Good morning and welcome, everyone, to the FEMSA Second Quarter 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, there will be a question-and-answer session.

During this call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data.

Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. At this time, I'll turn the conference over to Eduardo Padilla, FEMSA's Chief Executive Officer. Please go ahead, sir..

Hello, good morning, everyone, and welcome to FEMSA's Second Quarter 2018 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 the results of its Comercio divisions.

Coca Cola FEMSA published its own results and held its conference call yesterday, so most of you are likely up to speed on the numbers already. We hope this call will contribute to your understanding of our performance during the period. Our twelfth significant quarter was solid.

FEMSA’s commercial retail division again showed healthy trends across its income statement, particularly considering the tough comparison base on the Holy Week calendar shift as well as a record pace of expansion.

The healthy vision delivered encouraging results across all these markets, reflecting improved commercial activity and more effective its execution. With Spark the fuel division again faced a low comparison base and to deliver another quarter of margin recovery in spite of sub-volumes as well as an improved rate of unit growth.

At Coca Cola FEMSA we saw resilient top line performance in Mexico driven by strong pricing as well as sustained positive volume trends in Brazil despite the truckers strike in the month of May and the few challenging macro environment.

Furthermore during the quarter, we took a couple of important steps in our consolidated networks in the region by announcing the expansion of our bottling operations in Guatemala and the vision of Uruguay through our platform.

Moving on to discuss FEMSA’s consolidated quarterly numbers, total revenues during the second increased 8.6% and income from operations increased 3%. On organic basis, total revenues increased 8.9% and income from operations decreased 1.2%.

Net income grew 67.9% in the second quarter, mainly driven by the non-cash foreign exchange gain related to FEMSA’s significant US dollar denominated cash position as impacted the depreciation of the Mexican Peso during the quarter. To a little extent this growth also reflects low interest expense and creating income from operations.

Our effective tax rate was 2.3%, very much in line with our expected levels at low 30s. With Spark our consolidated net debt position reached 73 Brazil Peso’s at the end of June. Moving on to discuss our operations and beginning with FEMSA’s Comercio Retail Division.

We opened 483 net new OXXO stores during the second quarter, reaching 1,472 net store openings for the last 12 months and representing a new milestone achieved by our team. This number of openings represents an increase of 30% over the second quarter of last year, which puts us on track for a record number of openings for the full year 2018.

Now, let me comment on this a bit further. As you know we have historically tried to flatten the growth of store openings, so that the second half of a given year and particularly the fourth quarter are not so heavy with openings. The purpose is to add as many new stores as possible during the lower sales months at the start of the year.

Therefore, having those stores generate more months of sales and to allow the team to focus on selling during the month December which is by far the biggest month of the year for us. This year we’ve been successful with our efforts.

So the number of operating reported for the first half of the year includes some opening that would otherwise have taken place later in the year. Therefore, you should expect a slight deceleration in the pace of openings towards the end of the year.

So this will likely be a record year for our new store openings for the delta versus full year 2017 would probably be moderate. Revenues for the retail division increased 9.7%, OXXO same store sales were up 3%, driven by a 2.1% increase in average customer ticket and a 1% increase in store traffic.

These numbers reflect Brazilian consumer demand as well as the negative effect from the Holy Week calendar shift because the date of Holy week challenges from year-to-year is always useful to look at the growth rate for the very – for the first complete six months of the year, which this time reached 5.1% in line with our long-term expectations.

Moving on to the P&L, for the second quarter gross margin expanded 130 basis points on top of our demanding comparison base, 150 basis points in the previous year, reflecting the same drivers that we have a complex spec sustained growth of service category, including income from financial services, healthy trends in our commercial income activity, anniversary, increased and more efficient promotional programs with our key supplier partners.

Operating income increased 7.7% and operating margin contracted by 10 basis points, reflecting our continuing initiative to strengthen our compensation structure of key store personnel, and a tightening labor market; number two, increased secured car transportation cost driven by incremental volume, higher fuel costs, anniversary, the accelerated pace of store openings during the quarter, which put pressure on our operating leverage.

On the subject of operating margin, it is important to note that for the first six months, it is stable in line with our expectations. Moving on to FEMSA's Comercio Health division, we added 16 drugstores to reach 2,251 units across our territories at the end of June.

Revenues increased 17.1%, following an increase of 11.8% in same-store sales, which include a positive currency translation effect from strong Chilean and Columbian peso exchange rate versus the Mexican currency for this water [ph].

