Fomento Económico Mexicano, S.A.B. de C.V. (FMX) Q2 2020 Earnings Report, Transcript and Summary

Good morning, and welcome, everyone, to FEMSA's Second Quarter 2020 Financial Results Conference Call. Please note, today's call is being recorded. [Operator Instructions]. During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good safe estimates made by the company. These forward-looking statements reflect management's expectations that 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 like to turn the conference over to Eduardo Padilla, FEMSA's Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and welcome to FEMSA's Second Quarter 2020 Results Conference Call. As is customary, Juan Fonseca and Jorge Collazo are also on the line. And today, we're also joined by Eugenio Garza. We hope that you and your loved ones are healthy and safe. The second quarter was the most challenging period we have faced operationally in many decades, although there were differences in performance among our business units. But also, we saw a severe impact from continuing lack of consumer mobility in the geographies we serve. That translated into soft performance for most of our categories and consumer occasions. And the challenge was compounded by the lack of beer supply that only began to recover in the month of June. Our Health Division fared better as demand for its production -- products remained high, but sales were constrained by strict restrictions imposed on consumers and their ability to move around, particularly in our key South American market. The Fuel Division was impacted most as vehicle utilization fell quickly and drastically. However, from a deeper value and in relative terms, it is the retail operation that seems to be rebounding faster. For its part, Coca-Cola FEMSA was quite resilient, leveraging execution capabilities to once again adapt to consumer needs and minimize the negative impact of the downturn. Having said all that, our team continues to execute at a high level in very complex environment, and we continue to focus on the safety and health of our people and our customers above all else. Moving on to discuss FEMSA's consolidated quarterly numbers. Total revenue during the second quarter decreased 10.7%, while income from operations decreased 37.5%. On an organic basis, total revenues decreased 14.3% and income from operations decreased by 40.4%. For this quarter, the difference between reported and organic figures reflects 2 months of our drugstores in Ecuador, a full quarter of the AGV operation in Brazil and 45 days of the WAXIE and North American -- distribution platforms acquired in the United States. Net income decreased significantly, driven by: number one, lower income from operations, as I just described; number two, higher other nonoperating expenses, including ancillary charges related to the extraordinary payments of almost MXN 8.8 billion agreed with the Mexican tax authority as well as impairments, including for certain assets at Coca-Cola FEMSA and the closure of our specialties operations; and number three, in terms of participation in Heineken results, which were lower relative to the comparable figure we reported last year. In terms of our consolidated net debt position, in the first quarter, it increased by approximately MXN 10 billion compared to the previous quarter to reach a level of MXN 72 billion at the end of June. This reflects our investment of approximately $900 million in the WAXIE North American platforms as well as the majority of the large tax payments mentioned before. While we are on the target of debt, we should mention that during the quarter we placed $700 million in the second reopening of our 30-year dollar-denominated bond issuance, bringing the total amount to $2.5 billion, which was our original target. The weighted average yield for the total issuance was 3.5%, which was also our target back in September when we started with this project. And I highlight this because it took us 9 months and we went to the market on 3 separate occasions in order to get the amount we wanted, at the cost we wanted. We were very patient, and it paid off. And this is the approach and the discipline that we try to bring to our financial decisions. Moving on to discuss our operations and beginning with FEMSA's Comercio Proximity Division. We should start with our comment about store openings. While we managed to open a number of new stores during the quarter, we also have to close a small percentage of our store base due to COVID-19 restrictions and effects. Some of the closures will be temporary, but some will be permanent as we take this opportunity to remove certain marginal stores from our base. The numbers for the quarter went like this: 159 new openings; 85 reopenings after remodeling and maintenance; 24 definitive closures; and 260 temporary closures. As a result, we recorded a net reduction of 40 stores for the second quarter to reach 950 net store openings for the last 12 months. In addition to the store closures, we reduced the number of operating shifts from 3 to 2 in a large percentage of our stores as 24/7 operations is not viable or necessary given the current consumer dynamics. Also same-store sales were down 12.4% for the second quarter, reflecting a 24.1% decline in store traffic and an increase of 15.4% in average customer ticket. Here, it is also useful to pause and discuss a little bit what happened in the entire quarter because we did see meaningful differences as the quarter went by. During April, as you may recall, we still had relative availability of beer through most of the month as well as some panic buying for certain categories on the part of consumers. And this mitigated the glow and late April, the least -- the last month of the quarter for OXXO. During May, however, we basically depleted our beer inventories, and we saw the steepest contractions in traffic, making the worst month of the quarter. Finally, in June, we began to recover beer availability, and we also began to observe a gradual shift in consumer dynamics. During the first part of the quarter, most of the consumer demand weakness came from mobility restrictions and lockdowns with the thirst and craving suffering from the absence of customers going about on the street and the gathering occasion reeling from social distancing. However, late in the quarter, the weakness in demand seems to be driven increasingly by economic hardship as so many consumers have lost their income, making the crisis today a bit more similar to prior downturns, but also more pronounced. Adding to the headwinds, as much as half of our stores in Mexico were under some type of operating restriction from local authorities during the quarter. Also related to the sale of alcohol in certain time windows, we expect most of the restrictions to be temporary. Moving down the income statement. For the second quarter, gross margin contracted by 10 basis points, reflecting a negative sales mix effect caused by the beer shortage in May and improved performance of our daily and replenishment categories, partially offset by a high single-digit increase of our services category. Income from operations decreased almost 66%, and operating margin contracting 620 basis points, reflecting significant operating deleverage. Moving on to FEMSA's Comercio Health Division. We reduced our store count by 7 drugstores as amount of temporary closures was enough to offset the number of stores we opened during the quarter. Having said that, we have a total of 300 -- 3,189 open units across our territories at the end of June and 128 total net new stores for the last 12 months. Revenues increased 2.4%, while on an organic basis, they decreased 9.1%. Same-store sales decreased an average of 9.8% in Mexican pesos, reflecting the negative impact of the strict mobility restrictions implemented in our South American markets, including curfews, partially offset by a solid performance in operations in Mexico. Gross margin expanded by 80 basis points in the quarter, reflecting: number one, a positive sales mix effect driven by consumer behavior shifts in connection to the pandemic; number two, more effective collaboration with key supplier partners in our operations in South America; and number three, better margin performance in our business in Ecuador, where applying Socofar's operational best practices is very, very improved. Operating margin contracted 120 basis points, reflecting lower operating leverage in South America. As we anticipated last quarter, FEMSA Comercio's Fuel division was the most exposed to the current environment of lockdowns and reduced mobility, and the impact is visible in our quarterly results. While we were able to add 1 new net -- 1 new station to our network, same-station sales decreased an average of almost 50% in the second quarter. Gross margin reached 13.3%. The operating margin was 0.8% of total revenues, reflecting considerable operating deleverage. Operating expenses decreased 15% as a result of tight expense control and increased efficiencies. As a silver lining in relative terms, it seems this business is the one that is recovering more quickly in relative terms, showing the sequential improvement in certain weeks, but rising from a very -- from a deeper contraction. Finally, moving on briefly to Coca-Cola FEMSA. As John highlighted yesterday, the results show a resilient volume performance in Mexico, improvements in Brazil and Colombia and continued strength in Guatemala. They made further progress in development of digital and omnichannel initiatives in key markets and managed to deliver solid profitability in Mexico and Central America even in the context of the current pandemic. For more detail, you can listen to the webcast of the quarterly conference call. Looking ahead, uncertainty remains high, and it is hard to make predictions. However, as I mentioned before, it seems the crisis is terribly evolving. In the beginning, its main drivers were severe health concern and the lack of consumer mobility, and this remain a problem. However, we are increasingly seeing the signs of another set of more traditional economic headwinds come into play. This is not possible, but at least, we have more experience with economic downturns. As you might imagine, we continue to look for our entire business in an effort to optimize it to the changes taking place today and for those that seem to be on the way -- and for those that seem to be underway. And we will continue to work hard to evolve our company to meet the moment and to come out in better shape on the other side. And with that, we can open the call for questions. Operator?

