Mexican Economic Development Inc Q4 FY2021 Earnings Call

Please standby. We're about to begin. Good morning and welcome everyone to FEMSA Fourth Quarter 2021 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 faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which can materially impact the company's actual performance. At this time, I will now turn the conference over to Juan Fonseca, FEMSA's Director of Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to FEMSA's Fourth Quarter 2021 results conference call. Today, we have Daniel Rodríguez Cofré, Chief Executive Officer; Paco Camacho, our Chief Corporate Officer; and Eugenio Garza, our CFO. As always, we are also joined by Jorge Foyaso who heads the Investor Relations Center. The plan for today is to have Daniel comment on some higher-level strategic topics. Then Paco will talk about the evolution of our governance profile and certain changes that FEMSA is proposing for the upcoming shareholders meeting in line with feedback we have received from investors. That should enhance our board's accountability, composition, and function. Next, Eugenio will walk us through the numbers followed by Q&A. So the call will probably be a bit longer than usual, but hopefully, it will prove to be a good use of your time. So, with that, let me turn it over to Daniel.

Thank you, Juan, and good morning, everyone. Let me begin by thanking and recognizing Eduardo Padilla once again. We all know that he was instrumental in leading the effort that turned FEMSA into the powerhouse it is today, creating enormous value for FEMSA and its stakeholders and setting the foundation for compelling gross revenue going forward. We're also familiar with Eduardo's self-adopted role at FEMSA, Chief Central Officer, focusing on the development of a positive culture of trust and agile collaboration that has enabled our broader organization of hundreds of thousands of colleagues to pull together towards a common purpose. Now, allow me to make a quick recap of how I see FEMSA in terms of its potential for long-term growth and value creation. At Coca-Cola FEMSA, we have in place a new long-term relationship model with our partner, the Coca-Cola Company, that significantly increased system alignment and created compelling opportunities for future consistent growth. In our Health Division, we acquired the large minority stake from our former partner in Chile, allowing FEMSA Comercio to finally integrate our operations across the four countries where we operate. With Heineken, we reached agreements to extend Coca-Cola FEMSA distribution partnership in Brazil while we navigated the gradual opening of our OXXO stores in Mexico to sell other beer brands in addition to the Heineken portfolio. Finally, we have made significant progress developing our business in the United States with our investment in Jetro Restaurant Depot and the creation of MBOED solutions, our specialized distribution platform. As I begin this journey at FEMSA CO and take a close look at our company, I truly believe every one of FEMSA's operations is in great shape. We have faced and overcome challenges big and small, including navigating the COVID pandemic. I would like to talk a little bit about where we are today in our core business units and then discuss some of the opportunities we see going forward. Starting with the proximity division, in 2021, we surpassed the 20,000-store milestone. Importantly, we believe there is potential to add 10,000 more stores in Mexico over the next decade. At the same time, our South American operations are entering a high growth year, including our joint venture in Brazil. In a few years, it is entirely possible that OXXO international could be generating unit growth figures comparable to those in Mexico. Today, as consumers gradually return to their normal activities, having our value proposition is as relevant as ever, and our comparable sales are now above pre-pandemic levels. These combined with a leaner construction and improving commercial income activity are driving structural profitability gains. This means that OXXO and proximity retail more broadly will continue to be a key engine for FEMSA's long-term growth. We're also looking at our proximity format with different characteristics suitable for different consumer environments. We're always looking to grow not just in the number of units but in profitability and returns. Beyond physical formats, as you are aware, we are in the early stages of developing our digital strategy, driven by OXXO. Our digital wallet and OXXO Premia, our loyalty program is off to a very promising start and we have aspirations to become relevant players in Mexico's digital ecosystem. These digital opportunities are so important and relevant to our long-term strategy that we have created a dedicated business unit focused on them. This unit reports directly to me. While we are on the subject of digital, let me give you an update on the regulatory front for Spin. We have now received from the regulator the authorization with certain conditions. We're in the process of addressing these conditions, and the Spin brand is operating under this authorization. This is a very positive development, and we will keep you posted of any incremental news. On the broader topic of our digital strategy, we are deploying the necessary resources, including in terms of organizational structure and talent. While it is a tight market, we have managed to attract key industry hires for our Spin and Premier platforms, and the effort is ongoing. We're also interacting with potential partners that could contribute their expertise or resources at different levels through commercial or equity structures with a view to maximize value creation. While there is a natural focus on developing the ecosystem and pursuing the opportunity in Mexico, everything we learn and develop here will serve us well in other markets and other parts of our operation, such as the Health Division. Moving on to the Health Division, we are now able to transfer best practices across territories, and we're growing rapidly in Colombia, Mexico, and Ecuador, leveraging the scale and execution-driven results of the Court Julian operation beyond commercial and operational improvements that should allow us to gradually narrow the margin gap relative to Chile. We're also growing our digital offerings across the platform in terms of e-commerce, loyalty, and other related opportunities. On the expansion front, we're focused on consolidating and growing our current operations, but we remain vigilant for inorganic opportunities. Organizationally, we have evolved and simplified our structure a bit to better reflect the evolution of our business units and to allow me to be closer to the operations. Therefore, proximity, digital, and healthy divisions now report to me, allowing us to remove our corporate layer at FEMSA Comercio. This means we will not have a CEO of the retail businesses, but rather the retail businesses will be closer to the FEMSA leadership team. Moving on, our logistics and distribution operations are growing rapidly, driven by our successful acquisition strategy in the United States. This is allowing us to execute our game plan faster than expected. We are well on our way to achieving our objective of creating a national platform, and we are already capturing meaningful synergies from our enhanced scale and from cross-selling opportunities across territories. We have added almost $1 billion in revenue through 12 acquisitions in the past 14 months. There is significant integration and further synergy capture work ahead of us, but there are also a few important markets in the U.S. where we still need to strengthen our presence. This is a business that is very attractive and one that is already delivering solid returns, with the potential to increase margins over time. We are committed to continue playing a relevant role in the consolidation of this market. For its part, Coca-Cola FEMSA keeps focus on profitable growth, both organic and through targeted acquisition, such as the recently announced transaction with CVI in Brazil. In an environment where further system consolidation is always possible, Coca-Cola FEMSA enjoys ample cash generation and a strong balance sheet that support not just a healthy dividend stream but its own growth optionality. Operationally, costs continue advancing in its own digital and omnichannel initiatives. Its Juntos platform continues to make progress in Brazil and Mexico with a fast-growing number of customers now enabled to place orders digitally, with the percentage of digital orders reaching a new high. Following the increased system alignment with the Coca-Cola company, we are finding more ways to maximize the productivity of Coke FEMSA distribution platform through load sharing, pilot tests on our own feed, as well as through the new FEMSA business. Now, let me talk a little about some higher-level strategic considerations. As you know, FEMSA has evolved over time as we have developed certain key capabilities to allow us to pursue business verticals that share certain characteristics. We participate in mass market mainstream industries by providing highly scalable products and services. We developed high levels of capillarity, allowing us to reach and serve our customers through frequent interactions, and we rely on effective operations and processes, enabled by efficient logistics and distribution capabilities. All of our business units require and benefit from these key capabilities. However, our operations are at different stages in their development curve. They have different capital requirements and different growth rates and potential. Therefore, when it comes to FEMSA's capital allocation and deployment, we will privilege those operations that have the best opportunity to generate a positive spread between their return on capital and cost of capital, obviously adjusted for risks. Lately, the assessment has driven the growth of our retail platform as well as our recent investment in the United States. We're convinced this is the right approach, and therefore, you should expect us to continue deploying our capital along those verticals. Finally, let's talk about our two large minority investments, Heineken and Jetro Restaurant Depot. Regarding Heineken, we have obtained very good financial returns from these investments since 2010, and we continue to be, as we have said in the past, happy holders of their shares. However, we're constantly benchmarking this investment against potential alternative investments like those we have recently made in the United States. We have funded such investments in the past with proceeds from a partial divestiture of our Heineken stake, and we may do that again in the future. That brings me to Jetro Restaurant Depot. This is primarily a strategic investment and over time it is a regional business to which we would like to increase our exposure. As you know, there is also the potential to explore and eventually bring their Cash & Carry model to Mexico. JRD is very compelling from a financial standpoint, and we're happy holders of their shares as well. Let me close with the following. There are many moving parts in FEMSA, and right now, all of them are moving in the right direction. We truly believe the future is bright and full of promise. Our company is always evolving as we direct our resources toward the opportunities that we believe represent the most compelling long-term value-creation potential. I am fortunate to lead such an extraordinary team, more than 320,000 strong and the best in the business. Attracting and developing the best people is a keystone of any business that aims to thrive in the long term, and it is a high priority for us. Together, I have no doubt that we will achieve great results and write a few more pages in the long history of our remarkable company. And while we do that, I look forward to engaging with you frequently in the months and years ahead. Now, let me turn it over to Paco.

