's conference call on Wednesday, you can access a replay of their webcast for additional details on the results.

Let me it on to Juan for a moment.

Hi, everyone. I just wanted to mention -- basically, Eduardo is done with his prepared remarks, so we're going to move to Q&A, but I just wanted to mention that based on feedback from several of you after our last conference call in February, we're going to try to keep the Q&A moving along and try to keep the call from becoming a little bit too long for you.

So, please, let's try to have just one question per caller. Thank you. And with that, we can open the call for your questions. Operator, please?

(Operator Instructions). Alex Robarts, Citi.

Thanks, and hi, everybody. I guess, listen, for my one question, I'd like to go to the health division, the drugstore chain. And first of all, just before that, to say thanks again for opening out the segment data. It's very helpful.

So, look, as we think about this 21% growth organic that you have posted in the drugstore business, year on year, you tell us that about half of that is same-store sales. How can you compare and contrast what the Chilean business is doing versus the three acquisitions in Mexico? I guess it's probably safe for us to assume that on the metrics of store growth and same-store sales, there's a kind of more rapid growth in Mexico versus Chile. So if you could give us a sense of that 11% same-store sales growth, how much of that was in Chile and Mexico.

And the second part of this question is about Socofar. You now are kind of finished your second full quarter. If you had to give yourself a report card, are you happy with the integration and maybe some of the short-term opportunities you see for the rest of the year. Thanks very much.

This is Eduardo. Thanks for the question. We are very happy with the acquisition of Socofar. Things are coming as we planned it. The projections that we had and the results are very much aligned with the projections we had at the time of acquisition.

In fact, we are now hiring a new CEO, and he will be in place in probably a month and a half, and we're very happy. And I think there are a lot of synergies, the way we perceive business, the culture of this company in Chile, our culture here in Mexico, are very much similar, so we are very happy, and I think we are going to find in the long run more value than we really originally thought so.

Hey, Alex, let me take the part of the question -- this is Juan -- on the same-store sales. Actually, all of the same-store sales that you see is basically Mexico, because if you think about it, Chile, we haven't really had the opportunity for a full year, so the whole almost 11% that you see is basically the Mexico stores. And you're correct that the expectation is that the same-store sales growth in Chile is going to be slower than that.

I think what we're going to see this quarter and the following three quarters, as we kind of circle or lap around the integration of Socofar into the numbers, there are some differences in the P&L in terms of -- they stem obviously from the operation. As we mentioned in the remarks and in the press release, the gross margin tends to be higher at Socofar, so the stores are bigger, the revenue per store is higher, prices are probably higher, as well.

But then also, in terms of the expense structure, it's higher. You need to have a pharmacist on site, you have more people at the stores, the inventory levels are different -- so there's also implications for D&A. At the end of the day, what we showed when we first did the transaction, EBITDA margins around 6%. That's what we're going to use as a benchmark.

Obviously, this first quarter is seasonally a smaller quarter, so there's a lot of moving pieces that we're going to have to transition into as we go through the year, and because it is a large operation relative to the Mexico operation, it will impact the numbers.

But just to the specific question about same-store sales growth, we are not showing anything for Chile yet, but the expectation, as you pointed out, is that Mexico and perhaps Colombia -- Colombia also has I think a good chance for accelerated unit growth and same-store sales growth. But by and large, it's all about Mexico in terms of the numbers you saw.

Okay, got it. Thank you.

Sure.

Andrea Teixeira, JPMorgan.

Hi. Hello, good morning, everyone, and thanks for taking the question. Congratulations. So on this, and thank you for the format, as well, of the call. The one question I would ask relates to potentially now also health. On the EUR1b bond, I understand that obviously it will likely -- the use of proceeds will be M&A, and I was just curious what is your wish list, in terms of presence in drug stores in Mexico City or continue to expand outside Mexico. How should we think on that? Thank you.

