Fomento Económico Mexicano, S.A.B. de C.V. (FMX) Q4 2020 Earnings Report, Transcript and Summary

Good day and welcome, everyone to FEMSA's Fourth Quarter and Full Year 2020 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, and welcome to FEMSA's fourth quarter 2020 results conference call. Today, we are joined by Francisco Camacho, FEMSA's Chief Corporate Officer; Eugenio Garza, our Finance and Corporate Development Director; and Jorge Collazo, who heads Coke FEMSA's Investor Relations effort. The plan for today is to have Francisco comment on some higher level trends and more strategic considerations and to have Eugenio walk us through the numbers for the quarter, and we will follow the remarks with Q&A as we always do. So with that, let me turn it over to Paco Camacho.

Thank you, Juan. Good morning, everyone. Thank you for joining us today. We hope you and your families are in good health. In today's call, I will start by reflecting on the year 2020, including some specific comments about the fourth quarter. I will then share a few thoughts on how we will continue to navigate throughout the short-term volatility. Eugenio will then get into the details of the performance, and I will come back to share a few thoughts on why we remain confident about the future. I guess I do not have to tell you that the year 2020 was a difficult one because of the global pandemic. The volatility and the overall changes felt prior year certainly tested everybody's ability. With no doubt, our Company proved its resilience, flexibility and agility across the board in these trying times. As an organization, we have to prioritize, collaborate, become more agile and put the decision making to the operations and the teams from the ground like never before, all while trying to stay and keep everybody safe. Moving on to discuss our performance. During 2020, each of our businesses quickly adapted their operations, applied learnings from the different stages of the pandemic and was fast to recognize shift in local needs. In OXXO, the challenge was to make sure that our over 20,000 stores remain staffed and operational while facing supply imbalances, regulatory restrictions and drastic reductions in mobility across the market. In Coca-Cola FEMSA, the teams more quickly saw that their millions of clients across our geographies were always served with the right beverage portfolio, this, even as consumers shifted preferences looking for more affordable options, different shopping venues and moments of consumption. In our distribution business, the teams ensured that our 1,000 suppliers across Americas were serviced properly and the products shipped and received in a timely manner, regardless of the situation, be it a pharma company in Sao Paulo, a global CPG player in Mexico City or a large hospital in Chicago or Santiago, this was successfully done every day throughout the year, despite every changing conditions and requirements from our clients.

Thank you, Paco, and good morning to everyone on the line. Starting with FEMSA's consolidated quarterly numbers, total revenues during the fourth quarter decreased 1.5% while income from operations decreased by 3.5%. On an organic basis, total revenues decreased 5.3% and income from operations decreased by 3.8%. For this quarter, the difference between reported and organic figures reflects the results of AGV in Brazil as well as those of WAXIE and North American Corporation in the U.S.

Thank you, Eugenio. Thinking about 2021, it is clear that near term there will still be volatility and uncertainty related to the virus in most of our markets. However, directionally, our expectation is that mobility and thus consumption will improve as the months go by, particularly as vaccination efforts gain traction and more normality is brought back over the second half of this year. We know that the vaccination phase will be different by countries and we are prepared to adjust and adapt to this different COVID wave. Relative to 2020, the comparison base for most business units will get easier in the summer and then level off toward the end. Our expectation is that OXXO and OXXO GAS will continue to improve through 2021, gradually closing the gap and reaching performance levels in the fourth quarter that begin to match the pre-pandemic ones. For its part, the Health Division set a new benchmark in 2020 and we will seek to build on that. The pandemic has accelerated the digital momentum. We are poised to capitalize in this opportunity as we embrace and accelerate our digital initiatives across the board. For example, in OXXO, efforts are led by the launch of our digital wallet Spin by OXXO. We are doing an initial deployment in San Luis Potosi as we speak, with the objective of the national rollout in the coming months. We will keep you posted on our progress. In terms of dividends to be paid during 2021, the Board of Directors will determine a proposal to shareholders when it meets in a couple of days. So we do not have the number yet, but we will share with you as soon as we can. And for capital expenditures expectations, we are modeling our consolidated total CapEx of around 5% of revenues for 2021, of which approximately two-thirds will be deployed in Mexico. This of course would be subject to how the year progresses. We are confident about the future of our Company and energized by the prospects we have in our clear and defined business verticals. I would like to thank you for your continued support and trust in FEMSA. And with that, we can open the call for questions. Operator?