[Operator Instructions]. And we'll go first to Ben Theurer of Barclays.

Hope you're all safe and sound. Eduardo, Juan and well, Eugenio, welcome on board. So my one question would be on the more recent performance in OXXO. And you've elaborated how it went through the quarter. But if you could shed a little light on the current performance over the most recent weeks into July, where we've seen more states going into the orange phase, some of the reopenings. And if you could also share with us on the temporary store closures. How many you currently still have closed? And how do you think the reopening is going to evolve considering some of the tourist restrictions as well as office restrictions that are still in place? That would be my question.

Thank you, Ben. Let me tell you, we are making progress. As I said, in the quarter, 50% had restrictions. Now I would say 35% have restrictions. The same-store sales have improved a little bit. Mobility is coming still, but there's still -- if we just pay attention, let's say, to the global mobility index, and the global mobility index in Mexico is down around 40%. And that really -- I mean that also really leaves by the people are on the go and moving. And this is really being the major cause. We think that people are beginning to understand and adapt to this new environment. Mobility is coming up little by little. And not only car mobility, but production mobility, too. And I think it all depends that how -- what is going to happen with school systems in the next quarter, what's going to happen with offices opening or keeping it closed. So I think we're optimistic in the way that we are understanding the pandemic better. I could say that the lack of contagious of this pandemic in the stores is very low -- very, very low. Basically, the program that we have had with the -- our personnel is more because the lockdowns -- they leave their house and the lack of care they have with connection with some family members. And most of the people that have had the pandemic goes to the house, not really from the traffic, to the work or the store. So we are optimistic. But the thing is that we are feeling now the pain that the economic downturn is becoming -- is staying here. And we'll -- we are adapting the offering, too, but we are cautiously optimistic.

Our next question will come from Bob Ford of Bank of America.

In one of your opening comments, you mentioned the 24 closures that are announced. I was curious. Is it really for a wider assessment of the store base? And how do you think about the footprint right now in terms of maybe reallocating those resources to other locations or maybe just trimming in anticipation of a more traditional headwinds in terms of the slowdown in the economy?

