Mexican Economic Development Inc Q1 FY2020 Earnings Call

Good morning and welcome, everyone, to FEMSA's First Quarter 2020 Financial Results 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 safe 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 may materially impact the company's actual performance. At this time, I would now like to turn the conference over to Mr. Eduardo Padilla, FEMSA's Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and welcome to FEMSA's first quarter 2020 results conference call. Juan Fonseca and Jorge Collazo are also on the line today. We hope that you and your loved ones are healthy and safe in these challenging times. As you might expect, today's call will be somewhat different from our usual quarterly calls. Certainly, we'll discuss our operating and financial results for the first quarter, but we know that you are also keen to know how the health emergency is impacting our operations. What we have seen so far and what we expect going forward. We listened to Coca-Cola's conference call yesterday, and we have paid attention to the quarterly calls of other peer companies, and we'll try to address your questions and concerns as best as we can, given the high levels of uncertainty surrounding the current situation and its potential duration. The first quarter got off to a strong start. And with this being a leap year, yesterday in February came in handy, particularly since it was on a Saturday. However, by the middle of March, we began to see a meaningful fall in consumer activity, following more restrictive measures by authorities in Mexico and elsewhere. Therefore, if you simply look at our results, the quarter looks fine with most of our business units delivering on trend. For the final days of the quarter, we have a preview of what April would look like, and it's important to have this context. As the severity of the crisis became more apparent, our entire organization engaged in broad risk mitigation, focusing on ensuring the safety of our people and our customers, the continuity of our business, and the strength of our financial liquidity. We also began working to leverage our scale and reach to provide support to our communities. And let me tell you that the speed and effectiveness of these actions across our company have been extraordinary. I am very proud of what our teams have achieved at every operation and at every level, taking advantage of our strong execution capabilities. And it strengthens my conviction that we're in a good position not only to navigate these uncertain times but to come out stronger on the other side. Let me mention some of the initiatives and measures we have been taking so far. Our first priority is ensuring the safety and health of our people and our customers. To that end, we have sent home more than 25,000 vulnerable employees with pay, and we have enabled work from home capabilities where possible. Among many initiatives, we have enforced sanitary protocols in stores and distribution facilities, including the availability of face shields and other protective gear for our people. We're making hand sanitizers widely available at our stores, performing temperature checks, and disinfecting high-traffic surfaces periodically. We have rolled out plastic devices to enhance protection for our drugstore cashiers, and we are enforcing low-density business protocols for employees and customers alike. Finally, we're making it easier for our customers to buy through digital platforms, reducing the risk of direct contact. With Coca-Cola FEMSA leading the way with their omnichannel strategy, we are making progress on our own digital initiatives. In terms of our communities, we are donating and distributing assistance to our operations as well as through the FEMSA foundation. Examples include providing financial support, donating water, food, medical supplies, and even contributing our manufacturing expertise in a collaborative effort to produce low-cost medical ventilators in Mexico. From a financial standpoint, we're making every effort to further strengthen our liquidity. Our corporate cash position increased by more than 100% during the quarter, driven by debt issuances at FEMSA and Coke FEMSA during January, which totaled more than $3 billion, and we also drew down approximately $1 billion from some of our available short-term revolving credit facilities. As I mentioned before, we're rationalizing expenses, including looking at certain leases that are currently not generating income, and we're making an effort to address some fixed costs. However, regarding our employees, our mindset is to preserve the maximum number of jobs possible, and therefore, our objective is to look for ways to keep our people employed. Regarding CapEx, we are carefully revising our plans, cutting or deferring noncritical investments, and we have also given ourselves some additional flexibility regarding the timing of our dividend payment, which we will likely push toward the end of the year. On the other hand, we are maintaining a close dialogue with our supplier base, gaining visibility into our key supply chains, and working with our smaller, more variable suppliers to help them through the crisis. Moving on to discuss the consolidated quarterly numbers. Total revenues during the first quarter increased 5.5%, while income from operations grew 6%. On an organic basis, total revenues increased 2.7% and income from operations increased 4.4%. Net income increased significantly, reflecting a noncash foreign exchange gain related to FEMSA's dollar-denominated cash position and higher income from operations across our businesses, partially offset by higher interest expense and a decrease in our participation in Heineken's results for the quarter. Our effective tax rate was 35%. In terms of our consolidated net debt position, during the first quarter, it increased by approximately MXN 15 billion