Juan Fonseca - Director, IR Eduardo Padilla - CEO.

Luca Cipiccia - Goldman Sachs Robert Ford - BofA Merrill Lynch Antonio Hernandez - Barclays Benjamin Theurer - Barclays Ulises Argote - JPMorgan Alex Robarts - Citi Joao Soares - Bradesco Julie Chariell - Bloomberg Intelligence Mark Jason - Invesco Carlos Laboy - HSBC Jose Yordan - Deutsche Bank.

Good morning, and welcome everyone, to FEMSA's Fourth Quarter and Full Year 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 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 may materially impact the company's actual performance. At this time, I'd like to turn the conference over to Eduardo Padilla, FEMSA's Chief Executive Officer.

Please go ahead..

Good morning, everyone, and welcome to FEMSA's fourth quarter and full year 2017 results conference call. Juan Fonseca and Maria Dyla Castro 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 had the opportunity to participate in Coca-Cola FEMSA's conference call last Thursday.

So 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. Generally speaking, the fourth quarter looked a lot like the third quarter as we mentioned in the press release.

FEMSA's commercial retail division continue to open new OXXO stores at a rapid pace. While same-store sales grew in the mid single-digit reflecting the resilient, but gradually moderating consumer environment in Mexico.

Retail division grew its revenues at a low single-digit rate, but managed to expand its margins; driven by operations in South America while retail division continued its gradual recovery and profitability.

For this part, Coca-Cola FEMSA realized healthy pricing in Mexico and Argentina as well as encouraging volume growth in Brazil, Central America and the Philippines. Reading down in the numbers and moving onto discuss FEMSA's consolidated quarterly results. Total revenues and income from operations to the fourth quarter increased 11.5%.

On organic basis total revenues increased 3.5% and income from operations increased 6.5%.

As you already know from Coke FEMSA's disclosure and conference call held last week, the accounting change for Venezuela required a reclassification from a charge in equity on the balance sheet to a non-cash, non-recurring impact on the income statement of the IFRS rules, we generated a net loss for the quarter.

This impact from Coca-Cola FEMSA Venezuela was partially offset a foreign exchange gain related to higher US Dollar denominated cash position of FEMSA mainly coming from the sale of our portion of Heineken shares during the month of September has impacted by the depreciation of the Mexican Peso during the quarter.

In terms of our consolidated net debt position during the fourth quarter it reached MXN 28 billion at the end of December. Moving onto discuss our operations and beginning with FEMSA commercial retail.

We opened 527 net new OXXO stores during the fourth quarter, reaching 1,301 net store opening in 2017 and representing a new milestone for our expansion team. Revenues increased 10.1% OXXO same-store sales were up 4.7% driven by a 2.7% increase in average customer ticket and increased of 1.9% in-store traffic.

This increase came on top of a very good tough comparison base of 8.6% growth a year ago. On the subject of ticket, as was the case in the previous quarter we continued to see a change in mix coming from the fast growth of our service category that tends to have a low ticket. And therefore boost our average ticket a little bit down.

One important component of that continues to be financial services, which keeps delivering double-digit growth.

Moving down to P&L for the fourth quarter gross margin expanded 20 basis points due to expansion mainly reflect healthy trends in our commercial income activity and the sustained growth of the service category including income from financial services as I just described.

In terms of operating margin this quarter the retail division posted a contraction of 30 basis points reflecting first a sustained increased in electricity charges year-over-year second high secured car transportation cost driven by the increased volume and higher fuel prices for the year.

And third, our continue initiative to reduce turnover of our key in-store personnel. Moving onto FEMSA's commercial health, during the quarter we added 47 drugstores to reach 2,225 units across the territories at the end of 2017. Revenues increased 2.3% with low single-digit growth in same-store sales driven by South America.

Gross margin expanded 120 basis points reflecting positive sales mix of as well as more effective collaboration and execution with key suppliers. Operating margin expanded by 10 basis points in the fourth quarter.

Finally, FEMSA's commercial fuel added 55 gas stations during the fourth quarter to reach 453 units at the end of December representing 70 net new service stations in 2017. 10 station sales grew 16.7% in the fourth quarter as average price per liter increased by 19.9%.

Reflecting national price increases instituted at the beginning of the year 2017, while average volume decreased by 2.7% attracting some demand elasticity while still better than the industry. Because I think industry went down around 4.5%.

Gross margin expanded by 10 basis points and operating margin expanded by 20 points year-over-year the effecting expense on payment and operation efficiencies. Talking briefly in Coca-Cola FEMSA reported top line increased 11.6% during the fourth quarter including the result of Vonpar and the impact from the consolidated of 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 in some stress reflecting hired labor, trade and fuel cost in certain markets.

Certainly and as we mentioned at the top of the call, a big add in Coke FEMSA's quarterly results was a non-cash reclassification related to Venezuela operation. For more detail on that and the rest of the number you can access a replay of the conference call, webcast from last Thursday.

