Eduardo Padilla - COO Juan Fonseca - IR.

Benjamin Theurer - Barclays Robert Ford - Bank of America Merrill Lynch Luca Cippicia - Goldman Sachs Carlos Laboy - HSBC Alex Robarts - Citigroup Martha Shelton - BBVA Bancomer Jose Yordan - Deutsche Bank.

Good morning and welcome everyone to FEMSA's Second Quarter 2017 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, there will be a Q&A session.

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. At this time, I would now like to turn our conference over to Eduardo Padilla, FEMSA's Chief Corporate Officer. Please go ahead, sir..

Good morning, everyone and welcome to FEMSA's second quarter 2017 results conference call. Juan Fonseca and Maedilla [ph] Castro 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.

Since many of you probably had opportunity to participate in Coca Cola FEMSA's conference call yesterday. 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.

We knew back in April that we will have some calendar tailwinds from at the timing of Holy week particularly for also business and the month did not disappoint. What we did not know back then was that the strong topline trends will carry through the quarter, the way they did.

Revenue growth was strong during the quarter, not just for our retail formats, but across operations and reflected a resilient consumer environment in Mexico, in spite of rising inflation.

On the profitability front, operating leverage of FEMSA commercial retail division helped the team expand its operating margin slightly even as we continue to see pressure from operation expenses. At the Health Division, we again saw a steady South America provide cover for the ongoing work-in-progress of our Mexico operations.

And at the Fuel Division, we saw the highest level of margin pressure that we expect to see during the year. Driven by unique set of circumstances that we will expand on the on [indiscernible] and resulting in a soft set of numbers that does not reflect our expectations for this business going forward.

At Coca Cola FEMA we're also seeing some incipient encouraging signs that the consumer environment in Brazil is beginning to improve, just in time to begin helping our Mexico operations carry the load. Conditions remained challenging across several markets during the second quarter and we face some cost pressures in the sugar front as well.

However, we believe we're well positioned for improved performance in the second half of the year for this business. Moving onto to discuss FEMSA's consolidated quarterly numbers, total revenues during the second quarter increased 21.4% and income from operations increased 10.8%.

On an organic basis that is excluding the result of Vonpar and Coca Cola FEMSA Philippines operation. Total revenues increased 10.7% and income from operations increased 1.1%. Net income grew 4.3% in the second quarter mainly driven by growth in terms of income from operations and by increase in terms of reported 20% participation in Heineken results.

These effects were partially offset by foreign exchange loss related to FEMSA's US Dollar denominated cash position as impacted by the position of Mexican Peso during the quarter and by increased and other non-operating expenses of Coca Cola FEMSA. Our effective tax rate was 20.8% in line with last year.

In terms of our consolidated net debt position during the second quarter, it decreased by approximately 2 million Pesos compared to the previous quarter to reach 27 million Pesos at the end of June. Moving onto to discuss our operations and beginning with FEMSA commercial Retail Division.

We opened 373 net new OXXO stores during the second quarter, reaching 1,313 net store openings for the last 12 months. These robust number openings represents an increase of 42% over the second quarter of last year, which puts us on well on our way to reach our objective of 200 net operating for the full 2017.

In fact I think is the largest number that we've had so far. Revenues increased 16% OXXO same-store sales were up 10.3%, driven by a 5.6% increase in the average customer ticket and a healthy 4.4% increase in store traffic.

On the subject of traffic, we continue to see stabilization trends in the telephony category after three years of decline and we're seeing solid traffic trends in other categories, particularly services.

The high traffic numbers also effect a positive calendar effect usually timing of Holy week in the month April compared with the March last year because of this calendar effect large rough shifts on quarter-to-quarter on any given year. It is all useful to look at the growth rate for the six months of the year, was reached 8.1%.

Moving down the P&L for the second quarter gross margin expanded 60 basis points on top of demand comparison based of 150 basis points in previous year. Reflecting as days off in the case, sustained growth of the service category including income from financial services increased.

Number two, increase and more efficient promotional program with our key supplier partners. And number three, healthy trends in our commercial income activity. Operating income increased 18.2% and operating margins expanded by 10 basis points.