Well, let me tell you, in Mexico, what we are trying to build first is these two chains that we already have and the potential one that we might acquire. We have to build our common platform for operations, and once we have that in place, it will be much easier to have synergies and buy inventories, exchange inventories and exchange platforms for growth. So that is in place, and I think it will take us throughout this year to have that completed.

At the same time, we're also thinking of what to do with the brand. I think this will be very important to have a common brand and to have a common impact for the consumer. However, we understand that the [going] brands that we have are also very important, so it will be a plan how to implement one plan, which might be probably one of the going brands that we already have and have a transition phase where we could have the local brands available and slowly implement the change to the common brand for the Mexican operation.

The other thing that we are probably foresee important is that there are some territories that we should go, which is as you said Mexico City. Mexico City is an important market, where there are no dominant players, and I think we already are opening stores in the barrio in Mexico area, so I think we are very optimistic that we could probably in two or three years have a strong operation with a common platform and with a common brand to tackle the consumer.

Yes, I was just going to add to what Eduardo said. Hi, Andrea. In terms of South America, also, the fact that we're already there, but it's probably early days in terms of our getting our arms around the South America operation, but the fact that now we have people in Santiago, and as Eduardo mentioned, that we're going to have a reinforced management structure down there. I think it also improves the possibility that we might look around for assets in that region, and of course, Colombia is also an interesting place, where there could be other assets to pursue.

So you're right that some of the proceeds, probably a good chunk of the proceeds from the bond, we said during that road show, probably earmarked for M&A, small-box retail being the most likely recipient of that. We've mentioned in the past, our logistics business is also another one that we would like to continue to invest behind. But health and drugstores clearly are at the top of that list.

And how about a QSR in the US? Isn't that like something that could help you eventually roll out more OXXOs in the US? I know you had some, but that could change, could be transformational to your business model in the US.

Well, let me tell you. A QSR is -- this is Eduardo speaking. I love QSR, and I think we're implementing some QSR efforts in our OXXO stores, but at the same time, even though the value proposition of OXXO and QSR might overlap a little bit, the way to run QSRs is very different from running a convenience store. So we are learning. We already have some operations within our operations to learn and see how really we can add value.

And I think throughout the year, we will be more defined of how well or how strong we should pursue that initiative. But I'm optimistic, but it really requires different abilities that we should be incorporating in the Company.

So it's on the list, but it probably sits a little bit under, below the drugstore.

I think probably we shouldn't find this in the next 18 months.

And Brazil, on your comment -- on Juan's comment on South America, like Brazil would be out of the opportunity now, especially with your currency being stronger and the opportunity going to Brazil?

Brazil will be a very interesting market, and drugstores in Brazil are extraordinary, so there might be some opportunities, but we are still learning about it.

Okay, thank you very much.

Thank you.

Antonio Hernandez, Barclays.

Hi. Good morning. Thanks for taking my call. My question is on the health and fuel divisions. Do you expect an improvement in the margins of these divisions? And for when would you expect an improvement, and if you have any strategy on that. Thanks.

Hi, Antonio. This is Juan. Certainly I guess you have kind of two different things here. In terms of the Mexico operation, everything that Eduardo just described in terms of the integration of the three companies that we bought onto one platform, the SAP systems, the inventory, the back office, all of that should be conducive to margin expansion.

There is still what I would call perhaps low-hanging fruit in terms of three companies that are subscale. And we're in the process of scaling them up, and there is a lot of white space in terms of what we think we can grow in Mexico, and all of that I think would be conducive to margin expansion, so the answer there should be a very categorical yes.

I think in Chile, you have a more mature operation, where perhaps the opportunities for margin expansion are less obvious or less large, if you will. But still, obviously, we're coming to Socofar with a fresh set of eyes, and obviously there are things that we think we can bring to the table. I think we can accelerate growth, and I'm sure we can also work on expanding the margins.

But I guess what I'm trying to say is you're going to have two different slopes of the curve in terms of the Mexico operation, and perhaps I would put Colombia closer to what I would expect from Mexico, and then the role of Chile, where you have very steady cash flows, a very strong operator already, where growth within Chile is probably less obvious.