Thank you, Daniel, and hello everyone. I want to talk a little about what we have been doing on the corporate governance front, particularly with regards to the structure and functioning of our Board of Directors. As you might be aware, we circulated a press release a few days ago with several relevant changes aimed at increasing the accountability and independent oversight of the board. Our first objective is enhancing the board accountability, and to that end, our shareholders will be able to vote on directors individually for the first time this year. We believe we are among the first Mexican companies to do this, and hopefully this will become a trend. Second, we want to increase the influence of our independent directors. Back in 2018, our board had 21 directors; by 2021, we had reduced the number to 18 directors. In 2022, we are reducing it further by one or two directors, and we're making the commitment to reach a final target between 14 and 16 directors next year. Importantly, at least 40% of those directors will be independent when we achieve our target. Third, we are increasing the oversight role of independent directors and key committees. The audit and corporate practices committees will continue to be composed mostly of independent directors. Beginning this year, the corporate practices committee will also evaluate and nominate candidates for independent directors and ensure the entire board is composed of directors with the skills, experience, and capabilities required to provide effective oversight. For its part, the planning and finance committee will add operational oversight to its purview, which will be renamed as the Strategy and Operations Committee, composed of a majority of independent directors. These committees will oversee transformational initiatives, further increasing the involvement and time commitment of directors on operational matters and complementing the role of senior management. Beyond 2022, we have also set three governance priorities. First, we will continue enhancing our board's goals and effectiveness by balancing institutional knowledge with fresh perspectives, by adding new independent directors. We will add incremental expertise on relevant new business areas, such as digital and e-commerce, and we will further enhance the board's gender diversity beyond our current level of 22% and seek backgrounds in alignment with commitment to and leadership in ESG matters important to our success. Second, we will ensure we're focused on responsiveness by adopting limits on the outside commitments of directors. Third, we will bolster outreach to shareholders to gather their input as we continue to enhance our governance. On a related topic and before turning the call over to Eugenio, let me elaborate a little on the subject of ESG. Beyond the evolution of the board to better address these needs, we have established an internal ESG board to focus on, drive, and continuously assess our commitment and performance according to our ESG framework. As you know, we have put our money where our mouth is and we have issued sustainability-linked bonds with ambitious targets that will become more expensive if we fail to reach our objectives on important metrics like the use of renewable energy or the elimination of operational waste to landfill within certain time frames. ESG now permeates every aspect of our company, and we are eager to be part of the solution. And with that, let me turn it over to Eugenio.