Gross margin expanded by 146 basis points in the second quarter, reflecting commercial activity driving positive margin mix and more effective execution across markets, benefits from the incipient leverage of our recently integrated operating platform in Mexico, our drugstores, and number three, a favorable comparison base from last year.

Operating margin expanded 180 basis points reflecting the sales growth and gross margins expansion as Juan described. The currency benefits from Chile and Columbia, and increased operating leverage generated by tight expense control and recently integrated platform in Mexico.

So for its part, FEMSA's Comercio Fuel Division added 32 gas stations during the second quarter to reach 499 units at the end of June and 109 net new service stations for the last 12 months. Revenues increased by 21.5%.

Same-station sales grew 5% in the second quarter, as the average price per liter increased by 13.6%, while average volume decreased 7.6%, continuing to reflect demand elasticity. Gross margin recovered by 160 basis points and operating margin recovered by 90 basis points year-over-year.

As was the case in the first quarter as you probably recall, the second quarter of 2017 represented quite a low comparable base for the fuel business and this certainly contributed to the gradual recovery in profitability we reported today. Finally, moving on briefly to Coca Cola FEMSA. Total revenues increased 3.9% during the second quarter.

As I mentioned at the top of the call, we continue to achieve robust growth in Mexico, where the team again delivered encouraging volumes strength in spite of the truckers strike and a volatile macro environment.

However, we saw margin pressure from higher raw material costs, in particular PET across most markets, [indiscernible] in Philippines and concentrate in Mexico. If you were unable to participate in Coke FEMSA conference call yesterday, you can access a replay of the webcast for additional details on the results.

Looking ahead, we see a resilient consumer in Mexico with that size mix as inflation has come down the labor conditions seem to be tightening. Other variables such as the peso-dollar exchange rates have improved slightly in recent weeks, which is encouraging.

But Mexico is not immune to global concerns and international trade and there are other macro questions to be answered in the near future. Beyond Mexico we also face challenges and uncertainties in several markets. So we remain vigilant as ever as we continue to execute our strategy across businesses. And with that, we can open the call for questions.

Operator?.

Yes, sir. Thank you. The question-and-answer session will begin at this time. [Operator Instructions] And we’ll take our first question from Luca Cipiccia with Goldman Sachs..

Hi, good morning. Thanks for taking my question. I wanted to ask about the gross margin and also if I'm correct for the first half of the year this is probably between Q1 and Q2 is probably the highest we’ve seen in a long time, especially for the data that I can track going back.

So my question is really how do you see these progresses being sustained going forward in the rest of the year but also more generally going forward? And also given the greater number of store opening, quite substantially a higher number of store opening in the quarter, how much this impacted the flow through from gross margin to the operating profitability, I don’t know if you can quantify in business terms, in business points, or at least directionally as we look into the second half where as you were saying some of the stores will start contributing and the number of opening should be, I would assume, relatively less compared to last year? Thank you..

Well, let me start for the last part of the question, which is store openings, yes, increasing 30% of the store openings during this period of time affects results because the sales curve really comes into strong by the eight or nine month. So that will affect the quarter results.

But on the other hand I think we are very much well-positioned for the second – no, for the third and the fourth quarter of the year, with a much better store base.

I don’t know if you want to quantify the gross margin?.

Yeah, I think I look at it as one – I think the savior of this quarter is not substantially different directionally from what we usually see.

Obviously, the gross margin, the drivers as Eduardo mentioned in the remarks, are not that different from what you’ve heard us talk about in recent quarters and even maybe a couple of years in the sense that you have the services category continuing to grow very strongly well into the double-digit, which is very accretive to margins.

You have kind of the virtuous circle of scale and execution making us even more attractive to suppliers who then in turn are willing to deploy more of the budget to advertising within the store and positioning the products inside the store.

And then on the operating income side of the story, in addition to the pressure that had come much accelerated expansion and the fact that you have so many stores that are not selling what they eventually are expected to sell, we did mention the secured cash transportation has become an issue now for a number of quarters.

This is kind of – it’s a high quality problem obviously because it means we are generating even more cash at the stores and looking for ways to “get rid of the cash” partly by having the withdrawals from bank customers, from the remittance businesses, having people to be able to take some of the money in larger amounts of cash, but there is no question that we have seen some inflation on that front.

We mentioned that’s tightening the labor market.

As you know, compensation has been part of it in terms of our own networks to improve the structure and the gradual evolution or migration from commission based stores into more employee staff stores across different parts of the country and those I think the way that I think about it is this is not a very different quarter from what we usually see.