Now, there is also the opportunity, as we said a couple of questions ago, of going beyond Chile or even looking within Chile at the convenience store opportunities. There's a lot of things that come from the Socofar platform, but just margin-wise, and remembering that this first quarter is probably one of the lower-margin quarters, or perhaps the smallest quarter of the four, so I would view the 6% EBITDA margin that we mentioned for Socofar when we did the announcement as the reference point. And we'll obviously update you as we move throughout the year.

For the Mexico operation, we said before we are looking into developing an in-house distribution capability so that we can then deal a little bit more directly with the pharma companies. That's going to take a while, but it's already kind of getting started. So yes, you should expect a faster margin expansion at pharma Mexico than elsewhere.

Okay, excellent. Thanks.

Sure.

Luca Cipiccia, Goldman Sachs.

Hi, good morning. Thanks for taking my questions. Just as we focus on only one, I actually wanted to ask a bit an update on capital allocation and Heineken. I would assume there's no news there or there's no different message, but, Juan, I remember there was a comment you made in the previous call, which I wanted to clarify, which was about the possibility or the interest in maybe discussing a potential swap with Coca-Cola or even broader alternatives.

And I was hoping you could clarify and maybe elaborate a little bit on that, in the sense that should it come the day where in fact you decide to dispose that stake, and assuming that Heineken is the natural buyer for some of it or all of it, but assuming also that maybe they're not willing to buy, who else would you engage with? And is it realistic to assume that given the players that are left that could absorb such a large investment, the alternatives for you will really only be the other large beverage players globally, whether it's Coca-Cola, or to stretch it, maybe even Pepsi itself.

But could you maybe explain your mindset on that and even elaborate on that comment that was made last time on this point?

Hi, Luca. Yes, obviously, there are theses and theories circulating around in terms of obviously first, what is the future of our Heineken investment, and then, as you pointed out, what we could do with such a large amount of money. And you kind of, in a related way, kind of the dance of the elephants and the big M&A that is happening in the beverage world, obviously specifically in the beer world.

First, I would just reinstate or reinforce the message. Heineken is doing great. You saw this a few weeks ago when they came out with their numbers, very strong results, executing their strategy very well. The market, again, continues to reward them for that.

And so at the risk of sounding a little bit like a broken record, we continue to be very, very happy investors, very happy holders of the shares. So no catalyst that I can see in the near term or the medium term that would change our mind there.

But, obviously, we look at what's happening. We have to internally keep benchmarking Heineken versus other alternatives, like the one that you describe, but in terms of making a swap, which sounds so much easier than it would actually be.

But no, I would say this is interesting. I was just reading this morning, as probably many of you were, in terms of ABI-SAB, now apparently going to divest operations in Central and Eastern Europe. I have no idea whether that's something that might interest Heineken. Those are all questions for them.

But there's a lot of things going on. There's opportunity for Heineken to continue to grow and to improve their own business, so I would really again reinforce the message that we are happy with the status quo without ceasing to monitor what goes on out there, but that you should really not expect any major news on that front any time soon.

Juan, maybe just to point on this, assuming that you will decide to sell at some point, is it fair to say that you have no preference of who's going to buy it? The only preference that you would have, I would think, is just to minimize your tax leakage, if there is a scenario. Is that a fair assumption?

I think that's fair. We've said before this is a financial investment for us, rather than a strategic one, so following from that, you would have to assume that we're indifferent about the buyer, and whether Heineken is the natural buyer for the stake, again, I think that's a question for Heineken. But you're right, we are definitely -- this is a financial investment for us.

Perfect. Thanks for clarifying. Thank you.

Jeronimo de Guzman, Morgan Stanley.

Hi. Good morning. Just a quick follow up on what you just mentioned. Is there a tax implication if you sell the Heineken investment and transfer it to a different investment, or is that pretty much the same treatment as if you cashed out of the investment in terms of the capital gain?