Thank you, Paco, and good morning to everyone on the line. As we have done in the past several quarters, we will provide fourth quarter 2019 comparisons where we consider this to be helpful, as the 2020 comparison base reflects the impact of the pandemic and does not always tell the full story. Starting with FEMSA's consolidated quarterly numbers, total revenues during the fourth quarter increased 16.3%, while income from operations increased 18% compared to the fourth quarter of 2020. When we compare against the fourth quarter of 2019, total revenues increased 14.6% while income from operations increased 14%. FEMSA's net income increased significantly in which 10 billion pesos, reflecting higher income from operations, a non-cash FX gain related to FEMSA's U.S. dollar-denominated cash position, a decrease in net interest expense, and an increase in our participation in associates results, which mainly reflects the improved results of our investments in Heineken. Moving on to discuss our operations, beginning with FEMSA's Proximity Division. We opened 434 net new OXXO stores during the fourth quarter, totaling 865 net openings for the year, reflecting a strong push by the team to close 2021 with strong momentum. Same-store sales were up 12.5% for the fourth quarter, driven by an increase of 10.4% in average customer tickets against 2020, while compared to the fourth quarter of 2019, same-store sales increased 4.4%. Gross margin increased 150 basis points to reach 46.1%, reflecting a recovery in commercial income from promotional programs. Income from operations and operating margin increased significantly compared to the same period of 2020, reflecting improved operating leverage and strict expense discipline. Relative to the fourth quarter of 2019, operating income increased 15%, while operating margin increased 30 basis points. These are encouraging numbers that highlight OXXO's resilience in an environment that remains still below pre-COVID levels in terms of customer mobility. Regarding our additional digital imaging initiatives, let me give you a quick update. In the recent months, we made very good progress on the regulatory front, as Daniel mentioned, and Spin by OXXO continues to grow at a rapid pace. As of last week, we had 1.6 million registered users on the platform. On the loyalty front, things are moving even faster, and as of the same date, we had more than 4 million registered users on our OXXO Premia platform, which of course will play an important role in driving customer engagement and generating actionable data. These are still very early days, but we are generally pleased with the trends we're seeing. Moving on to FEMSA's Health Division. During the fourth quarter, we expanded our drugstore count by 112 net additions to reach a total of 3,652 units across our territories at the end of December, and 284 total net new stores for the full year. Revenues increased 7.3%, while same-store sales increased an average of 5.7%. On a currency-neutral basis, revenues grew 14.3%, and same-store sales increased 10.3% as we continue to see good momentum across our operations. Gross margin remained flat in the quarter, reflecting channel and product mix headwinds mainly in our operations in South America. Operating margin expanded 10 basis points, reflecting improved operating leverage. Moving onto OXXO gas, revenues increased 30.2% and same stations sales grew 23.3% relative to the fourth quarter of 2020. During this quarter, gross margin was 14.1%, while operating margin remained flat against 2020, reflecting tight expense control that offset operating deleverage driven by the still recovering mobility. Regarding our logistics and distribution business, revenues increased sequentially reflecting positive dynamics overall. Having said that, in the U.S. we continue to see different speeds of recovery at certain categories, such as facility supplies, which are still lagging their historical pace, while others such as packaging and food service have recovered a lot more quickly. On the logistics front, our operations again showed good trends across most of its Latin American markets. Finally, moving on Coca-Cola FEMSA, volumes grew 5.4% over the last year and almost 7% over the 2019 benchmark, with most markets contributing to the positive results. Revenues increased 8.5%, and gross profit grew 9.3% despite supply chain disruptions and cost pressures on certain raw materials. Operating income increased 7.6%, reflecting a one-time tax effect in Brazil. Overall, FEMSA showed the resilience of the business and its ability to deliver results in challenging environments. You can listen to the webcast of their quarterly call that took place last Friday. As you can see, we were able to close the year with good momentum across our platform, and the strength seems to be carrying over into 2022 as the world continues to gradually reopen. We are excited and bullish about FEMSA's opportunity set as we begin this New Year. With that, we end the prepared remarks and can open the call up for your questions.

We got first two. Bob Ford with Bank of America.

Thank you, and good morning everybody. And thanks for taking my question. Daniel, how does the creation of a digital division impact the resource commitment and the expected pace of development of Spin and Premia? And what are the key KPIs for management in the digital division this year?

Thank you both for your question. As you mentioned today, we are focusing on two main areas in the digital scope: one is Spin, which is significantly elevated within the organization, and the second is the loyalty program. Regarding Spin and resources, we have been very proactive in bringing in industry experts, and we have a leader who reports directly to me, as I mentioned earlier, and I would say we are making very good progress. I’m not sure if we can disclose the current numbers we have in terms of customers.

Certainly, I mean, we have more than 4 million on the loyalty side, we have 1.6 in Spin and about 60% or 60 plus in terms of actives?

Yes. And I would say that is where we are. I mean, we have made a lot of progress and fairly fast over the last couple of months, and we are very positive about the future. And obviously also mentioned during the call, we are looking for different levels of potential partnerships at different levels because we strongly believe that that could be an opportunity in terms of value creation. So that I would say it's the most relevant thing in terms of the indicators. Obviously, we're moving to the standards of the industries and that is how we're tracking the business. Internally, I would say that the fact that that division is reporting to me means that the FEMSA leadership team is very close to them, and we are following all the evolution in terms of performance and value creation on a monthly and sometimes on a quarterly basis. I don't know. Daniel Vargas would you like to add anything else?

We are focusing on key performance indicators as we move forward. Internally, we will start sharing some of these indicators in the market, including platform stickiness through churn, average revenue per user, customer acquisition costs, and other important metrics. In terms of loyalty, we are examining transactions in our stores and the platform's stickiness, and this data is being reviewed internally to identify future opportunities.

