Fomento Económico Mexicano, S.A.B. de C.V. (FMX) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon, and welcome, everyone, to FEMSA's Second Quarter 2015 Earnings 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 Daniel Rodríguez, FEMSA's Chief Financial Officer. Please go ahead, sir. Daniel Rodríguez: Thank you very much. Good afternoon, everyone, and welcome to FEMSA's second quarter results conference call. Juan Fonseca and Roland Karig are also with us today. As usual, we will focus the call on the consolidated figures for FEMSA and on FEMSA Comercio results. Since many of you probably had the opportunity to participate in Coca-Cola FEMSA's conference call earlier today. As you have also likely seen our detailed results, we will use this opportunity to share some of what we see as highlights and main trends in our business. Beginning, as we always do by commenting on the consumer environment in Mexico. The news is encouraging. While we would not say that the consumer is totally confident or that we are finally out of the woods, there is no question that the data at least as reflected in also same-store sales continuous gravelly improved and has now reached levels consistent with our long-term expectations. Certainly, the data is still benefiting from easy comparables, so we must keep that in mind, but it is also clear that the macro driver such as dollar remittances, our manufacturing activity are still supportive. However beyond Mexico, in Brazil, consumer sentiment and the macro backdrop remain challenging, and we are still facing an adverse foreign exchange environment across several of Coca-Cola FEMSA's markets that in turn puts pressure on their margins. Staying for a moment on the topic of foreign exchange, as you know, Coca-Cola FEMSA is using the SIMADI exchange rate to translate the results of its operation in Venezuela. This rate was VEF 197 per $1 for the second quarter of 2015, compared to the SICAD rate of VEF 10.6 per $1 using the comparable period of 2014. As was the case in the first quarter while this goes a long way in eliminating the uncertainty surrounding the contribution and valuation of the Venezuelan operations, both at Coca-Cola FEMSA and at FEMSA levels, the impact on the numbers is again significant. Also before jumping into the actual results, it is important to note that FEMSA Comercio's consolidated numbers now include the full second quarter of the results of our OXXO Gas service stations, which reached a total of 249 units at the end of June. As we have stated before, this is a business with modest margins but high returns and attractive growth potential. Moving onto discuss our consolidated quarterly numbers, total revenues during the second quarter increased 5.9%, and income from operation increased 4.7%. On an organic basis, that is excluding the results of the OXXO Gas business and one month's of our newest drugstore banner Farmacon, total revenues decreased 1.2% and income from operation increased 4.4%. As we mentioned before, this consolidated numbers reflect a significant impact from Venezuela. For the second quarter, the line label participation in Heineken results represents FEMSA's actual 20% participation in Heineken's first quarter net income, which was reported last April, using the average exchange rate for the euro during the second quarter and excluding the extraordinary gain booked from the sale of Heineken's packaging business in Mexico. Paying on the subject of net income we see that it increased 18.7% in the second quarter. As we explained in our press release, this reflects lower financing expenses and an increase in FEMSA's reported 20% participation in Heineken's result for Q1 2015. Our effective tax rate was 33.6% for the quarter within the expected range. In terms of our consolidated net debt position, during the second quarter it remained virtually flat at Ps.48.6 billion at the end of June. Moving on to discuss our operations and beginning with FEMSA Comercio, we opened 258 net new OXXO stores during the second quarter. This number face platform price on and it gained in slightly below last year's number. However, we continue to run at a pace of more than 1,000 openings in the last 12 months in line with our objective. In terms of the newer formats during the quarter we added 17 gas stations while the recently closed acquisition of Farmacon help us add 215 frac stores to our portfolio during the period. Revenues increased 31.4%, excluding OXXO Gas and one month of Farmacon, revenues increased 13.5%. Also, same-store sales were up 5.3% reflecting a healthy mix of 4.2% growth in average ticket and 1.1% in gross in store traffic. As the sustained strength of our services category increasingly offsets the witness in telephony. For the quarter, gross margin contracted 420 basis points, largely driven by the inclusion of OXXO Gas into FEMSA Comercio's numbers. Excluding OXXO Gas, gross margin would have expanded by 30 basis points reflecting healthy mix and commercial income trends of the underlying retail operation. In terms of operating margin, this quarter FEMSA Comercio posted a contraction of 60 basis points. Again excluding OXXO Gas, operating margin would have expanded by 50 basis points, reflecting better operating leverage at OXXO, as well as solid expense control and lower electricity tariffs that continued to help us. Moving on briefly to Coca-Cola FEMSA. Total revenues decreased 11.8%, but on a currency neutral basis and excluding Venezuela, they grew 8.3% during the second quarter. As was the case in the first quarter, Coca-Cola FEMSA achieved market share and profitability gains in most of its market. Favorable raw material dynamics and strict expenses control more than offset pressures from generally weaker exchange rates, resulting in a solid set of numbers once we isolate the impact from Venezuela. While we undoubtedly faced some challenging and operating environment including Brazil. Our colleagues of Coca-Cola FEMSA are making great use of the tools at their disposal such as pricing and portfolio strategy, which are allowing them to the deliver strong results under very difficult condition. If you were unable to participate in Coke FEMSA's conference call earlier today, you can access our replay of the webcast for additional details on the results. Looking-forward, our view continues to be constructive and exciting. FEMSA Comercio continues to strengthen its competitive position in a Mexican market that keeps gaining its footing. While its makes progress in the redevelopment of incremental gross revenues in pharmacies and gasoline stations. And Coca-Cola FEMSA keeps making strive as it helped itself by streamlining its operating structure. Focusing and driving transaction across geographies, and increasing market share as it waits for the consumer environment in some of the key markets to improve. And with that, I would like to open the call for your question. Operator, please.