Finally, let me talk a little bit about broad expectations for the year end that begins.

In our key Mexican market there are numbers of elements that make us forecast in 2018 a bit tricky? On the positive side, we'll begin with inflation which after little price, into levels not seen in years is beginning to abate and divert to more normalized levels.

Whether it continues to come down and how fast it will impact consumer sentiment which has been softening in recent quarters. Another factor that will be speed of interest rate increases in the United States to response of the Mexican Central Bank and ultimately the FX on the Peso-Dollar exchange rate.

We must also keep an eye on employment trend and how these in turn affect the consumer. I think the employment terms came out yesterday and few are very high for them as well for the Mexican market. Normally, a year with General Elections and FIFA World Cup will bode well for consumption particularly for OXXO.

However the uncertainty regarding this year's presidential race and the FIFA many of the World Cup matches will take place at odd hours in Mexico, make us less bullish about the positive contribution of this event in 2017 compared with the results in 2014.

Finally there is a question of [indiscernible] negotiation hanging over us and the possibility that the process may drag out much later in the year or even in 2019. We continued to deliver better decisions and dampen confidence.

So this is our long way to say that, we're more cautious about the consumer environment in Mexico, in the coming months and quarters that we would normally be. Having said all that let me give you some directional expectations for our business unit.

For FEMSA Comercio retail we expect openings to be in line with 2017 around 1,300 units with some offsite potential as we always try to improve on the previous year's numbers.

In terms of OXXO same-store sales growth, we should remain within our long-term expected range of middle single-digit growth with stable operating margin with a caveat that our margins are very sensitive to sales and therefore the uncertainty I mentioned around consumer sentiment may affect our margins in new direction.

In the meantime, we have already put in a place a number of revenue and profitability related initiatives across FEMSA Comercio to maximize our ability, to meet or exceed our plans for the year. Finally, there is also timing component that we need to be aware of.

Given that the Holy Week will shift from April last year to March this year and we can improve offer prospects for the first quarter and soften the expectations for the second quarter. For FEMSA Comercio health in Mexico we tend to recover in profitability over accelerated unit growth throughout the year.

While our Chilean operation should see a somewhat challenging start to the year but improved towards the second half, we expect same-store sales for the year to grow in the mid single-digit and after adjusting for currencies in terms of margins, we should see stable to slightly expanding operating margins for the division.

We start the Fuel Divisions enters in 2019 [ph] with an improved outlook relative to where we were at this time of the year, given that the industry is now behaving more like a functional retail market where scale and retail expertise begin to make a difference.

Therefore, we should accelerate our rate of station adding, expecting to increase our base by 20% to 25%. Operationally, we will have an initial comparison base during the first half of the year and particularly in the second quarter, but for the full year we expect double-digit revenue growth and stable to slightly expanding operating margin.

For Coca-Cola FEMSA I failed to mention [indiscernible] week in Mexico we should see a slower start of the year based on tough comparable base with second half improving as we see easier comps on the context of more muted consumer environment as we have discussed.

In Brazil, we're optimistic that the recovery will continue and we're also beat about the outlook in Argentina and Central America. Colombia continues to be a work in progress and of course Venezuela will no longer will longer distort our consolidated result.

It will also be interesting to see, how volumes have grown in the Philippines post price increase because of the tax things in Philippines and while adjustments we'll be able to make there going forward. In terms of capital expenditures we expect the consolidated amount for this year to be in line with 2017 in dollar terms.

This incorporates a flat number of Coca-Cola FEMSA and a sliding number retail in local currency. With delta related mainly for faster growth in our distribution center network and accelerated expansion in the fuel business.

Summing up, we're cautious of the consumer environment in Mexico, but we're confident our ability to execute and in our strategy and to impact the variables that are in our control.

We also have the high quality program, we're having to better allocate consumer [ph] level capital, over horizontal growth strategy exercising discipline as we grow our platform across market with a view on value creation. So plenty of changes ahead, but we love challenges and we can often turn them into opportunities.

And will try to do that again this year and beyond. And with that, we can open to the call for your questions.

Operator?.

[Operator Instructions] we will take our first question from Luca Cipiccia with Goldman Sachs. Please go ahead..

I was hoping you could maybe articulate a bit more around the plans for the expansion of drugstores and in gas in Mexico, this year I think you commented on the outlook is not as clear. You're relatively cautious and maybe if you can expand on this performance in light of this uncertainty around Election whether it's any question mark over there.

In particular, when it comes maybe to the gas business and for the pharmacies that have had a relatively low development in the last few years when arguably the consumer backdrop was somewhat supportive.

How do you look at that expansion or that development this year when in fact maybe the operating environment at least from a consumer standpoint maybe somewhat more challenging? So any more details on how far advanced you're in these two formats, how big of a push you feel comfortable in making in 2018 and or beyond that would be my question..

