Juan Fonseca - IR Eduardo Padilla - COO.

Robert Ford - Bank of America Merrill Lynch Luca Cippicia - Goldman Sachs Antonio González - Credit Suisse Lauren Torres - UBS Alex Robarts - Citi Mark Swartzberg - Stifel Pedro Leduc - JPMorgan Carlos Laboy - HSBC Luis Miranda - Santander.

Good morning and welcome everyone to FEMSA's fourth quarter and full year 2016 results conference call. All lines have been placed on mute to prevent any background noise. After the presentation, we will be having a question-and-answer session.

During the 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. As a reminder today's conference is being recorded. At this time, I would now turn the conference over to Eduardo Padilla, FEMSA’s Chief Corporate Officer. Please go ahead, sir..

Good morning everyone and welcome to FEMSA's fourth quarter and full year 2016 results conference call. Juan Fonseca and [indiscernible] are also with us today. As we usually do we will focus the call on the consolidated figures for FEMSA and FEMSA's commercial results.

As many of you probably had the opportunity to participate in Coca Cola FEMSA's conference last Friday. Though we want to use the call to try to add some color and some qualitative elements to the discussion as well as to hear your views and answer your questions. Hopefully you will find it useful.

Overall our company continued to make solid progress during the fourth quarter to close what turned out to be a strong 2016 across operations. Especially with regards to revenue growth and particularly in Mexico. FEMSA commercials as a whole including its subsidiaries [ph] increased revenues by 22% versus the fourth quarter of last year.

As a recent addition we saw high single digit growth in same store sales and also against a very tough comparison base. However it was the case in the third quarter, operating margin also faced a difficult comparison given the significant expansion of 60 basis points a year ago.

Combined with an increase in certain selling expenses produced a contraction this quarter. We'll get more into details in a few minutes. But the key message is that once we isolate the typical high margin expansions of the second half of last year, the long-term trail of variable [ph] expansion remained in place in 2015.

Our drugstore operations in Mexico continued to perform well on a top line basis, allowing us to continue making progress in integration of our single operating platform in Mexico. Even as some oil dependent markets in the South East continued to underperform significantly. And in South America we continued to run ahead of our base case.

At which part the fuel division saw some sequential and year-on-year improvements in profitability, largely reflecting the high prices, even as we continue with our expansion strategy and with the rebranding of our existing stations into the new offshore gas image.

Finally Coca-Cola FEMSA continues to develop and employ the tools at their disposal across markets, some of which continue to present significant challenges, particularly in South America.

Repricing, improved targeting architecture and increased efficiency were enough to fully offset adverse consumer dynamics and a challenging currency and drove material environment.

However topline was receding in Mexico and their consolidated report figure reflect a positive translation effect from several currencies that gain against the Mexican peso. Moving on to discuss FEMSA consolidated quarterly numbers, total revenues during the fourth quarter increased 22.8% and income from operations increased 9.8%.

On organic basis, total revenues increased 20% and income from operations increases 5.9%, reflecting margin contractions in most of our operations.

Net income increased 20.9% in the fourth quarter, reflecting growth in FEMSA's income from operations and a foreign exchange gain related to the FEMSA's dollar denominate cash position as impacted by the depreciation of the Mexican Peso during the quarter.

As you may recall, these dollar cash position is comprised largely of the proceeds from our Eurobond Issuance from March last year. Our effective tax rate was 31.6% for the quarter within the expected range.

In terms of our consolidated net debt position, during the fourth quarter it increased by MXN28.1 billion compared to the previous quarter to reach MXN87 billion at the end of December. Mostly reflecting the debt issuance to the acquisition of One Par of Coca-Cola FEMSA.

In terms of dividends to be paid during 2017 we'll use a meeting to shareholder of proposal of dividend payment of MXN8.64 billion, representing full pass through the dividend of Heineken and Coca-Cola FEMSA as well as a portion for the cash flow generated by FEMSA commercial in 2016 consistent with the mechanics of the recent years.

Coming on the back of our double-digit increase paid life year. this propose the amount represents a more moderate increase in line with generated in Mexico of 3.4%, consistent with our view that the core microeconomic environment coals where the conservative approach to balance sheet management.

We issued a said opportunity in our first conference call of the year to talk about the expected level of capital expenditures.

For 2017, CapEx at Coca-Cola FEMSA $770 million, FEMSA’s commercial retail edition should deploy approximately $290 million, the health division should deploy of approximately $60 million and the fuel division should invest around $40 million.

Adding an estimated $75 million for our logistics and refrigeration businesses, we reach a consolidated total of $1.3 billion, this is marginally higher than the figure we expected for 2016 a year ago, with a slightly higher number of Coca-Cola FEMSA and lower number for logistics and refrigeration.

