Juan Fonseca - Investor Relations Miguel Eduardo Padilla Silva - Corporate Officer and CFO Maria Elena Gutierrez - Management, Fomento Economico Mexicano.

Alexander Robarts - Citigroup Inc. Antonio Anaya - Credit Suisse Damian Witkowski - G. Research, LLC João Soares - Bradesco S.A. Luca Cipiccia - Goldman Sachs Group Inc.

Mark Swartzberg - Stifel, Nicolaus & Company, Incorporated Pedro Leduc - JP Morgan Chase & Co Robert Ford - BofA Merrill Lynch Robert Ottenstein - Evercore ISI Rodrigo Echagaray - Scotiabank Global Banking and Markets Damian Witkowski - Gabelli & Co..

Good morning, and welcome, everyone, to FEMSA's Third Quarter 2017 Financial Results Conference Call. [Operator Instructions] During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the company.

These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. At this time, I'll turn the conference over to Eduardo Padilla, FEMSA's Chief Corporate Officer. Please go ahead, sir..

Good morning, everyone, and welcome to FEMSA's third quarter 2017 results conference call. Juan Fonseca and Maria Elena [indiscernible] are also with us today.

As we usually do, we will focus the call on the consolidated figures for FEMSA and on FEMSA's commercial results since many of you probably have had the opportunity to participate in Coca-Cola FEMSA's conference call on Wednesday.

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. Before we get into the quarter results in more detail, I would like to comment briefly on our decision to divest a portion of our stake in Heineken.

As we communicated in other time, we continue to have a very positive view of Heineken as a long-term investment and this transaction does not reflect any change in our view or expectations.

However, the transaction allows us to partially monetize our position while retaining our existing governance right in Heineken taking advantage of the favorable tax treatment afforded by the repatriation decree issued by the Mexican government.

In accordance with the decree, we plan to invest the proceeds of the transaction to support our goals initiatives in Mexico in the coming years. Moving on to discuss FEMSA's consolidated quarterly numbers, total revenues during the third quarter increased 14% - 14.3% and income from operations increased 29%.

On organic basis that is excluding the results of Vonpar and Coca-Cola FEMSA's Philippines operation, total revenues increased 5.4% and income from operation decreased 5.9%.

However, reported net income was more than fourfold relative to the comparable period of last year mainly driven by the sale of 5.24% of FEMSA's combined interest in the Heineken group. Our effective tax rate was 15.8%, reflecting the tax treatment afforded by the repatriation decree from the sale of the Heineken shares.

In terms of our consolidated net debt position during the third quarter, it decreased by approximately MXN 60 billion compared to the previous quarter to reach a net debt of MXN 19 billion at the end of September mostly reflecting the cash inflow from the sale of the Heineken shares.

Moving on to discuss our operations and beginning with FEMSA's Comercio retail division, we opened 235 net new OXXO stores during the third quarter, reaching 1,304 net store openings for the last 12 months.

This number continues to affect the strong pace of opening that currently puts us ahead of our stated objective of 400 stores for the full year 2017. Revenues increased 12%, also same-store sales were up 4.9% driven by a 3.8% increase in average customer ticket and 1.1% growth in store traffic.

On the subject of tickets, we continued to see a change in mix coming from fast growth of our service category that tends to have a low ticket and therefore pulls our average ticket down a bit. Also, we continued to see mainly of our suppliers passing through lower levels into inflation relative to the national reported inflation numbers.

On the subject of traffic, was positive, we saw a negative impact coming from the natural disasters that occurred in September. Having said all that, year-to-date our same-store sales have grown a healthy 7%.

Moving down the P&L, for the third quarter gross margin expanded 60 basis points on top of our demanding comparison base of 80 basis points in the previous year reflecting as is usually the case sustained growth of the service capability including income from financial services; number two increase and more efficiency promotional programs with our key supplier partners; and number three, healthy trends in our commercial income activity.

Operating income increased 6.6% and operating margin contracted by 40 basis points reflecting our continuing initiatives to improve the compensation structure our key in-store personnel.

Number two, sustain high electricity charge year-over-year; and number three, higher expenses related to the secured transport of increased amounts of cash and the gasoline price increase that happened in January that impacted that transport.

Based on these factors and given where we are margin-wise 9 months into the year, it looks like our operating margin will contract a little bit for the full year coming slightly below our expectations of flat margin.

Moving on to FEMSA's Comercio Health Division, we added 34 drugstores to reach 2,178 units across our territory at the end of September. Revenues increased 1.8% with stable same-store sales. Gross margin expanded by 90 basis points in the third quarter reflecting a better sales mix and improved pricing and operating margin expanded by 20 basis points.

Our sales - SG&A grew above revenues effecting our ongoing efforts to integrate our regional operations and investment in infrastructure into - while building a platform of integrated company and to develop our own distribution capabilities in this key market.