Reflecting operating leverage in the face of finance related Peso openings, sustained high electricity tariffs, drug tariffs as well as our continuing initiative to invest to improve the compensation structure of our key in store personnel.

While this is an encouraging result, the fact remains that operating expenses again increase more than revenues. Particularly regarding the electricity tariffs which were the biggest point of pressure in the SG&A.

we're cautiously optimistic about the second half given the recent strengthening of the Mexican Peso, which is viable for the cost of electricity. Moving on to FEMSA's Comercio Health Division, we added 18 drug stores to reach 2,154 units across our territories at the end of June.

Revenues increased 9.8%, following an increase of 6.3% in same-store sales driven by a steady performance in South America. Margin contracted by 20 basis points in the second quarter reflecting an inventory write-off of the Chilean business.

And operating at the Chilean business and operating margin contracted by the same amount driven again by our ongoing efforts to integrate our regional operations in Mexico, into a platform-integrated company. And to develop our own distribution capabilities in these key Mexican markets.

In terms of where we are in this process, that began in January 2016 currently we have more than 850 stores in Mexico running on our unified SAP backbone and with an enhanced [indiscernible] on the stores. And we're on track to complete that part of the effort by the end this year.

Regarding the logistics platform, we're ready as far as the physical infrastructure is concerned with two new distribution centers in the cities of Magadha [ph] and Culiacan [ph]. As well as number of close docks in the same places.

We're now working on fine tuning processes and systems honing our inventory management capability with a view to enhance service at the store level and to optimize inventory as well. This effort will make significant progress during 2017 and will carry into 2018.

Commercial improvements will level to operate with a single SKU capital as well as a standardized commercial terms across our Mexico operations which in turn will allow us to grab value optimize our price and our solving strategies and improved service.

This effort has acquired a lot of hard work but in distance [ph] ago and we're getting closer to the point, where we will begin to reap the benefits. As you remember there were four changes and we're working to integrate those four changes into one single year.

First part, FEMSA's Commercial Fuel Division added just two gas stations during the second quarter to reach 190 units at the end of June. And 55 net new service stations over the last 12 months. Users [ph] like temporary deceleration our part, as we wait some of the uncertainty regarding the current developments on the industry to late.

As you know, maximum retail prices are beginning to phase out as we speak in different regions of Mexico and there are still some owners who questions regarding the supply side of the market.

So while our expectations is for the pace of our business to accelerate the gain during the second half of the year and beyond, as we all getting used to operating under new set of rules. It is possible that we may come up a bit short of 80 additional stations, we had originally expected for 2017.

Same station sales grew 22.6% in the second quarter as average volume slightly decreased by 0.5%, while the average price per liter increased by 23.3% reflecting marginal prices increases into [indiscernible] at the beginning of this year.

In spite of these price increases gross margin contracted by 150 basis points as gross profit per liter in main flat versus the previous year in Peso terms and is reduced with the margin percentage-wise. Even with some efficiency gains and expense rationalization.

Operating margins still contracted by the basis points, taken to operation basically to breakeven for the quarter. I mentioned at the top of the call, that this was the highest level of margin pressure that we expect to see in the year for the business and let me spend a couple of minutes on this.

As you may recall, gross profit per liter was very flat in peso terms versus 2016. During the first quarter of this year, according to the terms set by Pemex, for all the stations operated in Mexico. At the same time, retail prices were up double-digit so the pressure on the gross margin was already there.

However, our profitability was helped during the first quarter by our lower cost inventory - right before the end of 2016. We do not have that benefit of the second quarter, but we have all the pressure without the release, we saw in the lacklustre numbers we reported today.

In terms of expectations for the second half of the year and beyond, as maximum prices - across territories, we should have a little opportunity in terms of retail levels, at disposal and we're optimistic that with strong brand execution will help us win and will gradually become a more open market place.

On this front, our objective is to gradually return our gross margin in percentage levels, where we used to have based on which we have built our operating expense structure. I think you would say probably two months ready to recuperate that margin. And finally moving on briefly to Coca Cola FEMSA.

Total revenues increased 25.5% during the second quarter including the results of Vonpar and the part from the consolidated of the Philippines. Mexico volumes increased but accelerated against a tough comparison base and we continue to grow more optimistic about - of our fuel recovery in the second half of the year.