In practice, OXXO deployed CapEx figures tend to come slightly below the budget. Moving onto discuss our operations and beginning with FEMSA Commercial Retail. We opened 560 net new OXXO stores during the fourth quarter, reaching 1,164 net stores operating for 2016.

Revenues increased 17.3%, OXXO same-store sales were up 8.6%, driven by a 7% increase in average customer ticket and increased 1.5% in store traffic. This increase came on top of our very tough comparison base of 8.6% growth a year ago.

On the subject of traffic, we continue to see the telephonic [indiscernible] contract but at a slower pace than before, showing the increasing signs of stabilization, which is narrowly allowing the growth in traffic from other categories to being to show in the numbers.

Pointing forward such capability continues to be financial services which keeps scoring at a healthy double-digit pace.

Moving down to the P&L, for the fourth quarter gross margin expanded 40 basis points, these expansions mainly reflects healthy trends in our commercial income activity and the sustained growth of the services capability including income from financial services, I just described.

In terms of operating margin, this quarter the [indiscernible] posted a contraction of 70 basis points effecting first the top comparison base in fourth quarter '15, when retail operating margin expanded by 60 basis points. Second, there is a pickup in tariff. And third, our initiative to improve the compensation structure of the in-store personnel.

However, if we compared the operating margin for full year 2016 against the comparable figures of two years ago that is 2014, we see the operating margin expanded within our long-term expected range of 10 basis point to 20 basis points per year. Moving on to FEMSA commercial health.

During the quarter, we added drugstores to reach 2,120 units across our third quarter at the end of 2016. We should note that the [indiscernible] operations are now fully in the base.

Revenues increased 32% driven by solid growth in South America and continued store expansion across territories more than offsetting weakness in Tennessee heavy market in Southeast Mexico.

Same-store sales increased 22.5% growing by high single-digit in South America, remaining stable in Mexico and receiving the translation benefit from depreciation and Brazilian peso. Gross margin expanded maybe 90 basis points driven by the contribution of [indiscernible] which has higher gross margins than the Mexican operations.

Operating margin contracted by 50 basis points in the fourth quarter reflecting once again higher expense in Mexico as we continue to build infrastructure and prepare for further growth while we integrate our four legacy drugstore operations into a single platform, as well as improvements to the incentive structure for our in-store personnel and certain one-time changes in South America.

Finally, FEMSA commercial fuel added 34 gas station during the fourth quarter to reach 382 units at the end of December, representing 75 net new service stations in 2016.

Same station sales were up a healthy 12.2% for the fourth quarter, as average volume increased 10.8% while the average price for liter increased 4.1% reflecting national price increase executed during the second half of 2016.

Gross margin expanded by 20 basis point, reflecting the benefit of price increases and operating margin expanded 30 basis points to 0.9% of revenues, mainly driven by national price increases as described above as well as the higher operating leverage.

Touching briefly on Coca Cola FEMSA, reported top line increased 21.6% during the fourth quarter and Mexico related top line growth driven largely by healthy pricing. Our transactions and volumes were weak in South America reflecting microenvironment as well as the cases in the third quarter reduced operating leverage combined with our U.S.

dollar exchange, pence and the higher price of some raw materials, particularly sugar again considerable pressure and profitability in that region. So good pricing and stronger solution are only partially offsetting the challenging microeconomic trends that continue to exceed in most called South American markets.

If you were unable to participate in the conference call last Friday, you can access a reply of the webcast for additional details on the results. Finally, let me talk a little about our broad expectations for 2017.

Clearly, there is some uncertainty regarding the Mexican consumer as inflation with those flying and people make adjustments to their standing budget.

However, our former and general are also in particular have proved resilient increase where the consumer has to defer some of the large ticket purchases what we have to restore resort, and the resort to smaller more frequent call transactions. So, we are cautiously bought optimistic.

For FEMSA Commercial, we feel we expect net offshore openings suppose 1,200 units. In terms of outsource same-store sales growth, we will be facing a very demanding comparison base. However, with the leaf we can remain within our long-term expected range of mid-single digit growth with high traffic no longer presenting a graph.

In terms of profitability, we expect to continue to expand the gross margin by 20 basis points to 30 basis points. We do not base impression to selling expenses, some of it external in the form a higher and equity cost and some of it by its design. As we continue our initiative we gradually improve the compensation structures for Key in personnel.

As a result, we would expect operating margin to be flat for the year. For FEMSA Commercial, we expect to stand to operations in Mexico in the high single-digit is truly potential acquisitions, while the South American operations should grow in the mid-single digit.