Maybe the amounts were larger in terms of as you mentioned, a very big margin expansion at the growth level and a very big number of new stores, but directionally and more importantly going forward I don’t expect big departure from this in the coming quarters..

Understood and just to clarify for the number of stores, the run rate on an annual basis shouldn’t change dramatically. It’s just a shifting of timing of opening.

Is that correct?.

Yeah, I mean you should expect maybe a few more stores than the last year, but right now we are a lot higher than last year. And so we are going to give our guys the chance to slow down towards the end of the year, so that we still probably exceed our targets, but not by as much as the run rate would indicate today.

To that end, the curve makes us very efficient because the whole machinery is working for all the year. Whereas before we were skilled to these third and fourth quarter and that is, we know, affecting results and this whole performance.

So I think it’s a good thing that having flattened out the curve and being able to improve the store openings in this first two quarters, I think it’s very good for us..

So I mean we’ve been trying for a while and this is the most stressful that I’ve seen to be at this ever probably..

And out of curiosity, just logically why was that the case? I mean intuitively one would think that it’s better to open earlier and then leveraging the stores in the seasonally more important quarter, why in the past was not possible?.

Because we are also human beings and we tend to do different things and really this is like – I don’t know this is like, oh my goodness, the year [indiscernible]..

All of a sudden you are in July and you are behind your target and it’s – there is no big answer. It’s just –.

Its human nature at work and then you play a little bit with incentives, so that people are – they have a reason to focus on the first half of the year and it seems to be working..

In a way the old machinery was exhausted by the end of the year and then the next year it was depleted. So I think the ways that we were trying to do really is I'm very happy they’ve been able to succeed on that..

Great, thank you..

Your next question comes from the line of Antonio Gonzalez with Credit Suisse..

Hi, good morning Eduardo, Juan and Maria. My question is on the fine-tuning strategies that you’ve been doing on the compensation side for some time now.

I wanted to ask if you can give us any order of magnitude here of how has the turnover actually improved, I know that perhaps sharing the absolute number of annual turnover might be problematic perhaps, but I can just – I'm just trying to understand if you lower turnover by 5%, 10%, or was it something more meaningful than that? Sorry, go ahead.

Thanks, Eduardo. I guess what I'm trying to get is I’d like to see your bigger picture perspective of where are you in the journey of that improvement, who are you benchmarking with, because I presume obviously there’s a little bit of [tweaking the compensation structure, but then again you don’t have that many years in Latin America directly.

So I just want to see how do you think of who the best – who the best-in-class benchmarks for you would be as you are doing this process, where are you in the journey, is there more to come? And just finally, if you can share whether any of these best practices that you are capturing at OXXO specifically can be sort of exported to the rest of the format at FEMSA Comercio? Thanks Eduardo..

Well, Antonio thanks for the question. Basically we – let me give you – we are divided and the stores are either run by the commissioner’s leaders or employee leaders. We tend to have – we’ve been able to help the commissioners to structure the workforce very much.

So we’ve been able to enable them with systems, with processes, so they can manage the workforce the same way the OXXO will manage the store employees. I think that in spite of that we still have a higher pension in store – in commissioners and store employees than we have in our own employees in OXXO.

Before I think that lack of structure probably didn’t leave the store employees a better understanding of how the payment was made and how performance was measured. So the pension that we have in our own store leaders and the store employees, our employees by OXXO is less.

So little by little, I think we are saying that we have to – the beauty of the store leader and the commissioners is likely he is an entrepreneur.

He is a real entrepreneur with own team work and we will love to have the best of all words, to have that entrepreneur spirit and have this structured discipline of having our own employees and we’ve been trying to pursue both and that is unfortunately the rotation industry and the commission is higher than our own base.

We’ve been able – we’ve been mixing our own store base of store employees little by little and that is changing the – probably I would say 55:45. That will be around 50:50 and this is currently how the company is structured. When we compare our peers, we know that our competitors, direct competitors in company stores have a much higher pension.

We also compete in that particular profile with people that go for the QSR people. They also were paid very high and also for super markets. So it’s a very systematic thing, because sometimes we have now been able to deploy less – if the store employee – to arrive to the store takes one bus or two buses or interested person to arrive to the store.

That’s a major thing. So we’ve been able to – we’ve been trying to just not by increasing the payment, but also being wiser how to locate people depending where they live, depending on their own conditions.

And even though we have a new labor reform here in Mexico, I think we have now been able to use it well to have the people that are working just very few hours in favor of the whole shift.

So I think, Antonio, we used to love to learn and we will love to have – the more big the store is, it’s becoming more sophisticated in terms of services and everything. The more we think we will love to have a more stable workforce and that’s why we are aiming to control that in a better way.