However profitability was into some pressure from raw material cost and exchange rate to Peso particularly rates of Venezuela. If you were unable to participate in Coke FEMSA's conference call yesterday. You can access a replay of the webcast for recent details of the results.

So summing up, the second quarter surprised to the upside in the terms of topline growth. To the concerning Mexico again doing a lot of the heavy lifting across our operations. For our fuel in Argentina began to show more signs of stabilization for Coca Cola FEMSA, changes remain across several markets.

Margin-wise there is work to do across the portfolio, but it was encouraging to serve positive operating leverage - and as we look forward the second half of the year, we must remain vigilant in the phase of high inflation level and a tough comparison base in our key Mexican market as well as a soft consumer environment as well.

Now let me turn over to Juan for a moment..

Hi everyone. Just once again we've been doing last few calls. A reminder that we will take just one question per caller, this has worked very well and we want to make it permanent. So thank you and with that, we can open the call for your questions.

Operator?.

[Operator Instructions] and we will go first to Benjamin Theurer from Barclays. Please go ahead..

The one question I was having was, if you could give a little more detail on the Health Division.

If you could share how basically the progress is in Mexico, with getting one brand what you're seeing on same-store sales trends in Mexico and what's your outlook there and how does that compare in terms of where you are in South America already and what you think you can actually take in terms of best practices from South America into Mexico to hopefully get margins to let's say a healthier level because obviously in the quarter there was a little bit of pressure which I guess is cost related, so just to get an understanding where we're trending on profitability in the Health Division, going forward.

Thanks..

Well first of all the results were impacted by our inventory write-off that we have to make, the Maicao retail stores in Chile, which are, some beauty stores that we have a minor problem that we decided to recognize this quarter.

In the other hand, I think the way we've been working in our health division makes it really by, we integrated four changes and really the way to leverage those four changes together is to operate them as, if it were a single unit and really what we're doing is, really putting them altogether in one chain and then one that is established will be able to really to leverage our scale and grinding as a one single platform.

Then, we made this possible which I think we'll be ending this effort by the end of this year. We will involve little by little moving the brand where by using only one brand, but it will take a lot of time to recognize us.

Sometime ago when we bought some community stores in [indiscernible] we left the brand for some years and we started comparing our OXXO store little by little.

So I think in this time, we'll be able to do it more in a more aggressive way, but we'll just have to have the - we have to be, we have to have the trust of the consumer and at the very same time make the brand evolution real believable, so the consumer will not be nervous about it. So that's basically the plan..

Hi, Ben. This is Juan. Just to add to what Eduardo just said, part of your question on same-store sales on kind of relative performance and this is some color that we have been giving you throughout the quarters.

Obviously the blended numbers was 6.3 for the quarter, this is comprised of very good actually double-digit same-store sales growth in Colombia, which is very encouraging and I think consistent with our original expectation of how the different growth rates are going to behave in different markets, combined with a low single-digit same-store sales growth for Chile which I think is in line with expectations and slightly low single-digit negative growth in Mexico.

On that front I would remind everyone that we're still seeing very meaningful regional differences in terms of the consumer environment in Mexico and as you know the ESSA brand is Southeast Mexico brand.

It's still - we derive a lot of our economics from the part of the country that continues to experiment lot of pressure from kind of the oil related the things that have been going on with Pemex for now little bit, even over a year, people losing their jobs and things like that.

So when you're looking at the numbers just remember that Southeast Mexico, which is very, very important for our drug store operation is still going to a slowdown, this is also visible when we look at the OXXO number.

There are very significant differences between north of the country and the south and I'm talking about several percentage points difference. So just to keep that in mind..

Those things will be south of Veracruz..

Exactly..

Perfect. Thank you very much..

And we'll take our next question from Robert Ford from Bank of America Merrill Lynch. Please go ahead..

Eduardo, can you comment a little bit more specifically on year-on-year service growth rates in terms of revenue traffic and maybe some of the margin impacts at OXXO, from those efforts. Please..

Well the service comparative, we're still going - it seems like little by little the consumer is very - it loves to do things in OXXO and by the way we've been able to incorporate more services it seems like I think currently we have about 901, I think, 900 and 950..

A little bit over 1,000..