We expect same-store sales to grow in the mid-single digits that we are adjusting for the currencies, margins for the division should be stable to slightly be expanding. We start if [indiscernible] its unit count by approximately 20%. We expect margins to be under same pressure due to the first half of the year.

but gradually improving in the second half as maximum prices takes out across the country. Also, there is a possibility that currency suppliers will emerge during the year, our third party has expected to lease from capacity on pipeline and the storage infrastructure.

So, there are lot of moving pieces going through at all, we will continue to focus on growth take full advantage of the long-term opportunities. For Coco-Cola FEMSA, we expect to continue the use the price level at the lease in line with inflation in each market by earnings growth in line with GDP.

Summing up, we continue to see many opportunities to drive growth and we are once again cautiously optimistic about the year that begins. Understanding that generally [indiscernible] is also 2016 represent a tough comparison based, particularly in Mexico.

We expect this key market to continue to perform well, even with some added uncertainty the world continues to face challenging macroeconomic environment in several of Coca-Cola FEMSA's markets. At these during the first half of 2017, and volatility will likely remain high across the board.

However as is usually the case there are many viable within our control and we'll keep making progress on those and continue working hard. Now let me turn it over to Juan for a moment..

Hi everyone, just a reminder that we will take just one question per caller, this has actually worked well in recent calls so we want to make it permanent. So thank you and with that we can open the call for your questions, operator please..

Thank you, [Operator Instructions] and our first question comes from Robert Ford with Bank of America Merrill Lynch, please go ahead..

Thank you and good morning everybody, congratulations on the Small Box execution in the quarter.

My question is on OXXO, and I confess it has multiple parts, but I was impressed with the same store sales growth in the period and know that's mostly ticket versus traffic, but can you comment on the segments with faster growth please, you know addressing the initiatives you've taken in grocery, prepared foods, coordinated, promotions and services.

And then how big is service fee now as a percent of revenue and how is that Western Union effort maturing, and then lastly if you could break down the SG&A pressure in OXXO between electricity and compensation and with respect to that compensation what specifically is being done and how are you maintaining the entrepreneurial incentives which have distinguished your execution in the past? Thank you..

Well let me start at the beginning of the compensation structure at the store level.

The more we advanced with the store the more sophisticated the store is and the more I think, the higher the --we want to have a stable workforce and we are investing in a lot of monetary and non-monetary incentives to make the store look more appealing, more fulfilling. So we can really have a more stable workforce.

If we compare our industry turnover -- our absolute turnover compared with the industry tenders, we are below that. But I think we are betting that we should be even lower in the future.

In terms of categories and that will put some pressure, but I think the -- I will say this, from medium and long term investment that it will cost us some at the beginning but being in the middle long term it will be a great investment.

Secondly, when you speak about categories I think there are -- I mean as we have described there is the occasions where we are I think we are, we're basically the same in terms of thirst and craving, we're very stable in that, we're growing but not at a very fast pace. So what are the locations where we are growing.

We are growing very rapidly in food service by deploying some more complete food service offering the OXXO stores. We're also growing we're also growing in location that we call people gathering and also we are growing in the daily replenishment occasions. And I think those are the ones that we are really leading the growth for OXXO.

And I think basically what the OXXO people have been doing in that the, the value opportunity comes stronger and stronger. When you refer of the amount of how well the services are behaving, I will probably say that probably 60% of the cash at the store level comes from services. But it's not our cash, it really cash net deposited by our customers.

I think Juan you may remember the exact amount, -- how many card holders we have now?.

We have 6.3. .

We have 6.3 million cardholders and we added 3 million this year?.

Yeah. .

We added 3 million this year. So I think really we are becoming -- we're making a social service because we're providing to financial service that people, that didn't have access to financial services and the other hand also we're making the -- also it's becoming more and more applicable to all these people.

and they find that the store is a full supplier of their daily needs, and daily needs coming from financial services, to merchandising and we're position ourselves very strongly..

Yeah, I would add Bob on the part of your question about Western Union. And that's still a very very new initiative that we've rolled out nationally a few months ago. But it is growing double-digit, it is a smaller average remittance than the national average. So I believe our --..

It has been designed that way..

Exactly it's about MXN1000 approximately, but it's off to a great start. So we should have a more relevant base. .

And need less much less cost for the year user compared with the other entities that were in the market. .

And it also addresses some of what Eduardo was saying in terms of the CapEx in relation of this core, if you disperse some of that through withdrawals and cashback from your correspondent banking as well as from the Western Union operation.

It relieves a little bit of the pressure to keep having the security trucks come into the store, even more frequently than they are what they do. .

And our next question comes from Luca Cippicia with Goldman Sachs. Please go ahead. .

