Good morning, and welcome, everyone, to FEMSA's First Quarter 2021 Financial Results Conference Call. During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.

Good morning, everyone. Welcome to FEMSA's first quarter 2021 results conference call. Today, we are joined by Eduardo Padilla, our Chief Executive Officer; Eugenio Garza, our Finance and Corporate Development Director; and by Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations effort. Paco Camacho, our Chief Corporate Officer, is traveling this week and wasn't able to dial in today. So let me turn it over to Eugenio for some opening remarks.

Thank you, Juan. Good morning, everyone. Thank you for joining us today. We hope your families and yourselves are doing well. The first message that jumps out in the data for the first quarter is that things are getting better. Most importantly, they are getting better on the health funds, gradually, in some cases, painful so. And there have been setbacks, of course, such as the big COVID wave we recently saw in Brazil. But little by little, and following the trends on the health front, our numbers also tell a story of sequential improvement, not just quarter-over-quarter, but month-over-month. This is happening across all of our business units, and it's encouraging. Another thing to keep in mind as we look at the numbers is comparability. While the first 10 weeks of the year, we faced demanding comps from a strong start in 2020 and an extra calendar day in February. After that, as you all know, we went into severe lockdowns across all our markets that remain in place one way or another for a full year. This will make for a low comparison basis in the next few months and quarters to come, so we must not get complacent. In fact, internally, we are using 2019 numbers as a useful reference to measure our progress across different units. On the disclosure front, we're also happy to present the logistics and distribution segment, providing much needed visibility into this part of our company. And I take this opportunity to reinforce our message that we now have a solid presence in the business verticals that we have identified as attractive and that importantly offer a clear and compelling fit with our current capability set. The task now is to keep growing in every vertical and to drive incremental returns. Before we dive into the numbers, I just want to mention the €1.2 billion bond issue we announced yesterday. As you probably know, this was the first sustainability-linked bond ever issued by Mexican Corporate, the largest one ever issued by Latin America Corporate. We also achieved the lowest all-in yields ever for a Latin American issuer in the Eurobond market at 0.55% and 1.07% for the 7 and 12-year tranches, respectively. This issuance will allow us to comfortably refinance our currently outstanding 23 Eurobonds, improving our maturity profile and further strengthening our balance sheet while generating a positive NPV of approximately €20 million under reasonable assumptions. And just as importantly, it reinforces our commitment to deliver on ambitious ESG targets that are integral component of our long-term business strategy.

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

Thank you, and good morning, everybody. I was wondering if you could talk a little bit about Spain and San Luis Potosi in terms of early learnings and the timetable to roll it out nationally. And then when it comes to the changes in the labor law, do the outsourcing elements have an impact? Or should we expect something from the floor? Or are there other elements that weren't consideration? Thank you.

Sure. Thanks for the question, Bob. With regards to Spain, as you know, we launched the initial program back in September in the city of San Luis Potosi. And so far, it is coming along to plan, and we still continue to believe that by the end of the year, it should be rolled out nationwide. So still early to tell, but so far, the rollout is going according to plan. And with regards to the labor law, we have been studying it that carefully. We believe that there will be some administrative changes that we will need to make in company bylaws and some of the other legal requirements of registering companies and whatnot, and we should be ready to implement all these changes before the law comes into full effect in August. And at this point, we don't see any portion of the law affecting our view with regards to profitability or cash flow for this year. So far, we do expect, again, to be in full compliant by August and no major effect in our outlook for profitability.

Great to hear. Thank you, Eugenio.

Our next question comes from Ricardo Alves with Morgan Stanley.

Good morning. Thanks for the call. A couple of questions. Just a quick update on the OXXO same-store sales. The evolution throughout the quarter would be quite helpful. We understand in March was a little bit better than January and February, but whatever additional color you can provide on that would be helpful, but even more interestingly, even more interesting, if you could provide some color on April? That will be helpful.