That's very sorry.

From my perspective on repurchases, I want to emphasize that we are consistently attracting talent from relevant industries outside our own, which is aiding in the development of our projects.

And just as a follow-up, how should we think about the evolution of the functionality and the use cases on both sides?

Both what we are doing is obviously applying the same methodologies that the industry applies. So with MBPs, agile teams, and I think that the product is evolving as we speak. The most relevant thing can you just mention is we're very close about the stickiness of our product. And that is something that we are improving and will continue to improve going forward. So as I said, we're very positive about the product.

Thank you all very much.

One comment to add, Bob. It does look like adding customers is always a challenge. The greater challenge will be keeping them engaged. As you know, we are in an environment in Mexico where cash is still key, and there is some reluctance to embrace digital forms of payments. There's a learning curve. While we can add significant numbers, as we've mentioned, with additions per month in the hundreds of thousands and almost a million per month in the case of Premia, we need to ensure that people actually use the products and spend more time with them. Offering rewards will certainly help with that, but it's important to remember the challenges we and other players face in Mexico, particularly the deeply entrenched cash culture. While we benefit from cash transactions, transitioning to digital will take time.

You made a great point, Juan. I want to link that to our current ability to track exactly who our customers are and their behaviors. We now have much more robust information, which I believe will enhance our product. Additionally, as Juan mentioned, we need to adapt to the cash culture in Mexico, which remains significant.

Thank you very much.

Your next question comes from the line of Ricardo Ellis with Morgan Stanley.

Hi, everyone. Good morning. Thanks for the call. Thanks for being available. A couple of questions. On the OXXO same-store sales, gross margins well above expectations, as you highlighted in the initial remarks, just a quick question on SG&A. Were there any major lines or anything that surprised you? I don't know, perhaps on the personal expenses side. We were a bit disappointed just a bit on the SG&A line. So any thoughts that you could give on that would be helpful. Now, more importantly, is still on the OXXO. How are you seeing mobility and overall your numbers throughout February? We're heading to March. So just wanted to get your quick thoughts on the evolution of mobility and same-store sales as we get eventually completely tack this new wave? That's my first question on OXXO. And then the second question, moving down to Brazil. It seems that the GV is surprising to the upside. So just wanted an overall update on what you're thinking about Brazil in 2022? And more broadly, this leads me to my broader question on growth outside of Mexico? So wanted to get your thoughts on how you're thinking about South America in terms of growth contribution. The growth contribution of the region is increasing a lot relative to Mexico as it pertains to the expansion of the company, as it pertains to your expansion in retail. So any thoughts that you have going forward on ex Mexico? That will be helpful. Thank you.

Sure. Thanks, Ricardo. I'll start with the SG&A question and then turn it over to Daniel for the Brazilian JV progress. On SG&A, really there's nothing specific to mention other than the fact that as you saw, we had a big number in the fourth quarter in terms of new store openings. So we had an unusually heavy fourth quarter, and some of these expenses are not capitalized. They're put directly through the SG&A, and that's why you saw a little bit of a higher bump. But other than that, I think we continue to see favorable deleveraging trends. And as commercial income is coming back, that gross margin benefit is flowing through the bottom line in the way that we expected, but nothing specific to mention on the fourth quarter on the ESG front.

Yeah, and maybe just before moving to Brazil, regardless, in terms of mobility, which was your other question in Mexico. Well, as we mentioned, we are starting to feel a recovery, we are not there yet completely in terms of mobility. But so far, I am in a very positive trend in the fourth quarter. Moving to Brazil, just a reminder to everyone, the JVs that we have there with which is a 50/50 joint venture. We have three different models of operations. One, we have the traditional franchise model with the select brand inside the gas station. Second, still inside the station, we offered to the dealers if they liked that we would take the store and run it as we normally do with an OXXO store here in Mexico. The third one is the OXXO deployment of stores outside of the gas station, and I would say that we're very much aligned and even positive in terms of our original plan. The most important thing is that the best customer value proposition that is proving to be very successful in Brazil is Softsoap. So we're very positive about what we have seen so far in OXXO in Brazil. For this year, our plan is to open around 200 stores in 2022. Obviously, that will help us to learn how we can keep that momentum or even increase going forward. So that is where we are at this stage in Brazil, but very positive and very happy with the results that we have seen so far.

I appreciate the comment. Thank you.

Thank you, Ricardo.

Your next question comes from the line of Ben Cruz from Barclays.

Good morning. And thank you very much for taking my questions. So what I would like to understand a bit in regards to the most recent performance and the health position could you elaborate a little bit on the dynamics you think. Obviously, you had some very good results during COVID, and maybe things are just normalizing. So where do you stand right now in both South America and Mexico, and particularly in Mexico, where do you stand in terms of getting those operating efficiencies from having gone through the processes?

Let me talk first about South America. In terms of South America, as we mentioned, our core market and most relevant in terms of contribution is the Chilean market. But we are moving very fast in order to improve the capabilities both in Ecuador and Colombia. In that regard, these two markets based on the synergies that we're capturing from the commercial standpoint, we're able to speed up our organic growth. That's what we're doing both in Ecuador and Colombia. Particularly in the case of Ecuador, it's important to mention that we are growing very fast as well with our franchise model, which is part of the EV one learnings that we're bringing from our core market in Chile to Ecuador. Regarding Mexico, last year, we have made significant improvements in terms of the scale of our division. The fact that now we own 100% of the business has really helped us to do that much faster and that also is helping us to improve the speed in terms of organic growth. We're always looking for opportunities. In Mexico, we can see, for example, regional changes, etc., in order to use M&A as an optionality to see if we can go faster in this market. So that I would say in a nutshell is where we are. In terms of the pandemic, I think that was another question that you raised. I think definitely we got the benefit at the beginning of the pandemic, but so far we're able to compensate if you want the reduction in those components of our value proposition by the other ones. The fact that, as I said, we have a much stronger commercial regional division is helping really to be much more effective in terms of our value proposition in the markets that we're in and trying to be much more competitive in terms of price with our customers.