Over 1,000 different things you can pay at OXXO and so that is really making a major increase of how the consumer really feels doing those things in OXXO. In the other hand, the Telephony [ph] category which was sliding down to the US. It seems like it has stabilized.

In fact in the very last month it grew a little bit, so I think we feel that very confident that still there is room to grow and we've been also been able to avoid queues in some of the cashiers that were very much focused into paying services.

So in some of the stores that we detected those things, we were able to set off extra cashiers that will only do services. So I think those things are really happening right now and we feel very positive that will still grow for the next months or years. Really..

I think, Bob. This is Juan. I think you're also seeing different growth rates for different types of services. I mean, the bill payment that people have been doing for years that's probably not growing nearly as fast but if you look at financial services that's still growing probably north of 20%.

Actually if you look at the same-store sales composition at OXXO, the 10 plus number that we reported today comprised of - a traffic number that looks very healthy north of 4%, which is definitely reflecting some of the growth in services.

But a ticket number that is a little bit below inflation and this is related right because the services transaction is usually a smaller ticket, so it's big enough to impact the overall same-store sales number. You're getting a lot more visit, but smaller transaction.

Just to give you another data point, if we look at the Saldazo Card which of course correlates with the financial services we're now at about 7.8 million..

Close to 8 million..

Close to 8 million. So that continues to grow pretty much unabated we're still printing - 200,000 new accounts per month..

The [indiscernible] in one way we're also giving --making a social service because we've been able to bank wise, a lot of people that may have access to any banking account and in the other hand, those guys are very much linked with OXXO, so I don't know it seems of something but everybody is winning now..

And it also I think builds on the fact that, many of these consumers not necessarily feel welcome at banks. They're not used to go into the bank, but they're certainly made OXXO part of their daily routine so for them it's just going to the same place they're already going and being able to do more things while they were there..

And what percent of traffic now is coming from services?.

I don't think we've broken that down..

I don't know it's regional..

It's certainly - it's a growing number. Bob. We'll see we can get some information for you and discuss that later on..

Fair enough. Thank you very much..

And we'll go next to Luca Cippicia from Goldman Sachs. Please go ahead..

Just to change subjects for a second. I was curious if you could give us an update about the plans that you seem to have at some point around, the US and Texas for OXXO.

I remember that, there was that formal peach or project and then there was yet another ruling confirming that the fact that you came reconcile the Heineken participation and the presence, with the retail former there. But we've been talking about that for a while, I'm sure we'll touch on all the other subjects in the other questions.

But from my side, I was curious, if you could give us a bit of an updated view on that project and how do you think, you may continue to push that going forward in the medium to long-term and is there any change there, that would be interesting..

Well, unfortunately during the quarter I don't know this quarter or last quarter, we received a ruling from the Supreme Court of Texas that they didn't move the [indiscernible] relation for us in Texas.

So and really Texas is a market that is really is very much appealing to us because of the how the brand is well-known and we already have some two small operations in Texas and unfortunately really the lack of beer and lack of alcoholic beverages makes the stores not to lose money, but we do - we're breaking even.

So really unless we have the beer sales into the [indiscernible] being able to do those in the United States, it will be very difficult to pursue a different track. I don't know you'll have to add anything..

I mean clearly we have kind of worked this issue has worked its way through the course - obviously there have been the right time to remember at least three different instances I think also the original ruling, the appeal and then the Supreme Court ruling that Eduardo just mentioned, so clearly this has taken a while.

Obviously Texas is not the only state on the border but it is a most compelling as the one with the most number of kind of relevant border towns, sort of markets that would make this the ideal place to test up, so in a bigger way on the US now.

This is also contingent as you mentioned on our level of ownership/influence on Heineken and that is something is that is not also set in stone for eternity. So I guess what I'm trying to say that we'll within FEMSA to continue to look at ways to tap into the US economy is there, so we're going to continue to look for ways.

It is unfortunate that the most obvious one which is the OXXO in Texas is at least being delayed indefinitely and again related to whatever we decide to do with Heineken, but I don't think we're giving up. I know that over the board level there is this, willingness to keep looking so we're going to keep doing that.

But for the time being unfortunately as Eduardo said it doesn't look like we have other opening..

Okay, that's very clear. Thank you. Thanks for the clarification. Thank you..