Your first question will come from Benjamin Theurer with Barclays.

Hey. Good morning, everyone, and thank you very much for taking my question. Just wanted to follow up a little bit on the dynamics in the Proximity Division. And I mean, clearly, same-store sales was very - I would say, was almost a positive surprise with just about a 4% decline. But could you elaborate a little bit about the trends you've seen throughout the quarter of - last quarter of 2020? And what you've been seeing in the first two months, January, February? And particularly in light of what basically last year in March started to kind of be impacted because of COVID, so just to give us a little bit of a better sense of how restrictions have impacted during the quarter, at the beginning of the year, and what are your expectations going forward?

Yes. If you remember last year, the second quarter was clearly the worst part where we experienced significant drops in traffic, and over the summer months, it got better and we reached a little bit of a plateau in terms of negative comps during the year. For the fourth quarter, we did see significant pickups in - mostly in traffic as the holiday season approached, especially in November and December, and that's what caused the good surprise that's obviously that we saw in our numbers in the fourth quarter for OXXO. Having said that, as you know, the contagion numbers during the holiday season for the COVID pandemic increased significantly and that caused the authorities to impose restrictions with regards to alcohol sales, operating store numbers, etc., and those hit the first few weeks of January. Having said that, most of those restrictions with the case counts now under control and the better progression of the pandemic are - have been lifted for the most part. So at this point, we are back to where we were. And then in March, we would expect to see the beginning of the easier comps because of the COVID restrictions. So that would be with regards to the dynamic of the same-store sale and the comps. With regards to the opening pace, we do expect a little bit of a front-loading this year. We will obviously wait and see how the comp stores are doing at the beginning of the year. But as opposed to years in the past because of the pipeline of real estate that we have and the locations that we now have fine-tuned toward the new COVID reality, we would expect a more front-loading of the opening - of opening this in the first half of this year as compared to the years prior.

And Ben, this is Paco. The one thing that I would like to your question is that we also need to remember that there is a difference by city in how each of the cities are reacting and implementing specific things on mobility restrictions and every city is deciding differently. So it's important to remember that OXXO is very actively be averaging the situation to adapt to the very specific way and things that are happening in each of the cities. And I believe that it is very important to keep doing that as we start the New Year, and then it's exactly what the team is doing.

I think I would add. Hey Ben, this is Juan. Just following up on what Paco and Eugenio just said. To keep in mind that if you look at some of the restrictions that were put in place final weeks of the year and through our January where you had, for example, the state of Nuevo Leon where we have more than 1,000 stores, Mexico City where we also have probably more than 1,000 stores, where you could not open at all on Sundays, where you had a number of states in the country under red code in terms of the traffic light rankings. And in the opposite direction, just a few days ago, as I'm sure you're aware, there was a big improvement in the color codes across the country, there are no more reds, almost 20 states are in yellow, a couple of greens in the Southeast. So what was explained by here and as Paco was saying, look very closely at what's happening in each locality because these restrictions are local for the most part, but it is looking a little bit better and that's part of our cautious optimism.

We'll take our next question from Miguel Tortolero with GBM

Good morning. Thanks for the safer questions. My one question would be regarding Brazil. Could you share your first impressions of the market after opening your first OXXO there? It seems like that's like a market that could open room for relevant growth and capital deployment as it continues to be highly dominated by their mom-and-pop stores network. So, in this regard, what's the potential you see for this market and how aggressive should we expect you to be in terms of capital allocated to this region for the developing of the OXXO format? Thank you.

Sure. Thanks for the question, Miguel. I mean, as you know, we started to roll out the Proximity concept in the outskirts of Sao Paulo late last year with a few stores now open. So far, the results have been according to what we expected. It's a different value proposition that we got the Brazilian consumer is strong. We're still tinkering with the model to make sure that it adapts to local tax and customs. We are very, very optimistic that as we start to learn more and the Brazilian consumer starts to become accustomed to this, that we will be able to grow this in the broader Sao Paulo and other regions in Brazil as we go forward. So we do have a capital allocation plan for the venture. But you should recall, we also own and operate a franchise network of over 1,000 stores that are already generating cash. So a big portion of that will be hopefully self-funded with the operation that we already control in conjunction with Cosan and Shell. So, well, we do see a very, very attractive growth platform going forward in Brazil, and so far we're going according to plan.