If I might add onto Daniel's comment, I think some of the positive dynamics you see on the margin front have to do with that additional scale. The way we are operating in Mexico by concentrating volume of key FKUs with fewer suppliers is getting better terms. That has achieved hundreds of basis points in margin improvement in Mexico. That on top of the top-line growth is really helping the deleveraging effort provide solid results to the bottom line.

We're just coming from Chile. Many of these practices come from the Chilean operation. I would just add, in terms of segmentation, or the type of formats that we operate, for different reasons, some of our markets have a mix of institutional sales. For example, Colombia has an institutional mix and so does Chile. Mexico is basically retail. Even if you look at retail, our drugstores in Mexico cater to a certain segment. They're small, deeper within the neighborhoods, as opposed to Ecuador where we have two different formats, Fybeca, which is a bigger box, maybe a little bit higher-end. Then you have Sana, which are smaller, serving a lower socioeconomic segment. And then in Chile, you have Cruz Verde, which is also a big box place, a little bit higher. I've had a lot of learnings in terms of what is the right value proposition, and can we have more than one in a given market? That’s also proven to be very profitable.

Perfect. Thank you very much.

Thank you, Ben.

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

Thank you so much. Thank you for taking my question. Hey, Daniel, Paco, and Juan. Actually, I'm going to ask about an elephant in the room, but I think it will be a benefit for everyone. You didn't mention the share price of FEMSA in any of the remarks. The share price of FEMSA in dollars has done nothing in 10 years sustaining between whatever $78, $80 and $95. So how relevant is the share price in terms of all of the decisions that you're making? Specifically, I think that the share price suffers much because of a lack of increase in earnings per share. Behind that, the capital deployment and the structure of FEMSA. And in this case as you are announcing the digital initiatives, I think it would be good to hear how you're going to monetize the digital initiatives not just in the near future but in the longer term. What are the options? So I guess the two concrete questions are the relevance of the share price in everything that you're doing and the acknowledgment of the situation of the share price. How are you going to monetize additional initiatives in the future? Thank you.

Thank you for your question, Alan. Regarding the strong share price performance, a significant part of senior managers’ compensation and a large portion of minority shareholders’ assets are tied to FEMSA. Personally, I am very concerned about our stock price and we actively manage its performance. However, our focus is on long-term management of the company. I recognize that the market is not currently acknowledging that potential, but we continuously explore options to optimize our corporate structure. While we care about stock performance, our primary goal is to create long-term volume. Concerning digital initiatives, we see that as a future opportunity. Our strong presence in Mexico indicates that acquiring customers isn’t our biggest challenge, though it remains important. The focus is on rapidly enhancing our value proposition and adapting to the cash culture evolution in Mexico. We are committed to monetizing this business effectively. To achieve this, we are prioritizing the recruitment of digital talent and constantly evaluating partnerships that can accelerate value creation across our operations. That is our current focus.

I would add also, in terms of the changes we're doing to attract this management. We are trying to adapt our standard compensation practices to bring digital talent into the organization to something that replicates the value creation opportunities that they would get at a startup. Again, this value can hopefully be monetized internally through more disclosure as we go forward in terms of the progress of the value creation of these digital initiatives through both commercial and potentially equity partnerships that Daniel mentioned going forward. So, we do take that into consideration and hope that through all these mechanisms, that value will be a lot more transparent to you guys as shareholders.

Thank you so much, Daniel, thank you. Best of luck to all. Thank you.

Thank you, and thanks everyone.

Your next question comes from the line of Alvaro Garcia.

Good morning, Daniel, Paco, Eugenio, Juan. Thank you for the space. Two questions for me. The first one on average ticket at OXXO, up 10% year-over-year. I know you guys are very proactive on passing prices, but I was also wondering if you can comment on what you're seeing on structurally higher average ticket coming out of the pandemic, and whether or not that's actually sticking or not from a mix standpoint. And then my second question, on governance, congrats on the changes, particularly on the nomination front. Two questions. On tenure specifically, what should we expect as far as the average tenure for independent board members? And maybe if you could comment on the weight that the Corporate Practices Committee has had historically? And how you might expect that to change going forward? Thank you very much.

Sure. First on average ticket, there is an inflation component to that. No doubt. We are trying to balance the value proposition with the increases that we're seeing on the supplier front, but so far, I think that there's still a good chunk of the average customer ticket that has to do with changes that we believe will be permanent in terms of the average customer basket. We're seeing a lot more hard liquor instead of beer, we're seeing more food consumed rather than just snacks. Overall, we're comfortable that as traffic continues to grow in the store, that average ticket, at least for the customers that did change their habits, will stick and be a permanent accretion to the value proposition of the store.

Let me add that you're absolutely right. One thing we are still analyzing is how the new reality in office space will evolve. This could positively influence traffic, but the change in consumption patterns among those who work in offices might lower the average ticket. However, this decrease will likely be more than offset by the increased traffic. That's what I wanted to mention.

If I may add one additional thing, which is the consumer has changed their habits. A nice thing is that the OXXO teams have very quickly adapted the portfolio. They have very quickly adapted to how the mobility affected the consumer patterns. You should expect the OXXO teams to continue doing that strongly moving forward.