I wanted to ask about your outlook for 2017 especially when it comes to the profitability for OXXO. I was wondering how much that stability margin is predicated in fact on that same store sales being in the mid-single digit.

Or if you expand a bit more on the type of pressures that we're already clear in the fourth quarter when it comes sort of physical salaries, how do you see that maybe in an environment where top-line could be lower just for as to quantify the operating leverage with the type of same store sales that you delivered in the fourth quarter.

I guess most of us were expecting greater margin expansion. We understand this factors but looking at 2017 how much of that stability margin is predicated on same store sales being in mid-single digit. Thank you. .

Hi Luca its Juan, I think it’s a combination of the two. I mean certainly where we have a more visibility because it's obviously self-initiated, is what we're going to do with compensation right? I mean those efforts if you recall, we started talking about adjusting the compensation mechanisms a couple of quarter ago.

And we're still going to be doing that throughout this year. So it's a gradual approach, obviously, but it's not going to be just a job for this quarter, it's going to be in place for a few more quarters. There is hedgeability there, because we decide what and how quickly we do it.

Where there is certainty obviously is from the same store sales numbers, if indeed inflation is higher and suppliers end up-taking a bigger price increase which we than pass on to the consumers and then the same store sales number could be a little bit higher then and what we said. And obviously, margins are very sensitive to sales levels.

So I suppose there is a little bit of offside risk on that margin, but we felt after many, many years of talking about this 10 or 20 basis points margin expansion at the operating levels, that this is the year, between the things that we know and the things that we believe may happen, it's just more -- it makes sense to be a little bit more conservative and talk about stable margin as opposed to that expansion.

Again, I think this is not something that changes the long-term projections, I believe in time we will go back to the expansion trend that we've had for over a decade. But just this year, there are not moving parts that we feel better talking about stable margins..

Our next question comes from Antonio González with Credit Suisse. .

My questions on gas stations. I understand your comment about second semester, you're having better profitability as price as fully live our life Mexico terra. I wanted to ask if you can give us a little bit more detail of the progression of these EBITDA margin trend throughout the year.

Do you think that actually in the first semester, EBITDA margin could be flat or even down obviously, there was this price increase in Mexico, but your gross profit per liter hasn't moved? So I wanted to ask how do you think that's going to impact margins in the first semester.

Sorry Eduardo, just also wanted to ask on that, when do you think the infrastructure will be ready, so that you buy gasoline from third party, not just leasing FMX capacity, both actual types or else from third party.

So do you think that can happen in the next 18 to 24 months or you think it takes longer?.

Hello Elton, it basically -- I will say that these price increase have -- the margin -- the secretary of Energy and FMX reduced the margin in terms of percentage. I mean they get the same margin in absolute terms, so percentage wise it has been reduced. But the problem for us is that some of the expenses that we have and are related to total sales.

And that is going to have an impact in the very first semester that probably margins will be reduced. The second semester though because of the tighter recession [ph] we will be in the better position to increase our margins again and take advantage of that. Our same store sales at the gasoline station keep moving very well.

We have a very strong image and we have very strong brand. And the consumer has a major -- they trust us and that trust really reflects on increasing volumes. In terms of what is going to happen with the availability of the gasoline. As time goes by we keep discovering and we keep adjusting what the new rules of the games will be.

We are on top of that we are very close to some external sources and we're close to FPMX too in order just to be positioned to take advantage of the best scenario possible.

I don't know you want to add anything Juan?.

Yeah sorry I just wanted to make sure that on the margin question, so first half we do expect the EBIT and EBITDA margins to contract a little bit and then to your other point on the infrastructure, we do think that's more of a medium to long-term. It's hard to see with the way that things have been changing coming from CRE and FMX.

It will be a while before people make the investments. And so we're not banking on that in the immediate future I would say. .

Okay thank you so much.

And would you quantify the margins for the fuel division this year or too difficult to tell at this point?.

I mean internally we have our numbers, but with the amount of moving pieces and uncertainty --. .

Yeah by the end of 2016, we were very optimistic and then their repayment and then the growth being changed possibly --. .

Yeah obviously, what happened in January of this year, it just made everybody very cautious in terms of how the rules have been tweaked kind of on the fly. So we would just rather play by ear, in terms of communications..

And Moving on our next question comes from Lauren Torres with UBS. Please go ahead. .

I understand and I guess appreciate your comments and your view on Mexico this year and I think -- I know we're hearing it from several other companies in Mexico also. But I think the early read at least for the first two months of the year still seems quite positive.

So I know two months doesn't set the trend, but curious from an operational standpoint or consumer standpoint for the two months of this year, if you're still seeing some impressive growth that we saw last year.