And I guess my main question was just on OXXO. You mentioned the ticket growth, which was very strong, which offset the traffic. Was that because of the same reason, the phone card issue, or was there something else that was helping you grow ticket at such a high level?

Well, the FEMSA -- the OXXO results I think were driven because the Mexican economic environment, the comparables of the industry, even though we were better than the comparables, I think Mexico is in a strong mood for the consumer at this stage. And we are being successful innovating in some categories, as we have said to you before.

We pursue different occasions for the consumer, and there are some occasions where we are very important like (inaudible) and craving, and some others that we are not as important, which are daily or pantry deposition. And I think in daily and pantry deposition, we've been able to tackle the consumer, and finally I think the consumer is considering us as a major alternative for their purchasing -- for the purchases in those categories.

So I think in those, we are receiving very high growth. And in the other hand, there are some territories in Mexico, the northern border states, where growth has been also very important, and the more you go to the south, the less important the growth has been in -- within the stores.

And, Juan, do you want to do it?

Yes, I think on the capital gains question, Jeronimo, hi. If you sell the shares, more or less regardless of what you are going to do with the proceeds, you would be subject to capital gains tax, which is 30% for corporations. And obviously, given the strong appreciation of the shares since we received the equity back in 2010, that's not -- it's not an insignificant amount.

Obviously, if we were to dividend the proceeds out, there would be incremental taxation based on each investor's dividend rate, but, yes, that would be it in a nutshell.

Thanks. On OXXO, just the answer on the growth, is there anything in particular of those elements? Because I assume those elements were also still in the fourth quarter and the third quarter. Anything in particular that's helping the ticket side accelerate this quarter?

No. I think water, we were very strong in water, I think. Well, the very first -- I think the first water of last year was very -- we had a lot of rain, so probably some of the weather has been also helping us.

I think that's accurate. We are I don't want to say glossing over, but having read a lot of the things that have been written on retailers generally for this quarter, I don't know that everybody's remembering as much the whole Semana Santa effect.

That's true.

This quarter, we got the full benefit of the Easter holiday. We got the extra day of February, and to Eduardo's point, it was warm at times during the quarter. So all of those things, when we look at the breakdown of categories, beverages, generally, we're doing well. Eduardo mentioned water.

So I think in that sense, and also, I take the opportunity to make everyone aware that the second quarter, April, when you have such a good March, April tends to suffer because of the Semana Santa thing. So just to kind of temper expectations that the second quarter is going to be as strong as the first, because I don't think it will.

And then, of course, we will move into the second half of the year, where comparisons are going to be tough, because we're going to be lapping 8%s and 9%s in terms of the second half of last year, so those would be my thoughts.

Great. Thank you very much.

(Operator Instructions). Robert Ford, Bank of America Merrill Lynch.

Hey, good morning, everybody, and thanks for taking my question. I was wondering if you could just finish up from the last comment, and that is, could you just give us a sense of what the underlying comp is adjusted for the leap day and Easter for OXXO in Mexico?

And my question was really about fuel, and I was wondering if you would just give us your latest thoughts on the model for fuel and how you expect that business to scale, given your learnings over the last year. And also, as you build densities, are you finding that you're self-cannibalizing, and is that playing a role in the flat comp in fuel?

And then lastly, if you could just comment on some of the nascent efforts by new entrants, both upstream and in gas stations, please.

Well, let me try to tackle your fuel question. This is Eduardo speaking. What we've been able to do is we've been able to come up with a strong brand. I think our brand, OXXO Gas, might be among the market, among the strongest, and we see it basically in three things, service. The other one is promotions that we have been able to implement promotions within our service stations, and number three is that we sell liters per liter.

And those three things combined, we have been able to build a strong brand. Strong brands take time to develop, and I think where we have enough density of gasoline stations, the brand comes alive, although it takes time. But once it's alive, it -- our strong brand is reflected in the volume per service station, and our volumes are very high, because of those three things that combined makes our brand -- has a strong preference from the consumer.