And I would add, Miguel, that as Eugenio was saying, on the gas station front, we have been able to open more quickly, right, because the value proposition of the gas station stores which are operated under the Shell select banner, we're not really changing their value proposition nearly as much. And so, the opening of those stores is moving more quickly, some of those will be under the franchise mechanism and some of them will be Company owned and operated. And then on the OXXO front is where we need to do a lot more kind of fine-tuning of the value prop. And we've opened a very handful of stores in Campinas and we've opened a distribution center, which is also I think a big part of the equation that critical mass that we have going in because of the two types of stores is allowing us to have a distribution center pretty much right off the bat, which is a big advantage relative to what we've been able to do in other countries where we've started 100% from scratch. So that's also part of the reason why we're pretty optimistic.

We'll take our next question from Alan Alanis with Santander.

Thank you, and thanks for taking my question, Paco, Eugenio, Juan, and Jorge. So first is a housekeeping question. I mean this is the first call that a lot of the - our regional CEO is not in the call, it's OK. And the now first question and I guess just checking, he will no longer be in these calls, correct?

If you look, we are just - too many cook- too many people in the kitchen, so I don't say.

Okay, Okay. It looks like good things. Okay, that makes sense. Okay. Let me - happy with you - everything is good. Okay. My question has to do with the others business. I know you're going to bring additional disclosure the next quarter, but I'm already tracking this and I saw something that called my attention, and that might be relevant for all investors. In the others business, you are reporting a 61% increase in sales, probably mainly due to the acquisitions that you've done. But when you see the others line EBITDA, it seems that you had a contraction of around 51% over MXN540 million, that's almost as much of the increase of MXN600 million in Coca-Cola FEMSA. So it's a pretty material decline in EBITDA of the others business. So my question for you is, could you confirm that these numbers are right and what explains this discrepancy of such an important growth in Others sales but also such a relevant decline in the year-over-year EBITDA in the Others business? Thank you so much.

Sure. Thank you for that. And yes, you'll get more clarity as we start to disclose the figures of the logistics and distribution business going forward. But on the revenue side, you're right. It is the incorporation of WAXIE and North America into our financial statements. And I guess what you're referring to is a sharp drop in the EBIT, not necessarily the EBITDA. And the reason for that is because of the way we structured the acquisition of WAXIE and North America, we were able to get a significant step-up in the asset base, which is obviously advantageous from a tax perspective, but it will be putting basically part of the purchase price for those assets will be flowing through an amortization charge to the tune of around $26 million a year, heating obviously the operating income line, but not the EBITDA line. So that is why you see the discrepancy there. We took that charge for the entire year at the fourth quarter as we were wrapping up the purchase price allocation. But you should see that flowing - see that flowing into the quarterly statements going forward once we have the full disclosure. But it is basically the purchase price being allocated partially where a big portion of the purchase price being allocated to an intangible customer asset on the balance sheet of the others division.

Got it. So basically if I'm understanding correctly, Eugenio, it's basically a one-time off adjustment that you did on the purchasing of some of the assets that you acquired throughout the year. You took the charge in the fourth quarter because that makes sense for the business, but it's not an operating decline of that amount in the others business, right?

I mean, partially yes. I mean, it was a one-time in the fourth quarter for 2020. Having said that, for 2021, we will continue to be amortizing this intangible customer list going forward, and it will - again, the way to see it is, it's a portion of the purchase price that is flowing through the income statement, but it's not affecting either how the business is doing, how the profitability of the business is going according to our plan. But it should be about a $2 million per month charge of intangible amortization going forward for the next few years in the North America and WAXIE business.

Which is obviously non-cash, and, Alan, what this means for us is that going forward, probably, we're going to be focusing - I mean, because we're going to start opening this business up in the P&L in a couple of months, is that we're going to be looking at the EBITDA line probably more than we usually do to account for that.

We'll take our next question from Bob Ford with Merrill Lynch.

Thank you, and good morning, everybody. Eugenio, you mentioned digitalization in your comments. And I was quickly - I was curious, how quickly payments are going from physical to digital in the Mexico - in Mexico during the pandemic, if at all? And how you're thinking about that larger opportunity beyond just payments as you explored fintech so far?

