Yahoo Finance Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX) Q1 2024 Earnings Call Transcript
Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX) Q1 2024 Earnings Call Transcript April 26, 2024
Fomento Económico Mexicano, S.A.B. de C.V. misses on earnings expectations. Reported EPS is $0.47 EPS, expectations were $1.61. Fomento Económico Mexicano, S.A.B. de C.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and welcome to FEMSA's First Quarter 2024 Results Conference Call. My name is Melisa and I will be your coordinator for today's event. [Operator Instructions] I'll now turn the call over to Juan Fonseca, Head of Investor Relations. Please go ahead.
Juan Fonseca: Good morning everyone. And welcome to FEMSA's first quarter 2024 results conference call. Today, we are joined by José Antonio Fernández Garza Laguera, CEO of our Proximity and Health Division; Martin Arias, our Incoming CFO, and Jorge Collazo, who Heads Coca-Cola FEMSA's Investor Relations team. As you know, one of FEMSA's strategic priorities involves engaging more directly and proactively with our key stakeholders, and that includes providing more opportunities for you, our investors and analysts, to hear from and interact with, the heads of our core business verticals. You already have that possibility with Ian Craig, given the public nature of Coke FEMSA, and we will increasingly work to provide broader access to José and Juan Carlos Guillermety in their roles as heads of the other two core operations, Proximity and Health and Digital respectively.
Therefore, as a first step, the plan is for José to open today's conversation with his vision for Proximity and Health and the key elements of the strategy to move towards that vision. Going forward, José will produce quarterly calls a year. At a later date, we also plan for Juan Carlos to present his vision for the Digital business, with the expectation that he will also join our calls once or twice a year. After José's remarks, Martin will provide an update on the business and our quarterly results. Finally, we will open the call for your questions. José, please go ahead.
José Antonio Fernández: Thank you, Juan. Good morning, everyone. It is my great pleasure and privilege to be able to be here today, to begin what I hope will be regular conversations, with all of you. As we move beyond the FEMSA forward transformation, and focus on the future of our company. I relish the chance to help pursue and capture the substantial opportunity for growth and value creation that lie at FEMSA, particularly as we continue to develop and strengthen our leadership in Proximity and Health retail. As many of you know from following us for many years, FEMSA has always had the pursuit of long-term profitable growth, hardwired into everything we do. And we have a clear and focused blueprint, to keep achieving that objective, as we build on FEMSA's successful track record in Proximity retail.
The comprehensive long-range plan that we will develop, during the past couple of years provide us with a useful roadmap. We aim to accelerate earnings growth at our retail division, relying mainly on organic expansion and on continually adding layers of value for our consumers across formats and across markets. As you all know, OXXO Mexico is a mainstay of FEMSA's retail operations. For the past 45 years, we have been evolving and improving its value proposition while expanding its footprint, and growing its scale, always focused on understanding more of our customers' needs and finding new ways to serve them consistently better. As OXXO store economics have improved over time, we have been able to increase our footprint in Mexico, to the current level of more than 1,000 stores, while maintaining and even increasing store productivity.
We have built capabilities to develop consumer insights that in turn, are continuously applied in our segmentation effort. And we are confident that we can keep the current pace of OXXO expansion in Mexico for many years under the current value proposition. In the process, we believe we have become more effective retailers, and this is now allowing us to find promising opportunities, beyond the core OXXO Mexico format. As you know, we are thoughtfully accelerating our organic expansion efforts with OXXO in several markets in South America, having already reached the 500-store mark in Brazil and soon in Colombia. We believe OXXO in South America could, on a combined basis, reach a scale comparable to OXXO Mexico over time. Moving on to other different formats, we are taking advantage of the Mexicans' consumer increasing appetite for the Proximity discount format with our Bara store.
After many iterations and years of fine-tuning its value proposition, Bara is showing that it has the right unique economics and is ready for an accelerated rollout. We are also ramping up the development and deployment of other promising adjacent Proximity formats, such as coffee drive-throughs with our joint venture. Beyond Latin America, we also continue to advance with the Valora platform in Europe, where despite high inflation last year and general macro headwinds, we are building on improving momentum and focusing on driving all three business platforms, our retail, food service, and our B2B business. While we will pursue and capture these opportunities mainly through organic expansion, we believe entering the United States could open a new and compelling avenue for growth, value creation for FEMSA.
Leveraging our capabilities or closeness to a U.S. market and a broad recognition of the OXXO brand among demographics. This initiative may require a moderately-sized inorganic component to achieve certain scale up front, focus on border, or near-border states, and on assets with certain characteristics that would serve as a launching pad, for an OXXO U.S. value proposition among other possibilities. We still have work to do as we fine-tune our potential entry model, always with a clear objective of long-term value creation for FEMSA. However, we know this topic is top of mind for the market, so we will keep you posted as we continue to develop our strategy. Beyond the various opportunities across the Proximity spectrum, we also continue to make progress in our Health operations, where we are increasingly being able to leverage our multi-country platform and scale to optimize purchasing, pricing, supply chain, and several other aspects of the business.