Well, as that -- a lot of the times that we have has the restrictions of alcoholic, curfews or lockdowns or the possibility of open stores in certain commercial areas. And that was the number that we had, around 50% have these kind of restrictions. As I said now, out of the 19,000 stores, there are around 7,000 that have had some kind of restrictions. For instance, in the state of Tamaulipas, the previous weekend, we were not allowed to sell. We have to close, not only alcohol, but to close completely the store. And again, I think the local authorities are trying their best to adapt and have countermeasures against this pandemic. Some are effective, and some are not, I would say. And -- but the thing is, we try to lobby and understand what the government is trying to do and help them to accomplish the objectives, not necessarily by of structuring the way we work with the stores. I think another problem is really, through the lockdown, the lack of social mobility and the social distancing. Night shifts are very, very weak. And we have had some -- besides the lockdown restrictions that we have with authorities or selling of alcohol in some stores. Also, we are really closing some of the night shifts because, again, there is no consumers around. So -- but again, we think that it will be temporary, and we are adapting the best we can.

[Operator Instructions]. We will now go to Miguel Tortolero of GBM.

Considering the timing of this crisis that came right after you bought or invested in a couple of companies, which of them would you say that have had the most challenging start now on the -- in essential direction?

We're very happy with our partners and with the companies we acquired. They are in the Jan-San business. And as you imagine, Jan has had a great demand for the products. Out of the two, WAXIE is more focused to Jan-San and North American have a more diverse platform. And in fact, North America had to sell to some hospitality customers. And I think probably that is the one that has suffered the most. But I think both companies have adapted tremendously to this environment. They've been able to protect their employees and -- but at the very same time, trying to serve the customers. So we're extraordinarily happy with them. We have great partners. And I think that we are going to build an extraordinary platform with the help of them, and we look forward with a very optimistic future.

I think I would add -- Miguel, this is Juan. Even on the Jetro Restaurant Depot, which is also one of the recent investments, which being as exposed as they are to the restaurant sector, one would think or at least one would have thought a few months ago that this would be a complicated period for them. And I'm not saying it hasn't been complicated, but certainly, they have been adjusting and navigating the situation, quite frankly, exceeding at least my personal expectations, which kind of confirms our view that this is a very well-positioned and very well-run company. So they have been doing, as I said, better-than-expected adjusting. And I think their customers as well, the little restaurants, adapting to curbside delivery. And things begin to open up in many of the markets that they serve. So overall, I would say, on the restaurant depot front, a positive surprise.

We will take a question from Marcella Recchia of Crédit Suisse.

Okay. Juan, Eduardo, I hope you are well. Just two quick questions here from my side. The first one is about G&A. I saw that basically, your G&A increased across the business divisions, so just to understand what's driving such increase. And secondly, very briefly, if you can give your impressions about the Mexican pension reform in terms of potential impacts for FEMSA.

Well, I will go to the second one, and I think I'll let Juan answer the first one. The pension reform, I think, it's -- this hole led there, and I think it's a good thing that we altogether tried to solve it because it will be very difficult for the current environment to solve. And what we wouldn't like to have to solve it in a desperate way and that could disrupt the economic environment in Mexico. I think what we have for the future is kind of painful, but I think it's what -- the right thing to do. And I think between the private companies and the government, I think it's a good trend that we are together here to fix the hole for the long run. And the other one, Juan, why don't you go and try to answer the very first question, please?

Yes. Marcella, so we are having some amortization of IT investments. I think on the OXXO front, they have continued to invest in their new versions of some of the software as well as developing the digital platforms across the board. We have had some closures of stores. And we've had some asset write-downs both at Coke FEMSA and at FEMSA, so I think that would be playing a part on that. Obviously, we can also follow up off-line in terms of making the numbers match. But I think, off the top of our heads, that those are concepts that come to mind.

And next, we will go to Gustavo Oliveira of UBS.

It's on OXXO gross margin. You mentioned that your numbers are actually very good. There was a very little contraction there. You mentioned that the beer shortage obviously affects your profitability, but that was offset by the service category. On the recovery, do you think that you could actually see an expansion in your gross margin as the -- I don't know if the service category remains strong and the beer clearly could recover. Could you please elaborate a bit on the trend for the gross margin for OXXO?

Let me give you a bit -- our suppliers and us are concerned with the lack of consumer economic strength, but what we're trying to do is to come up with different offerings to really estimate the demand. And here, we are -- we have our suppliers and our partners and trying to do something great for them, for the consumer in COVID times. But I don't know, Juan, why do you go and go for the details of the numbers, please?

Sure. I think, on the gross margin, I mean, historically or at least for a long time now, the two main drivers of gross margin expansion have been the financial services category and the commercial income that we receive from our supplier partners. Right now, as Eduardo has said, I think a positive surprise has been the resilience and even the faster growth of financial services during the downturn, as consumers have kind of made sure that they're keeping current with their memberships and their utilities and realizing or taking advantage of the fact that it's a lot easier to go to OXXO than to go to the bank and it's less time-consuming. And so even though financial services had been contracting or at least it has been growing less in recent quarters in the last 2, 3 quarters, this quarter, it actually -- the growth came in the high single digits, which was a positive surprise and, I think, contributes to the high gross margin. The other question on commercial income is a little bit trickier because some of those agreements, as Eduardo also referred to, are tied to volume. And so it's hard to predict. I mean we do need volumes to come up -- transactions to go up, for commercial income to go up in consequence. So I would say visibility for gross margin is not as clear as we would like. I wouldn't necessarily predict at this point that we will continue to expand it more than trend. But at least, during the second quarter, it did kind of hold its own.