Sure. Thanks, Ricardo, for your question. Juan, I don't know if you could provide a little bit more color in terms of the same-store sales trend, and I can talk a little bit about margins?

Sure, sure, Eugenio. Ricardo, yes, I think it's a very relevant question that you asked because this was – from what I can remember, one of the most notable quarters, I think, in terms of how different one month was to the previous one. And what I mean by that is, the level of restrictions that we had on our stores coming out of the holiday period was very, very intense, right? And so I think if you just look at the monthly evolution of same-store sales, we actually had a bit of a step back in January, February relative to what we had been doing toward the end of last year. But then in March, things really turned around. The level of restrictions became much more manageable. If you recall, the color code, the tiers in Mexico had a big improvement. In March, we began to see more states going to green. Probably half of the country went to yellow. I think we stopped having any red states and what we mentioned last time around and when we've had conversations with you over the past few months, what we observe is as soon as people feel like it's safer to go out or they have a reason to go out, they go to the store, right? And I think that reinforces our thesis that structurally, there are no major changes to habits or patterns as soon as people are able to go out and about, they visit the store as they always have. So what I would point out in terms of actual numbers is that if you look at the March data, same-store sales were flat to previous year. So the number for the quarter, as you saw, obviously, negative 6.6, I believe. If you factor into significantly worse months than that and then March is significantly better than that, as I mentioned, going to flat. I'll now turn it over to Eugenio for the rest of the comments.

Sure. Thanks, Juan. With regards to your question on margins, you're right. I mean, part of the reason we've been able to maintain. But margins have been a very good performance by the payments business, which is obviously higher margin. But the other encouraging fact there is that as traffic is coming back, we are seeing the ticket remain high, which is very, very encouraging, basically signaling that the consumer habits with regards to other categories such as pantry items, even liquor and alcohol and the consumer patterns are shifting, so that now they see it as a viable option for those categories as well, which should bode well for margins going forward once the lower ticket items come back. So that is encouraging. And with regards to the trends on operating margin and EBITDA margin, we are seeing sequential improvements month by month. And it's just basically a factor of operating leverage, as Juan described although we are having a tight expense control still, I mean, more and more, we are getting back to our normal scale levels across all of our operations, and that should bode well for operating margins going forward.

Appreciate the call, that’s very helpful, very interesting also with thickness of some of the new consumption behavior. I appreciate the time. Thanks again.

Thank you, Ricardo.

Next question comes from Alvaro Garcia with BTG.

Good morning, gentlemen. I have a bigger picture question on sort of what's going on internally culturally, let's say, with the rollout of spin and the long-term thinking you have there on the financial services business, because you have this choice, right, of really pushing the digital platform, but you probably don't want to move too fast because it impacts your store economics, and you don't want to go digital too fast. And we saw – I know that they follow-up the platform a couple of years ago. We saw an Amex fall off as well recently. And internally, I'm just curious to how discussions are going on this front. Is there a push perhaps to maybe lower short-term economic gains or the fees you received for some of these services to really increase the size of the network? Or do you foresee – or do you plan to keep these fees high for the foreseeable future?

Sure. Thanks, Alvaro. Obviously, an interesting dilemma, an interesting question. First, with regards to just the cultural elements, clearly, to attract the right talent, we are keeping the spin unit a little bit separate from the traditional OXXO business. So we have routing talent from the outside. We're using a lot of agile methodologies to pivot, learn and react quickly to what the consumer wants. And I think the benefit of that going forward, as we get those skills into the mainstream OXXO business and throughout FEMSA has actually been, I mean, very encouraging in terms of other opportunities that we can have to digitally transform the entire enterprise. So from that perspective, I think that this thing will bring us a lot more value to the table than just what it is with regards to the business. And then with the more interesting question about the broader financial services platform, I mean, clearly, the way we see it is that we want to provide the consumer with as much choice as we can and let the consumer adapt to whatever bodes the best for his usage of the financial services platform in Mexico. And although we have seen, as you said, I mean, a couple of banks whose target client segment maybe did not match up with our customer – with our customer segment roll off the platform, we still are operating with 14 other banks. We have 7,000 associated services that's going to still be paid analog through OXXO, and we will be bringing that back to the digital platform as we roll out and bring more functionality and more have the customer decide where he wants to take – where he wants to take this transaction either analog or digital, and we will be reacting to that as a business overall. Our strategy, again, from both a top line and a profitability perspective is to be able to solve our customer needs in the best way possible. And whether they adopt quickly or whether they adopt slowly, it will be more up to the functionality that they want, more than a strategy on our part.