Compared with the industry, we are better, but we are not satisfied and we won’t lose anything..

I would say in terms of – if you were to see the data series for turnover, the improvements have been in the neighborhood that you mentioned, right, something like 5% or 10%. But the situation, when we look at it, right now as you know unemployment in Mexico is at historically low levels.

There are a lot of opportunities out there, but there has been some inflation at least and it’s coming down but it has been higher the last 12 months than it had been for a while. And so it’s turned out to be challenging to maintain the gaps that we aim to have versus the competition or all the alternatives that people have for jobs.

So it’s definitely become the kind of permanent exercise where you are trying to keep those gaps, then other people raise their own wages and we need to react. So I would say and that’s why we mentioned it in a couple of different points in the remarks. We do think the labor conditions are a bit of tightening cycle. We are obviously vigilant.

We will have to see what happens to minimum wages and things like that. But very few people – at FEMSA almost no one makes a minimum wage. Everybody makes more than that. So there would be a buffer of sorts in that scenario. But obviously if the minimum wage goes up, then that puts pressure on the whole – structure..

And let’s let me use it to describe how the work force of the story is. There’s a store there was the patients very low unfair with the store employee.

And we – simply we don’t want to stay like five years of course not because we know that we will be training them and they want to prove the position because of the training of OXXO, there better to be they are meaning they’re more able to work somewhere else because of the training is very good and they know how they are enabled to do more things..

For starters turn around 20%.

Less than that?.

Yeah 16%..

16%..

And the store employees that’s very high. But also we have the ladies that work in –also of worry is that the tackle venture that we having already know more than 1000 stores, I think around 200 stores. And the way we have been able to recruit people these are basically older ladies around 50s and that was very stable.

And they’re very they rotation is very low [indiscernible]. I understanding that how to some talent the workload at the store is heavy and sometimes that that is also something that we have to be remain so also how to make things easier to store in order to move things around that it’s also important things that we have to work on..

Fantastic. Thank you so much.

If I may just super quickly have you quantify the recent increasing 10% in minimum wages in Mexico and how much would that impact in your overall OXXO structure or are you still [ph]?.

Well since we are here with our total compensation is well ahead, well above that. We don’t know really how much we would have increased because if real wages increase in Mexico that will be a probably in one hand there will be put some pressure on us but there will be more consumption so it will be –.

Yeah, that plays both ways, but I think the fact that we do have a good buffer I think means that on days, on day one they impact would be very limited and then you need to kind of figure out how it’s trickling up are kind of up to the wage ladder if you will so not we’re not super worried at this point..

Thank you so much for this..

Your next question comes from the line of Benjamin Theurer with Barclays..

Hey, guys, good morning to Eduardo, Juan and Maria Dyla. Just switch gears a little bit I wanted to focus on the health division if you let me.

So the question is we’re seeing a pretty decent improvement from income from operations margins are up almost 200 basis points and you’ve mentioned a couple of things clearly the level of contribution from Chile, Colombia helped but that you’ve also seen already some of the benefits from the recently integrated operating platform in Mexico.

So on that, could you give us an update on where you are in terms of the integration process and what you’ve been seeing on Mexico specific on the health business in terms of margin expansion if you would have to isolate that to basically take away a little bit of that currency implication in that segment what we’ve seen during the second quarter that would be my question?.

Let me just give you that tell you that be of course that we haven’t place in the [indiscernible] from Mexico, where very happy with it. We’ve been able to improve margins to negotiate better to use better logistics systems, all the skills we have a lot of room to grow and to improve.

What we have what we feel probably stable that we will have to increase better, is still first store and that will be probably our second stage. Once you have the leverage to secure better then probably you can start focus in the consumer better because as I said probably in some previous calls.

The labors didn’t work well so this platform that we are mounting to have the whole general only one platform is something that were learning we are stabilizing and we are very, very happy with the results. In case of the exact numbers when you give some decision..

I mean hi, Ben. I mean just remembering that the different in size between the South American operations and the Mexican operations not in terms of number of units but just in terms of revenues and of course profitability it’s very, very significant.

So in order to have this magnitude of improvement at the health division you really need the South America to be performing very, very well. In Mexico along doesn’t really move the number and you were near that much.

So definitely there was a currency benefit there was a need to comp in South America, there were certainly exclusion improvement across the board.

But I think that what’s happening in Mexico is I would say directionally very encouraging, you begin to take pages off the playbook of OXXO in the sense of beginning to monetize that real estate at the store beginning to get some logistics income from now that you have your single platform.