compared to the previous quarter to reach a level of MXN 62 billion at the end of March, reflecting debt issuances at FEMSA and Coke FEMSA. Moving on to discuss our operations and beginning with the FEMSA Comercio Proximity division. We opened up 268 net new OXXO stores during the first quarter, reaching 1,365 net store openings for the last 12 months, including new stores in our operations in South America. Although same-store sales were up 5.5%, it was driven by a 9.1% increase in average customer ticket, partially offset by a 2% decrease in store traffic. These trends accelerated during the second half of March when the lockdown period started to extend across Mexico. We did see an increase in certain grocery and pantry-related categories as consumers stocked up in a flurry of panic buying. However, these represent just a small percentage of our overall mix of sales. Conversely, on-the-go purchases have contracted significantly, as many of our customers have stayed at home. Moving down the income statement for the first quarter, gross margin expanded by 160 basis points, reflecting healthy trends in our commercial activities as well as increased and more efficient promotional programs with our key supplier partners. Income from operations grew 50.4%. Operating margin expanded by 30 basis points, even as we continued our gradual shift from commission-based store teams to employee-based teams and as we also stepped up investments in IT. Moving on to the FEMSA Commercial Health division. We added 73 drugstores during the quarter to reach 3,234 units across our territories at the end of March, and 850 total net new stores for the last 12 months. These figures include stores that were reopened in Chile, following damages from the social unrest at the end of 2019 as well as the integration of GPF in Ecuador. Revenues increased 19.9%, while on an organic basis, they decreased 1%. Same-store sales decreased an average of 6.8% in Mexican pesos but increased more than 3% on a currency-neutral basis, reflecting positive trends in our operations as increased demand from the COVID emergency provided a modest tailwind during March. Gross margin contracted by 60 basis points in the quarter, reflecting modified pricing regulations in Colombia on sub-trading in our Maicao beauty store operations in Chile. These were partially offset by improved efficiency and more effective collaboration and execution with key drugstore suppliers in Mexico. Operating margin was stable as cost efficiencies and tight expense control across our territories were enough to offset the gross margin pressure I just described. With our Fuel Division adding 5 net new gas stations to reach 550 units at the end of March, it is still suboptimal but at least moves us in the right direction. As you might imagine, with our business platform, the Fuel Division is among the most exposed to the current environment of reduced mobility and social distancing, and this impact began to show towards the end of the first quarter. Same-station sales decreased 1.5% in the first quarter and gross margin was 10.6%, while operating margin was 2.2% of total revenues, reflecting lower operating leverage. Operating expenses increased 16%, reflecting higher wages and improved compensation structure for our in-station personnel aimed at reducing turnover in a tight labor market and maintenance expenses related to the transition into a new gas brand image. Finally, moving along, we've reached Coca-Cola FEMSA. As John highlighted yesterday, volumes were stable and ready to face significant currency headwinds during the quarter. Today, we're able to expand their margins at both gross and operating levels. Regarding the COVID emergency, the reaction of Coke FEMSA has been impressive. As another product of our company, their operational expertise is proving very helpful as we address the crisis. If you were unable to participate in the conference call, you can access a replay of the webcast for additional details on the results. Looking ahead, like everyone else, we are facing an uncertain environment. Our operators have worked hard putting together and analyzing potential scenarios with varying degrees of stress, reminding us of the actions we will need to take in each case with the goal of ensuring our ability to function with adequate levels of liquidity. As you know, a big part of the equation has to do with how long this will last. That is the question. Most of our operations are deemed essential, and therefore, our stores are open, and Coke FEMSA is operating and serving most of these clients. However, food tracking is down a double-digit adoption as many of our customers have stayed at home. When people are out and about on the streets, they are thirsty, hungry, or need to satisfy a craving; those are the consumption occasions that are also low. And they are not happening as much these days. We have limited supply for some important categories such as beer, and it is unclear when those key suppliers will be allowed to restart production. Additionally, there are local restrictions on our operation and customer mobility, requiring us to reduce shifts and putting pressure on our numbers. And yet, as I mentioned before, we have moved quickly to cut expenses, defer investments, and make adjustments to weather this storm, even if it lasts a while. It is very likely, for example, that we will be unable to open as many new stores as we expected at the beginning of the year. Results and performance metrics will suffer. But we take a long view, and therefore, there are some initiatives that we are not slowing down, including everything that has to do with our digital initiatives, loyalty platforms, and fintech. We will continue to work hard so that when the storm passes, we come out a stronger, more humane, more resilient, and better-positioned company. And with that, we can open the call for your questions.