This is Eduardo, Alvaro. I would like to add I think a good thing forward is that how our loyalty program is going to be connected with spin as well. So I think those connections will enable us to provide a very wide base for services to our customers and let the customer really decide when to go to the physical store and when to use the platform.

Great. Thank you very much.

Our next question comes from Alan Alanis with Santander.

Thank you so much. Eduardo, Eugenio, Juan, hope you well. A couple of questions, the first one regarding the sustainability bond that you issued, I mean congratulations, I mean getting money for eight years at a 1% rate, it’s fantastic. But what is the use of proceeds, what are you going to do with that money in terms of sustainability? I think we're getting a lot of questions from investors on that front. So you could expand on that. And the second question is the first time that we see the logistics business, but we don't have a history. And so we don't have a sense of how fast it's growing and how much of that logistics business, for instance, is servicing e-commerce, which is something that, as you can imagine, some of your competitors are doing in Brazil like Sequoia or Traxion in Mexico, and that puts a pretty interesting valuation on those businesses. Could you disclose that, that if logistics is giving any service directly to e-commerce? And what is the growth algorithm for the logistics business going forward? Those will be the two questions.

Sure. Absolutely. And thanks for the questions, Alan. First, with regards to the sustainability bonds, we are – we just – actually, last week called or redeemed our notes that were due $20 billion, $23 billion worth of euro-denominated notes. So this was a liability management exercise in that respect. So no effect on the total debt level at FEMSA. Having said that, we – this is why we chose to do an ESG or sustainability-linked bond rather than a green bond that's targeted of use of proceeds as we are making a commitment regardless of this refinancing and because we are making a long-term commitment as a business to achieve our sustainability targets of renewable energy, 85% by 2030 and 100% diversion of waste to landfill by 2030 as well. So with these covenants, I think we are committing ourselves to something that is not only – I mean, good for the environment and good for the ecosystem, but more importantly, good for our business and is in line with our business strategy. So again, not tied to use of proceeds, but definitely tied to our commitment to achieve these targets and putting our money where our mouth is in that respect for 2030 with regards to the logistics business, I think – I mean, just because we bought the U.S. logistics distribution platform in May last year, comparability would have been very hard to achieve. So as the quarters roll by, we'll be able to talk more about these kinds of trends. But having said that, and to your point, I think a growing part of our less-than-truckload business and some of our warehousing business more and more is geared toward the e-commerce companies. Remember, what we're trying to achieve with the 3PL strategy is to help our customers be able to be omni-channel, whether it be through digital stores or end-to-end solutions direct to the customer. And our solutions are tailored to that, not only e-commerce, but being able to offer omni-channel capabilities to our customers. I think more and more, regardless of how much is actually delivered or sold to e-commerce in one – in a lot of ways and in some way shape or form, the 3PL solutions that we're offering will help them achieve, and I think that will become a bigger part of our mix going forward.

Got it. And could you give us a ballpark figure what we expect the growth of the logistics business.

Yes. At this point, I mean, given – it's too early to tell and given the mix of U.S. versus Latin American business, I think it's too early for us to make a position. Having said that, we do believe that this will be a prime engine of growth for the portfolio going forward.

