Good morning, and welcome, everyone, to FEMSA Second Quarter 2019 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 conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the company.

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

Please go ahead..

Good morning everyone and welcome to FEMSA's second quarter 2019 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 of FEMSA and on FEMSA Comercio's results as many of you probably had the opportunity to participate in Coca-Cola FEMSA's conference call yesterday.FEMSA delivered solid results in the second quarter which was an interesting one from calendar standpoint.

We have tailwinds from the Holy Week shift in April as well as the comparison base from last year's World Cup that began in June.However, a key positive theme across most of our operations was one of strong revenue growth driven by healthy pricing that in turn allows to deliver margin expansion at FEMSA Comercio Proximity and Fuel Divisions.At the Health Division, our Mexican operation continued to perform well, but we -- we were overshadowed by the soft results and unfavorable foreign exchange dynamics in Chile, while Colombia continued to expand and we were happy to close the acquisition of GPF in Ecuador in the quarter.

For its part, Coca-Cola FEMSA also achieved strong topline growth in most of these markets which then flowed down the income statement.Moving on to discuss FEMSA consolidated quarterly numbers. Total revenues during the second quarter increased 9.4% and income from operations increased 8.3%.

On organic basis, total revenues increased 6.7% and income from operations rose 6.6%.Net income decreased 26% as increase in our income from operations did not fully offset our foreign exchange loss related to FEMSA dollar-denominated cash balance.

In terms of our consolidated net debt position, during the second quarter, it increased by approximately Ps.6 billion compared to the previous quarter to reach a level of Ps.46 billion at the end of June, mainly reflecting the dividends paid in the month of May.Moving on to discuss our operations and beginning with FEMSA's Comercio Proximity Division.

We opened 375 new -- net new OXXO stores during the second quarter, reaching 1,312 net store openings for the last 12 months. This figure includes new stores in Mexico, Colombia, Chile, and Peru.Revenues for the division increased 11.3% on organic basis. Revenues grew -- in organic basis, revenues grew 11%.

OXXO same-store sales in Mexico were up 6.2%, driven by a 7.5% increase in average customer ticket, partially offset by a 1% decrease in store traffic.If we look at the first six months of the year in order to isolate the impact of the Holy Week calendar shift, we were up 4.8% right in line with our long-term mid-single-digit expectations.In terms of the composition of the same-store sales, during the quarter, we saw meaningful price increases in some of our larger destination categories such as soft drinks, cigarettes, and coffee which helped drive the average figure up.

At the same time, we are seeing increasingly cautious consumers that are adjusting their purchasing patterns in ways that are still hard to read.Moving down the income statement, gross margin expansion was again strong at 180 basis points, reflecting sustained growth of financial services; number two, positive trends in our commercial income activity; and number three, more efficient promotional programs with key supplier partners.Income operations increased 15.4%.

On organic basis, it increased 14.2%. Operating margin expanded by 30 basis points, reflecting the gross margin growth I just described.

Partially offset by number one, the continuing strengthening of our compensation structure in a tight labor market including the gradual shift for commission-based store teams to employee-based teams; and number two, higher secure cash handling costs driven by increased volume and higher operational costs.For a change energy cost did not put pressure on our profitability during the quarter, but rather became a mother source of relief as we continue to increase the number of stores that are now getting their [Indiscernible] from wind sources reaching more than 50% of the total store base in Mexico.Moving on to FEMSA Comercio's Health Division, we added 61 drugstores across our legacy territories including a small acquisition in Colombia.

When we include the consolidation of Corporación GPF in Ecuador by the end of June, we have 3,061 units across our territories, representing the addition of 810 total net new stores for the last 12 months. Total revenues increased 13.9% but organic revenues were basically flat.