And then I guess just the second part of that question in your press release you did mentioned you exercised caution as you continue to execute your growth strategy for this year.

Just wanted to get more details behind that and depending on how the environment is in Mexico this year is it where you direct your spend or how you direct your spend that could change. Thank you. .

Well I would say that January and February trends look very positive. And although the quarter we will have a difficult comparison quarter because Holy Week last year was in the first and now Holy Week and Easter will be in the second quarter.

By if we take that our, I think just in terms of comparison base and in terms of day details, I think we are doing reasonably well. We’re happy -- we’re optimistic with the results. However, as you said, two months -- well, it’s difficult to make a turnout of two months, but I think we are -- that’s why -- we are optimistic.

I think also valuable decision keeps evolving; is very strong, and I think we are very well-positioned for the different economic environments that we face. I don’t know, you want to add anything, Juan..

Yes, comment I’d like to add has to do with regional differences. I mean, as you know, historically, the north of Mexico tends to outperform the south, and that continues to be very much the case.

So, definitely, right now, even with everything that’s going on, method wise manufacturing activity continues to be robust in the north; and then in the south, you have the additional negative factor of the slowdown in the Pemex region, Tabasco, Veracruz, Chiapas. So that geographical difference is perhaps more acute right now than it usually is.

But also, I think on a macro level, I believe what we’re seeing, and it is interesting for us, and I’m sure for you as you talk to your own clients, you have that situation where even though -- the situation on the ground continues to be quite good in Mexico, sentiment and expectations over the half turns are somewhat negative based on the discourse coming out of Washington.

And yet Brazil, things on the ground are not yet that good and yet sentiment has certainly turned towards Brazil. So, obviously we’re living through that, but the fact remains that things on the ground for consumption and certainly for our type of consumption, small ticket item, not that discretionary is actually very strong..

And our next question comes from Alex Robarts from Citi. Please go ahead..

Thanks. Hi, everybody. I guess my one question would really be about the same-store sales growth at the drugstores. So, there is a couple of pieces here. Is there a way you could just break down the fourth quarter number between Chile and Mexico, and comment a little bit as to where you saw the growth coming from.

And then, I got a few of the numbers for your 2017 guidance, but just to understand, is the mid-single digit number that you outlined for same-store sales and drugstores this year, is that right -- is it a good number; are you providing Mexico versus Chile? So, sorry, it’s also kind of a clarification.

Can I just go over the same-store sales outlook that you just gave us with a little bit more detail for 2017? Thanks very much..

Sure, I mean, what we’re trying to do is look at the data from the Health Division as a unit rather than go too much into the weeds in terms of the different countries.

Certainly, what we just mentioned or Eduardo just mentioned in his remarks, is that of the 20 plus growth in the aggregate, you can decompose it into high single-digit for South America and basically flat for Mexico.

And of course, this quarter, we're getting a pretty significant bump from the currency effect, which down the road, we're probably going to see a lot of fluctuations there. But right now, the peso did weaken against most other currencies. And so, you get very, very high same-store sales numbers. So, I wouldn't want to go into any more detail than that.

I think that's illustrative of what's happening on the ground in each one of the countries. So, very, very healthy in South America. And in Mexico clearly, we’re facing the challenges of having what is a new brand that begins to go national. You're facing some increased competition in some markets.

You're facing the growing pains really of what is still a very fluctuating [ph] operation in Mexico. So, I will say for -- our expectation that I described for 2017, I would again expect South America to contribute not only because it represents 80% of the operation, right, let's remember that that is our Health Division is 80% South America.

So, I would again expect Chile and Colombia to grow more than Mexico, not because Mexico from a macro standpoint is not doing well, but because of all the stuff that's going on, as we build our Company and also our continued exposure to the southeast where we are somewhat exposed to Pemex continuing to lay off people and kind of trim itself into a more lean competitor.

So, I would say next year, probably looks a lot like this, like 2016, without necessarily the benefit from the currency translation..

One of the benefits that we're really betting on installing this common backbone with the Mexican operations is really to start having the benefit of scale by purchasing together these full chains that currently are not connected.

And I think by probably third quarter, fourth quarter this year, we will have a more stable and common platform, so we can really enjoy the benefits of having a larger chain of the four independent ones that we already have now being integrated and start working as a single chain here in Mexico..

And you're going to see the brand start to be rolled out more aggressively in the second quarter. So, Eduardo said, I think as the year goes by, our Mexico operation will begin to look and behave more as a stable, unified company, and that should also benefit same-store sales.

But, as I said, right now, I feel more confidence just saying Chile's probably going to hold the cards more in 2017 just like it did in 2016..