And on your question on governance, as you know, the Corporate Practices Committee and certain board members used to take care of the nominations in any event. Now we're making it official, and they're going to be following established protocols based mostly on investor feedback, looking at stuff such as tenure and trying to strike the right balance between the corporate history of the company and the experience in the decisions that they made in the past together with fresh pairs of eyes that can look at the evolving topics such as digital ESG in other topics. Rather than at this point, communicate what these specific targets are with regards to tenure and the skilled matrix elements that will be playing out for the next few months, and we'll communicate if need be. However, we are going to look at number one, making it explicit as to the kinds of considerations that we're making. Hopefully, striking this right balance between institutional knowledge and history and fresh additions to the skill set of the board. Very helpful. Thanks for answering too. Thank you.

Our next question comes from the line of Luis Willard from GBM group.

Good morning and thanks for the space and comments on the results. I'm going to go a bit off-script with my question then, and I hope you don't mind. If you think of your characteristics and your track record and your capabilities, how do you see them aligning with the strategic vision that you have for FEMSA and where the company is standing in terms of its life cycle? That will be my question. Thank you.

Thank you, Luis. I believe the business units are performing well. There are a few key areas where my experience can make a difference. Firstly, we are focused on international expansion. Before joining FEMSA, I worked at Shell and later at Cencosud, which involved expanding into markets outside our core areas. In Brazil, for instance, combining our expertise with local knowledge is proving beneficial. Secondly, we are looking into new opportunities in the U.S. I want to acknowledge Eduardo and the team for their rapid progress in acquisitions, creating a new vertical for FEMSA in a familiar area. Lastly, regarding digital initiatives, my previous experience in Chile, especially in the FinTech sector, has been valuable. Additionally, I have knowledge about loyalty programs which we successfully developed in Chile and expanded to other Latin American markets. Overall, the key for me is ensuring we have the right talent to continue building on the legacy of this great company.

Thank you, Daniel. That was very insightful.

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

Hi, good afternoon, good morning. Thanks for taking my questions. Two quick ones I have here. The first one on the digital front, you mentioned you're being in Thailand to build the platform, right? We have seen that bringing people for rapidly deployment of consent. My question is, how far do you think you are in terms of building this digital chain? Did you cut out FEMSA Adventures that could potentially surface us as a partner for your digital platform? We know that you have a couple of investments there that would be my first question. And the second one, very quickly. To make sure I understood correctly, Heineken is taking Heineken, traditionally dividends were passed through to invest that success rate segment of dividend payments. Right now, with the U.S., as you mentioned, is it fair to say that the dividend for Heineken will be used to fund U.S. acquisitions; is that correct? That would be my two questions. Thank you.

Thank you very much, Rodrigo. Regarding the digital front and FEMSA venture and if you guys can augment me. First on the digital front, obviously, we have made a lot of progress in terms of bringing talent from outside, people that are experts in the digital space. Having said that, we know that this world moves very fast, and we need to keep that in mind. So we need to move even faster. For me, it’s in three fronts. One, is how we continue to improve the quality of our product, so the value proposition. At this point regarding the Geeknet. Second, how we make sure that we have the right talent at the speed that we really need. That's a permanent task that we are taking care of. It’s important that we recognize we need to change the way that we compensate this team, and that’s something that has already been mentioned. The third point, which is a combination of the first two is the fact that we are permanently assessing if there are opportunities at different levels to have partners. That’s why I connect very well to your comment regarding FEMSA venture. From a wider perspective, our intention with FEMSA venture is to explore opportunities that can connect not only to the digital world in the future but also could be potentially relevant for our other business units. So that is what I would like to say regarding the digital. I don't know if Paco has any additional comments on FEMSA Ventures?

Sure. What I would add on FEMSA Ventures is that following the good practices of corporate VC funds, we have a do-no-harm attitude towards the investments that we make. So although we do have investments in last-mile delivery companies and FinTech companies that complement the FEMSA portfolio, again, we share learnings. We make FEMSA properties available for them to do pilot testing, etc., to create value for themselves, and we try to share best practices. Having said that, we do let the ventures flourish on their own and follow their own value creation process as well. We try to do no harm and benefit mutually throughout the agreements. I think there have been great value propositions for the entrepreneurs, as well as good learning outcomes for us, helping us develop our digital platforms and figure out where the landscape is evolving in each of our countries.

One thing I would like to add, Rodrigo, to your comment is that the two teams are very closely together. They talk a lot, work closely in things where they have interest. They've learned a lot, and these types of learnings they take back to the digital team, and they share learnings. Let's face it, they look for a lot of companies, and some of them we end up not investing, and some of them actually move forward with their own projects. There's a lot of talent, better source available, and eventually, that will be leveraged as we get more talent into the digital efforts.

Finally, Rodrigo, to your question regarding Heineken dividends, just want to be clear. Obviously, cash is fungible. But traditionally, we've said around dividends based on the cash flow of dividends that we get from Heineken, now Jetro, into a certain standard cash flow provided by the Proximity Division. That has always been the case and will continue to be the case going forward. I think the comment that Daniel made earlier referred to about three and a half years ago. You might recall we sold off in a block trade about 5% of our original 20% holding in Heineken and used that capital to deploy into some of these new verticals in the U.S. That’s what he was referring to. So from a dividend perspective, it's still to be determined over the course of the next few weeks, but we would continue to follow the same mentality and hopefully recover the pre-pandemic levels of dividends this year.

So, it's basically a pass-through?

Correct, yes.

That's great. Interesting comments on the venture side. Thanks for the clarifications about Heineken. Thank you, guys.

Thanks, Rodrigo.