Same-store sales decreased on average of 2.6% reflecting a significant negative currency effect from appreciation of the Mexican peso relative to the Chilean and Colombian pesos.Gross margin contracted by 80 basis points in the second quarter reflecting number one a tough comparison base in operations in South America, where gross margin expanded above trend in 2018; number two, new pricing regulations in Colombia; and number three, increased promotional activity in Chile.Operating margin contracted by 70 basis points as cost efficiencies and tight expense control across our legacy territories were more than offset by the consolidation of GPF, which has a relatively high operating expense structure.For its part FEMSA Comercio Fuel Division added one gas station during the second quarter to reach 541 units at the end of June, and 42 net new service stations for the last two months, representing an 8% year-over-year increase in our OXXO GAS network.Same-station sales remained stable in the second quarter and gross margin was 9.8% while operating margin reached 2.3% of total revenues.

Operating expenses increased almost 33% above revenues, reflecting improved compensation levels for our in-station personnel as well as expenses related to the transition of our stations to the OXXO GAS banner.Finally, moving on briefly to Coca-Cola FEMSA.

As John highlighted in the conference call yesterday, they were able to leverage their operational spend to drive revenues across market and generally offset cost pressures, with a particular focus on the resilience of the Mexico franchise as well as the steadily improving Brazil.

If you weren't able to participate in the call, you can access a replay of the webcast for additional details on the results.Summing up, our second quarter results were robust particularly considering consumer environment in our key Mexican market that is gradually becoming more uncertain.

As always, we will continue to focus on the things that we can control and executing our strategy across all business units.And with that, we can now turn the call for your questions.

Operator?.

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

Hi, good morning, Eduardo, Juan. Thanks for the question. I'll start with the more obvious one maybe regarding Mexico and the OXXO same-store sales breakdown. I was a little surprised, even though I guess, it came ahead on aggregate, but I was a little bit surprised about the traffic number in light of a couple of things.

I mean, the base was not challenging, it was – but not that high.

And then we heard over the last couple of days, a few very positive comments I think yesterday from ABI in terms of the rollout of their portfolio, as well as earlier I think Arca singled out the convenient channel as outperforming at least in their category.So in the context of some of these mixed signals that we keep hearing from companies in the second quarter in Mexico, I was hoping you could spend a little bit of time on expanding on that dynamic traffic fee ticket and how you see that also playing out in the rest of the year.

And then related to this, also the store openings, they came a little short of our expectations, just see if there's anything about the freezing or the timing for OXXO during the year. And on the gas stations, it's the second quarter in a row that you only opened one. Is there anything we should read into that? Thank you..

Hey, Luca, this is Juan. You're not leaving any questions for the other analysts..

They are also making – one..

That's okay. That's okay. Now let's take them one at a time. I think on the ticket versus traffic question. I would say a couple of things.

I mean, we mentioned in the release and Eduardo's opening remarks how pricing plays an important role in the dynamic, right? We talked about some of these not only large categories for OXXO, but also the categories that basically draw people to the store, the destination category such as soft drinks, cigarettes, and coffee, all of which took meaningful amounts of pricing.

And this of course jives very well with what John described yesterday John Constantino.So you're seeing these big CPG companies taking the opportunity to use the pricing lever in a meaningful way.

And this – when you try to get into the mind of the consumer, if your main reason for – for your visit to the store is going to cost you significantly more money then maybe you begin to adjust your decision in terms of how many times are you going to visit the store or how you split your purchases into a number of times during the day or maybe how you undo some of those splitting of purchases, right?I think you mentioned in your question, mixed messages and I also think that's part of it.

I mean, when you look at the data and you look at ANTAD [ph] data or categories, you're seeing some things like apparel doing very well, but autos are contracting. So it's not clear whether consumers are privileging kind of big ticket items at the expense of others. I think there's a lot of moving pieces quite frankly.

I think, if we just look at the narrow kind of little window of OXXO, the best explainer of what happened during the quarter is -- has to do with these big price increases being taken on the part of these large categories. But it's not a completely clear answer and so I apologize for that.

But even internally, we are -- have a number of different theories.

Are people going to -- as people see kind of the clouds darkening a little bit on the horizon, are they really already adjusting their patterns? Or is this kind of more of a blip and in the third quarter we're going to have a slightly different story?.

We have also an index where we measure ourselves compared with the big-box retailers and to see how -- really how much pricing we're taking, we're price competitive or we're less price competitive than we were in the past.