Yes. [Operator Instructions] Your first question comes from Bob Ford with Merrill Lynch.

Hey, good afternoon, everybody, and congratulations on the quarter. Daniel I had a question on gas, which has multiple parts, so excuse me, I suppose my [indiscernible] getting around the limit, but I was curious if you could give us same-store sales of the gas. And then with respect to the additions of the new stations I was curious with respect to the geography maybe some general terms whether these are leased or acquired or purchased and if so kind of CapEx it's evolved whether it's to acquire to upgrade. And then there was just a little bit administrative expense pressure there appear to be and I was curious if you're happy with the central administrative structure to execute on gas and pharma and some of the new store categories and services or if you see some need for additional investment and capabilities. Daniel Rodríguez: Okay. Well, thank you very much for your question. Let me first try to start in terms of your question regarding CapEx and for the OXXO Gas business and that is something that we have mentioned in the last call, that there are several ways that you can participate in the business and that means in terms of the asset intensity. I mean even though that we can move from our very I would say asset like model, where the only thing that we do is to lease the asset and which are kind of our arm length agreement with the owner or the person that owns the FEMSA franchise up to the level that we can buy the land and also I mean buy all the facilities. So far our focus has been much more on the asset like, we are not excluding the other one, but as I said the focus has been on that area. So in that sense, I mean in the facilities that we are planned so far are I would say in relatively good shape. So I mean the CapEx has not been very relevant and we don't expect them any pressure in terms of CapEx going forward. Okay. In the case of pharmacies, I would say it's more or less the same and obviously the main focus so far in the case of pharmacies which is more linked to your last question is that we're really developing a plan in order to have kind of about backbone system and processes for the pharmacies business going forward. So in that sense, I mean, we are continued growing by developing this backbone in terms of the system and I would say that are the way or the main areas where we are working. In terms of the structure, I mean, maybe which is related to the question about admin expenses, but we are doing still leverage from the experience of OXXO. I mean most probably going forward we will need to implement some dedicated structure for each of the businesses in terms of support function, but so far we have been able to as I said leverage on the current capacity of OXXO and we often seen any need to expand much more over expenses on the admin side. I mean, regarding your question on same-store sales forecast, I would say that that is slightly ahead of OXXO. Okay. So we are talking about middle, single digit and that’s exactly – so not that different from the ones that we have seen at OXXO.

Great. Thank you very much. Daniel Rodríguez: Thank you, Bob.

Your next question comes from the line of Luca Cipiccia with Goldman Sachs.