And we'll take our next question from [indiscernible] from Bradesco. Please go ahead..

I just want to little bit details. You mentioned already about services, but I'm just trying to understand here in terms of the financial services specifically. I mean, is there any plans on having partnership and financial services provider, banks and so on.

In order to really enhance design here and if so, is there any guidance you could give us in terms of how much you could gain in terms of gross margin from this operation still? Thank you..

Well the latest new banks that we added, that we'll be coming correspondent of the services will be HSBC and Banorte.

And Banorte was I think a very good one because in small market Banorte is very important and in fact our competitors have Banorte so, I think the cooperation of these two banks also have improved over our competitive position in those markets.

I don't know about integrating more into financial service or into banking is really something that we're not considering there now.

Our relation really - are very much related be a non-bank; bank and those relations allow us to do something that our banks are not allowed to, so I think in that particular spot where we, I think we feel very confident and we didn't see more integration around. I don't know, if you want to add anything, Juan..

Yes I think in terms of partnerships clearly, we have selected partners for different products.

Right so we have a partnership with Citibanamex for the Saldazo Card that has exceeded I think expectations in terms of how many accounts we - I mentioned a few moments ago, we're about to reach 8 million accounts on that, we have a partnership on the correspondent banking now including HSBC and Banorte, which basically a lot of the bigger bank that operate in Mexico, we have a recent agreement with Western Union, which is not - it's not a bank, but it's certainly a financial institution for - this is a very new kind of recent development of kind of last two or three quarters for OXXO to participate more actively in the receiving end of remittances from Mexican people living abroad.

I think in terms of all factually beginning originate credit or really stepping more into the actual operations of a bank, as Eduardo just said that is something is not in the cards right now, we're happy to become somewhat of a toll collector is a way that I refer to it sometimes, where we do have, we receive small revenue streams from a lot of different transactions and we're happy to play that role for the portfolio time being..

We might be considering after the integration of the drug store addition in Mexico. We might reconsider adding some of those service into the drug stores, but I think finally the first stage is to have all these integration complete in order to provide this service to the consumer and some other FEMSA commercial..

Right that's an opportunity that is on top at this point..

Yes..

Okay, great guys. Very clear. Thank you..

And we'll take our next question from Carlos Laboy from HSBC. Please go ahead..

Eduardo, now that we're partners. I can ask you tough questions. Have you made a decision yet on whether you expect to sell beer in Brazil regardless of Heineken? And if you compete with Heineken would you be contractually required to sell the equity stake as a contract stands today..

I really think that we have an hour's lengthy negotiations with Heineken and really Coca Cola FEMSA will have to do whatever they need to do in order to be - to tackle the market the way they want to do it and I think the relation with FEMSA with Heineken is really an accidental relationship for them, which is will not affect their decision to do whatever is best for Coca Cola FEMSA in the Brazilian market.

And you know the same way we proceed originally with Heineken in terms of OXXO - when OXXO has the opportunity to negotiate the deal that we have with Heineken, we're partners with Heineken in one hand but on the other hand we have these additions that I have to do whatever they need to do, to improve that performance and improve those for the shareholders.

I don't know if you want to add anything..

I completely agree with that, to Carlos's kind of the last part of this question.

I don't think you should expect any change or any incremental pressure announced to them in terms of the ownership stake which said before we're - continue to be very happy with the performance of Heineken, with their strategy with their outlook and whatever happens, at the operational level whether it's Heineken's operation in Brazil or Coke FEMSA's operation in Brazil or the OXXO-Heineken relationship in Mexico, you should not expect that to trigger any kind of transaction at the shareholding level or I would say any deterioration in the conversations between us and Heineken at that level..

Thank you..

And we'll go next to Alex Robarts from Citi. Please go ahead..

I guess I wanted to go back to drug stores and I appreciate the color you gave us breaking down same-store sales and such. I'm just trying to better understand frankly you've come out this year with about 50 basis points contraction in that EBITDA margin and 50 bps contraction also in the second quarter.

And I'm wondering in the biggest pressure on the margins right now in drug stores is this fall off to declining same store sales in Mexico and - kind of understand I get the idea of oil heavy southeast end markets and the pressure there.