Well let me start with the gasoline business.

I think we're more optimistic in the gasoline business because we've been able to implement these asset light model into place and thank god, well we've been able to establish a very good ramp position, we have some scale and because of those two things combined we've been able to now to exert some pressure and understand the market better and probably be able to expand our margins.

In the other hand, we've been able to prove that some markets where the brand is important, the brand is very well established we've been able to make a weak productivity gains in those gas stations that we've acquired. In some of our market, we still and we're in the process of positioning our brand.

But the more we establish our brand, the more we'll be able to understand the market and the market understands really that we have a major brand that with the rest of the market that we deliver leader by leader and that is a very appealing thing of our brand. The second question related to pharmacy development.

I think we're in the process really of finishing the integration that in part of the Mexican operation that give you some confidence that we know will enable to establish a better logistics network to deliver better, to our pharmacies and to establish more specific strategies for each market.

That is really something we'll be doing during the year and although we're not bullish about it, but I think we're more confident that we'll able to pull levers in a better way that we did in the past year. So I think that will be, you want to add anything.

Juan?.

The way I think about it and it's obviously very consistent with what Eduardo just described. I mean I think 2017 was a bit of a transitional year for both of the businesses, but for a very different reasons.

In the case of the gas business, it had mostly to do with external factors such as the price increase at the beginning of the year and how the prices were liberalized gradually throughout the territory and that was something that was little bit of a question mark, at the beginning of the year and so our pace of expansion was curtailed by design as some of these external questions were answered but right now, we're in a much better position I think to put the pedal to the metal if you will and accelerate a little bit in terms of the number of patience with really high degree of confidence that we're also going to be able to improve margins as quarters go along.

I think on the pharma side, the transition was much more driven by internal decisions and processes that we integrated the companies.

Eduardo just mentioned in the opening remarks, we're going to privilege recouping some of the profitability especially in Mexico as oppose to unit growth in Mexico probably will be somewhere around 10%, so it's not that we're not going to grow, but certainly at different levels of comfort in the two businesses and the South American piece of the pharma business is very, it's much more of an auto-pilot some extent it's a very well established platform as you know.

So really focusing on Mexico in a better position than we were last year, having built many of these tools, the distribution center all of that. So I think we're optimistic about both, but for different reasons..

Thank you. Just to qualify on the openings for both formats. Maybe can you, if I look at 2017 how much of the OXXO gas now go combined with OXXO convenience.

Is there been any sort of any change or any acceleration on that front? Remember there was that discussion when you entered this business the opportunity of adding - using that as a platform also for the OXXO retail expansion, so maybe an update on that?.

Yes let me give you. I think around 20% of the convenient stores of OXXO are in a gas station and one sixth of those gas stations belong to us. One sixth. So that will be drop in the number, that was [indiscernible]. 20% and one sixth will be ours. Probably sometime ago while an eight or one tenth.

So in the process we're only having one sixth that belongs to us..

Great and for the pharmacies is the expansion still regional, are you moving into regions where you currently don't have a presence?.

I think we have to be very disciplined and extend as a water drop in a paper napkin. Regional and in continue phase or we can really leverage the brand and jumping into new regions. I think it will be very costly, we'll not like to do that right now..

Yes, I would say the only region which is probably not contagious to one of the original threes the value of Mexico, where we have opened a couple dozen stores just because in the long run that's the market that we definitely want to have a present change. But you should not expect us to open stores all over the place..

Yes, thank you. Thanks for the time. Thanks for the answers..

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

Eduardo like you and I'm sure Juan, I too am excited about deal, but when you look at growth in the quarter it appears to be all price driven. And I was curious why you don't think you're pulling in more volume given your full leader non-adulterated fuel positioning, right.

And then Eduardo you made comment earlier about slight EBIT margins and minimum wages went up by 10%, where you've been having some difficulty trying to rain in turnover and I was curious as to the reason why you're guiding for flat operating margins.

Is it the labor cost pressures because electricity should come off a little bit this year, right? But we typically see a little bit lift to gross margin and some better operating leverage and I was curious as to the basis for that flat EBIT guidance. Thank you..

Let me give you my view in OXXO. What is been liberating now is pricing and we don't know I mean since our main advantage in the consumers. And you can see the cues by the taxi driver in our gas stations really, how confident they are, how trustworthy we have become our brand to that, they heavily use gasoline, which are the taxi drivers.

We have to be very cautious, now the prices are liberated that the consumer made the right calculation of fuel efficiency and price difference and that will be something that we have to understand better. How those two thing, two variables will be afford by the consumer.

We're confident that we'll be able to take to leverage still on our brand positioning, we have to very cautious of those two things combined because there might be some price discounts and levers, but not delivering these levers. So that will be now a combination of two things; price plus times efficiency.

So that is something that we have to be very cautious and understand better..

And Eduardo, is some of the volume from the huachicoleros kind of finding its way into some of your competitor gas station, is that something that might be?.