Yes. And let me add, Alan, this is Eduardo. In the U.S. businesses that we have acquired, we are very optimistic because some of them were selling services to the entertainment business to big restaurant chains, even hospitality. And we see those sectors coming back strongly. And I think we are looking forward for that growth as well.

Next question comes from Marcella Recchia with Credit Suisse.

Gentlemen, thank you for taking my question. Just a follow-up on the distribution and logistics. Although we understand that the figures are not fully comparable, if we were to compare reported figures for this new division versus the previous other division, we note that sales grew very solid at 25% quarter-over-quarter, opposing 8% decline also quarter-over-quarter. So I just want to like to understand if you can give us some color on the reason on this gap, considering that we saw a material improvement on the decline.

Sure. I think in both the LatAm as well as in the U.S. operations, there was sequential improvement in sales as the lockdown is eased, specifically the 3PL business on the LTL front this quarter had a very, very strong quarter as mobility begins to take hold of a lot of the regions that have been subject to stricter lockdowns. So part of it is that. And then also part of that is just the acquisition on the U.S. business of Southeastern Paper group and SW Plus, which have, again, on an inorganic basis, help our sales. But nonetheless, the underlying trend month-by-month of our U.S. business continues to be positive as restrictions also in the U.S. open up. So overall, I think encouraging signs that mobility is helping not only our U.S. business, but more importantly, the Latin America business, which have lagged for the better part of the academic.

Got it. But just to understand what drove the EBITDA decline sequentially?

for what unit, Marcella?

Sorry. I just understood the sales growth and the drivers of that. Just would like to understand a little bit better what is driving the sequential EBITDA decline?

Sure. If you go into the numbers, Marcella, because the others division was also comprised of the intercompany eliminations. And then as you probably saw, within the fuel division, we are now reporting the wholesale margins as well. So there might be some profitability that you are assigning to the logistics that was not there. So we're happy to work out the numbers with you, but we did not see a significant decline in profitability in the core businesses within logistics and distribution. So there might be some confusion as we are now reporting different business signs in different buckets.

Got it. Very clear, thank you so much, guys.

Our next question comes from Rodrigo Alcantara with UBS.

Good morning and thanks for taking my questions. Two quick ones, if I may. The first one, related a bit about the ticket, which quite interesting in my view. So if we take the 2019 mix, let's say, beers, around 15% of ticket soft drinks and cigarettes, snacks, service around 3%. Now that we have the full base of 2020, how would you say that this year's change in 2020? How do you see this mix evolving in 2021? We have discussed a lot about spirits, some grocery items. But if you could give some numbers there would be extremely helpful. That would be my question regarding the ticket.

Rodrigo, this is Eduardo. Basically, when we go up, the mobility has to go up also. All the consumer occasions that have to go the people on the street, the people on the go. And so the ones that have been affected strongly have been fast food, for example, let's say, a quick cravings or a quick need for thirst. And I think those are the main effects that we have had because of that mobility has affected us on the prediction stores or the stores are very close to offices or the stores that are very close to business centers. And same – well, I think that – so the impact – so while mobility is coming back, I think really that obviously – that also represents among the Mexican population is coming back strong. So I think I will give you the main framework that those are the consumer occasions that were affected and the competitors related to that. And specifically, I think, Juan, why don't you try to address the specific question that Rodrigo was asking.

Yes. So I mean in terms of the ticket, Rodrigo, exactly what dynamic would you like to double-click on?

So for example, let's say, about spirits, the revenue contribution, how it evolve 2020 versus 2019? Or are there any significant category that you may say that emerge in 2020 as a relevant category for us?