Are we - suggest that somehow Pemex layoffs have stabilized and could it just be that this real wage erosion the Mexico generally is hitting this part of the country worse and you kind of alluded to some competitive dynamics. I'm wondering if they have intensified compared to perhaps last year or early this year and kind of to wrap this question up.

You started saying that, the guidance would be flat to slightly up in the margin in healthcare and in health and drug stores this year. Do you feel that that's something that you want to stick to or might that be something that you would consider revising. So that's the question on drug stores. Thanks very much..

Yes, we did have some competitive pressures in the market because competitors reacted very aggressively by Indonesian prices and because of the lack of the correct systems in the stores, will reduce the prices accordingly and I think we're learning and because of the system that we're incorporating to the operations of the healthcare division that probably we should have reduced prices across the board that now we being the position to reduce prices only in the items or in the units where we can, where we've been attacked.

So I think part of the process of having a backbone and integration backbone and having the same system, is by having somewhat competitive tools to difficult to complete in the market.

So I think that particular fine tuning is been improved and we've been seeing some of those resource by just reducing prices where we've been attacked and not reducing prices across the board.

Also the other thing is by incorporating more of the generic medicines in the portfolio; so far we're making progress by incorporating generic brands to the portfolio which also give us some price comparisons in the market that will benefit our consumers. So I don't know if you want to add anything, Juan..

Yes just the fact that, I mean the expectation has always been for this year that South America will provide cover for Mexico. Mexico is going to all these very material initiatives.

Obviously as we mentioned in a quarter like this, when where we had this situation with inventories and the beauty store that puts a little bit of pressure on the South American numbers which in turn it kind of trickles down to the absolute number.

I think expectations margins for the whole of health division should be stable, is what we're looking at right now. I think the possibility that they expand I don't think it's not there, but maybe that should not be a base case, where we stand today and we should be thinking about stable margins for the year.

And then as Eduardo mentioned as the outset, let the tools and the things that are being built in Mexico begin to work the commercial front and that will begin to repost those benefits in 2018..

Okay, I mean fair enough. I just wanted to clarify the early comment on generics. As you kind of move toward the generic products, is it fair to assume that a higher proportion of those in the mix, is good for margins.

Were you suggesting that the more generic medicines give you a little bit of margin pressure, sorry just to clarify that? Thanks very much..

No, I think it will enhance our position with the consumer and in the other hand it will give us some better margins and I think really by having, the cooling system that we have in this division, our own logistic system was improved, the possibility of having more generation to our portfolio because all being generics that will be used with our own brands in the stores and those need logistic there is to get to the stores and I think the margin - there will be two-fold thing one is improving our competitor position and the consumer appeal for those problems and number two, margin improvements..

Yes just to clarify to your point Alex. Increasing generics in the mix is without question enhancing to profitability..

And let me just give you here another a number that Maedilla [ph] is giving to me, if we haven't had the inventory write-off in Maicao, the number of the operating profit of the health division that we have improved around between 15% and 20%, so it really was a strong heat that these write-off that we decided to make it completely on this quarter, so just to give you some quarter really how big the impact of that write-off was for the year, for the quarter..

Which is already something that should not happen and will very happen quickly?.

Yes..

No, for sure. Accepting the 20% of what? What was that point there? Sorry..

The operating profit, we haven't had. We mentioned that the resource for the health division, were impacted negatively because write-off of inventories that we did in our Chilean operations, that write-off that happened in the Maicao stores which are the beauty stores that we have in Chile.

We haven't had that write-off the operating profit for the quarter will have increase above 15%..

For the drugstore business? It would have been that. Okay..

Yes..

Okay. Thanks that's very helpful. Thanks guys. Thank you..

And we'll go next to Chelsea Cullen [ph] with TIAA. Please go ahead..

I was just hoping you could provide some additional color around what you're seeing in terms of volumes in the fuel division and if you could just provide a little more color to on, what you mentioned as some uncertainty in terms of supply, what your outlook is there and what exactly do you mean by that?.

The price increase of gasoline which was around how much 20%?.

17%, 18%. Yes..

17%. Really renew the volume of the gasoline consumption in Mexico I think around 3 or 4 percentage points. And we really gained share because our volume reduction was 0.5 I think - and the volume.