Those efforts are well-advanced, and we are on the track to be largely done with integration phase by the end of this year. For its part, FEMSA's Comercio Fuel Division added 7 gas stations during the third quarter to reach 397 units at the end of September and 49 net new service stations for the last 12 months.

While our expectation is for the pace of additional during the last part of the year and beyond, it is possible that we may come up a bit short of the 80 additional stores that we had originally expected for 2017.

Same-station sales grew 16.2% in the third quarter as average price per liter increased by 18% reflecting national price increases instituted at the beginning of this year while average volume decreased by only 1.7%, much better than the industry.

Gross margins contracted by 50 basis points and operating margin contracted by 20 points year-over-year, but improved sequentially over the previous quarter.

As we mentioned back in July, as the industry continues to transition to free market pricing, we should have more flexibility in terms of the retail levels are responsible and we are optimistic that our strong brand and execution will help us win in a more open marketplace.

On this front, we aim to gradually return our gross margin to the level we're used to have based on which we have built our operating expense structure. And finally, moving on with the Coca-Cola FEMSA's total revenues increased by 16.6% during the third quarter including the results of Vonpar and the impact from the consolidation of the Philippines.

Real pricing in most markets help us offset currency pressure and volume trends were encouraging in the Philippines, Argentina and increasingly in Brazil. However, profitability was from raw material cost and exchange rate fluctuations.

If you were unable to participate in Coke FEMSA conference call last Wednesday, you can access a replay of the webcast for additional details of the results. As we look forward to the end of this year and beyond, we are optimistic but cautious regarding the Mexican consumer.

Inflation has dampened, fuel rate increases and consumer sentiment and after 3 years of solid growth, we are moderating our expectation for the fourth quarter and into the next year. At the same time, we are gradually becoming a bit more optimistic on Brazil.

Having said that, as you know, we take a long view of FEMSA and we will continue to forge ahead in our investment plans and growth strategy that will build the future of our company. Now let me turn it over to Juan for a moment..

Hi everyone. Just once again a reminder that we are going to be taking one question per caller, so far that's worked very well for us, so we want to make that permanent. With that I'll open it up for - let's open it up to questions. Operator, please..

[Operator Instructions] Your first question comes from Luca Cipiccia from Goldman Sachs..

I wanted to ask you about the proceeds from the Heineken disposal, partial disposal to see if you could give us some perspective on how to think about where you may allocate that capital going forward when there was a window of time and opportunity that you wanted to use, but should we think about more in terms of acquisitions or adding to the existing particles? Should we think about to proceed the way to have more CapEx flexibility, maybe if you can contextualize how those proceeds may be deployed and also in terms of priorities where some of the capital may be allocated?.

Basically, we basically have some requirements and we just have to fix those assets for 2 years with some specific regulation and we're in the process of establishing that. We really - we are in the process of redefining or these asset base how to see it for the future.

Without that, these next 2 years will be very important to think it over, redefine where these investments should be allocated. And basically, the relation also said that we should use those proceeds from that in our Mexican investment.

So first we'll be allocating those Mexican investments with these proceeds, and secondly, we will think it over after these two-year piece of assets to understand better the market and look forward for opportunities to build in terms of FEMSA's portfolio for the future. I don't know you want to add anything..

Yes, hi Luca, this is Juan. I think as you know when we think about M&A the question of returns and the spread between returns and cost of capital is always a big part of our decision-making process, and so in that vein the comments we'll be making actually some on this topic.

Try to send the message that the retail assets which generally offer higher returns and attractive spreads are obviously going to be a part of that discussion. We have talked in the past with you about opportunities in the Spanish-speaking parts of South America, so we talked about Peru, Ecuador, and Argentina. We look at Brazil with caution.

But as Eduardo was saying for the proceeds of the transaction we do have the constraints that they need to be invested in Mexico for the next couple of - I mean if they're invested in the next couple of years they have to be invested in Mexico, very discrete type of assets. So obviously we invest in CapEx MXN 400 million, MXN 500 million per year.

This brings some flexibility to the whole balance sheet management. There are some things that we have in the pipeline. There are some things that we would aspire to be hopefully put in the pipeline.

So, I think to lot of those earlier comment one of the things he's been thinking about and talking about a lot is kind of the portfolio-wise what - which of our businesses we're going to be focusing on growing horizontally and which we're going to be growing vertically.

So, the optionality that this brings is very compelling and I think one of the messages we need to get out there is that we're going to be as disciplined as always not because we - obviously we have $5 billion in the bank, but that doesn't mean we're going to be less disciplined regarding valuation or fit within the portfolio..

Yes..

But just to clarify, the so 2-year freeze means that you - if you want to deploy that capital within the next 2 years it would have to be Mexico and after that in theory you could do - you could deploy it wherever you like, is that correct?.