Hi. Thank you. Thanks for taking my question. Just a clarification really on, can you specify what you said gross margin was without gas, because I think I got to a slightly different number, if I'm doing the calculation correctly, but for – was that for OXXO specifically or both for or including the pharmacies as well? Daniel Rodríguez: Yes. I mean, what is said when I made the comment regarding the margin, that was for the FEMSA Comercio which include pharmacies, but excluding OXXO gas. So the number that I mentioned and what we said is that, if we exclude OXXO gas, I mean, the margin could have expanded by 30 basis points, but that expansion of margin are for both OXXO stores and also for pharmacy, but clearly, the most relevant part of that expansion is coming from the OXXO stores

Okay. So gross margin would have grown by 30 basis points. Okay. And then, and secondly, maybe just if you can comment on – sorry, I don't know that I already asked– but this was a follow-up on what you said before, but on the traffic improvement, maybe if you can comment on that if you see that continuing as well because it had been a while that we haven't a positive number there. So, it was encouraging to see that change. So, if you can maybe expand on the trends that have resulted in the slight improvement is this course. Daniel Rodríguez: Yes, sure. I mean, the traffic as we said, expanded by 1.1%, which I think is very, very healthy and as we mentioned, we feel very comfortable, because the expansion was in part of almost 4% and based on the increase of the ticket, and as I said 1% by the traffic and that means that we are in some way coming back to the levels that are in line with our long-term expectations of middle single digit. So, obviously, I mean, we still need to wait for the next quarter, but so far, I mean, we're very happy with the level that we have achieved, and very much in-line with over long term expectations?

Yeah, I think – hi Luca, this is Juan.

Hi Juan

I think – I will just add to – to what Daniel said, if you look at the little bit last couple of quarters, you saw slight improvements in traffic, I think we had 0.1 last quarter and 0.5 in the last quarter of last year. And, we've said long the telephony was the main culprit, behind the weakness in the traffic. And, even though telephony continues to fall its – so it's of course less relevant to us now, it's – we are in probably the third year of telephony weakness. And, as Daniel said in the opening remarks, services on a particular financial services continue to grow very, very consistently. So, I mean, right now it looks like the conditions are in place, for traffic to continue to be a contributor, rather than at the tractor of same store sales going forward.

Perfect. Thank you, thank you both.

Your next question comes from the line of Antonio González from Credit Suisse. Antonio González: Hello Daniel, Juan, and Roland. Thanks for taking my question. Just two quick ones, first is on the point Juan regarding services. I wanted to ask a – could you please update us on what's the number of debit cards that you've issued so far, and where do think this number can get to in, I don't know the next one year or two years? And is there any other specific service that you would highlight or now it's for instance payments from e-commerce retailers such as MercadoLibre that I understand are offering their MercadoPago debit card, is that also something significant for you, e-commerce as a whole obviously not mentioning any particular vendor. So, that's the first question. And then secondly, I just wanted to know if you can update us on what's the EBITDA margin of that drugstores currently and where would you expect that to be a year or two from now. Thank you. Daniel Rodríguez: Antonio sorry, can you repeat your last question. I couldn't hear you well. Antonio González: Sure, sure, sure, Daniel. What's the EBITDA margin of the pharmacies currently and where would you like it to be a year or two from now? Daniel Rodríguez: Okay. Thank you. Well, I mean in terms of the financial services – the number of cards that we have today is 2.2 million cards, okay. And in terms of growth I mean we expect to be...