You are taking care of some of the distribution so you can charge for that to suppliers.

Also I think become smarter in terms of how we’re growing the number of stores, we’ve slowed down a little bit that base of opening we’re focusing more on territories where brands are strong and well-known and we’re moderated the pace in terms of conquering new markets obviously that we need to let the brand begin to kind of take hold and for people to innovate and try it and generate repetition.

So I do think if it’s more than just the logistic platform or the fact that we’re now running on the same SAP system I think on a number of factors, we’re executing more wisely if you want. So I mean I don’t want to get into the neat degree of basis point but certainly directionally we like how Mexico is performing..

Okay.

And then just one follow-up in terms of same store sales performance in Mexico are you seeing positive trends with the stores or is that mainly as well driven by the South American business?.

Very I mean positive but just a little bit, right. So we’re coming across a few quarters where basically we were not performing well at all and now we’re improving. So I would say the best performer of the three countries was Colombia, then came Chile and then came Mexico. But again we have change in the drugs that are being sold in this store.

We are moving more toward more generic and that if affecting the price of the item, but it is benefiting our margin. So that’s a very important point because part of this I mean part of what the single platform and the direct that you’re relying on little bit less on the middleman which usually control how much generics you can have in your mix.

So we are definitely trying to grow that because it’s it helps profitability a lot but it’s going to be a little bit when you look at the same store sales number you need to keep in mind because the price point significantly lower..

Yes..

Okay, perfect thank you very much I leave it to you..

Thank you, Ben..

And next question comes from the line of Robert Ford from Bank of America..

Hey, good morning, everybody and thanks for taking my question. I just wanted to get some comfort with the same store sales at OXXO right. I think 3% was a little bit worse than expected were anticipating some impact because of the seasonality.

But could you go over the comps month-by-month and maybe touch on how you’re coming out in July? And then also given acceleration in new store openings, where are you now in terms of your views of industry stat saturation and was there a rule of cannibalization in the period if at all, right.

And then when could you also provide that the same store sales for the comps or the same stores comps for the health division in local currency for those three markets please?.

Well let me let me start with your second part of the question about the some duration of Mexico. We were very positive that that we are very low of upgrading the Mexico market. If you measure some other markets divided by the people and also we can unable to improve our valuable proposition to grab more occasions of consumption.

I think there are few I don’t know we’ve been same 30,000 stores a potential for helping stores in Mexico and wish to believe that. I don’t know Juan, did you want to answer the other part of the question..

Yeah and I mean did certainly the amount of wide space and the comfort level when we talk to the guys that are in charge of expansion is very, very high status highest I’ve ever seen it in terms of their how they measure the their internal metric the batting average the performance of the new stores versus the old stores.

There are some very high level of confidence that we’re going to be able to keep this up for quite a while. Now in terms of a same store sales number certainly the month of April we knew it was going to be a tough month because of the full shipment amount of time into the first quarter.

May and June were actually pretty good months and then we know we highlight the fact that looking at the six months we are we’re right where we thought we would be.

Right, obviously there’s a little bit of noise this time around because of the World Cup because of numbers that are out there from retailers that have a very different mix from what we have in terms of big ticket items TVs and the like.

But we feel good about the number quite frankly Bob I mean it’s this is a fourth year where if you look at the past three years in the compounded we’re talking close to 25% same stores growth to be in the fives in the first six months of the year given the uncertainty of the how people with the election coming up and uncertainties related to that, 70’s related to north side specially in the north of the country.

We don’t think this is a number that disappoints internally again on top of what has been an amazing run of the last three years. So we don’t think there’s anything wrong really with the machine. We actually feel pretty –.

Although we can improve it, of course..

Of course, but – yeah, that’s fair..

So it’s fair to say May to July you’re in line for about the six month trend?.

Yes..

Yes..

Great and then just on you all traffic areas for health?.

Yeah on the health side, I mean in Colombia if it’s in the teams basically. And then both Chile and Mexico are in the low single..

Great, thank you very much..

Yeah. Welcome..

Your next question comes from line of Ulises Argote from JPMorgan..

Hi, guys, thank you so much for the call.

Just one quick one from my side, can you provide an update on the Amazon Pilot rollout you told us about in the last call? Maybe give us some color on how this is driving sales maybe what kind of spending profile you’re seeing from the customers there walking to the OXXO stores to the pick up the Amazon orders? Thank you..

Well [indiscernible]. Surely I mean the object we have I think very much in line with what we said three months ago. We are almost at 3000 stores enable for the click and collect. This is basically the metro area of Mexico City, Monterrey, [indiscernible] some other medium size cities.