We'll now take our first question from Luca Cipiccia from Goldman Sachs.

Hello. Can you hear me?

Yes, we can hear you.

So I'll try to squeeze in two quick ones. On your comments about April, would you be able to put some numbers around maybe the type of impact for OXXO or sales? Just to get a sense of how the trend has impacted and what we should factor in for the quarter? And with regards to store openings pace as well, realistically, I understand you do not necessarily be able to open as many. But even in that respect, could you give us a sense of how big of an impact that could be, if you could quantify or give us some ranges, just to get a degree of the impact? That would be the first question. The second, more general, you mentioned same-store sales in the long term, and that you take the long view and so forth, which makes me wonder, in times like this, when it comes to capital allocation, there's been several transactions over the last few months; would you think that the decision-making process will lean more towards simplification or conservativeness, or maybe being more opportunistic, assuming that there will be assets even when it comes to inorganic growth that may come up for grabs or openings, including in Mexico, whether it's drug stores or whether, if you could give us a sense, how we should think about that through these periods when maybe some projects that were not available before are more available or you could be more opportunistic?

Okay. Let me start with the second question first. After this crisis, there are a lot of learnings about what we can do even better. And since there will be some, without doubt, there will be some, we have to adapt the value propositions of the stores in the Coca-Cola FEMSA offerings. We will need to adapt to the new environment, and that will take time. Our main effort is to rearrange our operations, make them very efficient again, and start growing organically to gain market share. In terms of potential acquisitions or opportunities, we are not going to pursue any actively during this period of time because we will be refocusing ourselves on what we have done and starting to operate efficiently and come up with, as I said, the right connections and adapt to the new consumer needs. I think we should be open to opportunities. There might be some opportunities, but we will not be actively looking for them. I don't know if you, Juan, would like to add anything?

Yes. No, Luca, this is Juan. I think on capital deployment, we were probably already done anyway. Having done six transactions in the last 12 to 18 months, we are definitely in a stage for digestion and stabilization and capturing synergies, and obviously, as Eduardo says, in the current environment, it's even more the case that we are not actively looking. Having said that, we should also acknowledge that since crises breathe opportunities, if something came along that was just too attractive not to take a look at, we would. But I don't think that's a high probability occurrence in the short term. Now to take the first question that had to do with what we are seeing in April, if I look at more than the whole month, if I just look at, let's say, the last couple of weeks, I think it's tricky because Holy Week is in there. Even though this year, Holy Week was in April, in both cases, 2019 and 2020, the comparison isn't ideal, given that Holy Week is an important period. If I look at the last 10 days of the month or the last week, we are seeing kind of a low-teen contraction in sales at OXXO. If you look at, for example, the Health Division, it really varies a lot by country; the most restricted country in terms of customer mobility is Colombia. If you look at Chile, for example, we are looking at also kind of a low-teen contraction. I would make the caveat though: In terms of OXXO, Eduardo mentioned that beer supply is an issue. Right now, we are still stocked; both our suppliers, Heineken and Morelos, were able to give us a fair amount of product a few weeks ago, but they are not producing as far as we can tell. If and when we run out of beer, which could happen in the next couple of weeks, that would be negative for sales as well. But in terms of what we've seen in the last few days, as I said, kind of low teens is the number, Luca.

Is there something that has become apparent in the way consumers are using or utilizing OXXO during this period? Are you aware of any takeaways, perhaps behavioral changes that make OXXO more of a proximity advantage destination? What have you learned so far about this?