The huachicoleros thing is not in the regions that we work, so I think that is something that is, it's taking our side that we've been able to position ourselves in places where the huachicoleros do not work and that is something that helps. So I think that as you say it into that - in divisions that we operate..

Most of the pipelines that have been subject of the huachicoleros happen to be in Central Mexico which is where we don't have a lot of stations..

Very north into the border in the Tamaulipas border, near Brownsville, Reynosa or Matamoros. The northern part of Tamaulipas..

Yes, one other thing to consider though about this. There has been some from an elasticity standpoint certainly the almost 20% price increase did result in lower volume. Right I mean people did..

You said about 4.5%, 4.9% in gasoline volume for all over Mexico..

Contraction in the market. So people did cut down a little bit on driving, maybe they started carpooling a little bit more. So certainly when you look at our numbers prices is the dominant reason. But still you know the same store sales number is very, very strong. So we feel good.

We feel good that we can keep it up in terms of as Eduardo said trying to get a consumer to realize that it's not just the price but also the efficiency, which is kind of how we capture the full leaders versus incomplete leaders from our competitors..

Eduardo also mentioned alliance. Juan and I was curious, is that part of the problem too? I mean is difficult to just running more volume through those existing stations because you've got people queued up..

I think the willingness of people to spend a few minutes in line has been in place for a while, but that - then we accelerate opening..

Yes, pipeline. The best way to overcome by rapid gasoline expansion and I think what we have - we still have a very high density in our gasoline stations, but we enable to cover lines as the ones I was talking about.

But more of if any lines, that you see a lot of taxi drivers charge in our gas stations and those are very strong leading indicator of sophisticated consumer preference in terms of prices and efficiency..

And yes on the other part of your question Bob, certainly in terms of our expectation for margins one thing that is keeping us on the cautious side as Eduardo said in his remarks is, the uncertainty regarding top line, right? If the consumer were to decelerate a little bit more than our margins very sensitive to sales and so we're talking about flat margins.

I think there could be some upside to that, if everything aligns the way that we hope it does. But we're being cautious, as we usually are..

So wages increases should not be a factor this year for you or kind of is?.

No I mean, I think there is a big and a multi-year effort as you know to reduced turnover. There is also been we've probably discovered this in the past how, the percentage of stores that have commission based teams as oppose to the percentage of stores that have employees has continued to move toward more employees.

Right? We found that from a turnover standpoint from an execution standpoint, stores that have employees especially in certain parts of Mexico operate better and that, thus present a little bit of an increase in the cost. So that's something that will continue but it is something that we can kind of turn the spigot on and off.

I mean we can definitely accelerate or slowdown based on how everything is going. So it shouldn't be a big factor. I don't think it's going to be big a factor as it has been in the last couple of years in our own, kind of how we explain and how we integrate margin pressures.

Right, so it's going to be there, but it's something that we can manage and gives us comfort that we can have stable margins. We've a caveat of how top line performs..

That's very helpful. Thank you both..

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

Could you elaborate a little bit more on retail same-store sales? Ticket growth was relatively low, so how much of this was driven by the higher proportion of services, revenues or by any other factors.

And if you expect this trend of growing services revenues to continue and still post your guidance of low-term mid single-digit same-store sales growth. Thanks..

Hi, Antonio. This is Juan. Yes I think the impact on ticket. I mean as you probably know in the last few years the issue was traffic, right? And traffic was not growing because of Telefonia [ph] now Telefonia [ph] is no longer a problem and traffic has recovered very nicely.

I think the point you raise is accurate in the sense that, the faster services growth, the more pressure that puts on the ticket, right because the average ticket for services transaction is probably half of what an average ticket for all of OXXO is. So the average ticket of MXN 30. The ticket for services transaction is somewhere in the teens.

I would also say there have been periods where we have observed some of our suppliers not pass through general inflation fully and I think this has to do with their own expectations of what the exchange rate may or may not do in their own, how much the dollar denominated costs they might have.

But in the aggregate this has meant that our average ticket has come in below inflation, now probably for the last year or year and half. So yes, we expect that to continue to be the case, but we still believe we can hit the mid single-digit same-store sales number and as we described kind of stable margins..

Okay, perfect. Thanks..

And we'll take our next question from Benjamin Theurer with Barclays..

Follow-up on just on the healthcare business, if I may? So in the past you did give us breakdown in terms of ticket and traffic on the health division.

Would be great if you could give us a little bit of the direction where we were during the fourth quarter in terms of ticket traffic? Obviously Chile, South America and then in Mexico, how is that been performing as you've mentioned.

I mean there was a little bit, the growth was basically driven by Chile, so it would be nice to get a little bit of sense on how the different dynamics are in the different markets on the health division. Thanks..

Hi Ben, we're trying to give you a little bit of color in terms of same-store sales by region. I would say for the fourth quarter again South America outperformed Mexico, but the deltas have gone smaller. So I would say low single-digit positive in South America, low single-digit negative in Mexico.