I would also add that, probably, there were a small increase also in -- and the lack of beer also shift demand to some other alcoholic devices. And that -- those have compensated the margin a little bit, too.

And that actually brings up an interesting point, Eduardo, because, obviously, you're right. Consumers did shift to higher consumption of spirits during the quarter. And interestingly, I think what the OXXO or OXXO colleagues were observing in recent weeks was that, even as the beer came back that the volume for spirits was still holding up strong. So maybe in the effort to look for the silver lining or the glass half full, as consumers realize what the assortment and the pricing is for spirits at the OXXO stores, that this becomes a category that is stronger than historically because, historically, we haven't sold as much spirits as we are selling right now. So hopefully, this remains after the pandemic is gone.

And we'll move on to our next question, and that will be from Alan Alanis of Santander. It looks like we may have lost Alan. We'll go next to Ulises Argote.

So here, I wanted to get your thoughts a little bit on any potential product portfolio rationalization there in OXXO. And maybe if you can share any color on what you're seeing in terms of the shift in mix more recently now in July, maybe going back a little bit more to the more profitable categories that you guys have there.

Unless we think that this lack of mobility will stay for a very long period of time, which we -- we don't think it is the case, I think we have to adapt better, and we have to adapt more to the lack of consumer economic power. And by probably with a different assortment, probably looking for cheaper or less expensive products, our returnable -- soft drinks is not as strong as we should have it now. And those can shift, we can foresee it, for the future. But not necessarily in the types of consumer demand of thirst or breakfast or people gathering, depending on -- we think that, eventually, those type of consumer demand will stay. It is more the lack of economic power of the consumer that we're more concerned than the real shift of our consumer occasions.

That's perfect. And a bit more on the short-term kind of thinking now on June, July after the beer categories back end, et cetera. Do you have any color that you can share with us kind of there on the shift back, let's say, in mix?

Yes. Juan?

Yes. I think one thing to kind of highlight, and I think Eduardo touched on it in his opening remarks, was that the quarter itself was a little bit of a -- I don't know if a V shape. It's a little bit of a strong descriptor. But certainly, the trough of the trend was the month of May. And we believe that -- we hope and believe that will mark the lowest point of this downturn should be the month of May. And then as beer comes back, it helps everything, right? It helps operating leverage, and it helps margins and generally begins to turn this into a more traditional downturn, so to speak. And so as Eduardo said in the beginning, we are seeing improving metrics and improving traffic. And really, the one concern I have is not to convey the view that once the mobility restrictions are gone, that we go back to normal immediately, right? Because we are seeing these symptoms and signs of our more traditional economic-driven downturn. But again, when you go dry, and this has never happened before, on the beer side, obviously, you have both of our suppliers on the beer front working hard to restock the shelves. Consumers themselves are probably buying a little bit more beer than they normally do to make sure they don't go dry again. And so you're seeing positive trends on some of these important categories, especially beer. So I would expect that to continue, and we will obviously make the adjustments. Eduardo referenced some in terms of packaging and mix for some important categories. I think we need to be careful and work hard at understanding how quickly and what the new normal eventually ends up looking like in the sense that we will, I'm sure, adapt our value proposition to that, whether it means some incremental SKUs or a shift in the mix and that sort of thing. So we're still not at the end of this, but we know more about how the consumer is adjusting habits than we did a couple of months ago. And we are acting in consequence.

And we will now go back to Alan Alanis of Santander.

Let's see if this time work. I hope your families are safe. Eduardo or Juan, I guess -- I mean, we, on the sell side, most of us have a buy rating on the stock. I mean it's because of the luxury valuation of OXXO implied here. Now the result of this quarter, I guess, the question is, is this result putting to question the business model of OXXO in the long run? This is the first quarter ever that you closed stores. So I guess the specific question is what -- and sorry if I missed it. What's the expectation regarding store openings going forward? And second thing, and this is a question we get a lot and I'm sure Juan also gets a lot, and Eduardo, it is, why the reluctance to stay away from e-commerce and invest in job -- you've been saying every time you guys mentioned the copilot with Amazon or so forth, the stock reacts positively. Why not invest in a basement or in a second floor in as many offices as possible to use them for distribution for e-commerce and leverage that, especially given the changes of the pandemic will cost? And the third and last question has to do with capital deployment. I mean, I think that the pushback has been visibility in terms of capital deployment. Eduardo, you mentioned about patience and discipline. I think that it's very clear for investors that you guys are very patient. But what can you expand on in terms of giving comfort to investors that you will remain disciplined in terms of that capital deployment, given the very strong balance sheet and cash flow generation that you generate? Those will be my questions.

We are very optimistic of OXXO in the medium and long run. I think we have a extraordinary platform, and it's just that we have the right consumer adjustments and the lack of mobility that will help us to be on track again. In terms of your question about the e-commerce, we're very much -- we are doing things that we are not prepared yet to disclose. But I think we are in the financial -- in the asset sector, we see the evolution there, and we have to be prepared. And also the loyalty program is related and connected with the international platform. We -- the current -- if you want to see -- those are the ones, the linkages that we are making with the current platforms like Amazon and everything. We are very optimistic with those two. What we don't know yet is the home delivery, home delivery, still, we don't see how the impact, the ones that are doing home delivery in small purchases, not groceries, but small purchases, the ones we deliver. Nobody makes money. Nobody makes money. And they are still trying to catch up and find a better way. So if we were in the grocery business, without doubt that we will be delivering a lot of things for the -- for homes because economically doesn't make sense. And the other ones, we haven't seen yet, although we have some test to deliver in a very efficient way with some back stores and everything. But I think there are still some learnings and efficiencies to come into place to perform better. I don't know if you want to add to the question, Juan. Thank you.

