Good morning, and welcome everyone to FEMSA's Second Quarter 2021 Financial Results Conference call. During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's 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.

Good morning, everyone. Welcome to FEMSA's Second Quarter 2021 Results Conference Call. Today, we are joined by Paco Camacho, FEMSA's Chief Corporate Officer, Eugenio Garza, our Finance and Corporate Development Director, and by Jorge Collazo, who heads Coke FEMSA's Investor Relations effort. The plan for today is to have Paco comment on some higher-level trends and more strategic considerations, and then to have Eugenio walk us through the numbers for the quarter. And we will follow the remarks with Q&A, as always. So with that, let me turn it over to Paco Camacho.

Thank you, Juan. Good morning, everyone. Thank you for joining us today. We hope you and your families are safe and doing well. As you know, the health emergency is not over. Despite this, our operations posted solid results for the second quarter of 2021. While this partially reflects increased mobility and some economic recovery, it is also driven by the team's superior operational capability and a top-notch ability to execute. Exactly one year ago, we were discussing the full impact of the COVID pandemic and the effect of the resulting lockdowns on our operations. Energy and resources were quickly reallocated to prioritize the safety of our employees and customers, to help our communities, and to ensure the continuity of our business. Once these priorities were addressed, we looked for opportunities to come out stronger on the other side of this crisis. Some of our operations, particularly OXXO and OXXO Gas, were affected by significant reductions in consumer mobility. Some areas like Coca-Cola FEMSA and our drugstore operations were more resilient and managed to deliver solid performance in 2020. Today, six months into 2021, all of them are achieving better results than they were a year ago, and in some cases, we are at levels that match or exceed 2019 results. Clearly, we are not out of the woods yet. Vaccination levels have been uneven across our geography, operating restrictions still exist in many markets, and consumers tend to increase or decrease their activity in inverse proportion to their level of concern. In fact, there is a bit of a rebound in cases right now, which seems to be a third wave. It continues to be a bumpy ride, but there is a clear recovery taking place in Mexico and in most of our markets.

Thank you, Paco. Given the operational challenges we faced in many of our operations last year, growth figures relative to 2020 do not tell the full story. We will, therefore, complement them with some comparison data relative to 2019, where we consider this to be helpful. Starting with FEMSA's consolidated quarterly numbers. Total revenues during the second quarter increased by 19.7%, while income from operations increased by 87% compared to the second quarter of 2020. When we compare results versus the second quarter of 2019, total revenues increased by 7%, while income from operations increased by 17%. FEMSA's net income increased significantly and reached MXN 5.3 billion, reflecting the generally undemanding comparison base from the effects of COVID in 2020. This was made even lower by the extraordinary payment of almost MXN 8.8 billion agreed with the Mexican tax authority, certain asset impairments, and a decrease in our participation in associates, which mainly reflected the results of our investment at Heineken.

Thank you, Eugenio. Before we open the call for questions, let me give you a quick update on the rollout of our digital initiatives. First, let me begin with an update on our OXXO PREMIA loyalty program rollout, which after a test period in the state of Chihuahua is now being deployed more broadly. So far, the results have been quite positive. This is even more relevant as OXXO PREMIA complements our spin by OXXO product. As you may recall, the spin is testing and validating its value proposition through our subsidiary, Control de Calidad, which operates under the Article of Travel Transitorio or Mexican regulation. This means we are still waiting for the definitive regulatory approval to fully launch and market the spin OXXO product. Wrapping up, a few comments. We are, of course, encouraged by these results. We feel this way mainly because they reflect the strength of our value proposition and our team's operating abilities. The deltas are big, but as we have discussed, we still have more work to do here and there when we compare versus the 2019 levels. So we need to keep our heads down and keep pushing hard, executing our action plans and moving forward. We are confident about our strategy. We are certain we are on the right path. Importantly, we have over 300,000 resilient, extraordinary team members that help us to move forward every day.

And our first question comes from the line of Bob Ford with Bank of America.

Congratulations on the results. It's great to see the progress you're making. Paco, regarding spin, it seems to be accelerating well in San Luis Potosi. Could you share what's contributing to that and any A/B testing you're conducting? Also, what do you need to finalize your regulatory approval for a nationwide rollout? You mentioned PREMIA, and I’m interested in how you plan to integrate that with spin from an app architecture perspective, as well as how to potentially drive cross-channel usage.