And by also doing really our price index comparison with the big-box retailers, we are in a better position by two basis points compared with this index that we have..

By 2%, right?.

By 2% which is -- in a way we are very competitive according to our index to the big-box retailers but as -- it's really -- some of them are -- of the CPGs are taking price increases..

Yes. Now you were asking about the phasing of the openings.

Is that what the second part of your question?.

Yes. I had a question about OXXO and maybe on the gas station, but I'm happy to leave that for the next people if you like..

No. Let me just -- I will talk a little bit about the gas stations. Certainly, the start of the year was complicated as you remember in terms of the supply chain disruptions and all of that. And I think it made everybody a little bit more cautious about deploying capital or going through the pace of expansion.

But I would say right now, it has more to do with -- there's a regulatory component when you're going to add new gas stations.

You need approvals from a number of regulators and those organisms are not yet back to kind of normal functioning, right within the transition, within the moving pieces of the entities that govern this industry.Some of the people that have to look at these and kind of sign the approval are not at their desks, right? And so, we're having to deal with that.

But our expectation for the second half is that we're going to pick up the pace. I don't think we're going to get to the original numbers that we have put out there. I mean at the beginning of the year, we were talking about maybe 80 to 100 additions. I think that's clearly not going to happen.

But if we do pick up the pace in the second half, then maybe we can have 50 new ones for 2019 when it's all said and done. So, I do think, we're kind of moving back to normal, but we do depend on these entities to help us..

Also I might add that the current environment with the energy sector in Mexico is kind of a difficult one because now -- before it seemed that we have very clear what the Comisión Reguladora de Energía played and what Pemex played. Now things are a little bit more cumbersome.

And permits are not flowing the way they were in the past and so that's inhibiting opening up a new gas stations in Mexico. And we are not the only ones that are a little bit constipated in the process..

That's a good point. I mean it affects everyone pretty much at this point..

Understood. Thank you. Thanks for the answers..

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

Hey, good morning and thank you very much for taking my question. Just on the Health Division, so first of all thank you very much for all the details you laid out in the press release and in your remarks this morning on why you saw some margin pressure.

Now can you share some commentary on what you think going forward in terms of profitability considering the pricing regulation in Colombia and all the promotional activity in Chile and how the acquisition of the Ecuador business is going to roll out in terms of synergies? What do expect on it? And a little bit of your outlook on profitability on the Health Division that would be my one question.

Thanks..

Let me start with the Ecuador acquisition. We are very -- we move -- we promote one of the main guys in the Chilean health -- drugstore division to head the Ecuador effort. And really I think it's taking less time to come up with better negotiations than we -- with the suppliers.

But in the other -- taking control of the company and coming up with a new culture and new way of thinking because the family was very much involved and not all the members of the family worked together, so I think that is going to take some time and effort to put it -- that company as a team. And I think we're doing -- we're making the right fix.

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

Yes. Ben, this is Juan. I would just add, when we look at our different territories on the Health Division, clearly, the benchmark in terms of profitability is Chile and it's also the one that has the strongest competitive position and it's the most integrated vertically in terms of distribution.

And that's an operation that is delivering something in the neighborhood of 7% EBITDA margins.

Obviously, when you look at Mexico, which is much smaller even though in terms of number of units it's large.But in terms of the revenue and the level of integration and the market share quite frankly, there's a big gap to kind of narrow and eventually hopefully close over the years to try to get to the levels of Chile.

And I think to Eduardo's point, I mean in Ecuador, the company we acquired has a strong competitive position, but it's not an integrated player. And I think some of these benefits of scale should begin to materialize.

I mean, if you look at the whole Health Division -- and some of the scale is local, but maybe a little bit of a scale can be for the whole company.I mean, if you're dealing with big pharma companies and you now have more than 3,000 drug stores across the region that should help get some of those benefits to each and every one of the units With 3,000 stores all of a sudden we're probably one of the if not the largest player in the region.

So hopefully, those benefits begin to accrue to the Ecuadorian franchise and we can bring all the levels of profitability closer to the Chilean benchmark..

Okay.