Okay. But just to understand, so the full year 2017, same-store sales growth at Health, you are saying the guidance is mid-single digits.

Is that right?.

You're right, on a currency neutral, let's call, it basis..

Got it.

And just the last piece on this question is, the thinking between flattish to perhaps slightly expansion vis-à-vis the margin, would it be safe to say that one of the big factors between that -- inside that range is just generally the rate of the topline growth or are there other elements that kind of explain that range that you've got for flat to slightly expansion on the margin? Thank you very much..

Sure, Alex. I mean, certainly, the Mexico -- I hate calling it transformation because that word gets used too much but certainly drops us in Mexico, I would call it by as a transformation. So, I think the efforts there should be begin to taper out in the second half. I mean, we will be done with some of these things that we've been working on.

We will begin to lap some of the things that we've been doing. And so, yes, I think part of that probably comes from a nice top-line growth but also the fact that we're going to stop spending or lap certain initiatives that allow the margins to recover on the back half..

Moving on, we'll take our next question from Mark Swartzberg with Stifel. Please go ahead. .

Thanks, and thanks for taking the question. Good morning, gentlemen. Couple of questions on OXXO and then one on soft drink business in Brazil. On OXXO, it’s nice see the foot traffic turning positive in the quarter and you gave a little bit of a read on what's driving that.

Could you talk a little bit more about your confidence to that turn to positive in ones and twos that that will sustain and what might even cause it to accelerate as you think about the larger same-store sales number of mid-single for the year? And then, I had another question on OXXO about remittances..

Yes. I think on the traffic -- hey Mark, it's Juan. On the traffic, I mean, we've been talking for a long, long time about how telephony was this -- the drag, tremendous drag that obscured the good stuff that what's happening pretty much every other category. And so, right now, it's not necessarily in our hands.

I mean, the two big telcos in Mexico were to start going out again in terms of the price competition. Then, we will probably begin to suffer again on the traffic front. But it doesn't look like that's happening. Telephony, wireless telephony has become in Mexico one of the cheapest markets in the world for wireless.

And I'm not going to talk for these companies but certainly it does look like they brought prices down to levels that I don't know that they could continue to hold too much further.

So, I do feel we're confident that that problem -- compounded with the fact that telephony has become a lot smaller for us than it used to be, I think we're worrying a lot less about that than we worried a year ago or two years ago.

Now, the more important part I think is that everywhere else from financial services to prepared foods to grocery and daily and replenishment that Eduardo was talking about a few minutes ago, we have been seeing some very healthy traffic trends for those categories for a while now. So, we do feel good about the equation.

Obviously, if throughout the year we begin to see traffic accelerate more, then, we will adjust the expectations. Now, we have to -- there is a caveat. I mean if inflation does go up by a lot in Mexico this year and the consumer has to make these adjustments to purchasing habits, then that would probably also affect the traffic number.

So, we feel good, talking about the low single-digit contribution coming from traffic. But, I would say, we feel better about that than we have felt in the last couple of years..

That's very helpful.

And then, kind of building on that and your comment about inflation and Lauren's question about January and February, for many of us sitting here in the United States, seeing the way the dollar’s performed against the peso and of course the role that remittances play in your own business, when you think about November, December, January, February, would you describe the -- that currency exchange rate, the peso depreciation as having had a significant impact in remittances and the behavior occurring in the OXXO stores since the elections of Donald Trump?.

No, we haven’t seen it..

No. I mean, the [indiscernible] there was -- the last time peso was 50 plus percent growth in remittance in peso. So, that’s a tremendous number --..

But that because of the peso devaluation --..

Exactly, exactly. .

In December and January. And now the peso is stronger --..

Yes, the peso is getting stronger the last few weeks. Also, I think we need to remember that remittances don’t affect all of Mexico the same way. The state that exports labor the most tend into be in the center and south where we probably under index in terms of our stores. So, we are still more exposed to manufacturing than remittances.

Having said that, I mean, if remittances are growing 30%, 40%, 50% in peso terms, that’s not going to hurt anyone. So, we’re happy to see that. But it’s not one of the bigger factors in our numbers..

Yes. And also, on the other hand, where we are very strong in some of the northern states where we have a very strong presence of OXXO stores and convenience stores, and in fact some of the more saturated markets that we have are in the north.

And we keep growing in those saturated markets, even though that we keep growing in the number stores and we keep improving the same-store sales number..

Great. That’s clarifying and encouraging. Last thing on EXXO, just to be super clear, the 10 bps to 20 bps comment about operating margin, it sounds like you think that resumes in calendar 2018.

I know you don’t have a crystal ball, but from a planning perspective, that’s how you’re thinking about it?.