I think we're growing at a pace of about a 150,000 per month for now. So, assuming that continues, that should give you the number. Daniel Rodríguez: And in the case of e-commerce and I would say that I mean so far we are just doing some tests, very small test at OXXO stores. But to be honest I mean we have not deployed anything relevant I mean as we do with other and I mean opportunities that we can see we can develop at OXXO. As I said so far e-commerce is only a very small pilot. And we don't expect to do any kind of rollout in the short-term, okay. So, most probably in the coming quarters. We will be I mean in a better position to comment if that is – we see that as a real opportunity, okay. And in the case of the EBITDA margin for pharmacies we are today in the range of 4% to 5% and I think I mean over expectation is by the consolidation in the way that we can integrate the activities. And obviously increase our purchase capacity that we are expected to see some improvement in terms of the margin. I would say I mean in the range of mid-single digit, okay. So I think we should end up I mean most probably I don't know I mean in the range of 5% to7% that is our expectation. But as I said, it still requires I mean a lot of work in terms of consolidation. I already mentioned before that we are working in the development of the pipeline from this business, I mean integrating the different bonds that we have purchased. I mean that work is proving to work very well. But obviously it needs to evolve and it will require sometime to achieve the synergies and improvement, I mean from the margin that we expect to deliver over the next 12 months to 18 months.

I think I would also just highlight the fact that two years ago, when we started talking about drug stores, we were talking about margins that were maybe a third of the OXXO margins. So roughly 3 and 3.5 and now as Daniel is saying, we are closer to the 5% some more like half OXXO margin in a very quick period of time. And then really without having the benefit of scale because to Daniel's point I think the two or now three small pharma companies in many ways are still being run as separate companies. So we haven't really captured the bulk of the scale benefits. We haven't really developed the backbone yet. So I would think that the best is yet to come. But even because that's the case. We've already extracted more than 100 bps of margin in less than two years.

Dan, and I think also that two other things that I would like to add to that is I mean we are very happy with the acquisition that we have made. I mean they are proving to be very strong brands in the regions that they're in. And second, I think that our – if you want a strategic view that trying to bring and in the strengths of OXXO, and I think starting to improve, that we – it's a very good match. I mean, in terms that we can take overcapacity to manage small boxes. I mean, overcapacity to do the procurement and obviously continue to develop the growth. I think so far that's going to be a successful story and I'm really very, very excited about the future of that business for FEMSA. Antonio González: Got it. Thank you so much and congrats on the quarter. Daniel Rodríguez: Thank you, Antonio.

Our next question comes from Benjamin Theurer with Barclays.

Hey, good afternoon. I have actually one question a little out of the whole business thing. But going through your balance sheet, there was a significant decrease in your accounts receivables. I would like to understand what was driven – what was driving that decrease in accounts receivables here, has it to do with the changes in the commercial side or where does that come from that you basically have less receivables outstanding, which was meaningful but down by about a quarter? Thank you. Daniel Rodríguez: Thank you, Benjamin. I mean, I think we will need to do some work to answer probably that question, but one of the things that we are seeing is the fact that, when do you analyze, I mean the devaluation that we're seeing both in Brazil and Colombia and obviously as well in Venezuela, when you will do the comparison with the last year, I mean, those have been, I mean, higher devaluations that the case of the Mexican peso. So I think, I mean, one portion of that reduction should come from the effect of the devaluation, but as I said, I mean, we will tell you a question and you would like to prefer to provide you the question, that answer offline. Okay.

Okay. Perfect, thank you. Daniel Rodríguez: Thank you, Benjamin.

We will hear next from Jeronimo De Guzman with Morgan Stanley.

Hi, Daniel, Juan and Roland. I had a question maybe just over the follow-up on the pharmacies. Have you already established or defined a banner that you will start growing within the pharmacies? Or are you still growing with the three different names in the different regions? Daniel Rodríguez: Yes. Thank you, Jeronimo. I think that's a very good question. So far we are continuing to work with each of the banner. Obviously, we are doing some work and analysis with the consumer in order to decide, I mean, if it’s really a good idea to consolidate that under one banner. That decision has not been made yet. I mean, we're still doing some analysis. And most probably that will take a couple of months before we make that decision. Having said that, I think even though that potentially we can keep some banners going forward and definitely that would be the case in the short-term. Our focus has been much more to integrate the operations. Okay. So in order that all that is not seen by the customer is something that we are develop on an integrated basis. Okay. And we are I mean as I said before doing more leverage of our purchase capacity of our supply chain capacity, distribution capacity. And clearly, what you start to see is that the customer offer and the customer proposition is much better and the banner is something that we are going to decide going forward.