Basically the limiting factor at this point in terms of the deployment is the Amazon logistics so whatever Amazon logistics can get we can enable those stores very, very quickly. So the expectation continues to be that we’re going to have I mean we already have a 2000 right now.

We expect this trend to continue in the second half, it’s very early I mean when we’re looking at the data in terms of how many transactions are happening or store for a week I mean that is the numbers are still low I think there’s a obviously learning curve or an information curve I guess for the customer to know that they have the OXXO alternative to adopt it, to try it.

So I would say the data so right now is probably not significant in terms of what this could potentially be. But it’s definitely moving in the right direction and I said we’re almost at the 3000 store mark so something like 2900..

Okay. Super, helpful. Thank you very much..

Your next question comes from the line of Alvaro Garcia from BTG..

Hi, good morning. Thanks for the call. I want to go back quickly to tight labor market in Mexico. You mentioned just to finish up on that point which sort of the discussion on where the system could go as a whole in the context of where you think margins can go next year? That’s first question.

My second question just real quick housekeeping when we look at your net debt at the center level so OXXO it seems some of your cash went over to it’s a longer term asset. I was wondering if you just remind us what your plan is to what your strategy is with that cash at the FEMSA level and what you’re investing that cash in. Thank you..

Hey, Alvaro. Let me start with the second part of the question first. I mean basically that you’re right I mean there’s a portion of the cash that is now invested in slightly longer term assets. Marginal in order to comply with every repatriation decree there’s a very clear set of guidelines in terms of what kind of assets we can invest in.

These are still short term assets they’re just a little bit more than the twelve months that you need to classify them as cash.

The greater question I think continues to be how are we doing on the deployment of that in terms of growth and in terms of actual transactions in businesses that put us in a good position to create value and I would say on that front we will moving forward there’s a couple of things that we’re working on that are promising and we’ve talked about this in the past in terms of what type of assets obviously the pharma whether in Mexico or in other parts of the region.

Again using not just I mean the process from Heineken sales have to be invested in Mexico but we do have cash that come from the operations and that can be deployed anywhere. So no change to the strategy in terms of the type of asset that we want to acquire but right now there’s really been nothing to report on that front in the last three months.

In terms of the first part of your question on the on the labor conditions, I think you know generally the comment I made a few minutes ago very low unemployment lots of opportunities for young people to have kind of short term jobs and we just have to remain competitive and not just competitive but hopefully continue to be the best the best choice for many of these young men and women.

I would say given that we are being able to expand the gross margin the way that we are put in a pretty good position to then manage the SG&A, sometimes you’re going to have electricity down there, sometimes you’re not like this quarter electricity what was actually a bit of a tailwind for us to headwind I mentioned secure cash transportation as a something that we’re probably going to keep talking about because it has become relevant and it moves in sync with the success of our service category and that is growing very, very strongly.

And for sure, labor I mean again with low unemployment numbers will probably continue to talk about how we’re managing that and maybe putting in a little bit of pressure on the SG&A. But overall, we’re sticking definitely sticking with our expectation that we can continue the year and finish with that with stable margins at the operating level..

Great, that’s great color.

One follow-up is sort of the net cash position at FEMSA today would be somewhere around the range of well over $2 billion is that ballpark?.

The net cash well yeah we would tend to look at it Exco [ph] FEMSA. You’re looking at the number right..

Correct, Exco [ph].

3.2 is the number we have here..

Perfect. Thank you very much..

Would you like to move to our next question now?.

Yes..

Okay, great. Our next question is from Alex Robarts with Citigroup..

Hi, everybody thanks for taking the question. Yeah I was keen to actually inquire about the Comercio footprint and profitability in Colombia. Getting impression it least on the OXXO sign right that we’ve got some more store openings or at least a taste of openings if accelerating.

And I’m wondering if you could kind of talk to that what is perhaps if there is a change in the ability to open stores or how are you looking at that footprint? What could be a go for store count over the medium term and when we think about that growing over time is it fair to think that today the OXXO Colombia EBIT margin is quite distant from where the reported OXXO margin is it close.

And I guess the last piece of this on Colombia is interested to hear what is driving this meeting same store sales growth in the drug stores in Colombia. Just curious to see if that’s a sustainable rate for now and if you could give us some color around that that would to great? Thanks a lot..

Let me start with the OXXO. OXXO in Colombia and hopefully Chile I think we’re happy that we’re stores and also find a profitable we lack scale and we years have to build the number of stores to have scale in order to have a very profitable operation.