What's our idea for growth? Well, our idea for growth is gradually growing and growing closer where our growing gas stations are, so we can transfer the value of the brand territorially among the neighbor territories, and we'll be doing this in a very disciplined way.

Secondly, in terms of margins, the way we've developed this growth is through a very highly leveraged operation, because we are not investing major assets. What we are doing is really partnerships with current service station owners and partnering with them so we could build together a stronger foundation for the future. So I think in a nutshell, that's one -- that will be probably our strategy for gas stations.

So far, we have not seen main -- any move or any relevant or important move from foreigners into those markets. There are still a lot of things to be learned, a lot of things to be clear of how this reform will take place, but I think we are slowly and in a very disciplined way growing from our position.

Yes, I think -- hey, Bob. This is Juan. I would just add to your question about building densities having a negative impact on the number, I don't think that's the case. The one metro area where we probably have the highest density is here in Monterrey, and the stations here are some of the best performing. So I think it has a lot more to do with what Eduardo mentioned in terms of the brand building.

So, for example, we mentioned a few months ago that we were building an infrastructure to start growing in Chihuahua. More recently, I believe, we're increasing our scale in Juarez, Zacatecas, and clearly, it takes a while for the consumer in those markets to establish the link between an OXXO gas station and the fact that he gets more miles out of his tank and that the service is better and that there are these interesting promotions that he gets coupons when he fills there and he can go and do a number of things for less money.

So it takes a while, and by a while, I mean probably more than a year, to get to this.

Sometimes more than two years.

Sometimes more than two years, to get to that point where we've said we can double, or as much as double, in some cases, the volume and then get the throughput where it needs to be and then get the returns to where they need to be. So it is a process, but I don't think anything we've done yet we're over-penetrating or cannibalizing ourselves by any stretch.

You had a quick question at the beginning, having to do with adjusting the comp sales for the calendar effects. Probably somewhere between one and two points, so of the almost 9%, maybe you can shave a couple of those to adjust for the calendar. But it's still a very strong underlying, something that will be probably close to 7% on a like-for-like calendar.

That was very, very helpful. Thank you both very much.

Thanks, Bob.

Antonio Gonzalez, Credit Suisse.

Hi. Good morning, Eduardo and Juan. Thanks for taking my question. I just wanted to follow up on the FEMSA Logistica business. Last quarter, Juan, you mentioned that there were some I guess growth-related expenses in Brazil, etc., and I just wanted to follow up on what was the progress this quarter. Are things improving? Looking at the implied numbers, by just stripping the rest of the FEMSA Comercio divisions, it seems like the EBITDA margin improved.

So I don't know if it was a function of FEMSA Logistica only, or there's any other noise in that number. And I wanted to ask if you can share what are your thoughts, if you have any projection that you can share of what's the EBITDA contribution that the business could have this year or next.

And just what are your latest thoughts, now that you did this big improvement in disclosure, which by the way is very helpful for us, are there any plans to give more details down the road on the Logistica business, just obviously as it captures a relevant portion of your annual CapEx, etc. Thank you.

Thanks, Antonio. Well, Logistica, what we are doing in Brazil, we will be consolidating a lot of efforts to have a consolidated operation of logistics with several facets, and in fact, more vectors than the ones that we have in Mexico, because the current regulations in Mexico doesn't allow us to move freight as freely as we could do it in Brazil.

Once that platform is in place and taking synergies and learning from territories and how complement one business with the other, there might be opportunities for growth. But I think so far what we are doing is we are learning a lot. We are executing very well, and thanks for the current scale that already we have from the current operations that we have that FEMSA Logistica has, it's a major enabler to acquire and complement the business. And that's really basically what we are planning to do in Brazil and in Mexico.

And that's why we have been doing those small acquisitions, so we could establish ourselves and start growing from that. I think we are very optimistic, even though the market in Brazil is very difficult, and we have a very difficult January. February and March were much better, and we're optimistic. I don't know if you want to continue, Juan.