Yes. Let’s leave that there for now and see how this year progresses..

Okay. Fair enough..

I really try to say that really what we are doing, in electricity, I mean it’s very much related to the dollar. If the dollar. If the dollar -- if the exchange rate is the way it is, I would say the, it will be stable, but again it depends more on how the dollar and peso exchange rate looks..

And we are depending more on more on renewables and we keep growing on what percentage of electricity comes from the wind farm..

We have a very strong bet on wind farms for OXXO supply and at the time that the electricity went down, that alternative was a little bit more expensive. But now that the electricity is going up again, I think we’ll have work out for the stabilizer for future prices..

Helpful. Okay. Last thing from my perspective, and this is --..

You’re going to get us in trouble Mark --..

Okay. Then, I’ll come back in the queue. I’ll come back in the queue. .

I apologize. We’re trying to keep --..

No problem. Thank you for taking my questions..

Thank you..

I’ll get back in the queue. Thank you, gentlemen..

Obviously. For all of you guys, if there is stuff that is -- other questions have come and we cannot really talk about it, we’re happy to take your call later, but we don’t want this call to drag on forever..

We’ll take our next question from Pedro Leduc with JPMorgan. Please go ahead..

Good morning, everybody. Thank you for taking the question; it will be regarding capital and balance sheet and the dividend announcement this morning, only 3% to 4% percent of above the one done last year and just mentioned that this will.

In the lights of good operating outlook, CapEx, which is not too aggressive, it wouldn’t be wrong to see the higher dividend, some could say and unless there is anything larger in the pipeline.

So, how would you balance these potential M&A opportunities with the dividend announcement; is it perhaps that if nothing comes up, because the more dividends throughout the year or just first to imagine this? Thank you..

Pedro, I think the comment we made on the dividend, I mean, certainly as we said, last year was a year where we increased dividend double-digit. And just given the uncertainties this year having to do with NAFTA, foreign direct investment into Mexico, exchange rate, what could happen on the tax front in the U.S.

that would have implications for Mexico, there is a lot of talk that that needs to happen. And I would say in the meantime, our Board as probably other boards around the country are just taking things a little bit more cautiously than usual. Never mind that our Board is pretty cautious as it is.

As you saw or heard from Eduardo a few minutes ago, we're not making adjustments or cutting down on the operational investment. I mean, we're shooting for 1,200 OXXO stores; we're growing double-digit pretty much every format.

You just saw on the CapEx front the $1.3 billion, which is a lot more pesos than the almost $1.3 billion that we were talking about a year ago. So, we're going to grow the Company as much as we always grow it, but when you think about M&A, there is obviously one more layer of caution and analysis.

We feel comfortable with increasing the dividend by general inflation. If this means that cash accumulates a little bit or cope them to have some deleverage that they need to do, then so be it.

I don’t think we're foregoing attractive opportunities; we're just looking at things one more -- giving it one more round of analysis relative to what we always do.

I don’t think we would adjust the dividend as the year goes by; this is a decision that is made once a year, and we always like to, whatever cash is being return to shareholders, we like to channel it to the ordinary dividend, as opposed to coming out with extraordinaries.

And buyback is something that we're always open to do from a shareholder approval standpoint but we haven’t really done it and the share price, it would really need to get very, very low for us to pull the trigger on that.

So, right now, I would say, just expect us to accumulate a little bit of cash and then pull the trigger when it really, really make sense..

Yes..

And we will take our next question from Carlos Laboy with HSBC. Please go ahead. .

Eduardo, I have a big picture question about how the Company’s leadership is evolving. There is a lot of new consumer and channel insights work being done at Coke FEMSA. At the same time, there seems to be a lot of changes in the senior leadership at Coke FEMSA with new country managers in Mexico and Brazil.

Can you comment on the competencies that you seek from this generation of Coke FEMSA leadership, there's new leaders? In other words, what do these leaders need to do to succeed that maybe is different from what the people they're replacing have to do to succeed?.

Hello, Carlos. Thank you for the question., I would say that we have incorporated two very strong executives in the past months, one for the all the new businesses developments in Coca-Cola FEMSA and the other one is replacing an Ernesto Silva [ph] after successful career for lots years at FEMSA, he's retiring.

And the one that is replacing him is Xiemar Zarazúa, which is a guy from the Coca-Cola system; he was working for the Coca-Cola Company. He knew the Mexican market very well, and then he spent some time in Colombia and the rest -- he spent about six to eight years in Brazil. And he's a great guy and he has a very strong alignment with the culture.

Always, when you bring executives from outside the Company, there are two things that we look for. One is that obviously the guy is very competent and he will bring some more -- the new insights into the company. And the other one that he could align with the same values and culture that we have in FEMSA.