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

Thank you, everyone, and good morning. My comment pertains to the changes in the corporate structure, particularly regarding the establishment of FEMSA's digital division. While cash remains crucial in Mexico today, there is a recognition that this could evolve over time, increasing the significance of Spin and digital initiatives overall. The question is how to ensure that you address any previous challenges related to setting the right priorities in KPIs and compensation under the new structure. Could you share examples of what hasn't been working and what the potential outcomes of these corporate structure changes could be?

Let me make sure that I understand your question. When you refer to corporate structure, you refer to the leadership team that is reporting to me, I'm correct?

Correct, that and obviously the creation of FEMSA.

Fine. Well, as I mentioned, the fact that we have now eliminated one layer, which was the role I had in the past, which is the CEO of FEMSA Comercio or the retail business unit, reflects two -if you want to call them key elements. First, that the business, particularly the Health Division, and now the digital area, are growing very fast. They have to grow. They are at the level that they really should report directly to the FEMSA CEO. For me, that is the first thing. At the same time, because all the retail businesses are part of that development path, we see that there is a big opportunity going forward in terms of value creation. It's important for me to stay close to this business. Regarding the digital one, as I mentioned, we are taking all the knowledge of the industry in order to evolve our compensation packages. Will that help us make our company more attractive? So far, to be honest with you, we have been very successful attracting talent. The market is very competitive on that front, but the fact that we have such a nice footprint with our OXXO business means everyone in the digital industry recognizes that this is a great opportunity. They see how they can evolve and develop their careers going forward. I'm very positive but at the same time, let me be clear that we are permanently analyzing if there are any other ways, particularly regarding potential partnerships to even grow faster in that industry.

Let me add, I mean, just to follow up on those comments. Number one, I think very importantly we're no longer trading off our resources either on the OpEx level or on the CapEx level with the Proximity concept. We're funding this separately, looking at it separately, and having kind of cost of capital and opportunity cost discussions separately. I think that clearly helps fund investments that on the other hand probably were not being funded. That's number one. And number two and I think more importantly, we are being a lot more agile in figuring out what we can do internally, what we cannot do internally, and being open to outsource certain elements of the development of the business, and being a lot quicker in that respect. So I think those two elements added to what Daniel already mentioned are helping us get a distraction that we’re getting in the market.

Got it. And then just one follow-up. So you obviously launched Spin without any partnership, the feedback side or on the tech side. What seems to be changing in that? It sounds to me like you are now a little bit more open to seeking these partnerships around that division?

Yes. I wouldn't say that we're more open. We have a culture of partnership in FEMSA. In that regard, I don't see much difference regarding that. The only element that we are focusing on more than maybe we did in the past is the fact that we realized that with the speed that we are growing the business and the environment that we see outside, I think if we can partner with someone or some people that can help us do that even in a faster and more effective way, we're open to do so. Analyzing as we speak, we started last year discussions with different people. Potentially, we're going to end up with different partnership models, which can be from a commercial point of view and can even include more structural partnerships that could encompass equity. That's what we are analyzing at this stage.

I will add, Rodrigo, just what Saldazo was in terms of originating the accounts, partnering with Visa, which of course is something that we’ve done and setting up peer-to-peer payments, that's something that's already happening. Areas like analytics, we probably need some help in getting this state-of-the-art. We need to be smart about where a partner adds value and where they wouldn't. I think that complements what Daniel was describing.

Great. Thanks a lot.

Your next question comes from the line of Thiago Bertolucci with Goldman Sachs.

Yes. Hey Daniel and team. Good morning, everyone. Thanks for taking our questions. We have two questions exploring the theme of capital deployment. The first one is about logistics in the U.S. right? The biggest unit is ramping up well. The U.S. has added more assets to the platform. According to your opening remarks, we understand that there's potentially more to come over the next months. Back from the short acceleration on the P&L that we've seen in the first quarter, how we've performed ends up like and what should we expect for the very short-term having in mind that potential organic activity should come from there going forward? This is the first one. The second one is on OXXO. You were able to pull some acceleration in store openings in the first quarter. You’ve been reiterating the structure's space for heart penetration in Mexico going forward. I’d just like to hear from you what should we expect in terms of expansion in Mexico for 2022 for OXXO? These are the questions, thanks very much.

Sure. If you want, I'll take the logistics question in the U.S. As you know, the entire strategy behind this is that we're looking at an industry structure that's a class model. A lot of different suppliers, a lot of different customers. Being at the center as a distributor allows you to create a ton of value. As you create a national platform, get that good synergies and value capture from the scale. We bought our original two companies in the spring of 2020, and we've brought a total of 13 companies so far. I can say a couple of things. One, most of the companies that we bought, both originally and through the beginning parts of 2021, are already meeting their right targets with the synergies and best practices that we have been able to deploy. From our internal perspective, we're already valuing on a DCF basis based on the performance that we see so far. I mean evaluation well above what we originally paid for these assets, so we’re very, very happy about what we have achieved there so far and still feel that we have a long way to go in terms of capital deployment into that space that has quick paybacks and quick returns on capital turnaround. We’re happy to report that we think we made the right bet on this industry, and it's playing out according to plan so far.