I mean, certainly, as Eduardo mentioned, we have seen above-normal growth in categories that we would consider daily and replenishment, grocery-type transactions, and pantry loading type of items. But unfortunately for us, that represents a small proportion of our mix. From a profitability standpoint, our margins are generally better in the on-the-go, kind of single-serve, cold beverages, snacks, and things like that. So yes, we have seen some consumers looking at the OXXO store as a place where they can refill the fridge for the short term. But we are not nearly as benefited as the big-box supermarkets, which are, of course, having a good time.

Thank you very much.

Thank you, Luca.

Thank you. We'll now take our next question from Bob Ford of Bank of America.

I had a question with respect to mix and gross margin, particularly regarding the strides you've made in commercial income, transaction income, corresponding banking fees, and remittances, and I was just wondering how you're thinking about that? And how those services are behaving because the points of sale have greater relevance in this kind of environment? How do you see that evolving over the course of the year?

Juan?

Yes. Sure. Bob, yes, if you look at even what happened in the first quarter, trends are still very, very strong. We had gross margin expansion of, I believe it was 160 basis points. When we talk about the drivers for that, I am specifically talking about OXXO. The drivers for that are a little bit different from what we've seen in the last two or three years in the sense that financial services are no longer growing double digits. We had many quarters when we were looking at 20% type of growth for financial services. I think that a lot of consumers who were going to adopt banking through OXXO were probably already doing it. Therefore, most of the gross margin expansion that I just described has really been driven by commercial income, promotional activity, and our enhanced abilities to offer layered promotions on top of each other, shorter term, and some for different parts of the country. We have become much better at catering to suppliers' needs to use OXXO as an extension of their marketing arms. Of course, as Eduardo said, we are making progress on the fintech and loyalty side, and we're not slowing down through the crisis, and this is something that I expect later in the year toward the fourth quarter. Hopefully, we'll have more tangible news to share with you in terms of how that effort is going, especially regarding the OXXO digital platform and putting together the loyalty program and some kind of fintech offering that begins to take shape. Right now, we are in the middle. Financial services are not growing anymore. But we are getting close to the point where maybe there can be another interesting leg of development enabled by the fintech platform.

And one, when it comes to remittances, that effort has been under, it's been in place for a while. I know it may be a flat to contracting pie, but is there an opportunity there for you to take greater market share?

I mean, remittances, we've been working with Western Union and with other providers now for a few quarters. Obviously, that moves in line with whatever's happening in the U.S. economy. We do benefit probably, but not as much as the bigger durable goods stores in terms of when people receive their remittances. A big chunk of that money logically will go to washers, dryers, and TVs, and things like that. Maybe just a small portion will go to groceries or to treating themselves a little bit in our store. But I think we are going to learn a lot in the next few weeks and months. One thing that I want to see personally is, and this is a little bit to Luca's question a few minutes ago, if people begin to privilege proximity a little bit more because getting on public transportation is a little bit risky, or because they just don't want to be out of the house for as long. And so then they start looking at the corner store to satisfy even more needs than they have so far. We're going to learn a lot about consumer behaviors and whether or not we can take an opportunity by leveraging proximity in the coming months.

We'll now take our next question from Alan Alanis from Santander.

I hope you can, can you hear me correct?

Yes, you're good. Go ahead.

Perfect. Okay. Just a couple of quick questions. One of them regarding how to think about same-store sales in the Pharmacies division? I think I was a bit surprised by the weakness there, given everything that is happening. I know you mentioned some differences between companies, so if you could expand on that? That's a basic question. And a more strategic question for both of you is, I think you're something very good at thinking about consumer behavior and how to match your value proposition in terms of consumer behavior. What are your preliminary thoughts on how consumer behavior will change after this crisis? What frame of references are you using historically or from other industries that you can share with us in terms of how you're thinking about the future of the whole FEMSA platform, Eduardo?