What is driving that is driving increased same store sales and there are no stories in the world [ph] that sell more than Mexico City stores and there are some things still of the cost structure of the store that we have to be more efficient and you need better. But I think very happy with results.

In terms of also in Chile, where we acquired Big John, Big John was not profitable.

Big John lacks scale and some of the stores were profitable but they have these different view of what convenience means for the market is very much it was very much in line with convenience means for the gasoline market in South America where sometimes the obvious to pricing is 50%, 60%, 70% more higher than the supermarket pricing.

We’ve been able to do is to add only 50, 60 stores that we have in Chile to transform close to 20. And what we’ve been trying to do is to prove to prove a valuable position that convenience can doesn’t have to be expensive and convenience could be profitable to the shareholder and also be very be an extraordinary value proposition for the consumer.

And what we’ve been doing to do is transforming those operations from Big John to OXXO and the way we will enable we are at the banner now it’s OXXO and those if any stores and the value proposition is different. And it takes like six months to reread to recuperate the margin because the stores fail much more what Big John used to sell.

With lower margins but at the bottom is basically the effect will be about the same. So in Chile and in both markets we are hopeful we’re very happy and I think the best year to come. I don’t know you want to have anything one..

Yeah no I think the fact that in Colombia we are finally where we wanted to be. I think in terms of the value proposition and revenue per store and it’s really just a matter of having more numbers to dilute the overhead and to increasingly negotiate better with suppliers.

I think Chile is be a little bit behind in that curve what I would say in both cases you should expect to hear more from us in the coming months and quarters in terms of ramping up the pace of openings. In the case of Colombia, if you look at the whole country you could certainly aspired to have several thousand stores eventually.

Obviously when you look at Chile it’s smaller and it’s more much more concentrated around the Santiago metro area I mean obviously there are other places we were we already have stores and where we could have stores.

But it in Chile is much more dependent on the metro Santiago and the absolute number of stores is probably a bit lower than what we could eventually have in Columbia.

But it’s giving us confidence that the speed at which we are now being able to test things and get to conclusions and make those changes that the value proposition would be able to make those profits a lot faster. And the level of comfort that we can probably aspired to go to another country in the not too distant future is high.

So as the percentage of all overall OXXO, this is tiny and it will continue to be small because the benchmark is growing double-digits or very close to that. I mean for sure, close to 9% in terms of the new stores in Mexico because the same store sales get you to the teams.

So some of the benchmark is growing in the teams, so as fast as we grow in South America, it will continue to be small. But the appetite and the confidence and like I said the frequency that you’re going to hear us talk about international operations are definitely going to raise..

Very helpful, thanks for that. But just to get it straight here in Colombia for OXXO. So what could you share with us what the store openings were so far this year or in the quarter and just I was keen to understand if you could touch on why at drugstores we’re seen in Colombia this mid team same stores sales corner? Thanks..

Yeah the new openings in Colombia have not really accelerated yet. So we haven’t started this kind of second stage rollout but we’re getting ready to do that. In terms of the Colombia health same store sales I mean it has been in that ballpark really for a couple of pretty much as we acquired Socofar.

I think the guys have been doing a very good job remember that the Colombian market has a big institutional component. So I think we’ve done a good job of increasing the number of entities that we are associated with. It’s a very fragmented market.

There’s a lot of room for improvement in terms of the traditional trade and it’s just a market where we expect to be able to continue to grow fast certainly of the three [ph] markets it’s probably the most compelling in that sense..

Okay, got it. Thank you..

Thank you. And we’ll now take our next question from Rodrigo Echagaray from Scotia Bank..

Thanks, Maria, Eduardo and Juan for the call.

Just a quick update on how that’s so if you may in wondering if the reason the option for that to be scaled at all other businesses in geographies meaning Mexico drugstores and potentially South American drug sources well as all the options that you guys are now opening? And maybe bigger picture if you can share any update on OXXO pay and the partnership with connect doing I mean it seems to be also very promising and just wondering if there is anything new on that? Thank you..

Well I mean let me just head before Eduardo want to comments, in terms of Saldazo, we are about $10.3 million..

That was the number we’re going to –.

Yeah $10.3 million which I mean in the run rate continues to be more than 200,000 per month. So that hasn’t changed..

The balance that they keep in those cards – the use of the cards is higher than the –.

Much higher I think about like 60% of budget utilization right..

The variations will grow with differ number –.

Which is about half..

Yeah..