So, I think these two executives Stan [ph] in the other hand, he was involved in the beer industry and with some alcoholic beverages and before he was part of Pepsico and he was responsible for Lipton tea. And I think the cooperation of these two guys I think is going to help us to move.

We need more strategic thinking and probably, we're being challenged to do things in a different way. The Coca-Cola Company is evolving, and we're also evolving, and the more that we could evolve together, the better will be tackled all the opportunities that we foresee. So, I think those will be my bets on these two guys.

I think they are great people. Xiemar Zarazúa, when I [indiscernible], I used to know him well, and we did have a lot of work together when he was in Mexico and I was in also by aligning and tackling the Mexican markets.

But I think the great thing is as I said is the Coca-Cola Company is evolving; we're also evolving and we need to evolve to tackle all the opportunities that we foresee for the future..

Hey Carlos, this is Juan. I'd also like to add one comment.

I mean, I was just remembering as Eduardo was talking just now when you and I used to talk some years ago, and you would say that FEMSA and Coke FEMSA really had aspirations of being a regional or multiregional company, eventually perhaps even a global company, and it was going to be really hard to achieve as long as the management was comprised of middle aged men from the north of Mexico that had attended the Monterrey Tech.

Obviously a lot of the hires….

No offence taken, Juan..

No, hey, look, we've come a long way based on those men, but if you look at the list of hires, we have hired people from Venezuela, from Spain, from Chile, from other parts of Mexico; it really has enriched the fabric of the management team and brought different perspective. So, obviously, all of them stand on their own individual merits.

But I also think it has enriched the mix a lot in terms of just the diversity of background and experiences..

You’re also saying Juan, we also cooperated with Santiago Roces; he was involved with Walmart at onetime; he was involved in fast food and also he was involved Save-a-Lot. So, he is the one that is going be heading all these new business ventures, new commercial ventures that we have on the retail side.

And I think we’re very optimistic, he is bringing a very fresh view; again, very important to be aligned with the culture, because this culture that is based on trust among all the guys that we incorporate this corporation is very important to keep evolving. But again, new mindsets, new experiences, new knowledge..

And we’ll take our next question from Luis Miranda with Santander. Please go ahead..

Yes. Hi. Good morning, everyone. Eduardo, my question is regarding OXXO and labor cost, as you mentioned.

When you try to produce [ph] structure of compensation to the new level of the competitive of the stores, is this process going to be implemented and finalized during 2017 completely or do you think it could expand or extend furthermore? And related question is when you are evaluating this structure of compensation in OXXO and considering the recent pressure that we’re seeing in inflation tariff runs in Mexico, do you see any risk of additional pressure in other divisions? And I understand that Healthcare is not going to move the needle, but it also it would be interesting to see if you’re seeing some pressure there.

Thank you..

Okay. So, basically it’s a very subtle balancing act of the management team in OXXO, because in one hand they want to keep the margins improving, in the other one they want to have a very stable sales force. And those two things combine is something that they have to make the tradeoffs in a way every quarter.

There are lot of things that have to be related with the compensation that we offer to this group of employees and or the typical that work for the commission is because -- again, we’ve been improving the commission base and helping them in the stand that is not only the commission that is going to be -- it has to be improved also what they offer to their own teams.

So, those are the things that we’ve been working together. And based on the results that we see by moving each of the levers, we will see that -- we should be expanding the pace -- or I mean reducing the pace or making it fast. And this is something that they are doing. But again, this is a long -- medium and long-term view.

And again, we cannot sacrifice the short-term strongly for the medium and long-term. And we don’t want to be opposite either. So, it’s a very delicate balancing act that these people do. But let me tell you what are the things that we are discovering.

I mean, we reduce most of the store people -- some of the store people take two buses to arrive to the work place. If we were very more intelligent to align where they live and they work by just reducing one bus, instead of taking two buses to arrive to the store to work, only taking one, it will be a major impact for the income.

And I think those kinds of things are the ones that are really challenging us. And we have the capability now because we are not happy where they live and where the stores are and how we can made these balancing better to deploy all these great people to all the stores in a more efficient way..

It appears there are no further questions at this time. Mr. Padilla, I'd like to turn the conference back over to you for any additional or closing remarks..

No. Thanks very much for attending the conference. Thank you very much for taking care of us.

I don’t know Juan if you want to add?.

No. Just, like we said a few minutes ago, if you have follow-ups or clarifications we'll be happy to talk to you guys later today or whenever you need to. And have a great week..

All the best to you all. Bye now..

That does conclude today's presentation. Thank you for your participation. You may now disconnect..