Good morning, and welcome to FEMSA's Third Quarter 2019 Financial Results Conference Call. [Operator Instructions]. 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 would now turn the conference over to Eduardo Padilla, FEMSA's Chief Executive Officer. Please go ahead, sir.

Hello. Good morning, everyone, and welcome to FEMSA's Third Quarter 2019 Results Conference Call. Juan Fonseca is with us today and as always, from Coca-Cola FEMSA, we have Maria Dyla Castro, who is saying good bye to Investor Relations, and Jorge Collazo who is taking responsibility going forward. Thank you, Maria Dyla and welcome, Jorge.As we usually do, we will focus the call on the consolidated figures for FEMSA and FEMSA Comercio results since many of you probably participated in Coca-Cola FEMSA's conference call last Friday. The third quarter was a positive one on both operations and strategic fronts. Operationally, we saw solid performance across our business units. OXXO Mexico continued to invest in its growth at a steady pace and we again saw encouraging data from the international operations. The Health Division continued to see a soft patch in Chile, but we are quickly making progress in the integration of GPF in Ecuador. While the Fuel Division did not add to its number of stations, but still managed to deliver encouraging results during the quarter. For its part, Coca-Cola FEMSA saw a resilient consumer environment in Mexico and solid growth in South America, combining to deliver a positive operating performance.Strategically we made two important announcements. First on our new joint venture with Raízen in Brazil and more recently, on the MOU for our investment and joint venture with Jetro Restaurant Depot. These are relevant steps in our quest to deploy capital in high-growth, high-return retail assets and we are very excited about it.Let me spend a few minutes on these new opportunities. As you know, we have been looking for a long time for the right entry model into Brazil with proximity stores. We knew we wanted to do it with a strong local partner and we also knew…

[Operator Instructions]. Our first question comes from Antonio Gonzalez of Crédit Suisse.

I wanted to ask about the Proximity Division, right and the margins that we saw this quarter which were flat this year-on-year. You cite on the press release some of the headwinds that you saw during the quarter, which I think we've been talking about for quite some time now, the compensation scheme and the costs of handling cash, which I think are very similar actually to the headwinds that you cited during the first semester, right, yet during the first semester, we saw this margin expansion that we thought was quite consistent driven by some other tailwinds, right, your services category and your commercial income, and so forth. So I just wanted to ask, Eduardo, if you can help us quantify perhaps directionally, which of these tailwinds or headwinds changed so that the margin expansion now reverted? And any comments as to what you would expect for the next few quarters in this respect?

Antonio, I think, Juan will be able to help me on this, to be more specific.

Antonio, I think of the headwind that you mentioned, the one that I believe is persisting at a significant point of pressure has to do with compensation and labor costs generally. Obviously, the closer you are to the border, where we have a lot of stores, there has been -- wage increases were high. And I think, if you ask me, not only during the quarter, but also going forward, I would say that the cost of handling cash, the amounts, I think, are going to start to get smaller in terms of lapping the biggest increases that happened a few quarters ago. And I think, based on some of the initiatives that we are taking, I think the cost of handling cash will be less of an issue going forward. We were already talking this quarter and I think, we started last quarter talking about electricity cost as being no longer a headwind, but actually turning into a small tailwind. And I think this will also accelerate a little bit as we get to the end of the year, where the number of stores connected to the wind supply will continue to grow.Actually, I think the fourth quarter is going to be an important one for that because we are -- right now, we are very close to 60% or maybe even a little bit above 60% of the stores connected and by the end of the year, we're going to be much closer to 80%. So that will continue to help. But the one that kind of remains without any significant improvement, I think it is labor, and we also have to wait and see obviously, what happens with minimum wage increases next year. Generally, though I think, we would describe it as a pretty competitive market and so, off the three, one has already become a tailwind. Cash handling will get smaller in the next few months and quarters, and I think labor is the one that remains.

That's very clear. And just very quickly, if I may. Can you remind us -- have you quantified in any way labor as a percentage of your total expenses or revenues and the costs of handling cash for both, have you given any metric that you can remind us, please?