Thank you, Eduardo. Yes, I do. I think Alan's first attempt that the question didn't work, but the second attempt, he made sure that he covered fair amount of big topics. So I will try to add to some of these. So on the store front, Alan, I think what we're seeing is we have, for a number of years, we've been opening more stores every year than the previous -- we got as high as 1,350, I think, at the top. And I think what we're doing right now is we're taking this opportunity to look at the -- there's a layer of stores that are probably marginal in terms of what they're contributing to the numbers. And we're figuring out which of those stores actually should not be open, kind of pruning the base of a small number of stores that should not be open. And just generally, I think the budget for stores this year before pandemic kind of reared its ugly head, we were thinking about 1,200 stores for Mexico. So that is a level that is a little bit lower than the top that we reached a couple of years ago. But we were already kind of moving into a phase where you are becoming more demanding about what you expect of your new stores in order to ensure profitability and productivity of the new stores. And at the same time, the budget for this year had us with about 150 stores outside of Mexico. So I think we are in the early stages of that process where international will begin to add more meaningful numbers to the number of stores. And obviously, once we get some scale in Colombia, Chile, eventually, hopefully, Brazil, that this becomes not just a Mexico story, but more of a continental story. So we are at that stage. And I think, this year, with pandemic, with the dynamics, we decided to start closing a few of those kind of marginal stores. I'm also optimistic on the storefront that for Central and Western Mexico, now that we have both portfolios of beers, that there will be a large number of locations in places like Guadalajara, León, Querétaro, even the value of Mexico, where the fact that you now have the ABI portfolio, kind of takes a lot of those locations that were just short of being viable, makes them viable and, again, kind of ensures that we can continue to open large numbers of stores in that part of the country. I think, on the e-commerce front, I mean, Eduardo touched on it in terms of also obviously realizing the potential and the power of the OXXO platform to bankarize people or to get people to adopt new technologies or new products. I mean I think we certainly have the Saldazo experience. That gives us a lot of comfort in terms of our ability to get people to sign up and adopt new means of payment or new means of saving. But one thing we don't want to do is to overpromise and underdeliver. So we are working hard at the 3-leg stool of our digital platform at OXXO, which involves last-mile delivery. And I think, more importantly, the loyalty program and the e-wallet. And hopefully, we'll have something to show the market towards the end of the year. And then finally, on capital deployment, I mean, you've seen us for over the years. FEMSA basically has a couple of ways that we grow. We either take what we do well to a new geography or we take what we do well and we expand it by a couple of degrees and examples of this abound. Whether you're talking about Jugos Del Valle or Santa Clara or the drugstore business where you took kind of OXXO and expanded what it does a few degrees and decide to go into drugstores. So I think what we're doing right now, and I think the market, to your point, in terms of how you frame the question, it's still kind of getting its hands around why it is that we made a couple of investments in the U.S. or how do the Jan-San business fit into the overall strategy. I think you're seeing us do kind of what we usually do, which is figuring out what we do well and then taking it to another country, obviously with the benefit of very strong partners as we have in the U.S. So we understand that we are adding a little bit of complexity to the org chart. We will try to address that to the extent that we can by increasing the disclosure and where we've spoken about how we're going to start opening up the numbers for the logistics business as well as for the Jan-San business first quarter of next year. So capital deployment, these investments and addressing the complexity that it brings to the equation are very much top of mind for the team. And hopefully, we are in the process of addressing it.

Got it. Got it. I mean you guys are extremely good, if not the best, in the region in terms of large-scale logistics of moving things. It's just like it's impossible for a lot of investors and analysts by -- I mean, that logistics expertise hasn't been moved to like all the way to small delivery, like Eduardo said, it's the largest point. I mean, I know I'm going to say something very humbly and things we already know. But Amazon, Tesla, Facebook, all of these companies started without making money initially. And they just -- and you gained the scale and this Colombia guys, Rappi, it's a question mark. They're going to be able to control the small drop size delivery and I just think that -- I think a lot of investor things that you have. You have a great opportunity. You have the balance sheet. You have the expertise. And I think that, yes, initially, nobody will make money and probably you get in, you probably won't make money either. But once you get the scale, eventually, I think consumers will take premiums for using Uber, for using PayGroup, for using Amazon and so forth. And with the long-term vision that FEMSA has, I think that a lot of investors are asking why what are you getting into that, with more strength in using your muscle than your expertise.

Thank you, Alan. I mean just that question -- the concept or the notion of the super apps and how in other geographies, obviously, things have evolved very quickly. But we do have the aspiration with the right platform and the right partnerships to hopefully become one of those or part of -- one of those ecosystems down the road. And leverage, quite frankly, the 20,000 bricks-and-mortar stores that we have, which are a differentiating factor vis-à-vis other folks.