So -- but fair to assume that obviously with integration cost and the lower level of that profitability, we should expect some of that pressure we've seen in the second quarter to just persist let's call it for the rest of the year until you actually start seeing some of the benefits into next year, correct?.

I think that's a fair base case, yes..

Okay. Perfect. Thank you very much..

What should not be -- I mean, another part of what we discussed on the Health Division of course had to do with the currency impact. And of course, Chile is two-thirds of the division at this point and we did see a double-digit weakening of the Chilean peso versus the Mexican peso.

And so, hopefully, that does not turn into a rest-of-the-year type of thing..

Yes. We leave that with someone else to try to forecast it. Thank you very much..

Fair enough..

Thank you..

Thanks..

Thank you..

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

Hi, good morning, Juan and Eduardo. Thank you for taking my question. I wanted to ask about the margins at OXXO. Obviously, you called out many of the elements that helped gross profit-wise this quarter, the services and commercial income and so forth.

And what I wanted to ask -- I do think there is a change in trend, right? I mean, margins have been flattish basically since 2016 or perhaps even slightly down in some quarters.

And now when you look at the first semester, there is a meaningful improvement right?So I wanted to ask first, what's the individual contribution from the beer that you're getting from Modelo, perhaps not just traffic-wise but also is it helping in terms of commercial income meaningfully yet or that is not the case.

Or from the other drivers that you've been mentioning for several quarters now, is there one that suddenly the contribution is more meaningful I don't know services is more meaningful than before or your efficiency in the promotional programs? Is there anything that suddenly changed driving what appears to be this inflection point now? Thank you..

Hello, Antonio this is Eduardo. Let me start with the Modelo and with the beer category. We don't expect to come up with better margins in the beer category. What we expect really is to come up with better revenue.

And it is taking more time than we thought because there's a learning curve of how connected we are with Heineken and how disconnected we are with Modelo.It would take time to connect the systems, to connect the stores and really to set up word of mouth that we are already now selling Modelo bottles in our stores.

I think by -- in the second semester these 25 -- this quarter -- this -- 25% of the stores that already have Modelo on it. I think we will understand much better what the effect of that in the second semester.

And -- but I will clarify that we don't expect really more margin what we expect really is more non-margin percentage wise, we expect more revenue in those stores..

Yeah I would just add Antonio, this Juan. I think Eduardo was talking about gross margin right? So it's not that we're going to get significantly lower gross margin or better gross margins for Modelo.However, further down in the income statement from an operating leverage standpoint -- as you know the operating margin is very sensitive to sales.

So if you sell a lot more then it's going to manifest itself down in the operating margin.Now to Eduardo's other comments this is -- it's way too early right? I mean we've only had Guadalajara, Morelia and San Luis for -- since April and the value of Mexico for a month.

So clearly I think what you referred to in terms of the trends that we've been seeing for the last few quarters have more to do with the gathering momentum of the commercial income from other suppliers ex beer or kind of the status quo with Heineken in the previous quarters.You're talking about gradual improvement further down the income statement when you talk about electricity costs that really manifested itself this quarter where we had mentioned a few months ago, how during 2019 we're going to see significant increases in how many of our stores were getting their energy from the wind farms and how we expected there to be a cost advantage.And now we -- the last data point that we have is, we have 57% of the stores in Mexico getting the energy from wind.

And so for the first time in a long time, energy is actually not a drag but rather a tailwind in terms of SG&A.

I think when we talk about cash handling, it continues to be a pain point but by a little bit less than it was in recent quarters as we address through several different strategies, how to mitigate the pain from the cartelization if you will of suppliers on that line item.So I think it's been building and it's more structural than just kind of oversimplifying and saying yes well the beer thing is going great, which it is by the way.

But I don't think it's -- I don't think we've seen the impact from that in the numbers just yet..

Okay that's very clear. And I guess it's too early to give guidance for next year. So for -- just to -- on the drivers that you're referring to Juan are commercial income increased costs and cash handling being less of a headwind, right? And then beer will come at some point.