Not really. I mean we used to obviously make the reference to rent being, obviously, the biggest expense and then after that -- I mean, you have labor and then rent. And we've never actually given the number, but it's -- labor is a significant component.

Our next question comes from Álvaro García of BTG. Álvaro García: My question is on Jetro, on JRD. I was wondering if you could walk us through some of JRD's competitive advantages for your rationale for entering into this business? And whether or not you'd be looking to increase your stake in this business going forward?

We think it's a pro that is an asset that is very much in because being a private company isn't very much exposed. But it tackles a market that we are very much involved with, which is the restaurant market or the grocery, small mom-and-pops market. And we found that the way this management team approaches the market is very much aligned with the way we approach things. The values of the organization is very much in line with us. And the history is a very positive one, where they've been increasing share, increasing their participation in all over the United States. And I think we found a place where we could add value to them in Latin America and then at the same time, participate very much align with the ownership that we have in the States. We want to have those two places together in order to be fully aligned because we didn't want to have not -- a misalignment by having a JV down there -- down here in Latin America and not being over there. And it -- you are asking, we will love to increase our share in -- both depending on the price and depending on the circumstances, but I think, currently, the way we are set up, we're very happy, and I think there will be a lot of opportunities for growth in the long run.

Our next question comes from Leandro Fontanesi of Bradesco.

I have two questions as well. The first one, you commented about cash handling that it will be less of an issue going forward, just to understand what measures have you taken to reduce this problem? And also you mentioned in the previous conference call that you were considering potential investing in this business. So just to understand, what -- which measures are being done in that front? And the second question, it's extra follow-up on investment in cash handling. Just to understand this is sort of a new segment for you, for the company, if you still need -- still have a lot of cash that could be deployed, just thinking about if you could enter other segments that FEMSA is still not operating at this moment?

Well, the first part of the question, we think by understanding the cost structure of the current cash collecting business, we're now having some small operations, understand it better, and see where we can reduce the cost by overseeing the system and not only the transaction cost of the van and the store. And we're finding out that there are a lot of different places, where we could work together in a systematic way and improve it. And I think we could even consider making some small investments with some those operators where we could be more aligned, understand the cost structure better. So that's really what we would love to -- that's why we are hopeful that there will be better things for the future. I don't know if you have anything, Juan?

Yes. No I think -- Leandro, basically, I think of it in terms of three different initiatives. One that has to do with processes optimization, understanding the different processes, because this is not just picking up the cash, putting it in a truck and taking it somewhere, that is super safe, but there is a lot of counting involved and there's middle points between the stores and the end destination. And so we have found that by better understanding which stores require what type of frequency and making adjustment to some of this processes that you can right off the bat reduce a little bit the overall cost of the operation. The second or the third component is precisely what Eduardo was discussing in terms of getting a very good grasp of the cost structure of these companies and maybe contemplating making an investment in one of them at some point.As you know, one of the things that we have faced is that the number of companies that provide the service in Mexico is limited, it's -- there's not a lot of them, and so we want to understand better kind of the industry dynamics and whether there is any improvement that we could bring about to that. And then finally, the third component has to do with technology in terms of certain type of machines that can be put into the stores where we have been actually running pilot for a while now and we're getting ready to be a little bit more aggressive in terms of deploying these machines to the stores. Basically what the machines do -- I mean the biggest constraint we've had historically is that, if you have the cash available to disburse to customers, when they're doing a financial transaction, receiving a remittance or they want to do a cash back or a cash out from one of the bank accounts, if you want to have the cash available to give to them, then it's also cash that is at some risk, right? And so what these machines do and I'm talking these are -- imagine a machine, it's not a big machine, but it's made by the same people that make ATMs. So already it's a very secure machine that is connected to the network that allows the cash to be disbursed when there is a legitimate transaction being done. And this allows us to have significantly higher levels of disbursable cash, as opposed to couple of hundred dollars or maybe not even that, that the stores have today.So that's another promising component of the strategy. Obviously, this one is going to take time and it's also going to require a little bit of CapEx and so we need to be very careful about pace of rollout. But I think the three components together represent a pretty robust strategy to address this that has become already a recurring point of pressure in our OpEx.