Exactly, correct..

Yes..

And then whatever the buckets of cash we had before the transaction, those we could utilize more broadly..

Your next question comes from Robert Ottenstein with Evercore ISI..

You've made comments I think over the last couple of quarters that you're getting more optimistic on Brazil and I was just wondering if you can go into that in a little bit more detail please?.

Well, the Brazilian economy this year I think is going to grow a little bit below 1% and our forecast for next year will be that probably the Brazilian economy will be growing at around close to 2%.

And the soft drinks market really had a strong heat this past 2, 3 years and we're just sensing now that we are experimenting the sense that the - Brazil has bottom up and we're in the process of regaining those volumes. I don't know if you want to add anything..

Yes, hi, Robert, this is Juan. I think already when we look at our own volumes for a long, long time, a couple of years maybe, we saw pretty significant contractions in volume on the Coke FEMSA business, and in the last - since June I guess we've had a couple of months where volumes have actually grown.

And generally, it does seem to be bottoming out and I think generally the operators in Brazil are increasingly seeing more data that is constructive. I know - I mean you - already you follow Heineken I believe in their numbers that they published yesterday, they talk about good volumes on the beer side in Brazil as well.

So, we just putting things together, obviously this would not be the first time that everybody turns a little bit optimistic on Brazil and then it doesn't materialize, but I do think we have more tangible signs this time around, I mean versus last year or the last couple of years to have us actually talk in this call about some improvement and some bottoming out compared to the - what turned out to be kind of false hopes a year ago or 2 years..

And I will also add that our logistics operations although we have not start gaining price, to be able to back prices up, but I think volume is increasing too..

Yes, that's another good point. I mean, another point of contact that we have with the Brazilian economy is through our logistics business which is spread across the territory of Brazil and the sentiment from our operators there has also been turning more positive based on actual data points with customers..

Exactly..

And just as a - just following up on that how you've been dealing with the sugar price increase and how do you see that playing out?.

I mean we usually have some hedging in place.

Maria Elena, do you want to comment specifically on that?.

Yes, of course. Our outlook for sugar, and at least in Brazil which is a market that follows international prices, we have some hedges for the rest of 2017. And starting 2018, we also have hedge established there taking into account that the trend seems really favorable for us.

In the case of other territories, you know that sugar prices are local prices, so it's - sometimes it's hard to say if we can hedge that, but what we do is try to find pre-buy to offset the price with our suppliers.

In the case of Mexico, we've said it 2 days ago that prices will probably remain at the level that are right now for the rest of the year and probably 2018..

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

I was hoping you talk a little bit about the cost structure, any outlook for improving operating leverage.

You're about to have some energy price pressure, labor hikes and OXXO you've been going at the Mexican pharmacy, European infrastructure for a while as well and I was just hoping to get a sense for your expectations going forward in terms of the kind of operating leverage we can anticipate or be it in maybe a slower environment?.

Let me comment about OXXO. Usually the way we have been growing OXXO in Mexico and in South America is like having these service office, the plazas and the stores.

And these plazas, we work - these plazas usually have been the case that each plaza will manage 250 stores because the - and that's where we'll be growing, and it seems like all the growth is really - all the expenses are viable.

And we are really challenging that because the current systems that we have, the current protocols that we have, it seems like we could expand - we could challenge that in order to build probably what used to be one plaza to make 2 or to make 3 and make regions instead of plazas and that is something that we're challenging.

We don't have any idea it will be able to pursue that idea and make some reduction in expenses, that is something that we are pursuing, and we are challenging probably, we're going to be testing next year.

And the - in terms of energy I think energy prices I think they already made the cycle, so that I think that will be also the transport of cash which is usually allocated to the store, I think that is also - we don't see a price hike in that matter. So that - I will give you that, that will probably be my briefing also.

And we are learning that to do - we're pursuing that also in South America in order to have a different way - we have very centralized way of managing, we're challenging that it could make it more efficient..

Yes, I think on top of what Eduardo just said, in the case of energy the year-on-year increases have been coming down, so last quarter we're talking about something like 40% year-on-year. This quarter we're talking about something like 20% year-on-year, so there's a little bit of improvement there.

But more importantly I think as we head into 2018, some of the wind generation that we have off-taking contract for will come online, and so we expect actually for - to have tailwinds from the energy costs next year I suppose to headwinds which is what we've had this year.

I think as you correctly pointed out, a big part of the investment in merging the 3 drugstore companies and having them all right on the same ERP is also going to be done in a few months.

And then on the fuel side, also we should - I think the outlook for margins is also better now that the market is moving to kind of open pricing and we continue to gain a little bit of scale.

So, I would say generally for all the three businesses or the three formats the outlook for costs, there's reasons to be optimistic vis-à-vis 2017 which has turned out to be a tough year..