So do you think that for the next, I don't know, 12 months, 24 months if it's sustainable to be above your long-term guidance of 10 bps to 20 bps margin expansion at OXXO?.

I mean, you know us. You're not going to get me on the record saying that we're going to do 30 basis points on a sustainable basis. But let's call it -- let's stick to the guidance, and then let's assume we have a little bit of upside risk..

Yeah. Fair enough. Thank you..

Thank you, Antonio..

Next question comes from the line of Alan Alanis with UBS..

Thank you so much. A lot of the questions that I wanted to cover have been asked, but let me ask you something in the other division. I mean, and here's the specific question.

When you add the EBITDA of Coca-Cola FEMSA plus the EBITDA of OXXO of the FEMSA Comercio, there's a difference with the consolidated EBITDA and that's coming from your logistics business and your distribution business.

And according to my numbers, if this is right, we saw a big increase year-over-year on the EBITDA of this other businesses not so much in the revenue side, but yes on the EBITDA.

Could you explain what happened in the profitability year-over-year of the other business units? And could you just provide Eduardo, Juan some color in terms of how you're thinking about growing these other business going forward please?.

Well, why don't we go with specific -- the most specific with the numbers and I think the logistics businesses is something that we will love to keep improving and be more meaningful with -- in terms of portfolio. Logistics is something that we do everywhere and it's part -- it's really part of -- it's a major enabler for our business units.

And we do perceive that there is an empty space for a Latin American player or a player for the Americas in logistics and we will keep improving our positions to become 3PL logistics player in the Americas. I don't know if you want to add anything to the….

Sure. Yes. Hi, Alan.

I mean, we talked a little bit the last conference call three months ago about how the -- Brazil in particular we have been reducing this exposure to some of the more asset-intensive parts of the logistics business the dedicated carrier in particular where we're reducing the number of accounts on that front and maybe shifting the focus more to the less than truckload operations and warehousing and other parts of the logistics business.I think when you look at the P&L that others kind of by subtraction you see that -- you look at the EBIT line you can see that we've taken some hits in the last couple of quarters.

This quarter was not as bad as last one, but it was still not anywhere near normal. But when you look at the D&A you see big numbers that are actually related to our exit or moving beyond some of these large operations that we had with some customers down in Brazil.So it's a little bit noisy, I would say.

But as Eduardo was saying you should expect that in the medium and long-term that line becomes more predictable and obviously begins to move in the right direction in the next few quarters..

Got it. That's very useful. And as you said, I mean, it is getting pretty sizable. I mean, this quarter, obviously, it's already bigger than OXXO. Last -- it's whatever 70%, 80% of OXXO Health.

And if you continue to prioritize that as one of your key competitive advantages I think -- I guess for a models and for our forecast we should expect that that number as you said becomes more stable more predictable in the right direction and growing. So no that's very clear..

No..

Sorry, go ahead..

No. No problem. No I was going to say, I mean, I think in terms of orders of magnitude I still think it's smaller and I think less -- it weighs less in the whole equation. But, hopefully, if everything goes in the right direction as we expect it to, this business will over time become as important as some of the smaller core retail operations.

But it's going to be a while..

And the only way to grow really fast on that is the acquisitions, correct? I mean, the organic growth on that is --.

Well, I mean, our exposure to that business is -- our exposure is basically Mexico, Brazil and Colombia. And to the extent that we continue to see a bounce in the Brazilian macro, I think, there's an opportunity for some good organic gains. But at the end of the day, you're right.

I think, we have made a couple of acquisitions in the logistics warehousing space in Brazil, and then one in Colombia, one in Mexico. And in terms of bolt-on type of acquisitions you should expect us to keep looking. And, yes, those would tend to accelerate growth absolutely..

Got it. Appreciate it. Thank you so much..

Thanks, Alan..

And our next question comes from Robert Ford with Bank of America..

Good morning, everybody and then thanks for taking my question. Eduardo, I had a question with respect to CoDi, Cobro Digital, and I was wondering when you begin -- or you expect to begin accepting CoDi transactions in your stores. And how you're thinking about QR payments as well, in terms of whether or not you'd accept them.