Our next question comes from Carlos Laboy of HSBC Bank.

Can you shed some light please on the performance of beer growth in the OXXO stores, where you're now carrying a fuller portfolio? What your same-store sales in that beer category is doing, please?

We have had some over than what we expected in some of the places and I think it is taking -- well, accordingly, I think that we -- currently we have been able to mix five places. And the very first ones -- first of all, it takes -- it is taking longer so the consumer will believe that we're handling Modelo brands in our stores. It seemed like that for so many years, we were the anti-Modelo store operator, that now when we are launching now, it is taking time. And but I think -- saying that in the other hand, I think we're very happy and we are very -- the results in a way are more promising than the ones we expected. And so we are very happy that probably there will be a source for growth during the year because of those Modelo offering and the cross-selling that we could have from that. And I think, Mexico City, again, which is the last place that we opened, the big Valley of Mexico, and again, it's taking longer than expected because the consumer, it's difficult to make noise in the Valley of Mexico. But again, we're happy with it and it is taking longer than expected to get the consumer, grab the attention that we have the Modelo brands in our stores. I don't know if you want to add anything?

Is there anything you can do to drive consumer awareness?

I think in small places like [indiscernible], we did very well. In Mexico City, it's more difficult, really.

Yes, and I would -- Carlos, it's Juan. I would also remind everyone. I mean we've basically done two waves. The first one was launched in April and it included Morelia, San Luis and Guadalajara. And so Morelia and San Luis not only are they smaller cities where maybe the communication is a little bit easier to get the word around, but they've also been -- we've had both portfolios for longer. So I think that also helps to explain why, in particular, those two have been -- the growth has been faster and more robust I think than in the bigger cities. Guadalajara was part of the first wave and then, as Eduardo was saying, we've had Mexico City and the State of Mexico come in, in June. So you have a couple of months less of data. I think when you look at the trend, I don't think there's anything that deviates hugely from our expectations other than, as Eduardo said, I think in the greater metro areas, it's taking a little bit longer than we thought. Having said that, another thing to discuss or comment on is that what we are seeing is that when we're getting the -- we're getting the consumer that was buying that beer elsewhere, but we're also getting the rest of that transaction and what I mean by that is you're seeing in adjacent categories or related categories such as tobacco and snacks, you're getting growth that you probably would not be getting if you weren't getting the beer transactions. In other words, the consumer is shifting their entire purchase to OXXO, which I believe makes sense, but once you see the actual data, it's very good to see.

Yes. I might also add Carlos that Modelo really was not fully prepared, and in fact, we are a different chain with different protocols with different processes, and I think they're also in their learning curve how to take care of us there in a better way.

Yes. And I think on that point, one important data point has to do with returnability versus one way. Over time, OXXO has shifted a little bit more towards the one-way packs and the multipacks, the 12-can SKU, whereas Modelo's historical traditional customers are using returnables. And so that's also part of the adjustments that they have needed to make in their supply chain to be able to serve such a massive customer that has a different mix than what they have historically done with their more traditional trade.

Yes.

Our next question comes from Martha Shelton of Santander.

Very quickly regarding Chile. If you could get some more color regarding the soft patch that you mentioned in the prepared remarks regarding what's going on in Chile and also given some of the recent social unrest that we've seen there, I just wanted to see if you could quantify the effect on your operations there during the fourth quarter?

Martha, this is Juan. Yes, I mean when we talk about the soft patch, I think generally the Chilean macro has been soft now for several quarters. And we, in particular, in the drugstore space, we have been making changes to how we interact with the ISAPREs. These institutions that have a certain number of affiliates and then you bid for the ISAPRE and once you're working with one of these things, those customers become kind of your captive market. And last year, we started moving away from that or beyond that and trying to innovate in terms of our sales providing some of the discounts directly and coming up with our programs to in a way build on the ISAPRE model.