And just as a follow-up to that, can you touch on the percentage of energy that you'll be obtaining from wind? And then with respect to the pressure that you mentioned, and I think you alluded to in the press release with respect to the armored truck service, is there an opportunity to take some pricing on a service business to cover that or is it still too early?.

On the wind part, I know that it's more than 50%, I mean the target is 85%, I know that we're not going to hit it next year in 5%, but I think it's going to be something like 50%, yes, 50% of our electricity needs will be coming from wind at the end of next year.

In terms of the cash transport, this part of increase as Eduardo was saying earlier had to do with fuel cost, so we don't expect that to happen again next year.

Certainly, part of it has been that we just accumulating more cash especially through financial services, but a big, big chunk of it has to do with fuel, so again that is something that should not be recurring..

And you were asking as you were able to increase the price for those services and well, we don't - we might, but I think it's very sensitive because it's - we are already charging a price that usually the grocery stores do not charge although we're really charging for convenience, so that will be our results as we go up probably for the second semester next year..

Yes, Bob, we just double-checked. The figure for renewable energy next year is 45%, and then it goes to something like 80% in 2019..

Our next question comes from João Soares with Bradesco..

I'd just like to get a little bit more color on what's happening in the Health Division, and if you could try to explain a little bit better what is related to the competitive environment and what is exactly related to pressure from the markets and as fuel prices normalize, how should we perceive this operation? Those are my question..

Well, in Mexico, thanks to this infrastructure investment that we're having, we already been able to start buying - making these economies of scale while we buy with labs here in Mexico and able to improve our margins. And really - and the other thing is that we will be able to move - be able to allocate pricing in a better way.

So, I think by next year we will have better tools and better management tools to improve our value proposition and to gain margin out of that.

I missed what you said about South America, did you say anything?.

Yes, no, I mean I think the comment that we should also make is that in our strongholds, do you remember how in Mexico we rebuild our company - we're building our company based on three regional companies, right, one the bigger one based in the Peninsula, Yucatan Peninsula, southeast Mexico; and then 2 of them on the Pacific and the west, northwest part of the country.

And so, on the competitive front, you've certainly seen some activity from 2 or 3 players that are as large or larger than us in some of these markets and as I mentioned we have such a big footprint in the southeast of Mexico that even though it's been more than a year, by now it's probably been 2 years since the national oil company Pemex began rationalizing their labor force and their cost structure, so even though it's on easy comps, it continues to contract.

I mean if we look at the OXXO numbers for example and we look at those same states in the southeast, they continue to under-perform the rest of the country by 2 or 3 percentage points.

So those - certainly the impact in the southeast where we have probably half of our drugstores in Mexico has been a big reason why the numbers have been so much sluggish. Having said all that, this quarter was a little bit better than the last few quarters, so we're optimistic on that..

Your next question comes from Antonio Gonzalez with Credit Suisse..

Eduardo, congratulations on your recent appointment and hopefully you'll have a lot of success. I wanted to ask you if you can share with us some big picture comments on what are the main elements of your mandate or your vision as you become CEO of the company.

Could you give us some additional color please on what the main mission that you foresee for the next few years, is it finding a new corporate structure for FEMSA after these partial divestment from the Heineken stake, or is it growing more in the existing format? And is there any one particular area where you see great offside that have not been explored yet, FEMSA or perhaps exploring the growing e-commerce opportunity in Mexico, is there anything else that captures your attention? And also, just as a quick follow-up, how are you thinking about succession planning for the company from here? Obviously, there's a CFO position still to be announced, but more broadly I guess how are you thinking about bringing the talent that will be perhaps the next generation for FEMSA? So, any big picture comments on that would be really appreciated..

Well, thank you very much for the question, Antonio, but I think you almost answered the question as well. You said the - all the issues that we are facing.

As you said, going forward to establish the business portfolio for the future of FEMSA for the next 20 years has been - is going to become very important and that will be a very important assignment of how to allocate with this disciplined approach all this capital and to build, and these investments will have to be also built around our capabilities, what we do best which is we're very massive, a very massive company, that we do very real things in a very disciplined way, in a very expanded with a geographic….

Footprint..

...footprint.

Secondly, I will say that also for us important the way we do things, and the way we do things, I think we at FEMSA to have a transversal culture of way of doing things that we can say that the FEMSA's mindset is established everywhere where we go and this - these transversal culture, although we are rebuilding it, I think it's very important to make it a very important tool for the future.

Thirdly I would say what you said about talent.

I think talent - we are in the process of a generation that is phasing out of the business and the new generation that will come in, and I think it's important to have this pipeline of extraordinary talent facing up, establishing it and having the - all these bracing systems in ourselves in order to build these new mobilization of managers that will be taking over this company for the future - for the future 10, 20 years.