Sure. Thank you, Bob. I mean as you did see during 2020, our services business grew significantly. Having said that, they continue to be the old-fashioned way, just I mean using the OXXO stores and using the store as a platform to do money transfers, payments, remittances, etc., in an analog way. Having said that, as we did mention in the comments, we are, as of today, launching the Spin product by OXXO selectively in the San Luis Potosi area, and then hopefully be rolling out that product throughout the rest of the year in other places. The Spin product is basically just a starting point. What it allows you to do basically is, I mean, to do the same thing that you would have done in the stores. I mean, paper services, peer-to-peer, paying for airtime, etc., but do it on your phone, be able to charge your Spin card through the OXXO stores and withdraw money from the OXXO stores as well. And then hopefully as that takes off, we should be able, as we attract more customers into the platform, be able to add other bells and whistles to the product. So we are hoping that this will be a good value prop for customers to start to take the analog way of doing things and moving more digitally, and hopefully be adding other functionalities both to that product as well as to our loyalty program, which we're also launching selectively this month - actually last month in a couple of cities and rolling out to be able not only to have now ticket level data for all our stores, but actually customer level data for our stores. So that coupled with the FinTech product should give us a clearer picture of who our customers are, what they're doing, what they're consuming, what their trends are, so that we can be more tailored with regards to promotions and offering of products to them. And again this is just the tip of the iceberg and hopefully we get enough adoption, we'll be able to grow this into other revenue streams going forward.

Sure.

And, if I may, Bob...

Of course.

Yes. This is Paco. I would like to add to that, that what is important is that, as you said, Mexico is obviously also part of this digital acceleration, but the good news is that we have a number of options, as Eugenio highlighted, that will allow us to not only stay ahead but importantly adapt to what specifically consumers need and require in Mexico and other geographies as they are different to what you see in other markets.

No, it's very interesting. And with respect to the back end, do you have a white-label bank that you're using or are you - do you plan on obtaining banking licenses? And I was just curious as you look forward to choosing the functionalities, are we going to be looking for just a basic L4 account or is it something more robust than that?

Yes. At this point, we have basically obtained a FinTech license that allows us to operate on the Octavo Transitorio of the FinTech law and that allows us basically to open up an N2 account, similar to the Saldazo accounts that we have currently. And that's what we're operating under. To the extent that we need to add other functionalities that would need a different license, we will look at that. But for now, we are looking basically to do the same thing we were doing with Saldazo, except doing it digitally instead of analog. The product by the way also includes a physical Visa card so that people can use the balance in their account also through the debit card. So we believe that both the cash-in, cash-out functionality at OXXO plus the Visa card will allow for maximum flexibility from a consumer perspective.

We'll take our next question from Alvaro Garcia with BTG.

Hi, gentlemen. Thank you for the call. Two quick ones. I'll be quick. One on Spin and it's just a follow-up to Bob's question. My question is specifically how it interacts with Saldazo? It seems to be somewhat of a competing product in the sense that you're capturing debit customers much in the same way as Saldazo does. Is Saldazo going to integrate into Spin or will they be managed in separate entities? And then just my second question on labor cost at OXXO, you continue to refer to a tight labor market in the release in Mexico. I think maybe the pandemic might have changed that a bit. But I guess, what's your outlook on the labor front for OXXO into 2021? Thank you.

Sure. With regards to Spin and Saldazo, we are maintaining two separate structures and really allowing the customer to decide what option is best for them, and we'll make decisions as need be with regards to how those two products move forward. But at this point, we are allowing the customer to basically go their own way. And with regards to the labor market, there were two separate issues. One was obviously the health concerns and the fact last year with the pandemic and the fact that several thousand of our employees were not able to work for a significant portion of time because they were in the vulnerable population. So we have to pick up a bunch of extra costs in terms of hiring people and then the concern that a lot of the new people had just in terms of being exposed to the virus and working at the store. So the labor market, specifically for the kind of labor that we need for OXXO stores, was tight for the better part of the year. Having said that, at this point, because of the restrictions, more and more of the people that were in vulnerable populations are now coming back, people feel more comfortable with regards to the safety of the store. With regards to contagions, as you know, most of the contagions are actually not happening at the store level, they're happening more at people's homes as they get together for social gatherings and whatnot. So, more and more that pressure is easing and we see less of that effect going forward this year than we saw last year.

And I guess the other thing that we need to keep in mind is that for 2020 precisely because of what Eugenio said regarding the initial part of the pandemic, we had a one-time situation like special bonus that we pay, that moving forward, we are not having.

We'll take our next question from Marcella Recchia with Credit Suisse.