Yes. It was more like supporting our loyalty programs and instead of going through the ISAPREs, where the loyalty went through the ISAPRE and not directly. So we aren't really trying to change our relation with the consumer, getting more involved with the loyalty program directly with Cruz Verde and not through the ISAPRE. And I think we are -- it might cost a little bit in the short term, but I think with a value addition for the medium and long-term connection with the consumer.

Correct. And obviously we've also faced in this quarter what the case FX, both the Chilean peso and the Columbian peso versus the Mexican peso. When you look at our data coming out of Chile, certainly that was part of the softness, I guess, when you look at it in Mexican peso terms. If we talk about same-store sales, actually in Chile, they were basically flat or even very, very low single-digit negative, but I would characterize it as flat in local currency. Obviously, the second part of your question is relevant also, mostly through Socofar, I mean our exposure to Chile is much, much more larger through Socofar than to OXXO and it's a bit of a fluid situation, obviously, the protest and the situation continues to happen. And as you might imagine, I mean we have more than 600 stores, most of them in Greater Santiago and so we definitely had some stores affected with different degrees of kind of costs. On the positive side, we can say that the insurance coverage that we have in Chile for Cruz Verde is very robust, and so probably have to use it. But we have had a number of stores, I would say probably several dozen stores that have been impacted by the events over the last few days.

Our next question comes from Luca Cipiccia of Goldman Sachs.

Just two quick follow-ups. First on the traffic trends in Mexico, considering -- and for OXXO, considering the Modelo addition, considering some of the initiatives, the fact that you reiterated the positive contribution of services, could you quantify maybe a bit more how -- what are the drivers and maybe they soften that we've seen lately, evidently tickets and prices, in general, have been quite strong, but maybe any additional comment you can give us on the ticket trend? It would be interesting. And secondly, on the U.S. move, entrance, could you put the balance of the appeal of this opportunity comparing your first inroad into the U.S. market, I guess that's quite relevant, as compared to bringing this business into Mexico and the rest of Latin America? And on the U.S., again, this is the first entrance, you typically have somewhat of a portfolio strategy when you enter a market. I don't think there is any market where you only have a single business or you don't aspire to have more, so how should we think about this prospectively maybe over the medium term now that you have some exposure to the U.S. market?

Yes. Let me go to answer the second question. Really what we is -- we do see as a big opportunity for growth and we want to be aligned in both places, in the JV and also in the corporate headquarters. And because it will be very difficult not to be aligned, we already understand how difficult things are when the two entities are not fully aligned. With this, I think the alignment was very important. Number two, creation of value. We do consider that there will be value-creation opportunities in the JV and also in the U.S. operation. We understand the market in a different way they do. We have a partnership where we could exchange ideas and learn from them to in order to replicate what they have done in the U.S. to do in Latin America. And I think by aligning these management styles and value system of those two companies, we feel very confident that it is a very nice way to be involved in the U.S. and having a business of size in Latin America by having those two entities good align. And again, value creation is important. Value creation is important for us in the JV, and also value creation is important in this partnership that we have this more minority entry that we have in the United States. And I can assure you that value creation is a matter for us. And if we haven't seen that opportunity for value creation, we have not invested in this asset. I don't know if you want to add anything, Juan?