I would say also the - to focus our operations, I mean, as I said this massive orientation of doing things with all these clients that we touch everywhere in Latin America and the Philippines, and also the customers that we touch every day in our stores, these kind of a massive approach of doing things, we have a connection that we're having a lot of data, we have a lot of data for customers, we have a lot of data from clients, and really we are facing that we have major opportunities to explore this data to do our things in a better way.

And I think these, it will be demanding probably some capabilities that we currently have kind of latent, but we have not explored the project correctly for the future.

And as I said to be always a benchmark reference for operations in the indices we are, and as you said these seeds that we have planted in some other industries where we have given capabilities, [indiscernible] there might be opportunities to expand them in a more aggressive way.

I think that will be probably, I don't know, first view of whatever our challenges ahead, but as you said - as I said before, Antonio, you really touched in most of them in the question that you raised..

We'll take our next question from Mark Swartzberg with Stifel Financial..

Mexico, could you elaborate on the comments you made? I think you said that your outlook is moderating a bit and put that in the context, I think in the second quarter you talked about the capacity to expand stores picking up we've seen a little over 1,300 in the last 12 months, how you're thinking about the capacity to expand stores while of course you have the additional capital that's come to you through the Heineken transaction?.

Yes, I think the - these capabilities, these machinery of building stores is very well working, and it keeps coming strong, so we - probably we are going to be having a little bit more - or close to 1,300 stores this year. We are pushing really to expand beyond that number for next year.

In terms of gasoline stations, all these instability that we have the very first semester of this year with the price hike, with a lower margin, we're very cautious and the way we were going to be expanding our Fuel Division.

And I think now that there is more clarity of how we are going to be able to obtain the margins that we were expecting from the business I think will be more - a little bit more aggressive in pursuing those gasoline expansions.

I don't know, you want to add to that?.

Yes. Hi Mark, this is Juan. No, I just wanted to make the point, when we talk about cautiousness or caution as we head into the fourth quarter and beyond, part of what's on our minds is that the fourth quarter of last year, same-store sales had also grown 8.6%. So, we have a really tough comp in the fourth quarter.

And if you just look at the kind of full year, this will - if everything continues as it's going right now, 2017 will have been the third year in a row where OXXO same-store sales will have grown something close to 7%. So here you will have grown almost - more than 20% in the aggregate of those 2 years.

And at the same time, we've seen inflation very linked to the price of gasoline, but it certainly has put a little bit of a damper on the consumer.

So, as we are building our budgets, or we have built our budgets in the last couple of months, some of the assumptions for next year are even more conservative is generally in terms of what we expect Mexico to perform. There are - in terms of the minds of the consumer, there's a little bit more uncertainty.

I mean obviously the whole NAFTA thing is again kind of rearing its ugly head in terms of will it be blown up or not.

We will have elections, presidential elections during the - in the summer in July and there's already noise around that, and so that might make consumers a little bit more cautious in the short term, but to Eduardo's point, the number of stores that we open in a given year almost never changes based on short-term expectations of what the consumer may or may not do.

I mean we're building stores for the next 10 years, for the next 20 years. In the 15 years that I've been at the company, we - I haven't really seen a bad year from OXXO. So, you should expect us to continue to increase the number of stores. I mean we're running at 1,300 as you said.

The efforts will be put in place to keep that up and perhaps accelerate.

I think there's a chance that we accelerate a little bit on the other formats as well, Eduardo was touching on gas and this will have been a year where we slowdown, this meaning 2017 will be a year where we slow down the opening of our gas stations, but next year, I think there's a high probability that we will accelerate again.

So, I think we're talking about 2 somewhat separate things. We do think the consumer is gradually slowing down a little bit and that's what we're putting into our 2018 budget. So that really doesn't mean we're going to slow down rolling out new stores and really getting ready for whatever comes up in 2018 year..

Really helpful, and I was impressed, I was there just before Labor Day to see with my own eyes.

Just one quick follow-up if I could, the in-store personnel cost, can you speak to how that might evolve over the next 12, 18, 24 months? Do you feel like that improvement in terms of being able to service your - the shoppers, but of course it's been a - it's comparatively high rate of increase, could you just speak a little bit about how that pressure might unfold in the future?.

Yes, we're modeling and we're - I mean this will persist through next year and obviously we like to have - as we mentioned before we're going to have a little bit of relief on the energy front. We don't expect the transport of cash to represent pressure point.

So, we believe - for next year we are modeling flat operating margins even though we will continue rolling out the investments in labor cost.

In a way inflation doubling from 3 unchanged to 6 unchanged where we are right now, it kind of made our job a little bit harder in the sense that we're trying to build certain gaps vis-à-vis the competition, so making it more attractive for our guys to work with us.

And then everybody took their wages off a little bit more than expected because of inflation, so now we're having to do it kind of all over again. So, you should expect us to continue to talk about this through 2018, but again the objective would be for the margins not to contract, they are contracting this year, but rather to be stable next year.