Okay. Thanks. And then just moving to the gas stations, I had a few questions, one of them was do you still expect to grow by about 50 this year or are you changing that expectation kind of given where you're right now, and then also on the gas stations, could you talk a little bit, it seems like the margin was a little bit lower this quarter is this kind of year-to-date margin, EBITDA margin of about 2%, what would you expect going forward or was there anything that drove slightly lower margin. And then also if you could talk about returns in the gas station so far like asset returns, you mentioned the return have been good, so just wanted to know if you had any number on kind of what you've seen so far? Daniel Rodríguez: Yes. Thank you. Well, I mean in terms of the gas station and also something that we mentioned before, I mean we are very excited about this business, but – I mean we are continue to grow at a moderate pace, I mean obviously there is a good opportunity most probably we will take it, but I think the growth will be more or less in the neighborhood of 50 gas station. I mean that is our current view and I mean obviously that can change going forward. I mean in terms of the EBITDA margin, I think when you do the comparison between the second quarter and the first quarter, you should keep in mind and during the first quarter we only booked mark. So actually you are comparing one quarter, which is the second quarter with only one month's, okay. So that is I would say that most probably the second quarter is a better reflection of the business in terms of margin. And we don't expect to a much more higher margin, I mean as I said we are – we're very conscious when you do benchmark with our companies, I mean particularly for this business that margin is very reasonable and clearly, obviously the more that we grow, most probably we will be able to continue improving that, but we don't expect big increases. And in terms of the return, we have to win about in the range of in the neighborhood of 20%.

Yeah. And also I think the one thing to keep in mind Jeronimo is, if everything goes as planned and then in by 2018 pricing is freed and you are free to buy gas from other suppliers and scale becomes relevant, then we could definitely expect more meaningful improvements to the margin, but under the current framework it will probably look a lot like what you are seeing.

Okay. It sounds good. Thank you very much. Daniel Rodríguez: Thank you.

Your next question comes from the line of Andrea Teixeira with JPMorgan.

Hi. Good afternoon. Thank you for taking my questions and congrats on the report – on the results. Just on the – if I understand that, correct me if I'm wrong. I mean, talking about M&A, I mean your main priority it seems to organize the kind of like message for the gas station, organizze the branding, and then perhaps also organize the branding on the drug stores and should we see like in the year of accommodation on that end? Or you are going to be open to do M&A and even it seems from your last comment that the 50 mark is probably what you can do for now. And related to that also, I mean, what we have seen is a tremendous opportunity for your cards and so far you can – I understand you can only remittance inside Mexico. When should we see when remittance from abroad coming into Mexico and you making an agreement with, I don't know any other player in the U.S. specifically to kind of monetize this more. So my question is on the M&A front? Thank you. Daniel Rodríguez: Thanks, Andrea. Well, I mean in terms of the gas station and as is the case as well for pharmacies, clearly we are working in two – so one is we are trying to put the structure, particularly I would tell about pharmacies, because it's where we have acquired I mean several banners and obviously those are different companies. So in that case I mean over study as I mentioned before is try to develop the backbone I mean to have a solid and diverse the one integrated platform, which allow us to continue growing but at the same time, I mean you should keep in mind that over organic growth has been very, very, very aggressive, I mean double digit growth and we will continue to look for opportunities on the M&A side. So I mean that's definitely is the case, but I mean based on the fact that we have achieved at this stage, we also need to take care of all the sustainability of the business going forward. So that is particularly the case regarding a gas station and the pharmacy – that's where the pharmacy is already and on the gas station, I mean we are working hard obviously to continue growing that business and we are in the process to see for opportunities, but so far it's not that we are reduced debate it's not about I mean to be realistic about how much we can do, because we need to reach agreement with the third-party, and definitely I mean if we are able to improve or to have a pace a little bit much faster, we will do so but I mean at this stage based on the questions that was straight we think we feel comfortable that we can achieve what we have mentioned at the beginning of the year, but we will compare in order to increase that number. So that is regarding your question on both pharmacy and gas station. In the case of card, I'd like to ask Juan to do answer that question.