Normally at the debit card would have about 30% usage were we are running at twice that. But I mean I did become and I’m going to make a lot of if to expand on this I think the part of the genesis for Saldazo was a loyalty program. But the truth is that we become a lot more ambitious in terms of what we want the loyalty program to be at OXXO.

We have the loyalty program challenge will have a drugstore and there’s a lot of work being done on the digital side and this kind of links up to your question of connect. I mean I think there’s a lot of work being done and hopefully there will be news down the road about improved loyalty programs in our different formats.

I think on the connector front, I mean it is promising as you say right now, I think a lot of the benefit that we’re seeing is kind of at the B2B level basically the time it used to be that if you paid your utility bill at OXXO. It would not be accredited at the provider in real time.

It would be done more in that shift and now that platform is enabling this to happen in real time.

Eventually, obviously the benefit of this needs to be translated to the end consumer so the desperation that we have that people will pay for walks or even sitting in the comfort of their living rooms kind of taking the strength of the brand outside of the box and capitalizing on the fact that for a big chunk of the Mexican population.

OXXO is now synonymous with payments that work as planned. Right, you give OXXO your money and you the money gets to where it needs to get. We become very reliable, we’re very reliable and the challenge is can we then do it outside of the box and connect base it’s one of the ways that we are working on that..

Helpful. Thank you, guys..

We will now take a follow-up question from Robert Ford from Bank of America..

Hey, thank you very much. I had a question with respect to logistic guy and if I’m looking at the stub correctly, it looks like the profitability or EBITDA was down by about a third in the quarter given the trucker strike that didn’t seem to be too bad.

Can you talk a little bit about how logistic has normalizing in Brazil after the trucker’s strike, if the disruption creates opportunities for you? And even given the rapidly growing demand for e-commerce related logistics, can you touch on in the least cost strategy when it when it comes to e-commerce if they’re planning something?.

Yeah before give this – one gives you the precise numbers.

And then we will give you the kind of no really I [indiscernible] we are in the – we have four pieces of the health – the business outlook, the business that we have very profitable in both becoming now profitable in both you although this disruption of the truckers strike what’s really affect us dramatically but again we’re very hopeful that we have very an extraordinary base to do business in Brazil.

The second business is the direct hires that we have for Heineken, for OXXO or for Coca Cola FEMSA and some other minor operations and that’s very stable. Although again, if we are on less we understand how to do this business better you believe is because becoming more commercialized. The other business is warehousing.

Warehousing is a business that we’re learning and we have some of the operation in Colombia and operations in here in Mexico. And again we’re learning the business and the other one is transportation management and we’re also very hopeful with this.

The thing is that we will love to have it seems like these businesses have we have different views in different countries. We would love to have one platform with a big common present to be useful in all the countries that we are. And again that will be a very challenging thing to do and it would take time.

And we are in the middle of making these decisions this business to work as one. And again we’re very convinced that this is going to be a profitable business something that we should be investing the future. I need goes very much aligned with the how things that the business deals have been required and you won’t love any one..

I think I mean to Bob’s point and by the way –.

You’ll talk a little bit about that I mean certainly the big chunk of our logistic operations are now exposed to Brazil. We did small and medium acquisitions there in recent years and so you’re right that are part of the reason for the subpar number to do with that.

But what happens there when you have tough conditions it usually kind of if it hits the smaller players more.

It probably drive some people out of business or it put pressure on from less formal players and so it much like it happens in other industries you sometimes come out of these diffraction sort crises with better market share or in a stronger competitive position than when you went in and so.

That it’s our expectation and you’re right that as Brazil continues to improve which continues to be our base case you should expect to see better numbers out of out of our logistic operation now. Basically the bulk of our operation of what I would say 100% continues to be B2B.

We really not involved at this time in the last mile in terms of going to competing with the FedEx and the UBS of the world in going to the home obviously with this cost on the also from how they’re in a way they click and collect kind of a reverse last mile but surely the logistics business Solistica does not currently serve the last mile..

And we have last mile efforts being tried in a lot of places..

Right. That doesn’t mean we’re not looking at how we didn’t start ourselves there. But as of today, that’s not the case..

It’s very helpful. Thank you very much..

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

Let me just clarify the number of the net – the net debt that we have is 1.2 and it referring to the cash..

3.2 is the cash..

3.2 is the cash number, so just to clarify, so we don’t have misunderstanding. Well. Thank you very much all for your presence. Thanks for your participation. Have a great weekend. We look forward for the better quarter in next quarter..

Thank you everyone..

Thank you..

Ladies and gentlemen, 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, we thank you for your participation and have a nice day. All participants may now disconnect..