And now we'll go to Rodrigo Echagaray of Scotiabank.

Just wanted to hear your thoughts on the state of the mom-and-pop stores in Mexico. I mean, on the one hand, it's hard to imagine many will not go on there of course. And on the other hand, high unemployment may push many sort of shop in the informal economy. So any thoughts on what you're seeing on the ground would be appreciated.

Well, I think the mom-and-pops were hardly hit, unfortunately, because of the lack of beer. And that was -- and also the lack of cigarettes because it was not only beer. In cigarettes, I think we were able to prepare ourselves with good inventories. And -- but again, the -- so those two were major -- they have major effects on that. On the other hand, I think the traditional mom-and-pops are closed where people live, so I think I would say there are mom-and-pops where mobility was a major role, yes, they've been hardly hit. But we don't have, I think the ones that are in the neighborhoods, I think they're coming up with a good performance. I would say also that we are better prepared in the returnable bottles that the ones -- the returnable soft drinks compared with OXXO. So that was a more advantage. But yes, again, I think they will recuperate because I think the Coca-Cola system, Bimbo and alike are very much willing to support and help them to compete. And so I do see that the pandemic, in those levels, I think, is helping them to sustain. But yes, but they were very hardly hit, the ones that have lack of beer, during this initial period of the downturn.

Great. And just related to the last question, I guess, you have taken some stakes in certain start-ups. And I have seen that one of those whole stores have been growing quite a bit. Any insights or things that you have learned on the delivery in these stakes that you can share?

Yes. We've been trying to support the -- with some pension money to support those suppliers that are very much in line with us. We'll help those to enhance our value proposition. And I don't know specifically the one you're talking about. Juan might have a better idea of -- but yes, we're working not only with technological suppliers, but also with normal suppliers, where we could help them to become larger. And in fact, we did that with a great supplier that we have with this Caffenio, which is the one that supported all the coffee operations. And I think, with that knowledge, we could be of great support to them. So this pandemic, we'll also -- all the small vendors, we are helping them to pay them very quickly, so they don't have this cash currency problem that this pandemic will cost to them. And so those that will serve the -- yes, our small-scale suppliers are very important. And the strategic ones, we want to invest with them so they can grow better and faster to become a major competitive advantage for us.

Yes. I think on the whole store, new store investment, I mean, certainly, we're trying to help these new ventures through our FEMSA ventures arm, but also learn about things that would help us in our own value proposition or the way that we operate. And certainly, distribution, the use of dark, dark warehouses or dark kitchens, large stores, the handling of perishables. These are all things that we would love to be better at and to know more about. And this investment, in particular, obviously, has turned out to be an interesting one. I mean the amounts involved are not huge relative to the size of FEMSA. But certainly, it's a start-up that is doing very well. And of course, I know that you stay close to these companies and the different rounds of financing and how quickly they're growing. And this is so far a very nice success story.

And we'll go to Álvaro García of BTG Pactual. Álvaro García: My questions -- I have two questions. Sorry. I have two questions. One on Heineken, I was wondering if you could comment on whether or not your position on the stake on owning this 15% has changed or not given the new tax agreement with the Mexican government. And two, on M&A, is it fair to say you're in integration mode would seem to be a nice time to sort of take a breather and integrate a lot of the different assets you bought over the last couple of years. Those are my two questions.

Well, the Heineken shares, yes, it's a temporary investment. We just have to try a way to deploy that capital in a better way. And it is as not as optimal as it was in the past, as you are referring. But we just have to find the right time and the right path to deploy that capital and have that use of those proceeds. The second question, I forgot, Juan. I forgot the second one.

Are we ready to take a breather after a lot of activity on the M&A front? And I think -- I mean, I think that the answer to that is yes. For the most part, you should expect us to start integrating, capturing synergies and kind of delivering on the promise of all of these investments. I would say there's probably one exception. The Jan-San platform, a big part of the attractiveness of that business involves growth through acquisitions and eventual integration. And it's hard to tell at this point whether there will be transactions kind of coming along in the coming months and quarters. But if they were, I think we would be interested in taking looks. But other than that, for the most part, and understanding that M&A is hard to predict, generally speaking, our stance is one of, as you say, kind of sitting a little bit more on our hands and digesting the number of bites that we took over the last 18 months.

Yes. And Álvaro, thinking about the fourth platform that we are looking, I think we already have it. So we don't think to open a new vector -- a different vector for growth. The ones we have is already well established, the Proximity, Health and now this Jan-San platform, I think we are already very much -- we will be very much focused into the platform that we already have.

And now we will take our next question from Sergio Matsumoto of Citi.

Yes. I have two questions. One is, I want to go back on the portfolio and the assortment question at OXXO. You spoke about how you can change some of the assortments given the economic slowdown. But could you explain more on the assortment changes you can make in the face of the reduced mobility and especially over the long term, if this changes the consumer habits, like if the mobility stays low for a long time? That's the first question. And the second question is in Brazil logistics, which are the biggest industries that those businesses served?