Let me try to start with the second one, Alan. Without a doubt, people will be avoiding crowds, public transportation, and will be more sensitive toward traveling everywhere or moving as much as we did in the past. Therefore, I think being close to the customer and having so many outlets everywhere, having the Coca-Cola distribution, which is a massive distribution network everywhere, we are well-positioned to be very responsive to these new behavioral changes of the consumer and start adapting. Without a doubt, we don’t know exactly; we don’t have many self-serving things, probably hot food and beverages will be among very few self-serving items. We also have our platform, which is served by someone and already has very, very stringent sanitary procedures to serve our customers that could grow too. I think with these changes happening, as we know, things might get better, but people will be very sensitive to those social distancing issues. I don’t know; time will tell. I think we will just have to be aware of how things might change. You might have very good ideas, Alan, that I know.

Well, I mean, it's not an idea, but it's something that is very evident. And it's unfortunately just it's not a good thing, it's kind of sad, no? I mean we're going through one of the most massive economic recessions that we've seen in Mexico. So I would think that people have to buy more on a daily basis. Eventually, that will be possible for OXXO. But it's too early to tell; too soon to tell. Unfortunately, that's something that we're expecting as positive for OXXO on the back of something negative for the economy, but we'll see. And Juan, do you want to comment on the pharmacies?

Yes, Alan. I mean, basically, the exchange rates and how the Chilean peso and the Colombian peso moved relative to the Mexican peso made a big difference. The figures we have, for example, for revenues for the Health division: reported, it’s basically a 20% increase, but if we adjust for currencies, it’s actually a 36% increase. If we look at same-store sales as reported, they decreased 6.8%. But adjusting for currency, they actually grew by 3.1%. That’s basically a 10-point shift in same-store sales once you control for exchange rates. So as you said, and it would be logical in the current environment for drug stores to perform well, but the FX did distort the data. The trends are fine in terms of local operations, and then we just need to deal with the FX once we consolidate information.

Thank you so much. Stay safe. Thank you.

Thank you.

Thank you. Your next question comes from Marcelo Alvisio from Credit Suisse. Please go ahead.

Hi, thank you for taking my question. My question is more related to the recent acquisitions in the U.S. and Brazil. I just would like to understand if you can give us some color on how the integration of these assets has been? What the update is on the integration of these assets into FEMSA? And also if you can have some visibility on when you should start disclosing some of these numbers for the market? Thank you very much.

We just held our first board meeting, and it was quite successful. However, the current environment is quite disruptive. We are pleased with our alignment in thinking and our approach to progressing in the Brazilian market. So far, everything has been going well. I believe we may not pursue expansion as aggressively as we initially planned due to the current circumstances. Nevertheless, we are satisfied with our partnership and our shared goals for our operations in Brazil. I think we're in a good place. Juan, do you want to add anything?

Yes. No. I mean, specifically talking about AGV, the warehousing operation, which I think is the first one that Marcelo was referring to and that you just explained. I think generally, it has exceeded our expectations in terms of the quality of the asset, the management, and the processes that they had in place. Bringing that business into our platform has been better than expected or faster than expected. I would also like to comment on the GPF front in Ecuador, which is expanding profitability and performing perhaps a little bit ahead of schedule. In what is a very complicated context, because I think of the different countries where we operate, Ecuador has been especially hit by the pandemic. Regarding the second part of your question, having to do with disclosure, definitely, we are already working with our Solistica business, the logistics business which is one that really bought AGV, which is now, in round numbers, about a $1 billion revenue company. We are working with them so that we're ready to start disclosing their numbers probably a year from now. So we are shooting for the first quarter of 2021. I think the acquisition we are also in the process of making in the U.S. of WAXIE and North American Corporation, the specialized distribution platform that we're creating in the U.S., we should also be in a position to start disclosing those results at the same time as Solistica, around the first quarter of 2021. So if you think about it, a year from now, we will start showing the performance, the income statement, and the operating metrics of businesses that represent combined, about $2 billion that you are not seeing today. We are working on that, and that is our expectation right now, Marcelo.

Your next question comes from Alvaro Garcia from BTG.