There were some quarters last year or where we also had the advantage of currency fluctuation. So if I recall correctly during the first half of the year, the Chilean Peso, the shift in the currency made the same-store sales gain be 20% plus in Peso terms.

That didn't happen in the fourth quarter and so you're really talking about delta of a few percentage points, but again South America is still performing better than Mexico. And I would even add within South America, Colombia is really being the star. They have been growing more strongly than Chile and certainly than Mexico..

Okay that's interesting and the ticket traffic composition, if you have that as in the past. I mean in the past, it was actually in the press release..

I don't think it was Ben. Let me take a look and if I'm mistaken, I'll be happy to give you a call and give you the break number. No I mean look, we're trying not to end up with separate sets of numbers by region so to the extent that we can..

No, just the consolidated health business traffic, not regional. Just the consolidated number..

Well it's not in the press release, we haven't changed anything in terms of things that we use to provide that we don't anymore. So I mean let me take a double look at that and again, if it's something that we missed we will provide it to everybody. But I don't think it is..

Okay..

And we'll take our next question from Ulises Argote with JPMorgan..

Real quick on OXXO, you continue to talk about pressure and cost related to energy among other things. When do you expect this pressure to loop and have easier comps on the year-on-year comparisons and what expectations you have for electricity cost for this year? Thank you..

I think the exchange rate will be very important into that. I mean the exchange rate keep stable I think will be, we'll see a very stable market to energy price. Secondly, I think this year we have recently ventured with aeolic energy and I think by mid this year, we'll start supplying some of the stores and depending on - of the energy prices.

I think in 2016 we felt we made a terrible investment decision, now we're on the bright side again but we made an externally - internal decision. So I think if energy prices stayed the way they are, little bit higher we're having very good position to overcome this prices by our aeolic sources of energy in the South Eastern part of Mexico..

I think generally the wind power is going to give us an ability to forecast better and to be a little bit more isolated from the vagaries of the exchange rate, as Eduardo said..

Okay, great. Thank you very much..

In general, I would not expect I mean again absent huge shift in the exchange rate. I don't think it would put as much pressure on the operating margins, as it did last year..

Got it. Thanks..

And we'll take our next question from Alex Robarts with Citi..

I wanted to go back to drugstores and I appreciate the earlier comments and the guidance for this year.

I mean it seems essentially during the course of this year in Mexico you will be kind of completing the integration phase and focusing more on selling, actual merchandise as we get into the second half of the year and I'm keen to get your comments around how you expect margin in the Mexican drugstore business to evolve and perform.

I mean, if we have a certain view of the top line as what you have in your budget, could you tell us a little bit about the efforts that you're making regarding the direct purchase from the manufacturers of the drugs I know piloting has been done and you're keen to move along that vector of direct purchase.

If you could give us an update on how that's going.

In terms of the assortment and what the drugstores in Mexico are selling, how is the health and beauty category rolling out? is it uniform around the country? Is it perhaps being accelerated in the 24 stores in the - Mexico? And the third piece is, it's kind of on the generic side how is that been going in terms of the place demand and the idea of where you could get to over the medium term in terms of the total sales being as a percent what might the generics actually represent, so that would be great for any commentary around that.

thanks again..

Okay, let me start with the generic because this is related very much to the ticket figures and at the retail side near Mexico.

I think we have an opportunity to increase our generic sales, increasing that in a very fast way and we have been able to buy together this three change, that will be probably be in place by March, then we have the opportunity to buy together and improve our position in generics and expand the generic brand everywhere to the drugstores.

That will have an effect in margin, they will have much better margin percentage wise, however the prices will be lower. And I think the net effect probably will be probably the income side and the revenue side, it will be hurt a little bit because it will be the same amount of medicine, more amount of medicines but at lower price.

But in the income side the operating margin I think will be a better margin, so that will be probably the way the number of - the first question and third question are related. I don't know if you want to add anything, Juan..

Alex I think on the overall margins, I mean as you know we've talked in the past about the margins of the South American operations are kind of aspirational [ph] target for what we could aspire to do overtime in Mexico as the Mexican operation gain scale and begins to operate as a large single entity.

There have been quarters as you know when where operating margins in Mexico were basically zero and we talked about in previous calls.

I think right now the steady state for Mexico is probably in the low single digits in terms of operating margin compared to the 6%, 6.5% that we have in South America and the trajectory should be to narrow that gap and hopefully at some point eliminated. So it's going to take a while, but having basically completed the integration phase.

It will be now more about using those capabilities, one of the things that we have done have had to do with streamlining the number of SKUs we had because this was three different companies, we use to have too many SKUs of comparable products and now we're bringing that down to numbers that make more sense.

Streamlining the whole working capital equation, so it's in a number of fronts, but gradually we should aspire to close the gap between the Mexico margins and the south American margins overtime..