Sergio, I think we have better abilities and competencies to suit the assortment for an economic downturn. Lack of mobility is -- it will be different because really it was also designed to serve people that are on the go and are on the street. We have had, in the past, the daily and replenishment category. And that is the -- groceries, could not really buy the groceries and also really the one -- the one that you are left out in your pantry. And that's really the occasion that we have been sharing. I think, in this pandemic, we've been able to compel the consumer that we have a good assortment for that pantry -- well, to find the product that are you left out in your pantry. And I think, by testing or finding more, they are finding that we have good prices. But I think that category, it will -- if lack of mobility will be in place, we'll have to expand that category compared with the quench or some of the categories are more designed to serve people that are on the go. But I think that will take more time and effort than product to the economic downturn. Juan?

Yes. No. I think -- I mean, on that front, it will be interesting for all of us to see whether the consumer begins to privilege Proximity even more, right, in terms of these traditionally kind of supermarket-type categories and whether our assortment and our pricing is compelling enough, which probably we will expect that it will be for some of these consumers to decide to not just buy the cooking oil or the rice that they forgot or that they run out of during -- between trips to the supermarket, but that they will use OXXO as a more frequent source of this type of products, and then we will make the necessary adjustments as we go along. I think on -- and I mentioned earlier, the comment about spirits as another potential category where we, hopefully, will become more kind of top of mind for the consumer in terms of how good an assortment and how good our pricing is for that category. I think you also touched on the second part of your question on the categories for Brazil logistics. I think, generally, as we have been moving towards the LTL, the less-than-truckload business, and specialized work housing. Certainly, pharma is an industry that is very well suited for the type of logistics that we do, not just in the distribution part, but also on the warehousing side. In fact, if you look at AGV, the company that we acquired a few months ago, their biggest category actually has to do with health. Certainly, a big component of animal or veterinary health, but also human health. I think when you think about the equation or the relationship between the size of the products, the weight and kind of the volume and the cost and the type of conditions that they require for the transportation and their storage, it's an attractive industry. It's a profitable industry, and it's a very good fit with what we do. So I would say you should expect us to continue to try to grow in that front. Obviously, there are others. There are CPG products and categories and companies, electronics companies. But certainly, the health for both human and veterinary stand out as probably one of the biggest, if not the biggest.

And next question will come from Carlos Laboy of HSBC.

John and Constantino spoke of a concentrate price readjustment yesterday. As the controlling shareholder and with really important rights in your equity agreement with Coke, what role is FEMSA playing in this negotiation? And what can you tell us about the long-term clarity of profit split with the brand owner? Are they adequate for you at this point?

Carlos, this agreement was signed like 4 years ago. And yes, we want to have -- we would love to have a more stable and certain long-term relationship model. And that is something that is important for us and important not only for the FEMSA's controlling shareholder. It's very important for management because the way we compensate the management. They have to have some certainty because that is very important for the long run and also for the minority shareholders. The Coca-Cola company is -- understand this. And I think it really is -- we just have to be very creative and empathetic from both sides in the stand that we are at the same ship. That is very important because probably, in the past, we were not as empathetic to understand the income statement of The Coca-Cola Company, and probably they were not as sympathetic to understand our income statement. And I think, through these conversations that we had with them, we are very much aligned, and they have a whole understanding that we're exactly in the same boat. And the current economic circumstances and the current consumer behavior, we have to be very much aligned. So we are trying to build as much aligned as possible, alignment as possible and certainty so we can invest and develop and tackle the consumer the best we can. And as I said, we love -- and I think the main 2 objections are to be fully aligned, fully aligned and build certainty and trust in the relationship for the long run.

So the tenure of the last agreement was a 10-year agreement. This one, you just got a negotiation four years ago that just -- you just finished making your last payment on it. Do you know what the tenure of this agreement is going forward? Or are we just really negotiating a long-term agreement now?

No, we have this established. And -- but it's something that they have the time, and we cannot disclose this to you without them being fully aware. But don't worry. We're very happy with it. And in fact, we would love to have this kind of agreement everywhere else. We have given the certainty for the long run and alignment, certainty and trust.

I think Carlos, if I could, a few weeks ago in one of the group calls that you've helped us set up with investors, you asked me the question of, is it possible to have a long-term relationship with Coke where both partners realize a reasonable spread of ROIC versus WACC. And my answer was, yes, yes, yes, we can, right? I mean, yes, it is possible. And I think the point I would make right now is that this is definitely not at odds with what John and Constantino said yesterday. I mean the alignment that is always talking about the expectation that there is a formula where both partners can make the right level of returns is what we are looking at.

And now we'll take a question from Ricardo Alves of Morgan Stanley.

Most of my questions have been answered. But if I may just insist a little bit more on the Jan-San asset. I appreciate your comments earlier. Now perhaps a bit more of a strategic question. I mean how do you -- how are you going to be unlocking value on this acquisition in the long run? I mean Juan just mentioned the M&A potential. But as you merge the two companies, you come up with a venture synergies and so forth. What's the plan here in terms of how it fits to the overall FEMSA platform? Or perhaps it's just that the growth profile of these assets just improved a lot with the dynamic and then M&A would really be the key driver for future cash generation? So just a few thoughts there would be helpful. And then just a update on the JV in Brazil as well.