And then after that, we should be back to full strength..

Your next question comes from Alex Robarts with Citi..

I wanted to go back really to drugstores, and the question focuses on top line with 2 parts, organic and non-organic. I mean as you think about the last couple of years, what you've done with the drugstores, I mean it's remarkable and kind of very much eclipsed the gas business in terms of contribution, right, and in terms of this cash flow.

And I guess 15% now is what the operative cash flow of drugstores cash flow relative to OXXO. That being said, when I think about and look at the sharp acceleration, right, in same-store sales, we have flat same-store sales growth here in the third quarter to run-rate for the first 9 months, 8%, 9%.

And I appreciate the comment earlier about the region of the southeast, but was there something else that was going on that maybe you can kind of comment about regarding this deceleration? In other words, clearly September was a tough month with the natural disasters and kind of maybe you could help us understand what would be the new normal rate of same-store sales growth for this business as we had 9% net flat? And could you help us think about what has been the normalized rate perhaps in the third quarter ex the natural disasters? I think we have a sense of that now, so - but if you could kind of help us understand that in Health, what are the kind of opportunities and challenges for that organic same-store sales growth? Do we get up to mid-single? And the last piece is the non-organic piece.

It's been more than 2 years since we've seen the Socofar deal, you've got the capital on the balance sheet to deploy.

Any thoughts about what have been some of the things you found in your search and quest for kind of acquisitions in the Latin American drugstore space?.

I think before we try to kind of separate the different pieces, there's a lot going on, right? And the first thing - the first comment that I would make is remember that of the Health Division something like 80% is South America and 20% is Mexico.

And as you know in South America couple things going on; one, currencies, and if you look at last quarter when we were talking about high single-digit, a portion of that was the Chilean peso and the Columbian peso strengthening vis-à-vis the Mexican peso, but also the fact that in both of those countries the industry, it's more institutional than it is in Mexico and, so you have the Isapres in Chile and you have the EPSs in Colombia.

And when you sign a contract with a new Isapre or when you lose a contract with an old Isapre, it can move the numbers meaningful. So, I think that that's part of the noise or the big shifts.

So, in second quarter we had a strengthening of the South American currencies and I believe we have some new accounts that have been gained in Chile, and now we kind of had a reversal on both of those things. In Mexico you bring out a good point.

I mean we talked about the southeast and we've talked in the past about the many things that we've been working on in Mexico in terms of building this single platform. I would say kind of in a currency-neutral environment and I hate getting into that, but sometimes we need to talk about currencies.

Mid-single digit is a range that I will feel comfortable with, but we are going to have that noise from the currencies very much in the way that Coke FEMSA has to do with that every day. Obviously in their case it's much more complex with 10 countries..

Yes..

What I would say, if we're modeling this mid-single digit for both countries would be kind of the medium-term member that I would feel okay with. And in terms of M&A, we're looking.

We are looking at the assets as I mentioned in the whole Spanish-speaking portion of South America and with some caution, but there are a couple of things in Brazil that are still out there and we - some investors tell us that we should be extra careful with Brazil and we obviously are and will be extra careful with Brazil.

But we are looking all around, Alex, which is a great position to be in, to have options, to have a good balance sheet and to have discipline..

And also, I would add that probably acquisitions give us really a great position to start in South America because it's a great asset. We have a great partner. And because I believe this is that company are extraordinary, are much better than the ones we have here in Mexico..

And I think that's a relevant point. I mean somebody asked earlier in this call or as they were formulating the question that pharmacy is a business where we don't have the expertise that we have at OXXO, and I think that's the third point in Mexico, it's something that's being developed.

But quite frankly the guys at Socofar are very, very, very good at what they do, they've been doing this for decades. And so, whatever we do in South America, they are going to have a lot of Socofar with them in it..

Yes, and they keep gaining share, they'd be growing and so it's a fantastic investment for us..

Yes, so credit where it's due..

And just kind of the follow-up would just be any thoughts around the CVS deal that was seen in the U.S.

kind of moving to insurance, that's probably something that can be pursued in the LatAm market, but any thoughts on that CVS deal?.

No, I just had - I just read the head news, and - but I don't know much about it. That will be very interesting. I also - yes, so I think there are very challenging environment too, so..

Yes..

The good thing is that those things happened first, and then we have to learn from them down here in Latin America..

I was reading an article yesterday, probably some of you read it as well in terms of how in every conference call of companies in very, very diverse sectors, some point somebody was always mentioning Amazon, right, and of course this is something that the CVS deal in some ways might be impacted by that.

But as Eduardo said, things happened over there first, give us some time to prepare. We don't think this is something that's about to happen in Mexico and we can discuss later about ideas I think that go on at the drugstores in terms of home delivery and things like that, but yes, no, we'll watch it unfold in the U.S..