And if so, when? And in that context, I was curious with respect to your latest thinking about how to position the Saldazo product, when it comes to this rapidly developing fintech and wallet functionality..

Well, fintech is becoming a major bet for the future and we would love to see if we can really take fintech as a complement to the OXXO position and where we could say -- position ourselves in fintech outside the store. And really -- still cash is coming -- cash is king in Mexico and cash is growing, it feels, very fast.

But we have to be prepared of this cash evolution to a different methods of payment.And we are investing and we are developing different associations and platforms, so we can be prepared for the future. And I think, that will be probably what we are seeing. It is not coming as fast as we thought, because still cash is king in Mexico.

And it seems like the current environment is not really fostering, in spite of CoDi is around, other forms of payment..

Yes. I think -- hey, Bob. I would add to what Eduardo just said.

I mean, if you think about this idea or this aspiration of having everything that happens within the four walls of the store today that eventually you could do all of that from your phone, right? So that means, obviously, that you can order whatever it is you buy from OXXO, if you want it delivered to your home.

And given the type of merchandise that we sell and the size of our ticket, obviously, there's a subset of what we sell that would be attractive for online delivery.If you think about the rewards program, we are actually making good progress in launching a proper rewards program, which we haven't really had in the past.

Because Saldazo -- as successful as Saldazo has been on a number of fronts, I don't think it's lived up to the expectation as a rewards program. So we're very, very far advanced on the design and implementation.

And actually, it's currently being tested in a couple of markets of our rewards program that could eventually link in some way to more of a wallet product.So it's moving faster than it was six months ago, for sure. The level of resources that is being deployed is meaningful, not so much in terms of capital.

But I would say on the human resource side and on the management focus side, this is something that comes up. In every big meeting, there's a time and effort being allocated to this.But to Eduardo's other comment, I mean we are seeing also how the Mexican consumer continues to be.

Cash is very sticky in Mexico and how -- even when you see programs to disburse funds coming from the government help people, their natural reaction is to cash those cards out and then operate with the cash as opposed to operate through the plastic.Obviously the 18000-plus stores provide us we believe with an advantage in terms of the cash in and cash out point of contact with the consumer, the 30 million tickets per day.

Those are things that we bring to the table that other people don't have.But we do feel there's some time to catch up to the players that have been working on these initiatives a little bit longer than we have.

And I think the consumer and the stickiness of cash and the size of the informal economy in Mexico and so on are things that will set the pace eventually for how quickly this is taken up by the majority of consumers. So hopefully we will be more than ready when that happens..

That's very helpful. And just with respect to timing, I understand the banking system has to go live in the fourth quarter and I was just curious, if you'll be on pace with them for Cobro Digital.

And then just on the QR portion of the question, what are you guys thinking about QR payments?.

I mean the thing with CoDi is that people have to open a bank account, right? And that's been a bigger line that a lot of consumers have been unwilling to cross and so we'll see how that behaves. I mean, we're moving as fast as we can.

I wouldn't want to give out dates or kind of milestones where we think, we'll be but we're moving as fast as we can Bob..

Thank you very much..

The next question comes from Alex Robarts with Citigroup..

I was keen -- just to make one clarifying question around the commercial income in OXXO and then perhaps just really focus on what seems to be an interesting inflection point on the energy costs that you have.So you characterized the trends in commercial income as healthy.

And I just -- wondering if we could take from that to mean that you have more commercial income in this quarter than last quarter.

It would be great if you could comment on that?And just going into the energy side here, I mean the -- if you could remind us -- kind of at the FEMSA holding level is it safe to assume energy is kind of a high single-digit percentage of your of the cost structure?And as you think about reaching -- I guess you mentioned 57% of the store base at OXXO so far with the wind farm.

Is it fair to think that you could get the whole store base covered this year? Or is that -- is it too early to say? Related to that is it fair to think that you might move on into other of the small block formats to service their energy needs with the wind farm?And just kind of -- finally just a sense of magnitude does this -- you talk about relief on your energy bill.

Is it kind of a single-digit relief? Or might it be a double-digit in magnitude? That would be great. Thanks very much..