Yes. I think we have a very good platform for the medium and long run. I think this pandemic has caused some damages, but I think in the medium long term, we are opportunistic. We have the Health Division, and we have opportunities there for growth. We have the Proximity Division, and then we have -- we're very optimistic of the performance we're making in South America and the JV we made in Brazil. And also, with our partnerships that we have here in the United States, we're very optimistic. We have 2 great platforms. We have the Jetro Restaurant Depot. Without doubt, Jetro has been eating share part of the competitors. And at least a major competitive strength that they have, and we're very happy with that. And on the other hand, in the Jan-San business, we are -- I think we made the right decision with the companies in it, with the partners that we have and the platforms that have been established and opportunities for integration and, going forward, for a more national footprint. As I said, we don't plan to open up a new vector for growth. I think the ones are there, and we just have to be very keen. And probably those short-term pandemic disturbance, cope with it, align better, make efficiencies and probably make some decisions to adjust ourselves to this new environment, but we have great platforms for growth in the future. Juan?

Yes. I think I would -- just following up on what you just said at -- on the whole Jan-San platform, there's certainly -- this is an industry that is very highly fragmented, where you don't really have a huge incumbent as a platform that we are forming by combining WAXIE in North America already becomes one of the larger players with -- WAXIE has kind of a bias to the West Coast of the U.S., North America and out of Chicago has more of a Midwest all the way down to Florida coverage. But you really don't have layers with anything resembling a big national presence. And so the synergy component, the aspiration to integrate more of these assets at the right time and in the right way, it's a big part of, I think, the aspiration that we have for that business. Scale is a beautiful thing. We have been the beneficiaries of scale in many of our businesses. And this is another one where we think that could work its magic if done in the right way. I think you also mentioned at the end of your question something about an update on the JV in Brazil. Obviously, the pandemic throws a little bit of sand into the gears in terms of the pace of openings down there. But quite frankly, we are almost on track in terms of openings for both the first new stores on the Select side, on the gas stations of Raízen but also on the stand-alone OXXO side. So we do aspire to start opening stores, OXXO stores towards the end of the year. In Brazil, we're already making progress in terms of setting up our first distribution center down there as well. So things are going very much according to plan. And like I said, I think the pandemic has not forced the team down in Brazil to depart very much from the original plan. Obviously, this is -- as we've said before, this is not going to be a piece of cake, figuring out the right value proposition for the Brazilian OXXO is going to take a little bit of time. But the size of the opportunity and, certainly, the partnership that we have make us very, very optimistic that this will eventually be an important part of the portfolio.

And I think the partnership that we have with Cosan -- and I think we found that the Proximity Division really -- entire commercial found the right way to go into Brazil. They are very happy. They are learning a lot. In fact, they are learning through -- and they are going to adopt some of the Select operations to this new scheme. And I think there is a lot of -- we see a lot of growth and potential to adjust the value proposition of the Select stores and the OXXO stores in the field. And I think that will be very -- but it will take time. It will take time, but I think we're very optimistic.

Now we go back to a follow-up from Gustavo Oliveira of UBS.

If I may, yesterday, at Walmex conference call, they may show some risks with respect to the introduction of the new labeling regulation rules that will start already in October. Can you please help us to understand what could be the impact of those new labeling rules in your OXXO business, perhaps during the transition time now as it's implemented in October? And perhaps in your ability -- on your suppliers' ability to push for sales growth?

We think that the -- sometimes, too much information for the consumer -- and it seems like what I've been learning, I think it's very important to inform the consumers or the consumer can do the better decision for their -- I don't know, for the health and nutrition and everything. Sometimes, if the labeling goes a bit too far, the consumer might be blocking some of -- so much information that he doesn't want to -- he's just overloaded by this labeling. We don't know really where we will stand. And I think -- but currently, we have been working very closely with our suppliers. And I think we'll be very -- in a very good position to adapt to this new environment. We don't see major retailers happening. I don't know if you want to add to this one.

I mean just to point that, I think, on beverages, certainly on the Coke FEMSA side, generally, the consumer has been well informed for many years now about the calorie count and that sort of thing. And the industry has been evolving for a while, increasing the percentage of the portfolio that has reduced or no calories at all. And so I think the challenges from the relabeling involve more the costs and kind of the operating conundrums of changing labels or adjusting your packaging, that sort of thing, but not so much in terms of the incremental information that the consumer will receive. There are other categories where maybe the consumer has not been as exposed to nutritional information. And I think, for those, there will be a period of adaptation. But to Eduardo's point, I think also is it's very well positioned, and the flexibility and the level of dialogue and cooperation with suppliers leads, I think, to what should be a relatively smooth transition when this eventually becomes a fact.

During this transition, Juan and Eduardo, do you foresee the risk of a more aggressive markdown just to get rid of the inventory that is with the old labeling and -- or suppliers are going to assume the cost of that operation? I think that could impact your 4Q results or perhaps part of your 3Q results.

No, but I think we -- I'm not -- the turnover of inventory in OXXO goes very fast. And there will be some opportunities very well to make more money. Yes, I think we'll be probably an alternative. I don't know if, Juan...

No, I agree with you that our inventory levels tend to be small and the turnover is fast. And I'm sure we will work with suppliers and come up with promotional activity as required. And I don't think it's something that is causing us to lose a lot of sleep at this point.

And ladies and gentlemen, that is all the time we have for questions today. I will now turn the conference back to Mr. Padilla for closing additional remarks.

Well, thank you, everyone. Thank you very much for your participation today. Stay safe, and be well.

Thanks, 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.