On the regulatory front, we are just making sure that we proceed according to the requirements to get all the necessary approvals. You know that this takes time, and on the other side, what we need to do is to ensure that we comply with what is being requested, and that's exactly what the team is doing. Then as for PREMIA, as you know, the loyalty program will allow us to give spin a significant boost in terms of consumer preference. That's the way to look at it. Eugenio, do you want to add to that?

Sure. From an architecture perspective, they are currently separated, but they will be integrated as we roll out the spin product more broadly. With the regulatory approval, we are limited in our ability to engage in extensive marketing campaigns. During this time, we have had success with early use, and it allows us to conduct A/B testing with different features, pricing elements, and demographics. This helps us refine the product features and value proposition in preparation for the full rollout. So far, we are pleased with the results we are seeing in the initial cities where we launched. We expect continued progress.

I'm sorry. I was just going to say, you mentioned city, so it sounds as if you're beyond San Luis Potosi now.

Correct. At this point, we are beyond San Luis Potosi, still rolling out in a number of different cities, and we expect to be nationwide by the end of the year. PREMIA has been launched in Chihuahua, Aguascalientes, and Leon. Spin has been started in five other cities besides San Luis, where we began. All with positive results. We also expect that as we roll out with more cities, the use case of the peer-to-peer product will clearly become more compelling as we broaden the reach.

Our next question comes from the line of Alan Alanis with Santander.

My questions have to do with capital deployment. You have a little over $9 billion of debt, but you have $5.4 billion of cash. So you basically have a lot of ammunition still. Can you give us an update regarding your thoughts on capital deployment criteria, the size of the acquisitions that you could be considering? Are we still thinking mainly in terms of logistics in the United States? And if that is the case, what indications are you seeing from the logistics business in the United States that it is worth continuing with the strategy of consolidating that business?

As you know, our portfolio provides very attractive optionalities in terms of future capital deployment. You mentioned logistics and distribution as one of them; we do participate in a fractured industry and continue to look at targets that are complementary and synergistic, both small and large. That presents a good avenue for future capital deployment, as do many other traditional businesses we have been involved in, as well as the other investments we have made in Mexico in cash and carry. Overall, I would characterize our portfolio as being very convex, in the sense that it provides a lot of downside protection in terms of us being a consumer-oriented company and also has diversity in market exposure to currencies, providing nice optionalities for upsiding capital deployment. That's why we're keeping liquidity on the balance sheet for now, looking for those opportunities while also ensuring we have the right capital structure to ensure adequate returns for shareholders. We continue to see ample opportunities for value creation by deploying more capital in existing verticals without increasing complexity. We've reached the limit in terms of industry participation, and the idea is to deploy additional capital while keeping clarity in the FEMSA portfolio and in coke with its own balance sheet, where the announcement of our new agreement with Coca-Cola allows for great optionality for further investment and value creation opportunities.

Actually, that last part that you mentioned was my follow-up. So you already answered it. So that was very, very clear and very useful.

We'll go next to Luis Willard with GBM.

Congrats on the results. Recently, some platforms are starting to tap into express deliveries, which are less than, let's say, 10 to 15 minutes. I know it's still very early and probably still unprofitable for most of them, but I would appreciate your thoughts regarding the evolution of the industry towards these types of services and then maybe how OXXO is evolving within this context in the next years?

Yes. Go ahead.

Clearly, express delivery, as you know, during the pandemic, many e-commerce platforms across all channels grew their volumes exponentially, and last-mile delivery continues to be something we look at very carefully. In terms of the proximity value proposition, it's hard to justify from a drop size perspective and compete against some players focused on that segment. At this point, still in a start-up mode, burning cash, trying to scale up users. We are competing on a smaller scale with our new OXXO app, trying to attack that category and learn about it. I think the higher drop sizes will probably be in the reunion categories, those larger gatherings, and that could be an option. Having said that, we see greater opportunities in the Logistics Division for both our Warehouse Division and our less-than-truckload divisions utilizing e-commerce platforms for not just consumer packaged goods companies but general categories such as apparel and healthcare. There, we see a clear opportunity and it's partially responsible for the good results in our Logistics portfolio in Latin America. We see more potential there than in the Proximity Division's current offering. Nonetheless, we continue to experiment and perform A/B testing to see how that evolves, but believe that the Logistics Division offers greater prospects than an end-to-end last-mile profitable business model, except in cases of larger drop sizes.

