Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX) Q3 2023 Earnings Call Transcript

Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Hello, and welcome to the FEMSA's Third Quarter 2023 Results Conference Call. Please note this conference is being recorded. And for the duration of the call, your lines will be on listen-only. However, you'll have the opportunity to ask questions. [Operator Instructions] I will now hand you over to Juan Fonseca to begin today's conference. Thank you.

Juan Fonseca: Good morning, everyone. Welcome to FEMSA's third quarter 2023 results conference call. Today, we are joined by Paco Camacho, our Chief Corporate Officer; Eugenio Garza, our CFO; and Jorge Collazo, who heads Coca-Cola FEMSA Investor Relations team. The plan is for Paco to open the conversation with some high level of strategic comments on trends and results, followed by Eugenio, who will focus more on the detailed numbers, and we will then open the call for your questions. Paco, please go ahead.

Paco Camacho: Thank you, Juan. Good morning, everyone. Let me begin by thanking you once again for all your kind messages of support and sympathy around the passing of Daniel last quarter. He left a big hole for us, but also a big legacy and we renewed purpose to continue what he starts. To that end, Jose Antonio transition seamlessly and is now fully engaged in his dual role as Chairman and CEO, steering the ship as we continue to execute our ambitious strategy. On that note, and as an update on where we are on FEMSA Forward, we can inform you that regarding the Envoy IFSBrady transaction announced at the end of August, the regulatory process has advanced according to schedule, and we expect the transition to close soon. Additionally, we have launched the divestiture process for the next layer of assets, including those related to Solistica and Inder [ph], and we have already made progress on those early efforts.

Furthermore, last month, we announced changes to FEMSA's senior leadership team, as well as an evolution of the organizational structure of our retail business vertical. Once these changes take effect in November, we will have one leader for each of the three-fold business verticals in full consistency with FEMSA Forward, enabling our organization to operate with maximum focus and effectiveness. As we have mentioned before, FEMSA Forward is fully aligned with FEMSA’s customer centricity and our broader strategic priorities of driving long-term growth, increasingly enabled by digital capabilities all the way within our core business verticals and with a disciplined approach to capital allocation. On this last topic, we have made significant progress in our analysis, and we will share and discuss our filings with our Board coming November.

We are all aware that this is an item top of mind, and we will keep you posted as appropriate. Moving on to the results. Our third quarter numbers continued the very positive trends seen during the first half of the year. Fully consistent with our strategic priorities and making progress towards the target set by each business unit long-range plan. Indeed, 2023 is shaping up to be a banner year for our core business vertical. Beginning with Proximity, like we did in our call last quarter, it's helpful to talk for a minute, their own long-range plan and the four priorities around, which it is built; strengthening the core, developing new growth avenues, developing multiple successful formats and growing the footprint beyond Mexico. Looking at OXXO third quarter results through this lens, we see they again made stellar progress strengthening the core as same-store sales growth remained above 15% against a demanding comparison base with average traffic contributing more than half of the growth, which is remarkable.

This strong performance continues to be driven by a broad set of tailwinds including a strong consumer demand for third, gathering and nations, solid commercial income dynamics, better segmentation at the store and the rapid adoption of a spin premier loyalty program. Continuing with the positive news of a stronger core, store growth was robust once again with Mexico and LatAm adding 293 net new stores during the quarter and 1,453 during the past 12 months. Looking only at Mexico, we are on pace to meet or exceed the 1,000 new net store threshold for the first time since before the COVID pandemic and with more productive stores. Moving on to the long-range priority of growing beyond Mexico. During the quarter, Grupo Nos continued its solid advance with revenues increasing over 150% year-over-year and with OXXOs footprint in Brazil more than doubling during the last 12 months [ph] Proximity America, but along the priority of developing multiple successful formats, Bara grew revenues by 36.7% and reached a total of 309 stores as of the end of the quarter.

For its part, proximity Europe increased revenues by 8.7%, reflecting traffic recovery and positive pricing initiatives as well as the growth of Valora food service and B2B business. As of the end of the period, Proximity Europe has 2,810 points of sale. Our health operations continued the trend we saw in the first half of the year. Reflecting foreign exchange headwinds from a strong Mexican peso relative to local currencies in South America as well as mixed results with flat numbers in Chile and positive trends in Colombia and Ecuador offset by pressure in a more competitive Mexico. Importantly, during the quarter, our health business continues to push to consolidate its competitive position across several markets, increasing its footprint by 9% and to reach a total of 4,247 locations.