Let me address the second question regarding openings in Mexico. Last year, we made adjustments to increase the threshold for approving new locations. We're now requiring a higher score on our internal metrics because we want to avoid situations where we have to close stores due to poor performance, as we experienced in 2020. Therefore, the criteria for opening new stores in Mexico have become more stringent. We have been building our pipeline with these criteria, and it's encouraging that we performed so well in the fourth quarter, opening over 400 stores. Going forward, we should aim for 800 openings in Mexico for 2022. In terms of overall expansion outside of Mexico, we expect to approach 400 openings, with over 200 in Brazil and around 150 to 160 in Chile and Colombia. This year, we will almost have a 2 to 1 ratio of openings in Mexico compared to international markets, but this ratio will change quickly. While Mexico may see slight growth, we anticipate significant acceleration in South America. As Daniel mentioned, it’s quite possible that in a few years, we will be opening similar numbers in both Mexico and other countries. Additionally, we've discussed the advantages of scale and how it affects returns and supplier relationships. As we grow in other countries, profitability will increase significantly, and we expect margins to improve quickly. This transition will mirror what we're observing in our Health Division, where we've begun to narrow the performance gap with Chile, similar to how OXXO operates in that sector. I hope this clarifies our position. Before we conclude, regarding logistics, for most early acquisitions, we are achieving ROICs in the low double-digits within the first year or year-and-a-half. This highlights the strength of our business model.

No, that's great. If I may make just a quick follow-up on one of your comments. Any structural difference in terms of unit economics in Mexico and outside of Mexico going forward, we should keep in mind when adding each of the models?

Not really. We are seeing as you know, different traffic and ticket patterns throughout the portfolio. Depending on whether it's a tourist area or an urban area, or a residential area, we are seeing certain changes in terms of the traffic/ticket mix. However, we continue to see very, very high marginal returns on capital similar to those we've been seeing in the recent past.

There’s a distinction to consider. When we look at Chile, our stores there offer a slightly more convenience-focused value proposition. If we compare it to the spectrum of convenience and proximity in Mexico, Chile tends to have slightly higher margins, with the average transaction amount being greater than in Mexico at the moment. However, achieving a certain scale is necessary, which impacts decisions regarding distribution centers and the development of your supply chain and logistics. Essentially, you're applying the strategies used in Mexico; however, you're at a point similar to where Mexico was over 30 years ago, but now equipped with a wealth of knowledge that Mexico lacked three decades ago.

That's very clear. Thank you very much.

Our next question comes from the line of Sergio Matsumoto with Citi.

Good morning. It's Sergio Matsumoto from Citi. Thank you for taking my question. My question is on Mexico OXXO and specifically on the assortment and the store footprint strategy. You mentioned earlier in response to one of the questions that the portfolio has adapted to the near consumption habits under the pandemic, and that makes a lot of sense. But I seem to recall that in the past you mentioned repeatedly that when you saw the municipalities that we opened, that the traffic came back and indicated that the business model was good, and that portfolio was good, so it didn't really need to make too many changes. I'm wondering if this might be a change in narrative on your part? If so, if you could help us reconcile and provide some color on how you would address the assortment and store footprint in Mexico in the near normal. Thanks.

Great Sergio, it's Juan. We've talked before about the early days of COVID when everyone was staying at home and the streets were empty. There were certainly concerns outside of FEMSA as well as within the company regarding potential structural changes. E-commerce was booming, and some speculated that people might not return to physical stores, or that e-commerce might overshadow spontaneous purchases. However, our observations show that once restrictions eased and the environment improved, people returned to stores to buy their coffee, snacks, and tacos as they did prior to COVID. We do not observe any lasting structural changes. While Daniel mentioned earlier that we might not be opening many stores in office buildings anytime soon, we are seeing an increase in revenue at stores located in residential areas, as more people are present there during the week than before. Furthermore, we’ve seen continued relevance in the spirits category and the small supermarket replacement strategy we began discussing about 18 months ago. As Eugenio noted recently, the experience of running out of beer for a couple of months in mid-2020 led consumers to discover that OXXO offers a great variety of spirits at competitive prices, which seems to have persisted. Additionally, the small supermarket replacement transactions have attracted consumers who may not have realized we stocked their favorite brands or that our prices were quite comparable to those of supermarkets. Overall, I don't think there's been a significant change. I'm not sure if I was clear, but I hope that was helpful.

Yes, it is. It makes sense. If you could maybe update us on what you just mentioned about fewer OXXO in office buildings, that makes sense too. What was the ratio in the past and where you expect to be in the future? You don't have to provide any timeframe just like in general.

If you remember, we were talking a few years ago about niche locations. So we talked about opening a few stores inside office buildings, and we talked about opening stores inside manufacturing facilities. I remember talking about Honda, for example, where we had some stores that didn’t charge us any rent. Obviously, we’ve opened more of those in more places, stores in airports. These were always niche, this wasn't a big part of the numbers. So I don't have a percentage off the top of my head, but it was single-digit in terms of any openings in any given year. It doesn’t really move the needle; it's more about reallocating to more traditional locations, and I think we’ve made some further progress on segmentation. I think we've gotten better at going. You remember we used to have just one kind of store; now we have six or seven kinds of more segmented types of stores. I wouldn’t say losing the office building or reducing that significantly moves the needle very much.

It's important to mention that this is a fluid situation, meaning as we come out of the pandemic then clearly, some decisions will be made by office buildings, by companies, etc. on how their hybrid or not working situations are going to be. Depending on that, if everybody comes back to the offices, then evidently the opening of stores close to the office buildings will restart the same way it was before. That’s what we need to keep our radar up for and see how the situations evolve. Then we'll act accordingly.

I believe a useful metric for understanding our internal processes is the return thresholds we have set for capital investments in new stores. We monitor our openings, such as those in January and February, to see how they align with their typical stock maturity curve. When we decreased our openings from around 1,200 to 1,300 to 800, we saw a significant increase in our performance by being more selective about where we open stores. Now, we're achieving an 80 to 90 percent hit rate regarding how well stores are maturing in the early stages, despite the pandemic. We've gained valuable insights from this experience and will continue to be careful as consumer behavior changes.

Great, thanks, and thank you for the color.

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

Thank you, everyone for attending the call and for your continued support of FEMSA and the team. Have a good week. Thank you.

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.