Hi, gentlemen. Thank you for taking my questions. I have two quick questions here. The first one, taking the opportunity that Jorge is along with you, following the redesigned agreement between the Brazilian Coke bottlers and Heineken, does this friendlier agreement change anything about your willingness to - of keeping or divesting from the remaining stake in Heineken? That would be my first question. And secondly, about OXXO. How can we think about the margin recovery trajectory from 2021 awards? Basically I understand the lower operating leverage has been one of the main drags, but we also understand that you continue investing in digital and shifting your commission-based store teams to employee-based ones. So just to hear from you, any color you can give us about the margin outlook going forward. Thank you very much.

Sure. Thank you, Marcella. First, with regards to your question on Brazil, we're definitely thrilled from a number of perspectives about what happened in Brazil, but you have to remember that there are two separate things. One is just the commercial agreement reached between Coke and Heineken with regards to how to move forward in terms of the beer distribution agreement. And on that one, we're thrilled as shareholders of both companies, both Coke and Heineken, that they were able to strike an agreement that I think maximizes value for both of them in the medium term. In the case of Coke, it allows them to have a base volume of beer to not reduce drops very significantly and allows them also flexibility to carry other brands going forward. And for Heineken, at least, in Brazil, which is an important market for them, it gives them, I think, more clarity on the competitive situation going forward and then it also allows them to focus on their two stellar brands, which are Heineken and Amstel. So we couldn't be more thrilled and happy that both of them were able to reach an agreement. And then with regards to our stake in Heineken, again that is a separate decision. And at this point, as we said in the last conference call, we continue to like the way that they've been handling and they've been performing through the pandemic. Clearly, the on-trade exposure that they have has been a significant drag on earnings in the past few months. Having said that, they are doing things very, very well with regards to cost containment, investing in digital, so we are optimistic about the future and continue to be happy shareholders as we believe the stake provides, I think, a significant value anchor in our portfolio at this point. But again, the two questions are separate. That's the way we see it, and on both fronts, I think we're very pleased with what has happened in the past few weeks. The second question - yes. The second question, sorry, was with regards to - with the trends for OXXO in 2021, I mean clearly the most important effect is the operating deleveraging. I mean we have same-store sales down, I mean high-single digits. And that clearly has an impact with regards to operating costs, which was partially contained frankly and I don't think we mentioned this enough, but the cost containment measures improvements in the supply chain to be able to continue to deliver products at prices that are competitive. But in any case, that continues to be the main thing. As we go forward, we are investing, as you said, a lot in digital, mostly on the backbone of the POS and some in distribution centers. But on digital, we have been investing some money to be able to make sure that the backbone of the stores continues to allow for continued growth, not only analog but also in a digital format. But having said that, there is still a lot of, I think, headwinds in our way with regards to the mix sale of beer not being rolled out in all of the categories. We do believe that with this new Spin product that there will be, I mean, an increase in the customers' attractiveness to this product to be able to push the category as well as other modes of consumption, fast food and hambre, sorry, hunger and thirst of the needs that have not been met during the pandemic, which will come back once the pandemic - once we are on the other side of the pandemic with hopefully better terms for us. So, we do see again these headwinds in costs being compensated through other growth avenues in the store going forward.

I would add. Hey, Marcelloa, this is Juan. I would add on top of what Eugenio just described. Some of the structural initiatives that we've been working on for years remained, right? And so we are at the point where we can again look at those initiatives and continue to invest behind them. And what I'm talking about, I think you touched on it as you were framing the question. This gradual shift from commission-based to employee-based, which among other benefits, has the advantage of addressing turnover and improving long-term turnover numbers and we continue to work on that. And the other I will highlight is international, which are things that in the past we've discussed that put a little bit of pressure on the margins pre-pandemic, and this is also something that will continue to go on. So for example, if we talk about 800 stores at OXXO in Mexico for this year, international actually has another 10% on top of that that is planned for - especially for Chile and Colombia. And until we get to the critical mass that we need in those countries, they are slightly dilutive to the overall margin. So I think it's for the right reasons obviously because we continue to see a lot of attractiveness in growing OXXO outside of Mexico, but we are returning to the growth path as Paco said in the beginning and part of that includes continuing to grow international in addition to the transaction that he mentioned that we're doing in Chile and in terms of the process of being approved.

That's pretty helpful. Just a quick follow-up if I may. Can you give us just an update on the current status of your workforce between commission-based and employee-based?

I think something like 55-45 employee versus commission. So we're slightly now more employee than commission.

Okay. Then the target is 100%?