No, there's actually been some encouraging developments on that front because what we've been saying in the past few months, really since the pandemic began. I mean if we think about a year ago, we were talking in this very call about how beer – both brewers had been in order to stop production. And so we were about to go dry on the beer front. What we didn't know at that time was that the consumer – I mean, I guess we could have assumed so, but what we didn't know was that consumers were going to begin substituting beer purchases with spirits purchases at the store. And I think this has had some very welcome developments because the – even though we had a very robust portfolio of spirits from before, a very, very good price points. And in fact, some presentations that are directed to the proximity format. I think a fair amount of consumers discovered that we had such a good assortment of spirits and even wines. And so the spirits category has been growing double-digit or very high single-digit for the past year. And it looks like – because, obviously, we only went without beer for a couple of months. But the pickup in spirits seems to have remained, right? So we got beer back. And now we have higher spirit sales than we used to. And I would make a similar statement on some pantry kind of supermarket type items. Where again, I think the pandemic may consumers take a look at OXXO's assortment in terms of things like food, milk and cheese and eggs and diapers and cooking oil and detergent and pet food. We have more than 3,000 SKUS. And some consumers clearly that had been visiting OXXO for the on-the-go transactions, the single serves, the preferred food or the coffee discovered that we carry all these other products. And just as importantly, that the price point at which we sell these items is very much in line with what you would pay at the supermarket because of the purchasing power that we have as a company. So again, I think we're seeing some of those – many of those transactions remain. I mean when we talk about same-store sales, obviously, you've seen the composition, right? You have a big double-digit fall in traffic and a big double-digit increase in ticket. And this reflects precisely what I'm discussing. Some categories that were not the typical OXXO categories 18 months ago that now are becoming a little bit more typical. So that's encouraging because we continue to recover, the traffic seems to be the case as mobility comes back, and we were able to hold on to some of the ticket gains, then that bodes well for the future of the same-store sales number.

Yes. Totally Agree. Thank you very much for that. And the second one here, quite interesting on the discussions of logistics, category – on the revenue side, just curious about the potential of profitability. I mean, when I look at this 9%, appear me that still, we may see some opportunities for improvement here, perhaps when you absorb the synergies generated savings, you could take this perhaps to the low teens. Would that be for us to assume? Or what could be a normalized EBITDA margin for this division in your view?

It's never served us well to actually put a target out there because, I mean, if I take the experience of OXXO, we've always managed to do better than we thought we would. And so hopefully, that is the case again here. But what I would say is the numbers that you're seeing are definitely not of a normal quarter because of pandemic. I think Eugenio was mentioning earlier how and Eduardo, how some of the sectors of the end users in the U.S., for example, are not yet normalized, even though the U.S. has opened more quickly than Latin America because of the vaccination efforts. But you have big sectors. Eduardo was mentioning, hospitality. We cater to hotels in a big way. Entertainment, we cater to stadiums, for example, that are in many parts of the U.S. are not yet functioning normally. We cater to a lot of government and education facility, so university campuses and government buildings that are not yet back to full occupancy, not even close, right? I mean we're expecting, for example, colleges to go back fully in person in the fall, some of them might ask for vaccination proof. We'll see about that. What I'm trying to say is, things will get better as the year progresses. And also to Eugenio's earlier comment about acquisitions and nonorganic growth, you know that we've said this from the beginning that a part of the strategy for the U.S. operation is to create a national platform. And we do aspire and hope that we will be able to do a couple of deals between now and the end of the year. And you're correct in pointing out that, that brings a margin expansion opportunity that comes with the scale of the bigger national platform. So directionally, I'm optimistic like you are in terms of actually putting a number out there, I think we just rather let things work out on their own. And hopefully, you're correct. I think, like I said, directionally, we're both on the same page.

Very clear answer, yes.

The other thing just to note – the other thing to add to your point, you have to remember that some of these businesses in logistics are more asset-intensive than others. And we are growing the less asset-intensive one. So even though you might see margins as these lower asset-intensive businesses take part of the mix, you might see margins coming down, the profitability and the return on capital is actually going up. So that's why it's also kind of hard to just look at the EBITDA margins and figure out what's going on, so.