Thanks that's very clear. But just on confirming clarifying. Today in Mexico are you making direct purchases of the drugs through the manufacturers. Are you still, are you primarily going to the wholesalers? Thanks..

I think we have Mexico too and the better logistics we have and the better we can gain scale, the more we could price direct. But in terms [indiscernible] of buying, I mean the generated market it has to be direct.

So and the branded market, we have the two and I think we are in a very good position now because we're becoming very important to the wholesalers and we're outlining better that will be at the previous years..

Great. Thanks very much..

And we'll take our next question from Joao Soares with Bradesco. Please go ahead..

I have two questions. First one is, on SG&A and you've been coordinating in release related to the natural disasters that happened in second half of last year.

so I was wondering if I can consider any spillovers that happened from the third to the fourth quarter or are you just chewing significant that you have were able to clean up all the higher maintenance draws that happened. And just if you could comment a little bit on that.

and my second question is, with regards to same-store sales the Comercio, if I mean honestly some of our competitors have been posting above 6.5% same-store sales especially in the larger format.

So I've been wondering if that is related more to the average ticket because of the service category that is been going little bit down or maybe that you're seeing some movement towards the consumer going to larger formats. So just a little bit of changes in the consumer trends..

This is Eduardo, let me start with the second question, about same-store sales in larger format in these quarters.

And I think they've been performing well we haven't had a very strange winter well, more typical winter what we used to have in Mexico, where we have had some snow and we've had very some freezing temperatures that tends to sell clothing very well.

And I think those formats have been helped by these extreme weather, where there will be some good things happening in the [indiscernible] market. So regarding to that and the other respect, I think we don't see - I don't see any major difference..

I think I mean generally we tend, when I say we, I include you guys in our analyst and investor to some extent. When we look at the data that is published by some of the larger format companies, we extrapolate right and there is always a comparison of the OXXO same-store sales versus that of those other companies.

When in reality the formats are very, very different, right? And the overlap in assortment is actually quite low. I mean I would say maybe 15% of an OXXO sales 20% tops, overlaps with what you would normally find in a supermarket.

So sometimes we read too much into those comparisons when consumers really react differently because these are different types of stores.

But your point is valid that, as services are becoming more and more important for us and they do depress the ticket as we describe, that is something that is not really a factor for bigger format stores, so it's one other reason why the two are going behaving in different ways.

I think at the end of the day, we try to gain share from other types of sources than the big super markets. So I would not, I think I would not read too much into that. in terms of the natural disasters part of your question. I mean obviously that affected differently Coke FEMSA and OXXO I think.

Coke FEMSA has a little bit more exposure to in relative terms to the value of the Mexico and to the Southeast, Oaxaca parts of the country that were most effected by especially the earthquakes. In the case of OXXO, we did have a number of stores that were closed for a long period of time.

So certainly disruptive and they impacted the numbers but I'm not sure what the kind of your questions we're getting at in terms of impact on the SG&A. so maybe you can give me a little bit more information about what you're thinking..

Yes, sure. no, I just imagined here that it might have some spillovers still they would be noticing the fourth quarter estimating this cost. I'm just wondering if there were any imagine your margins could be higher during this quarter..

I mean I don't think it moves the needle. I mean certainly we had some stores that did not open for a while because in Mexico City either because the building where they were might have been damaged or because getting towards the store is had some issues. But I don't think those numbers are material. So I would say not really..

Okay, thank you very much..

We'll take our next question from Julie Chariell with Bloomberg Intelligence. Please go ahead..

I've two actually. The first one sort of, what if question? I know you're concerned a bit about the consumer in Mexico potentially slowing over the course of this year and you mentioned how that would have a pre-direct impact on margins. So I'm wondering if you do begin to see that scenario play out, what are some of the leverage you would pull.

Now what are the first things you would do, to begin to shore up margins in that environment?.

I think the more, I think we've been becoming more acquit in our segmentation efforts. We've been more acquit in the way we carry SKUs per store basis. So those, that thing make us more –gaining better understanding and better how to play with the levers. Just an example, we just established opened up an OXXO store here in the FEMSA building.

And it's interesting how we've been observing I mean, how the SKU which is okay this is format, that is been for offices and there are some SKUs I needed for that space.

But we're understanding there are some SKUs needed, let's say health cleaning things for the households that many people that would love to have that because they don't want to stop by in the way home to buy them.

So I think, we have to tackle and understand better, some work better with numbers to extrapolate, understand better the consumer and not just understanding consumer by local or geographic presence. So I think the more we - and I think we're making better inroads into to understand better, the consumer to use our data better and explore it better.

But I think that is something that we're in the learning curve to understand that market and so we found a difficult year probably we'll have to relate more on these kind of tools to tackle the market better. I don't know what..