Yes, hey, Antonio. I think what you're seeing, and yes, the number, when you do this adjustment that you do this kind of isolate the others component, obviously, the first quarter was much better than the fourth one of last year.

In Brazil, part of the growth that we've achieved in Logistica has been horizontal, so we've made some acquisitions there that have either brought us new capabilities or new territories, and there's always when you do those transitions, you lose some clients, and then it takes a while to get them back. On top of the very tough backdrop, just the macro backdrop, where clients are trying to save money, it's just harder to compete in such an environment.

But I think to allow this point, I think the improvements that we're seeing are coming in pretty evidently and pretty fast. It's still a small operation in the greater scheme of things. I think if you look at how we evolved the whole dialogue and discussion around drugstores, first, when we started talking about drugstores, we didn't talk about them that much. And it was part of FEMSA Comercio for a long time.

Once we've made this really large acquisition in Chile, and the numbers really got to where they moved the needle, it became logical to strip it out and disclose it as a separate entity. I think we're not there yet for the logistics business, but once it gets to the right size and once it makes sense to provide you guys with more granularity, I'm sure we're going to go ahead and do that, but not just yet.

That's very clear. Is there a number that you feel comfortable sharing at this stage in terms of the annualized contribution to EBITDA? I don't know if this year is to be considered normalized because of the situation in Brazil, but let's say in 2017 or whatever, is there a number that you feel comfortable sharing, or not at this stage?

I would rather keep that internal for a while. Obviously, the number that you see --

It's very small.

It's small, it's small. And again, the number that you're seeing, there's also the embedded component, the cooler business, which is also actually doing very, very well. We have very good market share in the US. We export to something like 50 countries. It's smaller than Logistica, but it's not insignificant by any stretch, and there's a number of things in that number, so it's hard to isolate, and obviously that's why you're asking me.

But I think it's too small to really merit a number, because also, if I give you a number, then you're going to keep asking me about whether that number is growing and how fast it's going to --

But the good thing is I think there are very good bets, good bets that we're learning and we are making progress. And I think we're optimistic that probably -- I hope in the near future, we'll be able to disclose, because -- the importance and the relative importance of those investments within FEMSA portfolio.

And also to keep in mind, kind of the business philosophy and the emphasis that FEMSA puts on generating returns in excess of the cost and the focus on positive EVA, all of those things apply. And so you should all assume that this is a very profitable business that has great potential for value creation, but it's a little bit early to start throwing numbers around.

Got it. That's very helpful. Thank you.

Thank you.

Luis Miranda, Santander.

Yes, hi, good morning. Just a quick question. Could you give us the update figure on the Saldazo cards and what's the current rate of new customers? I remember if I recall correctly, last quarter, you were running a running rate of close to 200,000 new issues per month. Thank you.

Yes, as you remember, Saldazo is a joint venture between [Visa], Banamex and OXXO. And this Saldazo is a dedicated card which is very easy to open where we're incorporating a lot of people to the banking system without -- very little regulation, because there are very small amounts of pesos that could be managed in those accounts.

And the beauty of it is that those debit cards, you can cash out from any Banamex cashier or from the OXXO stores. We've been very successful. We are now close to 4m bank holders, and -- cardholders, I'm sorry. And one thing that the Banamex -- we are very happy that the use of those cards is very -- they are very highly used compared with some comparables in the banking system.

And we are growing at 200,000 new cardholders per month, and I think we are becoming -- I hope we can become -- we can incorporate a lot of people that have not been able to incorporate into the banking system, and although I cannot tell you that it's a huge business, because it is not. But once we have a lot of people incorporated in those as cardholders, we should find a way how to leverage such a big population and such loyalty into our stores.

I would just add, Luis, I think since the last time we talked about this, we added HSBC as a partner, so right now we have almost all of the large banks.

And the services.

Yes, for the correspondent banking.

Yes, for the correspondent banking. I don't know if Banorte was --

I think Banorte is still not.