We will take our next question from Ulises Argote with JPMorgan.

Thanks for the space for questions here. Just wanted to get an update on the OXXO rollout there in Brazil. Any details on how the different business models there on the stand-alone stores and the Select stores are performing on these initial phases? And maybe if you can share some of your expectations for the year there in terms of the rollout and how the business should be expected to kind of perform?

Sure. Thanks, Ulises. As you know, we started the rollout of the physical OXXO stores, the proximity stores in December. By now, we have thinking the teens in terms of the number of stores that are operating, and we're very positively surprised with regards to how they're doing, how we're adapting the value proposition to the local taste. I think Juan mentioned in a prior call, the bread business there, which was an integral part of the value equation is really, really doing very well in attracting traffic as people start to get accustomed to the value prop. So we're very, very encouraged there. And I think we continue to be on track with regards to the openings for the year there. The other good news, piece of news there is that the select stores that, as you know, are operating together with the Ryzen gasoline business. Those are actually despite restrictions and despite constrained mobility are doing well as they've been able to upgrade, in a sense, the product categories that they're offering and have been seen as a different consumption pattern in the same way that we're seeing in Mexico as customers are taking advantage of their trips to pick up some items that they otherwise would not have. And as you know, most of these businesses are franchise business. We are starting some company-operated stores in the select space as well, but we couldn't be happy with regards to how the numbers are looking at right now for Ryzen.

Also, Ulises, I would like to add, this is Eduardo that we are very happy with the partnership. I think we found the right partners. We are very fully aligned in terms of culture, in terms of way of doing things. And I think we are really leveraging the best of them and the best of us together, and we are very happy with the partnership, the way it was established. And it was a 50-50 partnership decisions low. We have the right management with people from Ryzen and the right management with OXXO. So we are very happy with the management and the JV, the way things and decisions are made.

Your next question comes from Carlos Laboy with HSBC.

Yes, good morning, everyone. Congratulations on the green financing. It seems that you had to establish specific ESG targets on key projects to get these projects qualified for funding. But on waste, you did not – it doesn't look like you qualified refill bottles. Do you need targets of refillable at OXXO and at Coke FEMSA to get refillables qualified for green financing? And do you have those targets? I ask, right, because it seems that it's very important – an opportunity for you to get these green bonds to lower your cost of capital and the refillable up boosting your ROIC?

Sure. The sustainability targets with regards to waste to landfill are companywide, so they do include Coke, FEMSA, OXXO and the rest of the operations. And the idea is to get to 100% reducing the – reducing of waste to landfill in that respect. But we don't have the target for refillables at Coke cans as part of the green bond. The – again, the target is more directed toward diverting total waste to landfill and related more to circular economy. So we are including, for example, with cycle resin and others – and other components in there. And the other thing to note is that the target has to do with what happens within the store, not post-consumer waste, which is what we can control. But more and more, we are assessing with third parties to include refillables in the future.

Yes. I think in that sense, Carlos, this is Juan. The role of refillables as part of the strategy has always begun with the affordability strategy. But more and more, and to Eugenio's comment, more and more, it's also becoming a component of the ESG strategy as well. So I think you're going to hear more about that in the future.

Do you see yourselves publishing refillable targets for Coke, FEMSA and OXXO?

We – again, we need to contemplate that. But at this point, we're still in the process of digesting whether that will be a part of the broader sustainability framework.

Ladies and gentlemen, that is all the questions that we have for today. I will now turn the conference back to Eugenio Garza for additional remarks.

I'd like to thank everyone for their participation in the call and your continued interest in the company and hope to see you next quarter. In the meantime, if you have had any additional questions, please feel free to reach out to the IR team or to myself. Happy to take the call. Thanks again, and have a great weekend.

Thanks, everyone.

This concludes our conference for today. Thank you for your participation and have a nice day. All parties may now disconnect.