We'll take our next question from Pedro Leduc with JP Morgan..

On the services front at OXXO, looking around how it evolved this quarter for you as well as looking ahead into next year especially given the fast growth in e-commerce, you just touched on it, how OXXO is positioning to capture it, you have a deal with MercadoLibre, but also seeing Amazon starting to take cash payments in Mexico, and you have a click and collect with them, just wondering how you're planning seeing that opportunity for next year?.

The biggest opportunity for OXXO are more opportunities than a threat.

We're very lucky that most of the occasions that we serve are not really well-served by the e-commerce platforms, and I think really what we are envisioning is that we have in our retail operation, we have lots of good ideas and we have so many opportunities and we are - the problem is how to prioritize and focus ourselves in doing them.

And I think really the next year we're investing in some people, we're investing in some infrastructure to really to enable more in many markets a way our digital platform and see how we can connect the OXXO stores, the physical stores to the OXXO digital platform and where we could connect and evolve the OXXO platform, not only for the stores, for the digital world.

That will be a very much - that will be a very challenging and not - I don't know yet what will be the outcome, but I think as you said we are making - and more important that for next year where we're really applying the joint resources and gave some cash to invest and better and we do see as a major opportunity for us to tackle the market, I mean even the opportunities where we are not - occasions for the consumer that we are not taking care of now, so through the digital platform we will be able to address.

I don't know, you want to add?.

I mean, there is no question that OXXO has become a very trusted brand in the realm of payments. Obviously, the vast majority of them take place physically at the store, but there are opportunities that we're looking at kind of the youngest store now.

Even before we get there, in a way the 12 million people that today will buy something at OXXO and 12 million that will do it again tomorrow and the day after, in a way the store has become kind of the last mile itself, right, instead of taking the last miles to people's homes, it become the last mile because people come to you.

However, as you said, the - we already are exploring some of these opportunities. The test with Amazon is going very well. I think we're very close to being ready to expand it. And as you said we have other things going on with MercadoLibre, you can buy Amazon prepaid cards at OXXO, so that also kind of address the cash situation.

So, there's a lot more opportunities than we have been able to tackle yet, but we're certainly looking into them..

Yes..

With a fair amount of resources..

You don't have a non-compete with MercadoLibre for the cash payments for example?.

I'm sorry?.

You don't have a non-compete with MercadoLibre….

No..

...with another client on Amazon that might....

No..

No..

No, there's no non-compete..

We'll take our next question from Antonio Hernandez with Barclays..

Can you give more color on same-store sales performance in July and August and the impact of the earthquakes in September? And also do you think that 1% traffic and 4% ticket growth you feel achievable?.

Well, I think with the effect that we have about the earthquake in Mexico, there were close to 300 stores that were closed for some period of time. I will say that probably the same-store sales, the effect on the quarter will be like 0.5, 0.7 and as seen that will be probably the number that I can give you.

I don't know you have to add anything?.

Yes, I think it's always hard. I mean obviously we have a lot of experience calculating when a period has an extra weekend or an extra Sunday or - so those metrics are bulletproof.

When you have a couple of hurricanes, flooding and they hit metro area in the country and then to earthquakes, it's more an art than a science, right, in figuring out exactly how - what you lost. We did have, as Eduardo said, about 300 stores that were closed for a few days for lack of power.

As of today, we still have I believe it's 80 stores that are closed because some buildings around the stores are structurally not completely sound, so people are not walking on those sidewalks or those streets. So, it's kind of hard to put a fine point on it, but as Eduardo said, it's probably somewhere between half a point and a full point.

I think more importantly going forward if we assume an inflation of about somewhere between 3% and 4%, which is I think the Central Bank's target, something around 3%, we should be able to generate at least 1 point of traffic.

I mean as you know telephony is no longer a drag and, so we have now been pointing positive traffic closer to 2% the last few quarters.

So, if we can get somewhere between 2.5 and 4 ticket and something like 1.5 of traffic, you get to 5 and I think that's exactly what we - when we think about medium and long-term same-store sales, it's basically a mid single-digit, so it should definitely be doable.

And as far our colleagues are continuing to add new services and new reasons for people to go to the store that definitely should be doable..

And July and August, how were your same-store sales I mean on a monthly basis, were they much higher than what you posted on your quarters?.

I believe….

July was higher than August..

July was higher than August, right? Yes, I mean, it's also a lot of what we sell is beverages, right, and weather will have an impact and, so you get some shifts based on temperatures and rain level, but yes, I think in terms of the full month, just generally speaking, broadly speaking, I think one was better than the other.

September usually an important month, you have Mexican Independence Day in the middle of the month. It's usually a good month, but obviously this time around it was a very unique, a very typical month. So hopefully fourth quarter is boring..