Yes, I think I would also make a comment on the promotional activity. I think we continue to become better and smarter at designing promotions and executing them one on top of each other. I mean it used to be that we have very little flexibility even from an IT perspective to do several promotions at once and now we're being able to do that.

I think we're also fine tuning the number of promotional periods that we have in a year, adjusting that a little bit to privilege, promotional periods where we can actually extract the better economics from those promotions.

So when you think your environment is stop cooperating or cooperate a little bit less, that's the time to get most creative with the levers that are at your disposal.

So this is something that Coke FEMSA has always been able to find more efficiencies and improve affordability when the conditions require that and I think that's - those are skills and disciplines that are now being exercised within FEMSA commercial as well..

Very interesting, thank you. And if I can just ask you one more about e-commerce and you're positioning there. There certainly seems to be some good momentum generally in the e-commerce market in Mexico and lots of players, beginning to pile on. I'm wondering if you can just talk a bit about your positioning there, how it's going.

Is there evidence that it's driving traffic to the stores? And some other solutions around payments and shipping and when it might become a meaningful portion of your revenue? Thanks..

I think, this is Eduardo speaking, we have a lot of opportunities really by how to involve, what we have - if we can become a fulfilment center in the OXXO stores or we can expand the OXXO brand to some other things in the store or outside the store. So those things are things that we're in the process of building.

But I think it would not become, I think it will be very important for years to come, but not entirely for this year. I don't see it a major impact in defaults of these efforts for these 2018. However from the next years I think there will be several bets that will really make us start new course for growth for the future..

Yes, I think with notion that the store with 12 million people that buy something at an OXXO on a daily basis, whether OXXO is becoming sort of last mile, in and of itself not because we go to people's home but because people come to the store anyway.

So as you know we have partnerships with some of the big e-commerce players and as Eduardo said, I mean a big question for us is how do we want to play in the long run, in this new phase of retail, with the understanding the because of what we sell because most of what people buy out on OXXO are kind of spare of the moment decisions that we're better insulated from e-commerce ourselves right in terms of when people buy something to drink or consumer OXXO, they usually want it on the stop.

So it's a good place to be in, where you're somewhat insulated from the risks but very much in the stake of the opportunities. So we'll continue to analyze and test different things..

Thank you..

We'll take our next question from Mark Jason with Invesco..

Although it's still in its infancy, I would like to get a little bit more information on c-store. What are your c-store plans in Chile? How is the progression of Big John going in terms of conversion to OXXO, organic expansion and then lastly how are you thinking about pricing in the stores.

Is it more of a traditional c-store pricing? Or are you bidding more towards OXXO low price leader type of pricing?.

We're very excited about the stores that we're finally adding in Colombia and also the ones we're having in Chile, basically by reducing prices, reducing margins where we think we have to. And not - we don't want any consumers that views a drop by visiting our stores.

And I think Big John strategy was to charge for convenience all the way down and it was a very difficult process because so what we've been doing is by charging the value proposition to the OXXO, value proposition and set up the standard levels of OXXO at the same recent time and the more we can do it, the more we can evolve the brand from Big John to OXXO.

at the end, at the Big John will end and we'll have OXXO with the mindset of Mexico, but I think very much understanding the market from the Chilean operation.

So far the Chilean operation is very much into very dense ideas, with a lot of pedestrian traffic and I think, with that in mind I think we have a very strong - we're building a very strong powerhouse to really to expand and I just visited in last November or last December the Chilean operation.

I was very much impressed I think the bet that they're doing in Chile is a mobile bet that we did in Colombia. I think the better in Colombia, we were a little bit more cautious. And I think the bet that we're doing is by having these 50 stores already in Chile and by opening the stores, converting the stores.

I think we've been able to be a bit more broader move in Chile. I don't know, you want to add anything..

I mean just off the 51 Big John stores. I think 20 have now been converted into OXXO's and I think as Eduardo was saying the big challenge is going to be to understand what the Chilean consumer wants out of their OXXO's.

right? Because it's a transition from the traditional c-store into something different and the more we can move it towards the Mexican model the better, but it has to be a gradual process and very, very dependent on what the Chilean consumer really want from the corner store. Chile being a very modern trade market compared to Mexico [ph]..

We do see an opportunity for neighborhood stores and what we don't want to, you know in South America basically, the typical convenient store relay is established in a gas station. And the pricing gaps with the big box retailer would be 50%, 60%, 70% and for our mindset that is criminal. I mean, we work with a different mindset.

We love to tackle the market with a very efficient price range and I think. We're testing that in Chile and we're very hopeful that it will, there's a space for us in that market. In fact in Colombia we're doing it right and even some other big box retailers are losing share and they're in big trouble.

We're very happy to have very strong same-store sales in a very difficult Colombian market. So that's why I'm very positive about those two. It took us very long. Yes I know. It took us a long time, but well..

Yes, better late than never..

So are you thinking about rolling out more stores? I mean how aggressive can you be or how much time do you need before you really start to move forward in Chile?.