No, this is dependent on the geography. There are some markets, a lot of them in the North, where the commission format actually works incredibly well. And there are some places, some of them happening to be in Central and the South, where we have found the employee format is a better fit. So there is not one size fits all, there is no goal to have 100% of either one, it will very much continue to be market by market.

Thank you. We'll take our next question from Rodrigo Alcantara with UBS.

Hey, good afternoon, and thanks for taking my question. Have two quick ones, if I may. First one, if you can have any special consideration regarding the upcoming energy reform, labor reform, any potential impact that we should be aware? That would be my first question?

Sure. I'll start with the labor reform. Clearly, we're keeping an eye on that. As I said that it's been deprioritized from what we hear in Congress, so we're waiting to see what happens with that and we are obviously - we will obviously respond the way - we do believe that we have enough margin to be able to comply with whatever regulation or the different things that are being discussed there. So I think it's less of a concern. With regards to energy reform, clearly, as you know, we've been investing heavily, especially with regards to our wind energy. We had an ambitious goal of 85% of our energy needs in Mexico coming from renewable sources, and we basically almost got there. So we will continue to see what happens with that. And if we need to make a change, we'll make a change, but we will continue to be heavily committed toward having a significant portion of our energy needs going forward be in renewable energy. We've also been testing in other areas, testing electric vehicles for our small vehicle fleets. So I'm sure there will be - continue to be challenges on both the legal and regulatory fronts, but we will obviously continue to comply with those frameworks, but again continue to keep pushing forward toward achieving these targets of getting most of our energy from renewable sources.

Thank you. So let's say considering the draft, just as it is now from the energy reform, do you see any friction at this point from the way you operate and from what the draft is mentioned? Is there any friction that we should be aware of?

It will all depend on how the private generation and consumption of energy portion of the bill comes out of, and if that will not continue to be allowed or will continue to be allowed, but at some cost we'll have to evaluate then and there how to adapt to that new regulatory environment. But as I said, we continue to be committed to supplying significant amount of our energy with renewable resources.

Okay. And the second one would be, very quickly, just to follow up on Alan's questions on the other business division set. So very quickly what appears to me that which on the D&A - well, the adjustments on the amortization also appears that a large increase in administrative expenses also happened during the quarter. So I'm not sure if this has to do also with the integration of North American and WAXIE or not sure what drove this increase on administrative expenses. And also taking a look to the same line at Proximity Division when it has been aligned that has been growing a lot of over the last few quarters, low-double digit I would say in the last four or five. So I was wondering if you can comment a bit about what are happening here and the main drivers of this line. Thanks.

Sure. The admin expenses on other businesses, part has to do with just the addition of WAXIE and North America, but there were also a couple of one-time charges taken at Solistica with regards to restructuring as we adapted to the pandemic, so basically headcount restructuring from the pandemic. And with regards to the Proximity Division, yes, the admin expenses there has to do - some of it has gone to CapEx and some of them has gone to OpEx and has to do basically with the continuing building of the pipeline for the growth in digital, and then we provide - the provision of certain bonuses that were pandemic-related bonuses to employees during the course of 2020.

We'll take our next question from Leandro Fontanesi with Bradesco.

Hi, thank you very much for taking my question. The first question I have is with regards to the definitive closures at OXXO stores. It was almost twice as much as the number of stores we closed in the third quarter. So just trying to understand why you increased that much the number of definitive closures, if you think the performance is improving? That's the first question. And the second question is with regards to financial services, and you mentioned a lot of measures you are doing that there are interesting measures. But I understand you had some challenges with cash handling and just trying to get an update if you have something on that front, if you have come out with new solutions with regards to the cash handling? Thank you.

Sure. First, with regards to definitive closures, I mean, as we said, during the year, we took advantage to basically prune the portfolio of stores, so some of them were very obvious like the ones in shopping centers where we saw traffic was not coming back because certain of the stores were closing etc. And so we did give them some time. So we finished that pruning exercise for the most part in the fourth quarter. As I mentioned in my comments, there were 30 stores that were closed very late in January that would still show up in our January numbers this year, but for the time being, we are done with that pruning exercises. But again, the reason it was back-ended rather through the quarters was because we gave some time to marginally performing stores to see how they behave as mobility was coming back, and then we might - we made the decision at the end of the year. But for the most part, you should not see that number of store closures. In a lot of these - in a lot of these situations, we also had negotiations with landlords. I mean, we opened up negotiations with landlords saying, look, the stores traffic is never going to come back to the same thing and some landlords were flexible and we decided to keep them open, some landlords were not flexible and we decided to close them. So we made those decisions as time goes - as time went by, and at this point, we wouldn't expect anything major for this year. And with regards to your second question on financial service and cash handling, there was, as you know, over the course of 2018 and 2019, significant increases in the cost of handling cash. For the most parts, those increases have now been absorbed by the stores and we saw the brunt of that impact in terms of loss in profitability already, probably, in the late 2019 and early 2020. And at this point, we are running other programs and pilot programs to see how we could use alternative sources of cash handling and exploring ways in which we could contain those costs into the future. But at this point, we're not seeing any additional pressures from what we saw back in 2019.