My question is on the balance sheet. You mentioned you're thinking about suspending the dividend. But I was wondering if you could you mention in the release also that you drew in some credit line. If you could just remind us what that amount was? And if you could remind us what your net debt position is at FEMSA sort of on a pro forma basis, assuming the WAXIE and Jan-San transaction is closed, that would be very helpful.

Alvaro, this is Juan. Let me take a crack at that. So on the dividend, what we're saying is, normally, the way that we've been paying dividends for a number of years now has been in two installments: one in early May, one in early November. What we did this time around was to give us the flexibility to, rather than pay something up in May, we are giving ourselves the flexibility to do it later in the year. In all likelihood, this is going to go to November, right? The resolution that the shareholder meeting drafted states that the dividend will be paid no later than November 5, 2020. So it's not, I mean, it's postponing the first half of the payment and moving it, again, I don't think it's been decided, but my view would be that it's going to go toward November; it will be paid during 2020. In terms of the figures on a per-share basis, I mean we can give you the total number a little later; you can calculate that.

That was the main question, whether or not it would be paid or not. That's clear that it will be paid rather in installment than in cancellation.

Okay. In terms of the WAXIE-North American transaction, that's basically a $900 million investment. The numbers we are disclosing today in terms of our press release are obviously pre that. The comments that Eduardo made on his remarks about the bond issuance and drawing down credit lines, you would need to subtract $900 million that will be paid for that transaction in the coming probably, certainly in the next month or so for a few months.

Our next question comes from Carlos Laboy from HSBC.

Juan, Eduardo, can you please comment on the sustainability of the Coca-Cola FEMSA dividend and your expectation of that dividend going forward? And also, perhaps share some insight on recent transactions?

Well, regarding the sustainability, Carlos, this is Eduardo. We don't have any problem; in fact, it's growing. The way Coca-Cola FEMSA is emerging from this economic crisis is doing just fine. I think we are very happy with the way the company is performing, the way they've been adjusting their structure to this new environment. For the long term, we are working to set up a better way of understanding between us and the Coca-Cola Company. We are making progress on that. I think in the long run, we will be better prepared to sort out this new economic and consumer environment. Regarding the acquisitions that we made, we are very happy with the synergies, and we think we are in the right sector. We are just figuring out how to close the deal by not being able to travel and connect as much as we could. But the current top management of both companies, WAXIE and North American, we're very happy with them. I think we're very much aligned to try to close this deal sometime in May. I don't know if you would like to add anything, Juan, about other acquisitions Carlos Laboy is referring to.

Yes. Carlos, I mean, generally, there is certainly an appetite from a returns-driven appetite to continue to grow the retail component of FEMSA. Some of the transactions we've announced in the last year or so move us in that direction. Whether it's the JV for OXXO in Brazil, for proximity in Brazil, whether it's the investment in Cash & Carry in the U.S. and the optionality that gives us to develop that platform in Latin America, in Mexico and beyond. Obviously, the special distribution is another part of the strategy where we are working to grow; we think these are businesses that will satisfy our requirements in terms of ROIC over WACC spread, so to speak. So I think directionally, we're moving in that direction. Obviously, also thinking about this, if you go back a little bit in history when Coca-Cola FEMSA acquired Jugos del Valle or Santa Clara, expanding the scope a little bit of what they did and when FEMSA Comercio went into drug stores, our incursions into the U.S. with these two acquisitions or investments follow the same logic. There are a lot of things about these companies that we are familiar with; it's just that they're operating in the U.S. as opposed to Latin America, and we need to learn how to do that. We also need to leverage the local existing management, as is the case in both of these transactions. So directionally moving toward retail and specialized distribution, geographically looking at the whole continent as places where opportunities might arise. Of course, these are things that in the current environment are taking a backseat to getting through the current situation as best we can and then we can actively retake the expansion phase.

Thank you.

Thank you, Carlos.

Thank you. Our next question comes from Joseph Giordano from JP Morgan. Please go ahead.