In fact, during the last year, our Shell division added new locations across its territories at a pace of MXN1 per day. For its part, our fuel business delivered a stable performance with the strength in the corporate wholesale business continuing to perform relative to region outperformed relative to region. Regarding digital, the number of active users for Spin reached $6.4 million during the quarter. An active user for our Premier loyalty program reached $17.7 millionwhile more than 28% of OXXO Mexico sales are now associated with the program. We continue to privilege the acquisition of higher-quality users while we make progress fine-tuning the use cases, value proposition, unit economics and monetization strategies for each part of the ecosystem.

In terms of financial implications, during the quarter, we deployed close to MXN 1 billion in growing this business, roughly in line with the previous quarter as well as budget. Finally, Coca-Cola FEMSA delivered a remarkable set of results for the third quarter, driven by double-digit volume and revenue growth as they accelerate their pace of investment across markets. And with that, let me turn it over to Eugenio.

Eugenio Garza: Thank you, Paco, and good morning to everyone on line. Before going on to the numbers, I also want to give a quick shot out to our colleagues in Acapulco and surrounding areas that were affected by Hurricane Otis. There have been true heroes in helping the community to get back on their feet over the past couple of days. Thank you for that. Going into the results in more detail, I also want to bring your attention before that, that -- as of the third quarter, we are now booking onboard solutions as of the discontinued operations. Therefore, for comparability purposes, we are adjusting our third quarter '22 consolidated financials to reflect this change. Moving on to FEMSA's consolidated quarterly results. Total revenues during the third quarter increased 19.3% and while income from operations increased 12.7% compared to the third quarter of 2022.

Net consolidated income was MXN 12.8 million billion, reflecting higher income from operations a non-cash foreign exchange gain of $5.4 billion related to FEMSA's U.S. dollar denominated cash position as impacted by the depreciation of the Mexican peso during the quarter and a decrease in net interest expenses during the quarter. This was offset by a decrease in our net income from discontinued operations, which mainly reflects the results of our investment in Heineken during third quarter 2022. Moving on to discuss our operations and beginning with proximity Americas. We added 283 units during the quarter to reach 1,453 net new stores for the last 12 months. This puts us ahead of target and underscores not just the momentum we have achieved in Mexico, but also the strong pace we now have in Latin America, particularly in Colombia, where we recently began opening stores in our fourth city Cali.

OXXO in-store sales were up 15.1% for the third quarter, This was driven by an increase of 6.6% in average customer ticket and a very strong 8% growth in traffic. As Paco mentioned at the outset, this performance reflects a broad set of tailwinds related to core categories performing well. Healthy commercial income dynamics, better segmentation efforts and the growing impact of the Premier loyalty program, all of this against the backdrop of a robust consumer environment. Gross margin expanded by a full percentage point to reach 41.2%, reflecting strong commercial activity and promotional programs with key suppliers as well as an undemanding comparison base from last year. Income from operations increased 14.7%, while operating margin decreased 50 basis points compared to the same period of 2022 to reach 8.9%, reflecting an increase in labor expenses stemming from the labor reforms in Mexico.

At Proximity Europe, revenues increased 8.7% in local currency to reach MXN 11.2 billion, reflecting a recovery in traffic and ticket, driven mostly by improved customer mobility. Gross margin was 41.8%, reflecting a mix effect driven by the positive performance of Valora's foodservice and B2B businesses. Operating margin was 3.1%, reflecting better operating leverage, partially offset by an increase in expenses driven by inflationary pressures. Moving on to FEMSA's Health operations. During the quarter, we expanded our drug store count by 80 net new additions to reach a total of 4,347 units across all of our territories at the end of September and 365 total net new stores for the last 12 months. Revenues increased slightly, while same-store sales decreased an average of 3.6%.

However, as was the case last quarter, it is important to note that on a currency-neutral basis, revenues would have grown 13.6% and same-store sales would have increased 4.7%, partially offset by a demanding comparison base in our operations in Chile and a very challenging competitive environment in Mexico. Gross margin contracted 30 basis points in the quarter, reflecting a negative mix effect, driven by the increasing contribution of our operations in Colombia, which have structurally lower margin. Operating margin increased 60 basis points, reflecting an increase in labor expenses in most of our markets. At OXXO gas, revenues increased 14.2% and same-station sales grew 8.1%. Retail volumes were again complemented by a robust pickup in corporate and wholesale activity.

During the quarter, gross margin was 12.4%, while operating margin was 4.5%, reflecting tight expense control, offset by increased labor expenses. Moving on, Coca-Cola FEMSA, as you saw a couple of days ago, delivered a stellar set of results in the third quarter. Total volume grew 11.6%, driven by growth across all of its territories. Total revenues increased 10.1% and operating income grew 15.3% as operating margin expanded by 70 basis points to reach 13.5%. You can listen to the replay of their conference call held last Wednesday on their Investor Relations website. And with that, let us open the line up for questions. Operator, please?

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