This is Juan. So let me take the first part of your question first. So, commercial income has been growing for a while now.

And I think this has a lot to do with the realization on the part of CPG companies that the retail point is a very good extension or can be a very good extension of their marketing strategy, right?When historically these companies have relied a lot on media and on TV and having spots in prime time and all of that and then you had to speculate about conversion rates and whether your brand would stick in people's minds by the time they went to the store.I think what they're increasingly realizing is that while people are at the store with the mindset to buy if they're looking at the brands and they're looking at the activation of products and extensions and launches, the conversion ratio is probably much higher.

And so gradually we've seen a lot of these companies deploy more of their marketing budget through the point of sale and that's one place where OXXO is in very well position because, of course, again, the frequency and the way that the store has kind of inserted itself in people's daily routine and daily life.So, I would say a broad area of companies -- I mean it used to be the obvious ones, right? I mean it used to be the beer company and the soft drink companies and the snacks companies and the confectionery.

And now you find other companies that are -- that probably didn't use to play in terms of kind of bidding for the banners or bidding for the space on the walls and the decals on the doors of the coolers.So, I would say it's been a pretty steady rise in terms of the contribution.

As we mentioned earlier in the call, I don't think we've seen yet any benefit from the latest -- the beer -- the new beer agreement. I think it will come down the road, but it's just been a very steady increase. And I wouldn't want to kind of get into the nitty-gritty of saying whether one quarter was a little bit higher or not than the previous one.

I think just generally if you assume that this is a driver that is -- it continues to move in the right direction.In terms of the energy, as you might recall, we have said that by the end of this year, we should be north of 80% in terms of all FEMSA Mexico and this includes the cold FEMSA plants this includes the OXXO distribution centers.

And of course this includes the stores.So, today, I mentioned we are I think 57% of the stores plugged in. Different parts of the company have different levels of connectivity. But most of them are north of 50%, so we are well on our way.

And I think just yesterday, we were hearing from the energy team that we are on track to be north of 80% by the end of the year in terms of all of FEMSA's Mexican energy needs.Now, in terms of what this means in the P&L it depends, right? I mean as long as the cost of the grid the regular CFE supplied energy continues to move stable or move higher which is something that would happen for example if the peso were to weaken, then the cost to us from the wind farms becomes even more attractive, right, because the delta gets bigger.In the scenario where for whatever reason, CFE were to lower its tariffs aggressively, and I don't know if this is a likely scenario, then what we pay for the wind energy could end up being more expensive.

Again, I don't think that's a very high probability scenario, but it's something that we need to keep an eye on.Energy, the number that I have off the top of my head is about 20% of the COGS -- no of the SG&A, sorry of the SG&A at OXXO.

It's probably significantly lower than that for the rest of company because obviously the refrigeration needs of the OXXO stores is very high. And so that would probably be the high point. You should assume that it's lower than that when you look at the whole company..

Very clear. Thanks a lot. Have a good weekend..

Thanks, Alex. Likewise..

The next question comes from the line of Leandro Fontanesi with Bradesco..

Hello. Hi. Good morning. Thanks for the opportunity. I have one question regarding the services category. So I understand that one issue that you have been mentioning is cash handling and our understanding is that this also limits the size of the transactions that you can make such as withdrawals for example.

So just to understand, how do you see cash handling and what kind of opportunities to solve to improve that you are considering? And also in terms of the financial transactions, if you see room for potential increase or do you limit this? Thank you..

Well, good morning, Leandro. In terms of cash handling, what we have seen is that the cash really has different stages and we are trying to find and understand better how the operations of the store could make those three stages of the cash handling more efficient.

In fact, we have in fact invested ourselves, and we are now currently operating the cash handling of 50 stores understanding how costs behave, how the system works. And we might even think to invest in cash handling companies.

So with that in mind, we are really opening up the spectrum of alternatives, because it's something that is – we are very depending on that infrastructure to manage the stores and we have to – it's very important to collect cash every day for the store to reduce any cash loss within the system.So understanding those things, understanding if we were the owners or we were the ones that managing the cash collection those cash collectors could make some other services to the store so we can reduce the cost of it by the service that could be provided to the store.