Hi. Good morning, everyone. Thanks for taking my question. I hope everyone stays safe and healthy here. I have a couple of brief questions about the digital initiatives being implemented by the company. I'd like to understand how the rollout of New OXXO is taking place, the level of engagement you are seeing with consumers, and what have been the main challenges here? Things are a little bit beyond the COVID outbreak; how do you see opportunities to further connect the OXXO platform with the logistics and distribution structure that exists inside the company with other e-commerce operators, basically becoming more like a service provider, but also empowering those OXXO stores with, let's say, ship-from-stores kind of capabilities, catering to potential new consumer needs, given the social distancing mindset that should remain? Also, moving away from technology, I'd like to understand what’s your view on potential opportunities to further expand into Latin America, specifically Brazil, in light of the economic downturn we're witnessing here, do you expect to find plenty of available good locations that could support OXXO stores?

Joe, this is Juan. Taking the first part of your question in terms of digital. Certainly, we probably were a little late out of the gate on the whole fintech development vis-à-vis other players, but I think we're catching up. This is going to be a very interesting year, where I think both on the loyalty program and the fintech platform, we are going to make a lot of progress. Many resources are being deployed to those efforts, not necessarily just financial investment; there’s also a lot of human resources and management attention and focus. We are currently testing the loyalty program in several markets. For many years, we did not have a real loyalty program. Now it has become more attractive than ever because it brings the information and consumer insights into who’s buying what and the opportunities for potential monetization of that data. On the fintech side, also, as I mentioned a few minutes ago, I think this is going to be an interesting year; hopefully, by the fourth quarter, we have more tangible information to share with you regarding our products and what they can do. We approach this with the benefit of a structural advantage unique to OXXO, which is the 19,000-plus physical stores where people transact to put cash in and out of a new wallet; these stores are very relevant. The OXXO brand is already a widely used and trusted platform for cash payments. Therefore, as the Mexican consumer gradually embraces cashless and digital transactions, we can leverage the strength of our brand and the ubiquity of our store network. I'm not saying we will have the magic bullet that transforms how people transact but I think we are in a unique position to at least get better visibility into ongoing initiatives. Regarding Brazil, the second part of your question, our partners down there, the Raizen team, are very knowledgeable. They already have about 1,000 stores in their gas stations. In terms of the intelligence of where we should look first, especially considering standalone stores, which I think is going to be the biggest challenge but potentially brings the biggest reward in the long run, we are relying a lot on the Raizen team to help us decide where the first stores are going and what distribution capacity we might need in the future. So the strategies are already in place. It's early for us to disclose more details regarding our plans for Brazil right now, but in terms of the current environment and expectations, as Eduardo mentioned in his opening remarks, we tend to take a long view, and the current situation doesn't really change our expectations.

Our next question comes from Rodrigo Alcantara from UBS.

Just a follow-up on the Health Division. So in 1Q, it was clearly the FX a negative effect, which could potentially revert in Q2. However, my question here is on the performance you have seen at e-commerce on drugstores, particularly at Cruz Verde? Some industry numbers suggest that this segment, e-commerce, is growing double-digit. So what are you seeing at Cruz Verde in terms of e-commerce?

This is Juan. Yes, you're absolutely right. Looking at it not from an industry perspective, but just from the Cruz Verde perspective: Cruz Verde is a large player in Chile; I think the loyalty platform and e-commerce and home delivery platform are pretty well advanced. The current situation greatly incentivizes people to buy from home. Chile is a market with stricter mobility restrictions than other countries we operate in, especially compared to Mexico. It makes perfect sense for consumers to rely more on our e-commerce platforms. I would say Cruz Verde is definitely well-positioned for that.

If you can provide a revenue contribution or growth, at least in the last few weeks, perhaps, that would be helpful.

I don't have the breakdown for the last few weeks regarding e-commerce versus traditional sales, but it's something that we can definitely look into and get back to you with that figure. I apologize for that.

No worries. Thank you, Juan. Just a follow-up on the Solistica Division. Just qualitatively speaking, I mean you besides FEMSA, you also serve other clients, right? So if you can comment on the performance that this division, Solistica, particularly in Mexico has had in recent weeks, that would be helpful. Thanks.