If I may add, Luis, we need to keep in mind that this is a rapidly changing environment, and our business operations remain closely linked to understanding what consumers are looking for, how this whole thing is evolving. And clearly, because we have a broad platform, if we see any opportunities in the future, you can rest assured that we will take it. Just as Eugenio said, in our Health Care Division, they do have some last-mile delivery which is performing well in Latin America. We see opportunities but want to capitalize on them when they are sustainable.

We'll go next to Antonio Hernandez with Barclays.

Congrats on your results. My question regards your performance in OXXO across the different formats. Are you seeing any acceleration in the gradual recovery that you've experienced throughout the last couple of quarters? Are you seeing any acceleration because of the rising COVID-19 cases? Additionally, are you seeing any pressure from competition or an inflationary environment in regard to your promotional activities?

Sure. I'll start with that. Month by month, we've seen a general improvement overall in volumes. With the recent uptick in cases, there hasn't been as much closure or restrictions in terms of mobility as we previously experienced during the pandemic's earlier waves. We have been fortunate. However, there are still certain restrictions in alcohol sales and hours of operation at some of our stores. For example, June had restrictions due to elections, where we lost a weekend. Therefore, we expect a bumpy ride ahead. Having said that, we do not see a drastic change in measures taken by the government in comparison to what we've experienced previously. We anticipate that a full-blown lockdown like we faced last year is unlikely. Those are encouraging signs. We will see other operating restrictions in terms of hours going forward, thus making it a bumpy road; however, we are encouraged for two reasons: that as traffic returns, the use case for pantry and other items that weren't typical before the pandemic will stick, and we've capitalized on the pandemic to increase efficiency on cost, which will lead to a more profitable OXXO once traffic and ticket levels normalize.

If I may, Antonio, I will add that the pandemic has allowed the team to be significantly flexible in adapting to the unique operational situations. This means that whenever a situation arises, whenever there's a consumer need, the team has become more adaptable to capture those opportunities and react effectively. As we've discussed, these increased capabilities will persist, and even if governments and consumers are less likely to favor heavy lockdowns, the habits will continue to change and shift. The team is better equipped than ever to respond to these situations.

Keep in mind that schools and universities are mostly not open yet. It seems that they will open this coming semester. Hopefully, this will also bring back customers who haven't visited our stores since March of last year.

Perfect. On the promotional activities and inflationary side, are you noticing pressure there due to competition?

We are experiencing increased promotional activity from our supplier partners, which has affected our gross margin. As usual, you'll see a decrease in the top line, but we make it back in commercial income. The gross margins look higher than you would typically see. This is primarily due to CPGs trying to promote consumption in different categories. We are observing some inflationary pressures, but not at OXXO to the same extent as in other hard goods divisions. For the most part, retail-level inflation has been comparatively subdued compared to other hard goods, and we haven't noticed any impact on price elasticity with consumers or margins thus far. Our belief is that this inflation phase will hopefully be temporary and not permanent. Currently, we aren't seeing impacts on consumer behavior.

We'll go next to Álvaro García with BTG.

My question is about the Health Division, specifically regarding your gross margin. Thank you for clarifying the gross margin strength at OXXO. However, in the Health Division, we observed a contraction, and you mentioned increased institutional sales and more promotional activities. I'm wondering how recurring this might be going forward?

That has to do, frankly, with the mix as well. Last year, during this quarter, we were observing many COVID prevention or treatment options that had higher margins. The more institutional sales, especially in South America, are affecting our mix adversely. The promotional activity mainly involves nondrug products. This is an adjustment to customer preferences and aimed at driving traffic to our stores, particularly in South America, and in Chile, where disposable incomes have been boosted due to liquidity in the system via pension fund withdrawals. We have adjusted our pricing to drive more traffic into stores, so I would not characterize it as a long-term trend. It's more temporary. Various factors impacted that gross margin, including the current mix of products that are now non-COVID related.

On the positive side, it's important to note that this was offset by significant efficiencies in Mexico, working with our suppliers. We will continue driving those efficiencies forward.

In Mexico, month-to-month, we are observing recoveries of over 100 basis points in similar product categories of gross margin, which is encouraging for the Mexico business.