I mean our internal projections are pretty aggressive Mark. Obviously this is not something that we've put out..

We don't want to promise anything..

You should expect, as the data comes in, as the thesis are confirmed, you should always expect us to accelerate. And there is definitely a multi-year target of few hundred stores in Santiago for step-by-step..

Okay, thank you very much..

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

Thank for the insights on the moderating Mexican consumer. I was hoping you could give us a little bit more insight though.

Is there a change in the terms in the pipes of products that these consumers are buying in your stores that you're already seeing or is there a way, a change in the way that they're paying their bills? Is there difference by region that you're starting to see? And then lastly Juan, if you would please.

Are there any major technology or efficiency initiatives multi-year initiatives at OXXO that you haven't spoken about, that you could share with us?.

Basically what we're seeing in Mexico is really the inflation is differently different economic levels of the population.

And I think really inflation was very - in a very white spread base, so I think the consumer is being more cautious about spending and really although there is still firm [ph] in Mexico now, but I think the inflation really heat the pockets of that big base population in Mexico.

Thinking of that, I see that there are opportunities - we're still making inroads in categories that we've been used to sell and that is very promising because now the consumer trust us, that we're reliable source of some other categories beyond beers, few of these water and more the categories that we're more as indicated for the big box retailers, so with that I think we're becoming stronger and stronger as a good neighborhood supplier and the more order Mexico is, I think the better off we're in the position to serve those consumers in a better way.

I don't want to add anything, Juan..

I think on the consumer front. One thing that we need to remember is that 2017 was the third year in a row of very, very robust growth, right? Purely going back to Eduardo's point wages real wage growth was the norm for the better parts of that period and it no longer is. So right? And so you see that and impacting consumers sentiments.

Fortunately OXXO has always been a pretty defensive format, the type of presentation that we sell. I mean you could extrapolate even to the conforms of the business where over that you have the returnable presentations which when people are looking for more affordability, you can always go to returnables [ph].

And then so - generally even in slow years, I think OXXO tends to do quite well and so I would expect that to be the case again assuming the consumer continues to slow down. There have definitely been regional differences and we continue to see that, even more acutely than usual. I think this has to do with what makes each region tick economically.

The whole bottom half of the country which is solidly more exposed to the oil industry, it's now probably been a couple of years since Pemex began their kind of belt tightening exercise that we continue to see much more muted numbers out of the South East of Mexico, which of course is a big part of the market for Coke FEMSA compared to the North, right? Which is much more linked to manufacturing and export activity, so that continues to be the case very much.

Now in terms of technology I mean we've talked in the past about the amount of data that we're collecting and our own ability to processes and mind it eventually have it inform our commercial decisions. I think that's something we're making a little bit of progress on, but certainly it's a multi-year effort.

The whole digital aspect the number of resources, the amount of resources that are being allocated within FEMSA commercial to the digital strategy is quite significant and I think we're presentative [ph] of the opportunities that we see increasingly leverage our massive scale in terms of trying to understand what people want and how they want it and our ability to satisfy those need.

So lots of reasons I think to be optimistic in terms of opportunities. But we need to move fast. I think something even as simple as private label; we have been growing in certain aspects of private label going back to the other comment about affordability.

Coming up with better quality private label that kind of closes the gap to the national brand, that's another part of the story that I think holds the good promise because as you know our percentage of private label in the mix is still in the low to mid single digits. So there is significant room for improvement there as well..

Thank you..

And we'll take our last question from Jose Yordan with Deutsche Bank..

Just have a quick question on capital deployment that has been three, four months since you received your money from the Heineken sale and while I appreciate you can't tell us what specifically that's going for. I guess I would like to get a sense of maybe what's the probability that, that money gets put to use in 2018.

Just any sense you could give us on that would be great..

Basically there are some legal circumstances that we haven't to say about timeframe..

The constraint to those forms, the proceeds from the share sale need to be invested in Mexican assets for two years..

Over two years..

Which started running back in September..

Yes so with that in mind, I think we earned the process of really of deploying our great discipline and approach to really to allocate these funds but that will be probably to expand the control portfolio FEMSA of businesses where we have our capabilities and capacities to run businesses will be similar, although it could be identical [ph] because some of the reason that we've explained in the past and I think probably that will be something that we have to deploy and understand better, during this year and probably you will see some moves by next year, with that depression..

Yes I mean obviously the money is fungible and there is other funds that we generate from operations and as we've said in the past, we're looking beyond Mexico for opportunities and then we'll see I mean M&A as you know it takes a life of its own and it's very hard to predict.

We're still in February so hopefully should the way you phrase the question, will we see something this year? Hopefully that is the case; we certainly expect that to be the case, but we'll keep you posted both within Mexico and beyond..

Okay, makes sense. Thank you..

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

Thank you very much for your time and I look forward to meet you on our next call and thanks for trusting us..

Thank you guys..

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