Hey, Andrea. How are you? I mean, on the currency, certainly we continue to be very pleasantly surprised at the resiliency of the pace of growth. I mean, we're now 18 months after launch of Saldazo and it's still growing strong like Daniel said, something close to 150,000 per month. I think, I love the work that has been done in terms of launching the card, which of course has data benefits and traffic benefits on its own, but it also – it would be useful – it is already useful in terms of moving money within Mexico and it could be useful in terms of receiving money from abroad. We've also learned a lot in recent months and quarters about the disbursement of cash. OXXO has been developing its own capabilities to have more cash available for disbursement. Obviously, when you think about somebody that's getting a remittance, a portion of that maybe they're going to be happy to keep in an account, but a portion of it could be likely that they were wanting cash. So it's been a gradual process, because it involves how much cash can you have available without raising the security risk, so that's why I think it's taking a while, and obviously when you talk about cross border, you also need to find a solid partner on the U.S. side to capture those transactions in that business. So, we're definitely looking at it. We're working on it. It's at this point, I really couldn't say kind of create expectations of when we could materialize an agreement. But in my previous comments, I hopefully go in the direction of telling you that we are getting ready, right. And we are doing what needs to be done to enter that business when the conditions are in place.

Thanks, Juan. And Daniel, just on the – when you say the backbone, when do you expect the drugstore backbone to be ready? And I understand I've seen companies and drugstores taking years, literally a couple of years to get the backbone to get them and some would never could. But how – do you think how long that would take? Daniel Rodríguez: Yeah. I mean it's a good question, Andrea. I think that there are two, I mean, two folds to answer to your question. So, one is about processes, and in that sense we have a very good capacity inside the company to develop those processes. So, the way that we are I mean developing that word is to mapping all the processes from the different banners, and from there I mean try to take the best process – recognizes that of certain cases where we'll need to keep some local, if you want differences if that is required. And second, in terms of the systems, I mean we feel very comfortable that in one of the banners that we have acquired, there is a very strong system and an orientation is that to implement that system and also the banners of this approved system. And in that sense, I mean, we feel comfortable that something that we can work. And we are developing that as we speak. And I mean we are very positive that something that, I mean I would say from the beginning of next year, we should be in a very good position to rough that – I would say implemented or in the middle of the process of implementation, but we are also being very conscious about the fact that we need to continue the growth, so we're trying to keep the balance in terms of R&Ds integrated model, but at the same time continue the organic growth and continue the growth, the same-store scales. So, that is if you want the balance, that we're trying to keep and so far, I think, based on the numbers that we have shown, we're still successful doing that.

All right. Thank you so much. Daniel Rodríguez: Thank you, Andrea.

Your next question comes from the line of Alex Robarts with Citi.

Hi. Thanks, everybody. I wanted to, I guess, focus my question on this commercial income dynamic that for commercial seems to have come up more often than not in the last several quarters. And I guess, if I understood it right, the gross margin expense in commercial ex-Gas mainly because of the commercial income, I just wanted to confirm that, that's what you referred to when you said the commercial income trends were favorable. And if that is the case, what – how can we think about this going forward the commercial income. It seems to come up in various quarters last year during the July heavy promotions, the middle of the year, there seem to be a bunch. It's also come up obviously at the end of the year, but as we think about that going forward, including what you've been getting this year with Pepsi. Is it safe to assume that commercial income this year will be more than it was last year and what might the magnitude of this be and if it's too strategic, that's fine. But maybe directionally, do we see this increasing over time as these other small box formats come online in new sources of commercial income. And then kind of the last bit of this multi-part question. Sorry. But – is – in the second half, I guess I have the impression that you have a tough comp for commercial income. Is that fair to say or not. So that's the question from us. Thanks. Daniel Rodríguez: Yeah. Well, thank you very much, Alex. I think try to give you, I mean, an overview or holistic answer. I think, I mean first of all I think that I mean the performance of – improvement of the performance in terms of margin, I think really prove the strength of our brand. So I mean the OXXO brand. And that means that the brand has been very attractive, and we are very confident that we'll continue to be the case to be complete. I mean attractive for the vendors, okay? So I mean we expect that trend to continue obviously few products you said, I mean the comps will be different. So I mean we will continue working in that area, but most probably we will not see, I mean, the same growth as we have seen so far. So there is some, I mean, combination in terms of that – the brand will continue to be strong, will continue to be attractive for the vendors, but at the same time, I mean the race of comparison will be tougher. So I think that sounds important to remind. But having said that, I mean, that element is relevant in terms of the margin improvement, but that is not the only one. So, and there are combination of all the things that all add to the improvement in terms of margin but particularly regarding that question I would say that, I mean we will continue to see improvement, most probably not at the same pace and in terms of the second part of your question about the second half of the year I mean we expect to keep the same level and I don't expect to see anything very different. I do not know Juan if you concur with that?