That's great to hear. Is that a function of greater buying power on your end given your greater scale?

Correct. Greater pricing power and a shift in our commercial strategy, concentrating purchasing power in fewer SKUs, which move the most and offer better margins.

The team has been focused on finding efficiencies and improving operations, which is contributing positively as well.

Next question comes from the line of Ricardo Alves with Morgan Stanley.

I'll limit myself to one question as well. I want to insist a little bit on OXXO same-store sales. If we could go back to that. You referred to several sectors. But when you think about your OXXO performance post-COVID, and we discussed this in the previous call, what were your key findings with OXXO same-store sales in the second quarter? A lot of discussions center around the fact that traffic will improve as mobility increases. The question is how your average ticket will perform? I'm curious to understand if your average ticket performance surprised you to the upside, given the strong top line. Also, do you have further evidence that some of the items you're mentioning will be stickier in the future?

I'll start and then let Eugenio add. Clearly, when you examine the ticket at OXXO, it's aided by several of these sticky products that we added to our portfolio last year. Spirit-related products are ones that continue to boost our ticket prices. More importantly, we've noted that the team has quickly adapted to consumers' needs in our offerings in stores, which has also positively impacted traditional pantry items. Consumers are returning to stores and discovering more solutions available, assisting ticket prices. We expect these trends to remain consistent because consumers have modified their shopping towards what is found in stores.

In terms of sticking trends, I would highlight pantry items, spirits, and services as the three categories that will likely remain prevalent. The purchasing of personal soft drinks and smaller snack items is returning to stores, causing a decrease in average tickets from during the peak of the pandemic. Those three items contribute to a higher ticket price than would have otherwise been the case. We hope this trend continues.

Our next question comes from the line of Rodrigo Alcantara with UBS.

I'll limit myself to one as well. Just about the integration of the U.S. assets. I was wondering if you can comment on any updates here and about the sequential improvement that we witnessed on margins in a quarter-over-quarter basis. How much of that can we attribute to operating leverage or cost control initiatives or synergies? What level of EBITDA margin can we expect for the full year? That would be my question.

Sure. If you want, I'll start, and then Paco can add. During the pandemic, similar to OXXO, there was a strong focus on cost-saving initiatives. A lot of management's efforts were geared towards lowering both SG&A and increasing efficiency in operations. This has contributed considerably to our performance. I think in part, we are also comparing to the second quarter last year when there was no beer transportation. This additional volume contributes to operating leverage. More and more, we are securing stickier contracts with improved margins not only on the warehousing side but also on the less-than-truckload side. We've seen a noticeable uptick in higher quality, higher margin products. So this is encouraging news moving forward, and we expect a continued upward trend in margins, balanced by the different margin dynamics of our U.S. distribution business, but there should be improvements going forward.

The only other points I would add to what Eugenio mentioned are that our Solistica business is consistently benefiting from the operational efficiencies we've achieved. We should expect to see continued benefits in the future as we integrate and synergies align with our operations as anticipated.

Our next question comes from the line of Rodrigo Echagaray with Scotiabank.

I wanted to touch again on the spin launch. What should we expect from spin's full capabilities at launch aside from loyalty? Will there be any changes to the Saldazo strategy, specifically as a result of this launch? I'm also particularly interested in the last-mile initiatives discussed previously; if you could provide further details on what to expect, given your learnings from FEMSA ventures and exposure to start-ups like Houston. How do we integrate all of this?

I'll start, and then Eugenio can elaborate. First, we are currently utilizing the test market to fine-tune our value proposition. We are understanding consumer preferences, how they utilize the service, and what modifications and enhancements are needed. This pilot test is serving precisely that purpose, and as we expand to other cities, the experience and service will improve based on these insights. Regarding last-mile, we are observing consumers using this service as part of their post-pandemic experience. However, currently, we do not see a sustainable business model with existing economics. The landscape is changing rapidly as consumer habits evolve, and we recognize that opportunities may arise to utilize our comprehensive platform to offer better economics. We will act upon this when our ticket size justifies a sustainable business model. Importantly, we have insights through our investments in FEMSA ventures and the learnings from My OXXO. We will surely leverage these insights in the future. Eugenio, would you like to add?