And just, Leandro, to add on the comment on the OXXO stores, as we said before, pruning is an exercise that is - it's a good exercise to do as we try to become more efficient, and it is also an exercise of the averaging effect as I said before. And it is a fact that some types of the stores have been affected more than others, some regions have been affected more than others. And I think that what we need to keep in mind is that we need to remain flexible to the - truly, looking at the stores that are not performing and then take decisions when need be. But at the end of the day, it is a matter of making sure that we follow closely what is happening and stay close to the market.

I would just add, Leandro. Hi, this is Juan. On the cash handling, another thing to focus on, the best way to address cash handling is to disburse it to customers, right, as opposed to putting it in a truck and sending it to the bank. And so we've been working to increase the maximum amount that people can withdraw from their accounts. This involves, obviously, just the regular banking, but also remittances. We are looking for ways to increase those numbers without or being very mindful of the security aspect of having more available cash. It's a bit of a fine-tuning exercise, but that's something that we're working on which is take care of as much cash as possible by giving it to customers because also when you probably make a fee both ways, when you receive it and when you disburse it. So that's something else that you're going to continue to hear us talk about.

Thank you. Just a follow-up on the first one. It's clear. It's just the - were those stores already underperforming before COVID or COVID changed the profitability of those stores and then it became - you took the decision to shut them down?

Sure. The way we started was we had a list of marginally performing stores even before the lockdown and those were the ones that we started to take a closer look at, see if there was anything we can do with regards to the fixed expenses, the rent charges with the landlord. And where we were able to make changes, we gave them another chance, we will not close them. And then even if we gave them another chance and traffic just have not pick up because of the location, those were, I mean, the blunt of what we did in the fourth quarter.

Thank you. We'll take our next question from Rodrigo Echagaray with Scotiabank.

Thank you. Just a quick question on OXXO. This, I guess, you have answered directly or indirectly throughout the call. So I'm just curious if you think that the strategy and the sales mix at OXXO could change post-pandemic, whether in terms of the SKUs that you carry, the price points, locations where you're opening stores, cities where you focus? Are there any - is there any impact from the pandemic on the OXXO commercial strategy? Thank you.

Hi, Rodrigo. This is Paco. I mean, clearly, as we said, this has been a very dynamic exercise of the teams in OXXO have done tremendously well, I mean, just to pick a few examples to your question. On one hand, consumers have been more careful with - with their out-of-pocket expenses. So you can imagine that when it comes to, for example, our private-label offering, we have been doing a very good exercise in terms of understanding what additional things we need to offer. That's one. Second, you can imagine also that when it comes to beverages, for example, the OXXO stores are usually very strong on single-serve. But the pandemic came, people where limiting their consumption of single-serve because the traffic growth was lower, and they were buying bigger sizes, returnables and sometimes even multi-packs. And once again, the portfolio was changed accordingly. And these are the kind of things that we need to continue doing as we move forward. I mean you have seen that the , for example, has increased and this is partially because of all the things that we're doing. So this is probably fair to say or safe to say that some of these will remain once the mobility comes back, once the pandemic slowly starts moving away. Some of these new ways in which the portfolio has moved will remain. Which ones? I think that what is important that we stay close to what consumers are doing and what the shoppers want, and we are confident that as we have done, as the teams have done, that will continue to be adapted accordingly.

If I understand correctly, I mean - sorry, go ahead, Juan.