I think it's in the process.

It's in the process.

(technical difficulty).

Perfect. Thank you.

Thank you.

Jorge Mauro, SPX Capital.

Yes, hello. Thanks for taking my question. It's on the fuel business. Just a clarification, do you get here a fixed margin per cubic meter you deliver, or do you actually have operating leverage on the pricing level? Because what I'm trying to understand is this impact we saw on your margins in the fuel business? If it is just related to the inventories, or -- and then, as such, we should expect some normalization in the next quarter, or if this would be recurring?

Hi, this is Juan. No, the price is fixed. The price is the same for everybody, regardless of how many gas stations you have. This is scheduled to change in 2018, when you will be able to set your price based on basically market conditions.

But right now, the price is fixed, and obviously, a lot of the cost structure is also fixed, right? So the rent that we pay, the labor, which as you probably know, all gas stations in Mexico are full service, so labor is not an insignificant line item. Those are fixed.

So when you have to reduce your prices by 3%, obviously, that causes this operating deleverage that we're talking about. And I would expect until we cycle the price decrease, this is probably going to be in the numbers for second, third, fourth quarter. And that's already assuming that this is the only change in the price mandated by the government, basically.

Right, so you don't have a fixed margin, like a fixed amount of pesos per cubic meter, to --

No, not margin, no.

Right, okay. Perfect. Thank you very much.

Thank you.

Jose Yordan, Deutsche Bank.

Hi. Good morning, guys. Just a quick follow up on the use of proceeds question from the bond. I just wanted to know if there was any change in your willingness to buy or Coca-Cola's willingness to sell additional shares in Coca-Cola FEMSA to you, and might this be -- this potential use of proceeds be revived? It's been in place since the last bond issue, and nothing's happened. So just any update on that would be useful. Thank you.

Hi, Jose. Still, I guess it's on the list, and as we've said before, there have been some conversations with KOF. Obviously, the prices have moved around. KOF has had a very nice run. Year to date, as always, you have -- the buyer and the seller have different worldviews about value, but to be honest, there are so many things on the list in terms of potential M&A, high growth opportunities, high return opportunities, that I would not put the 2% that we've talked about of KOF shares as the highest priority.

It could happen. It might happen down the road, but I wouldn't say it's at the top of the list, Jose.

Okay, thanks.

Alvaro Garcia, BTG.

Hi, guys. Thanks for the call. My question is on seasonality on your operation in Chile. You mentioned that it was the seasonally weakest quarter of the year, but I was wondering if you can give us some kind of idea as to how weak, or maybe put it into context. Is it similar to OXXO's seasonality in Mexico? Any sort of color on the seasonality in that operation would be helpful. Thank you.

This is Eduardo speaking. I was surprised to find that some of the cooling businesses in Chile, some of them are very highly seasonal, and they are very highly seasonal because of two factors, because the summer is in December, and the other one is because December is December. So I think we should find better ways to have a value proposition that is appealing to the consumers throughout the year.

And currently, I would say in some of the Socofar operations, they are more seasonal than OXXO, and I think there were really some challenges how to shape the value proposition so we can have that proposition attractive to the consumer throughout the year. But I think currently, I would say they are more seasonal than what we have been experimenting in the OXXO stores in Mexico and drugstores in Mexico.

Colombia, in the same [granular], is not as seasonal as Chile.

And I think at the end of the day, all the spending that takes place around Christmas and the holidays happens whether it's warm or cold, but still, there are these differences where in order for the Socofar operation to reach the 6% EBITDA margin for the year, for this first quarter, I think we were probably closer to 4%.

So clearly, there should be some quarters where you do better than 6%, and we're going to see that over the next few months.

Yes, that makes sense. Thank you. Thanks, guys. Thanks for the color.

Thank you.

Thank you.

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

Well, thanks for being with us. Thank you very much for all your questions, and everyone who posed one.

Yes. Have a good weekend, guys. We'll talk soon. Thank you.

All the best. Bye now.

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