Yes. Just I think obviously, at kind of time zero right now, the orders of magnitude are pretty different, right, I mean we made -- we signed the documents to make the $750 million investment, which -- it's obviously not an insignificant amount of money, but it is 2%, 2.5% of the market capital of the company, so keeping things in perspective. But really the point I want to make is compare that to the Mexico JV, where we are going to start looking into the format and the opportunities and eventually, I mean, I think just in terms of ballpark, you could probably expect each one of the partners, in the beginning, if we're going to open 2 or 3 stores, maybe all told, that requires $50 million and so each partner put something like $20 million or $25 million. So clearly in terms of orders of magnitude, the U.S. represents a much more significant amount of investment in the beginning. But to Eduardo's point, down the road, ideally the two would gradually converge in terms of relevance for FEMSA.One other comment to make, I mean we're obviously very, very respectful, and given that JRD is a private company, the amount of information that is out there is very, very small and that obviously creates a little bit of a challenge for us as a public company, but the message that we want to continue to try to drill into you guys is that this is a very remarkable asset in terms of its growth trajectory, its growth opportunities, profitability, ROICs, so on and so forth. In terms of the other part of your question or rather the first part of your question having to do with traffic at OXXO Mexico. Certainly, we've made these comments about destination categories having taken price increases, and I think the consumer, in some cases, in the case of beverages, for example, moving a little bit more to bigger kind of, from single-serve to multi serve. We have seen these price increases, and I think there's reason to believe that they might continue to come in some of the main categories at OXXO.And you'd have to ask some of the suppliers why they're doing this. But I think some people might be trying to get ahead of FX moves or just trying to lock in price increases before the end of the year. And so that means people can come to the store a little bit less frequently. Because the reason why they're coming to the store, they're making bigger ticket purchase because prices went up or they might be buying bigger volume presentations and basically, just changing that where they probably used to come in a little bit more frequently for the single curve. So that's what we're seeing. It's all the theory from our side, but it's now being in place for a few months, and we think there's something to it.

I might add that there might be some tension in some markets where permits -- it seems like the different counties in Mexico, the Federation is distributing less cash than they were in the past. And some of them are pretty much in need for some cash and then by looking to some alcohol permitters as a good source of cash. And with that in mind, we have had some tension in some markets, where the previous schedule for selling alcohol have been reduced. And now we're in the process of negotiating really what the idea is. And I think that was probably some of the -- a minor effect that we have had also.

Yes, I think that's something, for example, we see in Cancún, where the window to buy beer has gotten significantly smaller than it used to be.

Yes.

And if I can -- very clear. Just a quick follow-up on the U.S. discussion. So we are all aware of the fact that you have looked in the past to bring OXXO into this market, and there are some legal hurdles for that to happen. Is this transaction a way to get a foothold in the market in anticipation of maybe additional sort of retail inroads down the road long term, medium term, whenever that would be possible? Or is this something that came up as an opportunity in itself. But what I'm trying to ask is how much of this is the first step of a sort of longer sort of U.S. exposure or inroad or expansion or opportunity that may come down the road? Because we knew there is a history as well there of previous attempts.

I think by itself it's something that has value and has the thesis that I already explained. But going forward and understanding the U.S. market, I think, yes, it might give us a way to start entering here and understanding the dynamics of the industry. And yes, we would love to get into the United States in the convenience sector, but we're just finding the best way to do it.

Yes. No, I think if you're kind of trying to take a 30,000-feet view, I think what you're also seeing is incremental steps in the process or by FEMSA move towards the -- in our quest for that delta between ROIC and WACC, right, I mean, the retail part of the company offers very compelling spreads in that sense. And so obviously, there's the U.S. component. As Eduardo explained, this is the first step, and we're going to keep trying to see how we can eventually, hopefully, be able to invest on the convenience side -- convenience store side.But more broadly, I think it's, again, proof that we are very serious when we talk about putting capital in assets that have a very good chance of generating a bigger spread between return on capital and cost of capital. And those are the parts of our business that grow the fastest. And so this is -- it's another step in that shift towards -- we've called in, in some conversations the retailization of FEMSA, which is a gradual process, but OXXO is the fastest-growing part of our company. And so every day, we're a little bit more of a retail operator.

Our next question comes from Alan Alanis of UBS.

My question has to do with your investment in Coca-Cola FEMSA. Could you speak a bit of how do you see that investment going forward? And I mean as the controlling shareholder of Coca-Cola FEMSA, what is your preference for the use of their cash generation in terms of capital deployment? And I mean, I guess, it's a more strategic question. How do you see that asset in the long run? And if you can connect the answer with a relative comparison in terms of versus Heineken, you're involved in Heineken more than over the -- you run one of them, Coca-Cola FEMSA in a way, and you're more of a minority in Heineken. But how do you think of those assets, just strategically?