So really if we compared that with the market reduction for consumption with gasoline really, we have gained share in most of the market where we are and we do expect that prices of gasoline impact, they have been - they have been reduced slightly and we see the volume of gasoline coming up again because really consumption in Mexico has been strong for the year.

So there was some [indiscernible] the Mexican market went down 3.5 I think around 3.5 and our numbers went down 0.5..

I mean if you look at the first six months were basically flat..

Yes..

So it hasn't been very big deceleration in the volume and on the supply side.

I think what we're referring to is, you've read probably about this open season that is supposed to be taking place in terms of the infrastructure of Pemex being auctioned or excess capacity on the infrastructure, the pipelines, the store facilities being auctioned to third parties.

The profit went ahead in the Northwest of the country which is not a huge [indiscernible] for it, it's not part of a country where we have any significant presence.

We're much more keen to see what happens in the Northeast of the country where we have maybe 70% of our volume and certainly in the center and the south of the country where we have some presence. But just generally speaking, I think all players are waiting for the rules to be finalized.

I mean to Eduardo's earlier comment about how back in January the terms from Pemex were that everybody had to kind of share the pain a little bit and so margins remain stable in Peso terms even though the retail price were going up 17%.

So those types of things I think players are waiting to see how it all turns out, what happens with open season in the Northeast of the country and the center of the country.

Who comes staying as a potential second player that we could add at some point then have more than one supplier which is at that point, that your scale begins to be more relevant? So some questions that still need to be answered before I think people commit more capital to the industry.

Having said that, we mentioned in our comments so mid-June maximum prices began to phase out in the North east of the country, which as Eduardo said gives us a little bit more flexibility and how we use the levers at our disposal, as retailers and what will be or is already beginning to be a more open market and so that makes us optimistic that we can trend back towards the type of margin that we had a year ago or two years ago..

So mid-June is when you started to see prices for your supply come down or more likely in--..

Prices at the retail level. So as of mid-June gas stations in the North east of the country were able to begin to decide basically what is the price at which they are, they want to sell and of course the consumer obviously is beginning the process of learning to live in an environment where gas prices differ from one patient to the next.

So I think that again it gives station owners - more degrees of freedom in terms of what you can do, with your prices but we're all going to have to learn, as that goes on..

Okay, got it. Thanks..

And we'll take our next question from Martha Shelton from BBVA Bancomer. Please go ahead..

Just regarding the piece of unit, unit openings at OXXO. I noticed year-to-date we've got about 549 openings which is more than 35% higher versus the first half of last year.

So just trying to get a sense for what sort of unit gross opening target you have for 2017 and beyond, should we still be thinking about 1,200 units or so or should we be nudging that up a little bit..

I think you would nudge it up a little bit..

That's why I don't like having Eduardo on the call. He just says like it is..

Not but really it's something that I wasn't [indiscernible] also, really to have more openings in the very first half of the year and these guys thank god, I'm no longer with them. They've been able to move more openings in the very first half, which I think is a great news.

When you open up stores in the very last quarter being December such a busy month having new stores is a painful experience, so it's very nice what they have done. I think I'm very grateful and I'm very happy to see these openings of stores in the second quarter, I think is very good news..

Yes, I think in all seriousness this effort to kind of flatten the curve so that you have more openings in the first half of the year. This is something that you also have been struggling with for years.

Years and years and as Eduardo said there is the objective of being done with the expansion by the end of November, so that you can kind of leave what the operators be for the most important month of the year..

But our official data for not opening stores anymore will be usually November 3 and according how the number is moving sometimes we give one more week to open up stores, so I'm very happy that probably this week in December would be close again, so we can speak to operate well the stores and save our customers better..

The guidance that when we talk to the OXXO guys they're still, they're sticking to their at least 1,200 stores but obviously what we said today I think we can probably have a bit of an upward bias on that number. I don't think we're ready to formally operate the guidance to something close to 1,300 I don't think we are there yet.

But it's looking good..

Okay, thanks so much..

And by the way, I mean just sorry on that thought, the earlier we open stores the more months that they're selling, right. So this whole ties us into the same-store [indiscernible] absolute sales number and margins for the year and margins are sensitive to sales and so it brings all kinds of good things to open store faster..