Yeah, I think I mean certainly some of the programs that we have with certain suppliers came into place middle of last year to the end of last year and so you could say, okay, that makes for a slightly tough comp, but at the same time as Daniel said I mean to the extent that we keep growing, the way that we're growing, the attractiveness of the channel that we represent to suppliers keeps getting better and better, so we believe that as a value proposition we continue to get stronger and stronger in terms of what we can offer supplier that want to launch a new promotion or a new flavor or a new SKU. I would also, I think I take the opportunity to make the following comment, Alex. As Daniel said this quarter ex the gas business, gross margin would have expanded 30 basis points and operating margin would have expanded 50 basis points, this is usually the other way around, right, I mean if you look at a lot of our previous quarters we expand more at the gross level than at the operating level. So, you could maybe make the case, okay, so we are facing the top comp on commercial income, so gross margin is expanding only, "only 30 basis points" but make the comment about the operating margin because like I said, it's not normal that it can expand by that much and I would bring into the conversation the subject of electricity. I mean among other things and there was of course a lot of expense containment but also the fact that the fall in the price of oil is highly correlated with the prices that the electricity utility is charging to customers. So it looks like the low electricity prices are here for a while, which puts us in a very good position to keep expanding the operating margin and hopefully keep delivering results like the ones we did this quarter.

That's helpful. And I mean just to understand, it's a fair assumption to expect going forward in the years to come or in the couple of years, the total amount of commercial income that you book at Comercio should increase on an absolute basis year-on-year. In other words, you have as you said the brand is growing in appeal and in reach and in different formats. You have the discretion to ask for higher prices for this. In other words, you can do that on a pretty discretionary basis. I mean is that the way we can think about it, right. Daniel Rodríguez: We like to think of it more in terms of – we work with the suppliers. We help them sell more of whatever they sell and then we do a little bit better ourselves. Certainly, we keep I mean, the growth rate of OXXO versus other channels continues to be significantly higher and I'm not just talking about same store sales, but just overall square footage growth and that has to be compelling, but it's not unlimited, obviously and really we should think about, you've heard us pay before. I mean we think in the long run, we can probably expand the operating level, maybe 10 basis points for the retail business, maybe 10 basis points to 20 basis points is what we've said at different points in time. This quarter, we're doing significantly better than that, and it all originates at the growth level. So I would not change, I mean, if you're building your model, I would not change the assumption on gross margin expansion just because right now we're doing a little bit better.

Yes, yes, okay. Very helpful. Thank you, guys. Daniel Rodríguez: Yes.

Your next question comes from the line of Antonio González from Credit Suisse. Antonio González: Thank you for taking my follow-up. Just wanted to ask very quickly, I know the overlap that you have in terms of products with supermarkets in Mexico is not huge, but it has become a theme in recent months that the supermarkets are stepping up price aggressiveness and I just wanted to ask if you are seeing anything that is heating you in that respect, and are you reacting in any way? Thank you. Daniel Rodríguez: Thank you, Antonio. I mean not, to be honest, I mean we haven't seen any relevant effect. And we have not been, I mean, forced to make any specific reaction to that. Our plans continue the way that we have defined at the beginning of the year. So, I mean really that has not been, I mean, a major impact for us.

Yeah, I mean, as you know, Antonio, we have a basket that we've built where we look at all of the relevant retailers, and sometimes we tweak how we weigh them based on what they're doing, but to Daniel's point right now, we haven't really tweaked the basket. And it hasn't, when we look at the categories that you've mentioned, we haven't seen any change in trend. So I think we're doing okay. Antonio González: Got it. Thank you.