Okay.

And so far for October you're seeing of course much better same-store sales than September then?.

Yes, but probably very much like August which was not number strong -.

Was a normal month. I mean….

Yes..

...also, what you had in September, part of the equation is what - a lot of people were buying lots of stuff for donations, for helping out, or people who were afraid that there would be stock-outs, but unfortunately, we didn't capture a lot of those sales, right, because people buying in bulk, you're buying 24 packs of thing and we tend not to carry those SKU.

So, I think some of that is probably still present in October in terms of people that bought in September and still have some product left. So, I don't know that October is a very good measure of how the quarter is going to be, but I would expect the fourth quarter to be a more normal quarter..

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

Yes, hello, this is actually Alexia [ph].

So, Eduardo, can you state a number of issues that will consume your attention as - in your tenure as CEO? Can you share with us which ones might pose the most offside and transformative potential for FEMSA?.

I can't - I couldn't….

I think Alexia is asking about the - of the things that you want to as CEO which one you think holds the most offside?.

I think the most offside will probably to allocate the capital we have for the future. And as I said we have enough time and a lot of opportunities.

And second thing would be probably to leverage ourselves in - and lots of capabilities that we have latent and some of them will be probably data analytics, logistics and all of these things that probably we have not been able to leverage ourselves better in order to get to the consumer, to our client-base from the perspective in a better way..

And we'll take our next question from Rodrigo Echagaray with Scotiabank..

Just a quick question on Saldazo, if you can share any update on that? And also, you discussed briefly on the ERP on the drugstores in Mexico, but just wondering what does that mean in terms of the in-house distribution getting rolled in Mexico, when do you guys feel like you will be ready to bring all the division in-house?.

Well, that's really the big - the major challenge, that we are having the infrastructure - the IT infrastructure build-in by the end of this year I think we'll be in a very good position. And little by little we are building the logistic side and the logistic arm outside the store infrastructure.

So, I really think that probably - by probably next year we'll be in a better position to explore that..

Yes, and I think you already saw - Rodrigo, you already saw some improvements in mix even in this third quarter, you saw the gross margins expanding nicely in the drugstore business, so hopefully next year….

Yes..

...you can see more of that..

Some of the people that we have in place in the commercial side, in the drugstore business here in Mexico, they fill away in a way that OXXO was probably 12, 13 years ago where there was a lot of things to do, but there were not enough levers or cables connected to the operation where we could enhance our value proposition.

So, I think the better is still to come and with this - I think I'm very optimistic that with some very good people we're establishing good processes, we'll be in a good - great position to tackle the consumer in a much better way..

Yes, I think one way to think about what Eduardo just said is basically we've done this before..

Yes..

Right?.

But unfortunately, it takes time. It takes time..

Your question on Saldazo, we have 8.5 million accounts….

Debit accounts..

Yes, debit card accounts..

We might be now probably close to third - the third debit….

In terms of the larger….

Credit cards, so debit cards..

Probably..

I don't know, maybe second or third..

Well, we're definitely, yes..

Yes..

Yes, so….

No, to mention that anecdotally I went to a couple of OXXOs and they actually ran out of Saldazo cards which is pretty amazing..

Yes..

Well, it's releasing, but it's not just....

It's a great story because in a way we are back-writing - we're helping to back-drive with the dynamics and people. Lots of people that didn't have access to the banking industry, and we are very proud and very happy..

I won't tell that to the banks..

We'll take out next question from Damian Witkowski with Gabelli & Co..

I just want to go back quickly to the Health Division and to the competitive dynamics. You - I'm curious is it across all regions or are you seeing more in Chile, Colombia or in Mexico? And then is it an industry issue or is it in response to something that you're doing on your stores in particular? Just some color there would be great..

Yes, no. This is really Mexico specific. What we're talking about is some of our competitors with the large incumbency, if you will, kind of feeling a little bit of pressure because FEMSA is coming and we're opening our - all of our drugstores and so it's not - don't interpret it as a price war because that's not what we mean..

No..

It's really these guys opening more - accelerating their own things of opening little bit versus what they were doing before we came into the industry.

And of course, they know what our strongholds are and, so they have become more active there, right? So maybe that for example, maybe that is probably where we have a bigger density of drugstores in the whole country.

You will find a few more of our competitors' drugstores [indiscernible] than you would have a year ago, that's what we mean by the competitive intensity. It's not having to do with price skirmishes or anything like that..

No..

And it's - like I said it is Mexico specific..

Yes..

And ladies and gentlemen, that concludes our question-and-answer session for today. If you wish to replay the webcast for this call, you may do so at FEMSA's Investor Relations website. This concludes our conference for today. Thank you for your participation and have a nice day. All parties may now disconnect..

Thank you very much..

Thank you. Have great weekend..

Great weekend. Thank you very much. Bye now..