So we are thinking of a lot of things, but we're optimistic that probably not immediately in the next six months, but down the road in the next 18 months to 24 months, I think we will come up with a more and better structural solutions.

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

Hey, Leandro, this is Juan. I think you raised a good point when you talk about the services category linked to the cash handling.

The biggest constraint that we've had historically is the more available cash that you have at the store to disburse or people that want to make withdrawals to their accounts or people that are receiving their remittances from relatives in the U.S.

the more cash you have available to them, the more cash you have available to the bad guys, right? And so historically, we've tried to come up with an amount that kind of finds a sweet spot that allow us to do most of these service transactions, but without raising the risk profile of the store in a big way.And then this is a tough exercise, so part of the efforts precisely have to do with the technology through the new type of machines that exist out there.

Could we deploy these machines that would allow higher levels of available cash to be at the store without making it available for the bad guys? I think that those are the questions that we're trying to answer.

And if all continues to go the way that the initial pilot seems to be pointing to we are on our way to mitigating these problems and to having a much better equation in terms of equalizing the amount of cash that comes in with the amount of cash that goes out to the services category or at least closing the gap..

That's very clear. I appreciate the color. And just thinking about the quarter, I understand that in recent quarters you're growing double-digit 20-plus something. If you saw any change in this trend given that you have this reduction in traffic, et cetera. If you saw any change in terms of this trend..

Of what account Leandro, sorry?.

No. I mean, in terms of the top line growth in the services category, if there was any change in the trend in the second quarter in relation to the previous quarters..

Not really. It's still -- it's very close to 20%. So I would say no change in the trend. But in terms of the market we really still have a very -- more share of what really can the government control of all the payments in Mexico. So I think we are optimistic that we will keep growing..

Yeah. When we look at what market share do we have with payments of the various utilities and the various cable companies and the Netflixes of the world and that sort of thing, our market shares are low. So the size of opportunity is still significant..

Perfect. Thank you very much. Have a great day..

You’re welcome, Leandro..

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

Hi. Good morning guys. Thanks for taking the questions. I have one question on the sort of capital deployment or M&A. In this new -- or sort of in this trickier environment in Mexico, I was curious if you thought, it would be more likely that you were to be presented an M&A opportunity maybe in the health space or in the retail space generally.

And maybe if you could sort of just qualify your appetite for M&A in Brazil now at the moment as well. Thank you..

Well, again, it has to be -- yes, the current environment in Mexico could make some things attractive.

But on the other side, we don't know really what to expect on the consumer, what to expect on the economic conditions of Mexico in the short and medium-term.I think yes, we are in a continuous effort of looking out for opportunities here in Mexico, in Brazil and the United States, just understanding what really good things could we find, so we can enhance our competitive position and find opportunities for growth.

So those will be the ones -- that will be the mindset that we are really thinking for the future..

No. No. I think that doesn’t capture it. I mean, we, as a company our exposure to Mexico is probably somewhere close to 70% and we are investing something like $1 billion every year into Mexico just through the organic growth, the opening of stores and distribution centers and so on.

And so even in order to maintain that type of exposure, it would require some investment outside of Mexico.And I think you raised a good point that Brazil, obviously, is looking more attractive. We're certainly getting more comfortable with the water temperature in Brazil after a few years of staying away from the edge.

And so hopefully we can find opportunities in all of these markets and then we can hopefully pick and choose.But, yeah, those are the three markets. I think Eduardo mentioned the U.S.

We've also spoken in the past about how given our capabilities, we believe there are some industries, some markets that offer -- certainly offer some cross-border opportunities but also some opportunities to get some exposure in the biggest economy in the world in those activities, in those spaces where we have become we believe pretty good at the game..

That’s very clear. Thank you very much guys..

Thanks, Alvaro..

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

Well, thank you everyone for your participation today. Have a great weekend and look forward to hear -- with you in the next quarter..

Thank you guys. Have a great weekend..

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. Thank you for your participation and have a nice day. All parties may now disconnect..