Sure. We'll take our next question from Margaret Schwartzberg [ph] from Stifel Nicolaus..

I was hoping we could talk a little bit more about Brazil specifically and based on what Coke FEMSA told us yesterday I appreciate that there was this dramatic turn to positive volume in the month of June after some pretty significant declines in the prior two months.

So I appreciate that's an improvement and I see how that's contributing to your own optimism.

But I was wondering if you could give us a little more meat on that bone because you're describing the consumer environment is generally improving and I'm wondering what you're seeing other than because the critics view would be, it's only one months of improvement.

Why do you believe there is something deeper and better unfold in the way of consumer behaviour?.

The Vonpar synergies and the Vonpar integration in the Coca Cola FEMSA operations Brazil has been better than expected.

I mean what these guys have done a tremendous job and I think the contracts that we already have tackled the Brazilian market by having Vonpar's around little close to 50% of the Brazilian, so I think we're in very good position to exchange a better practices to integrate, to work as a one single unit and I'm very positive to see what we're seeing Ian, Greg [ph] and his team building for Coca Cola FEMSA in Brazil..

I think kind of at the company specific level, you have seen improvements in execution.

There is Coke system as you know has all kinds of metrics where they regularly kind of measure their bulk as to see how they're doing relative to each other and Coke FEMSA Brazil has improved significantly on that front as well, so it's hardly what we think is happening on the macro side, but it's also a lot of things that have been kind of sales execution in the market..

[Indiscernible]..

Exactly. So now to your point. One month does not make a trend. It has been a while that we have not had positive volume growth during the month. So there is a number of variable that seem to be converging in the right place that make us optimistic. Obviously we could be here three months from now saying how things are going south again.

We don't know that, but we have more reasons to be optimistic now that we've had probably in the couple years..

And is it fair to say your econometric work or whatever work you do on, what determines consumer behaviour in Brazil. I know the Coke FEMSA comments excited moderating rates of inflation.

Can you just speak a little bit more about the macro environment and what you're seeing there?.

I mean we're definitely seeing that. Inflation, it's a big deal because you're already coming from very high levels, but at the same time there is - we don't have a crystal ball and there is as you know uncertainty on the political front and a lot of things happened during the last three months.

So I think you should take this as from a company that has significant operations from the ground and improving outlook, but the data points are, they're fragile somewhat. Yes that's how you correct, right..

Great. Well thank you gentlemen..

And we'll take our last question from Jose Yordan from Deutsche Bank. Please go ahead..

Just a quick follow-up on the fuel division. Eduardo I think you said that you would expect gross margin recovery in two to three months which would basically just bring us into a normalized number in the fourth quarter.

But I was just curious as to by normalized do you mean the sort of close to just under 7% of the first quarter or the closer to 8% in the fourth quarter of last year.

Where do you think will you stabilize that?.

I think currently what we could move our margins will be around 60% of the gasoline stations where we run, which are the markets where we move we can move minus and recover to set up our margins. Well we have this our [indiscernible] to work which is around 7%..

Yes, I have to say, the gross margin before these adjustments and changes by Pemex was 6.5% gross level and Eduardo to his point. I mean right now we're only operating with about two-thirds of our volume in parts of the country where we now have some freedom to play..

And in those markets I feel, I feel confident by September that we'll be able to recover the margin in those particular months which is two-thirds..

Correct, so the blend is still going to be below 6.5%. I think by the end of the year, we should be running at 6.5% gross for the whole of the business..

Yes and the problem was - even though the margin was turn off - in Peso terms, the thing is that some of the viable, some of the expenses are very much related with income and let's say just tariff cards, 50% of the gasoline sold in our gas stations sold through credit cards and credit cards really is a viable expense and is very much related to volume and price..

Okay, great. Thanks a lot..

All right, ladies and gentlemen. That is all the time we have for questions for today and I would like to turn it back to Mr. Padilla for any additional closing remarks..

I'm glad we're able to meeting again. Thank you very much for your presentation today. Have a great rest of the week. Thank you very much..

Ladies and gentlemen, if you wish to replay the webcast for this call, you may do so at the Femsa's Investor Relations website. This concludes our conference for today. Thank you so much for your participation and have a nice day. All parties may now disconnect..