Your next question comes from the line of Lauren Torres from UBS Securities.

Yes, hi, everyone. Now that we're a couple of the months past that the lockup period for the Heineken shares. I was just curious to get your impression and thoughts. I know you've commented previously that you're happy shareholders. And I was curious that if you're mindset has changed in anyway, it sounds like you do have a lot of projects ahead of you. Is that all internally funded, is there a reason why or how you would decide to start to on one that position at anytime in your term, if you could update on that would be great. Thank you. Daniel Rodríguez: Yeah. Thank you. I mean, no, actually our position has not changed, I mean, we are very happy shareholders of Heineken. I mean, we really believe that they are delivering I mean on their strategy. And actually the market is recognizing that's all, as I said, we are very, very happy with that. And obviously the fact that we have now the expiration of the low cap that has increased our level of the flexibility. And that always is a good thing to have. So and we have already mentioned that before, we will continue to do over analysis, I mean its something really important of our peers, we will consider. But so far, I mean our view regarding our position at Heineken customers changed at all.

Okay. And if I could ask just one another question on OXXO expansion particularly OXXO out of Mexico. I think, there was the petition to potentially sell alcohol at least asking to sell alcohol in the OXXO in U.S. I don't if there's anything view there. Anything with respect to OXXO expansion, I mean in Latin America, whether it'd be Colombia or your thoughts of entering other markets?

Hey Lauren, this is Juan. I mean, in terms of OXXO outside of Mexico as you correctly point out. We are still in conversations on the U.S., in terms of whether OXXO or should be considered as a participant in the production of alcohol given our minority stake at the FEMSA level in Heineken. So, those – no, that's an argument, that's a discussion that we're having particularly in the state of Texas, where we've also I think tried to make the economic case of how, from a jump creation standpoint, from an economic activity standpoint, OXXO would be very good news for Texas. But there isn't anything really new to report on that front. And right now, it doesn't look like we're going to be able to change that position anytime soon. So, I would say nothing to report in the U.S. In terms of Columbia, I would say there's some improvement in our own perception of the different tests that we've been carrying out in the last couple of years, involving slightly smaller footprint boxes, where we can reduce the cost of the real estate, without losing a lot of the revenue. So, getting to not just a breakeven point, but beginning to feel more optimistic about the possibility that this can become a profitable format, that then justifies more aggressive growth. Definitely, we're sticking to it and we are, like I said, I think feeling better about it, than we have in the last couple of years and we're going to keep looking. I mean we're going to keep looking at other markets. As we've said before, some kind of a transaction, the learnings from Columbia being very clear, in terms of the greenfields being especially difficult. So, some type of a partnership or JV or an outright acquisition, we're definitely going to keep looking at assets around Latin America and keeping our eye on North America to see if conditions change.

Okay. Very good. Thank you.

Thank you.

Our next question comes from the line of Luca Cipiccia with Goldman Sachs.

Thank you. And thanks for the follow-up, and it's a very quick one, just again on the gross margin, apologies if I'm doing the calculation wrongly or we should take this offline later, but on this point about margin expansion you had a 34.9 I think margin – gross margin in the first quarter last – in the second quarter last year. And if back out the gas station from the consolidated that you have, this year I get gross margin of 34.5 which would imply a contraction, when you refer to the expansion does it excluded from last year as well just – sorry, it's a boring question, but I was just trying to figure it out what I'm doing wrong?

I definitely think what we should do look at its impact to our computers, we obviously have the numbers constructed with and without and we'll be able to identify whether as you say the base that we're looking at differently or what are the discrepancies are. So happy to drilling to that a little bit more, but let's do that offline.

Okay. Absolutely. Thank you. Thanks a lot.

Sure.

Ladies and gentlemen, that is all the time we have for questions today. I will now turn the conference back to Mr. Rodríguez for closing additional remarks. Daniel Rodríguez: Okay. Well, thank you very much for your participation today and apologies for keeping you so late. So good bye for now.

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