In terms of Saldazo, it remains available as a product, and we are allowing consumers to determine how Saldazo spin fits in for them. The two will coexist in our stores. Regarding spin, our minimum viable product (MVP) currently enables users to pay at OXXO stores through the wallet, perform peer-to-peer transactions, and conduct cash-in/cash-out transactions at new OXXO stores. It also allows for bill payments and integrates with OXXO PREMIA, meaning users can earn points and transfer them to their OXXO PREMIA accounts. These are the features being launched initially. The potential for future developments is extensive. We can explore credit options and many more functionalities within the platform. Last-mile is also a learning experience; our investments in various last-mile companies targeting both end consumers and mom-and-pop stores have provided us with insights. We must ensure we focus on use cases that offer profitable margins, while maintaining the robust product offerings through our digital channels to consumers. We look to compete on speed, convenience, and availability of products that other platforms may not be able to provide, focusing on the economics that ensure profitability.

That makes sense. The ticket is clearly an important component of the equation.

Next question comes from the line from Marcella Recchia of Crédit Suisse.

My question relates more to OXXO's operations in Brazil. I understand that you've been conducting a roadshow discussing your expansion plans. It would great to hear you share updated expectations on that. I've also noticed that many new stores are being opened. Can you provide your initial impressions regarding the market dynamics and how they compare to Mexico? What are the main differences that will likely require adaptation?

We’re very happy with the collaboration with our partner there. During the pandemic, over 1,000 select stores have remained relatively stable. These have adopted our value propositions effectively, and we are pleased with the performance. With the initial rollout of the proximity concept to the OXXO stores, we have a limited number of stores to compare, but they significantly differ from traditional Mexican OXXO stores, featuring more food service and various offerings not typically consumed. Their positioning is more akin to competing with local convenience stores rather than traditional mom-and-pop establishments in Mexico. Overall, we’re pleased with the performance thus far, but it's still early to conclude as we are only rolling out in the outskirts of São Paulo. The stores are maturing as planned, and we are optimistic about our expansion plans.

Our next question comes from the line of Ulises Argote with JPMorgan.

Just a quick question about OXXO's performance in Mexico, and I would like some segmented insights if possible. Can you provide some detail on trends in big city locations versus tourist centers that may have lagged previously? Any details on the evolution and performance there would be helpful.

Certainly. When looking regionally, tourist locations have struggled somewhat during the peak of the pandemic this past summer, but they are on the rebound. However, we're seeing significant traffic returns in beach areas like the southeast and the Pacific Coast. As for big cities, it varies; locations near bus stops and transportation hubs are performing well. In contrast, office areas continue to suffer along with school zones. Therefore, placement is critical to performance trends. Overall, we are encouraged by recovery trends within our product mix.

I will add that we are noting broad recovery across OXXO in this latest quarter. This recovery is influenced by city-specific mobility and traffic that impacts consumer behavior. Stores near schools remain impacted, while those close to business districts are showing promising improvements as they return to a more normal operating schedule. Our capability to adapt store management based on developments around them has benefited performance, providing us with the ability to respond to shifting consumer patterns.

Our last question comes from the line of Carlos Laboy with HSBC.

Having reviewed the Heineken stake's strategic value, it shifted to tactical, and as you began selling it down, you now have new leadership members. With the new CEOs at Heineken, Coke, and Coke FEMSA, are you perceiving cross-category collaboration growth and partnership opportunities differently than you did two or three years ago? Are you reassessing the long-term benefits of retaining the Heineken stake? Is it becoming more strategic and less tactical now?

As previously mentioned, Heineken provides a very stable downside protector in revenue generation and exposure to developed markets within our portfolio. We are also growing our partnership across various markets and remain excited about the future collaboration opportunities. However, we evaluate the Heineken stake like we do with all assets, continuously assessing returns against current valuations in comparison with other opportunities and the cash on our balance sheet for capital deployment. We will analyze our portfolio to deliver the best returns for shareholders. For now, we remain happy shareholders of Heineken, and we see it as a vital safety net within the portfolio with significant strategic implications.

Additionally, as you referenced in your question, we maintain strong relationships with Heineken's management and Coca-Cola Company's management. These relationships are pivotal for collaboration.

Ladies and gentlemen, that is all the time we have for questions for today. I will now turn the conference back over to Francisco Camacho for final remarks.

I think that’s all for today. Thank you very much for your participation. Thank you for your support, and have a great day.

Thank you. 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.