Hey, Rodrigo. This is Juan. I think also in terms of locations, following up on what Paco just said, adjustments that you should expect, given that there will be a percentage of consumers that maybe spend more time at home, maybe working from home, and less time in a proper office building as such, that in terms of our own segmentation of stores, probably overemphasize stores in certain residential neighborhoods and deemphasize the opening of stores in office parks or inside office buildings where we have a model of stores that what's going into the basements or the parking lots in the basement of some office buildings to get the captive traffic from that particular building. Probably there's going - there's going to be fewer of those and we're going to have to take a look. We are already taking a look at those stores that are in neighborhoods where people are actually spending some time during the week because they're working from home. What else do they need throughout the day, right? And I think to Paco's point, the same-store sales number that we see today for the quarter involves a double-digit increase in ticket and a double-digit decrease in traffic, and we've seen the categories that are kind of pantry-loading or supermarket-type items driving some of that increase in ticket. Things like spirits as well, which was discussed in the past, I think the absence of beer in the middle of the year make people discover that we carry a portfolio of spirits. So if we are able to retain some of those increases in certain categories and the average ticket remains above trend and then we recover most of the traffic, then that will put us in a pretty good place.

And if I may add a - follow Rodrigo, the fact is that what is important is that the team has demonstrated to be very flexible product portfolio, so that they offering for the shopper. And that basically means that, that's why we are very optimistic about what the future looks like because we - that flexibility will allow us to - once mobility is back that the traditional categories which are very strong for us, such as fast food, the fast craving, those will be back. Those will be back when mobility comes back. And so we'll be in a better position, understanding that consumers will - might continue to be in some difficult regarding the cash - the out of pocket, we are in a perfect condition to offer all sorts of solutions for them. So we are very confident that more than ever, the OXXO format is very relevant for consumers when we start moving out of the pandemic. So we remain very positive.

Got it. Very helpful. And so from the comments you've made, the comments around deemphasizing office and emphasizing more residential, probably something like the more - a more structural versus a tactical shift, any other structural changes? I mean, perhaps in terms of regions as people work from home, so have they - some of these are you seeing in other countries are leaving the and are essentially buying houses that are cheaper in the interior and elsewhere? Have you seen some of that? Do you think that will happen in Mexico?

As we said, Rodrigo, that the averaging that you are highlighting in something that has become a day-to-day for the OXXO team, I mean just starting to work, this is fairly - this is true that that is happening. It is also true that you will see differences in the case of Mexico, for example, when it comes to tourist area for example. I mean it depends on the - how the traffic is - the tourist traffic is going, then obviously we will adapt, and will see some differences. The same applies to the - to by region, but once again, depending on what we have seen on the restriction that the local authorities are doing because it's different, it's different. As Juan said, in the north of the country we had certain restrictions throughout the month of December that were not in place for other parts of the country. So at the end of the day, what we need to ensure is that this flexibility that the teams have shown to adapt and to offer the shopper and to comply with the regulations and take the opportunity to add new categories, we need to stay like that in 2021 and I assure you that that is the plan.

We'll take our next question from Carlos Laboy with HSBC.

Yes, good morning, everyone. I think you said earlier that you pretty much started with the new expansion into new businesses. Does it mean that you will not go into some stores in the U.S.? And if you are going to go into some stores in the U.S., of some stores become prohibitively expensive? And the reason I ask is because organic growth can be really slowed. So is there a point at which the Heineken stake just represents too much opportunity cost for you and not being able to go into the U.S.? I mean we've already rolled about 11 years of sitting on the U.S. sidelines in the USC store business. Are you Okay for another long run of not participating in that business?

Yes. And from a portfolio perspective, as you know, Carlos, we have mentioned that which will be complexity, but Proximity continues to be one of the main pillars in which we expect to fund growth. So clearly there is room to grow in Mexico still, there is room to grow in the rest of the countries that we are present in Latin America and elsewhere. So we continue to actively monitor our convenience formats in Proximity formats throughout the world, including the U.S. We are aware of course of the restriction that the Heineken stake brings us there. But having said that, as you well mentioned, I mean some of the assets there will have to evaluate on a one-by-one basis and see what the opportunity cost of having one asset versus the other is. And if opportunities come along that warranted, we'll take a look at them. But again, there are plenty of opportunities I think still outside of the U.S., including in our regions, I mean, which is we're not currently in that at least would allow us with our current business model to create value. So we will look at any and all, but again, always looking at it from just a relative risk-reward perspective in our portfolio. So for now that hasn't materialized, but we continue to actively monitor all situations.

That will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Francisco Camacho for any additional or closing remarks.

Thank you all for attending the call. Thank you all for your support. Continue to support FEMSA. And we want you to stay safe and see you next time.

Ladies and gentlemen, if you wish to replay the webcast for this call me. 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.