Well, with Coca-Cola FEMSA, we're happy with Coca-Cola FEMSA, the way Coca-Cola FEMSA is trying to restructure itself and realign to tackle these Latin American markets in a better way. And I think Coca-Cola FEMSA is finding a way to evolve with these growing market circumstances in a better way by centralizing, by establishing platforms and being more efficient and effective in the strategies. And also, is -- Coca-Cola FEMSA is changing its culture and its culture to tackle these new opportunities and be more aligned with the markets that we're involved.On the other hand, we are working a lot with the Coca-Cola company because Coca-Cola FEMSA has the best platform for distribution in Latin America, and we are world-class in that matter. And I think, really, it has to do with the Coca-Cola company, how better we can align by reintroducing or introducing products delivered by the Coca-Cola Company or support some others as way -- the way we do it in Brazil to have a better economics for load sharing and distribution. So I think those might be some interesting opportunities for the future. And -- but again, we are very hopeful that the Coca-Cola Company and the Coca-Cola FEMSA will be more aligned in the future to create more value creation. In the mid and long run, I think we have had some difficulties and some headwinds, but again, I think Coca-Cola FEMSA, it's an extraordinary company, and we see that there are still lots of opportunities for growth in Latin America. I don't know if you want to add anything, Juan?

Yes. No, I mean, I think John and Constantino mentioned this on their call on Friday in terms of the early stage testing of some alcoholics in Brazil and, obviously, the topic of load sharing came up in a couple of the questions. Another characteristic obviously of Coke FEMSA is the very, very significant cash generation capability. And so one of the high-quality problems I suppose that we have is to figure out how to best -- for Coke FEMSA how to best utilize that cash. Obviously, some of it going to their own growth. But they've also created, as you know, significant equity issuance capacity. They have over $3 billion that they could issue with the new restructure that we did in the shares a few months ago. So clearly, there's the growth bias and the search for growth opportunities at KOF. But there's also a lot of cash being generated by the operation. And so I think the analysis will be done in terms of whether there's opportunities to -- or what are the best ways to use that cash. Those would be really my observations.

Juan, could you, I mean, categorize, I mean, what are the priorities in your view as a FEMSA in terms of the cash usage of that strong cash generation of Coca-Cola FEMSA?

I mean, obviously, we -- historically, we've taken the dividend from Coke FEMSA and passed it through as we do with the Heineken dividend. And I forgot to address. In your previous question, you asked about Heineken. I mean, obviously, that's a different situation in that we have a much more limited scope in terms of how the company is run and how the capital is deployed. But in both cases, we've just taken the dividend and passed it through. At this point, I don't think I have any reason to think that, that will change in the short to medium term.

Got it. Got it. But -- so is it fair to say -- just to conclude, is it fair to say that then we should expect -- I mean, if the -- if Coca-Cola FEMSA doesn't find any opportunities or, let's say, how the negotiations with the Coca-Cola Company evolve in terms of the use of this as a distribution platform for other kind of products that we should be seeing a -- we could see an important increase in the dividend?

I think it has to be on the menu, right? It has to be a possibility.

Ladies and gentlemen, this is all the time we have for questions today. I will now turn the conference back to Mr. Padilla, for posing additional remarks.

Well, I thank you very much for your participation today. Have a great week, everyone, and...

Yes, just to give another shout-out to Maria Dyla. Thank you, Maria Dyla, for these years of help. Good luck in your new responsibilities. And obviously, Jorge, I'm sure we're going to continue to do good things together. Welcome to -- I mean you've been a part of the team for a long time, but welcome to you and your new capacity as Head of IR for Coke FEMSA. So thank you, guys, and have a great week.

Congratulations, Maria Dyla.

Thank you, Eduardo and Juan. Thank you, everyone.

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.