In Solistica, I mean, it's itself a collection of several different business units. For example, there's the Less-than-Truckload operation, the warehousing operation, and the dedicated carrier operation. They are performing a little bit differently. Our dedicated carrier operation in Mexico; Heineken is a big client, so with Heineken not operating right now, that is clearly a problem for our Solistica team. Less-than-Truckload in Brazil has also had some weakness in their figures. But other parts of the operation, like transportation management, are performing well. It varies among the different businesses in different geographies. For example, warehousing is not impacted because you have long-term contracts managing the space; it is not something that changes week to week. It’s much more sticky in that sense. But directionally, yes, I would say Solistica has been affected, particularly by direct fleet with the brewers and some other clients, with Heineken being highlighted due to what's happening in Mexico and also Less-than-Truckload in Brazil.

Thanks; very helpful. Thank you, Juan.

Thank you. Do we have any more questions?

Hello? Juan, I think somehow we've been disconnected.

Yes. No. Maybe let's wait a couple of minutes.

Solistica has been impacted, especially in its direct fleet operations with brewers and other clients, with Heineken specifically mentioned due to issues in Mexico and also with Less-than-Truckload services in Brazil.

Yes.

We'll now take our next question from Antonio Hernández from Barclays. Please go ahead; your line is open.

Hi, good morning. Thank you all for taking my question and congrats on the results. My question is if you could give us more light on the rate of the proportion of OXXO that are exposed to areas impacted the hardest. Also to corporate areas that can be affected due to social distancing and work-from-home restrictions? Thanks.

Antonio, could you repeat the question because we could hardly hear you? Will you please ask the question again?

Sure. My question is regarding OXXO. If you could give us a breakdown or some light on the proportion of OXXOs that are located in areas affected by COVID-19 or that can be affected by work-from-home policies?

Let me tell you, we are really analyzing on a store-by-store basis. As you may imagine, some stores, let's say, in front of Cancun, where the hotel environment is, they have had a major drop in sales. However, others that are probably closer to hospitals or certain areas even have some medical divisions. I would say that in terms of tourist areas, I would say between 5% and 8% probably of the current stores but I think the major damage to our OXXO store platform is that we really rely on the larger on-the-go pedestrian foot and car traffic; those people who are always moving. They are moving whenever they need anything; OXXO is there to satisfy their needs. I would say that is the main sector, and I would estimate that probably around 50% or 60% of our stores have experienced this reduction. I think as we start to reopen the economy, which could be by the end of May, we will probably have a better understanding of the market. The other threat that we have is really related to beer sales. We don't know there will be some decisions from the government on breweries reopening or not, and so I think the coin is still in the air, and we don't know yet how it will end. I don't know if you want to add anything, Juan.

Yes. I think in terms of beer sales, the regulation is very local. We have seen varying degrees of restrictions in different parts of the country, some states where you have much fewer hours in the day during which you can sell alcohol; a small proportion of markets where you are not selling alcohol at all. Our bigger concern, Eduardo was saying is that for a category that is one of our most important, we could run out of product in the not-too-distant future.

We'll now take our next question from Gustavo Oliveira from UBS.

My question was really on the beer supply. If you could just shed a little bit more light on when you think you're going to be running out of inventories? What’s the situation on the ground today for supply in general? Do you think it could normalize soon, or do you foresee more problems on that front going forward?

Let me share my thoughts. Beer makers have a strong history of maintaining cleanliness in their production facilities, so I believe their focus is primarily on distribution. My main concern is that a number of small local businesses that depend on selling beer are facing significant challenges. I hope beer distribution can resume soon, as many businesses rely on this for their livelihood. Beer plays a vital role in social interactions, and the government might be cautious about allowing distribution due to concerns about increased socializing. Overall, I think the beer industry should begin to reopen gradually, though it remains uncertain how things will unfold. Juan, would you like to add anything?

Yes. Gustavo, I don't want people to just get off the call and run to the store. We were probably looking at about ten days of inventory.

Although there are some open stores that no longer have inventory because they exhausted supplies.

Thank you. There are no further questions in the queue. Ladies and gentlemen, that's all the time we had. I will now turn the conference back to Mr. Padilla for closing remarks.

Thank you very much, everybody, for your participation today. Stay safe and be well. Look forward to the next conference call. Thank you.

Thanks, everyone.

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