However, we continue to operate in distinct, diversified, and sometimes challenging macro operating and commercial environments, something we're quite familiar with in our neck of the woods. In certain markets, our Health division is currently navigating complex, competitive, and regulatory environments. But in every case, we're taking clear steps to address the challenges by adjusting and evolving our operating approach. To put all our retail opportunities into perspective, I can share with you that today, if we consider all formats and all markets, we're opening more than six stores per calendar day, or a new store every four hours on average. By the end of the five-year period covered by our current long-range plan, to the extent that we have further proven and improved the economics, of our various formats in various countries, we could eventually increase that pace by up to 50%.
These plans are certainly ambitious, and while ultimately dependent on improving the economics of certain formats in certain countries, we believe they are achievable. On the topic of growth and investment, I would like to highlight a couple of points. First, although these plans will require considerable CapEx in the coming years, the organic and modular growth inherent in our business model puts us in a good position, to capture high returns. Second, these investment plans are reviewed rigorously on an annual basis, thus as we advance on each one of these organic growth initiatives, we may find that some opportunities become more compelling over time, and some fall short of expectations. And we will adjust our CapEx accordingly. Therefore, I have asked our team to relentlessly focus on unit economics, cash flow generation, and achieving ROIC levels above our cost of capital, to drive and guide our growth decisions.
Finally, we should talk about the digital opportunities that exist in and around our retail platforms, and which complement and expand the opportunities being developed by our digital division. As you know, I had the chance to take a short break from our Proximity business to help launch FEMSA's digital efforts a few years ago. And it is very rewarding to see how the Spin ecosystem continues to thrive, and develop by leaps and bounds, always leveraging the physical store network, multi-capability for our customers, our suppliers, our partners, and ultimately our company. To take one example, less than three years after launching the Spin Premia loyalty platform, already more than a third of OXXO Mexico's revenues are associated with the program, meaning that on average, we have access to more than 4 million tickets every day that allow us to begin building compelling, and valuable data sets.
And as we get closer to the point where we can begin moving, from a pure customer acquisition mode into more of a monetization phase, we are developing new data-driven initiatives. For example, OXXO has proactively invested in using AI, to capitalize on the breadth and depth of this data. The density of our store network, and the frequency of customer visits, provide us with a unique perspective of Mexican consumer behaviors and trends. Over the last year, OXXO has materially evolved its algorithms, IT systems, and data science capabilities, to offer better and more effective assortment, pricing, and promotions, and to efficiently staff each store according to its unique transaction pattern. These AI-driven improvements are being rolled out across our store network in Mexico, resulting in measurable increases in profitability as well as improved customer satisfaction.
Summing up, we have our work cut out for us. We will drive our top line, by increasingly expanding our store base and satisfying with excellence, the needs of our customers. We will drive our bottom line, by constantly seeking efficiency and effectiveness, as we evolve our operating models, and we will carefully pursue acquisitions where appropriate, to increase our scale and drive the virtual circle that flows from it. We will keep you appraised of our progress, and we will also drill down on some of the opportunities discussed today, not only in future calls like this one, but through a more proactive stance, where we generate recurring dialogue with the investment community. We are excited about the opportunities ahead and the clear path we're taking to capture them.
I am fortunate to be surrounded by the best team in the business and to be part of an organization bound together, by a strong and unique culture of collaboration and permanent cross-learning. I look forward to continuing our discussions with you going forward, and I will now turn the call over to Martin to talk about FEMSA's first quarter results.
Martin Arias: Thank you, José, and good morning, everyone. I'm happy to be with you today to talk about this remarkable company that, I have had the pleasure of calling home in one capacity or another for 25 years. As José just described, this is an exciting time to be a part of this team, as we pursue compelling and unique opportunities at every one of our three core business verticals. The first message I want you to take from me is this. The mandate I have received from our CEO and Board of Directors, is to continue executing the capital allocation strategy that, was announced as part of FEMSA Forward, steering the finances of the company towards the leverage goal of two times net debt to EBITDA, excluding Coca-Cola FEMSA, which we expect to reach by the end of 2026.
As of the end of the first quarter, that ratio stood at 0.24 times, compared to 0.1 times at the end of 2023. To meet this mandate, our CEO has asked me to focus on disciplined, organic, and inorganic capital deployment, as well as to continue to monitor additional opportunities to return capital to shareholders. Prior to reviewing our quarterly results, I would like to provide you with an update on the FEMSA Forward initiatives relating to returning capital to shareholders, some thoughts on capital deployment generally. As you know, we have been active on the share buyback front, and during the first quarter, we launched an accelerated share repurchase, or ASR program, through a financial intermediary. Through that program, we were buying back $400 million worth of FEMSA shares.
Before the ASR was launched, we had also bought back approximately 73 million shares in the quarter. In addition, earlier in the year, we received shareholder approval, to pay an extraordinary dividend of approximately $600 million during this year, the first installment of which was paid last week on April 18. This means we are in the process of returning nearly $1.1 billion to shareholders during 2024, in addition to our ordinary dividend, which was itself increased by 20%, representing a total of approximately $800 million at current exchange rates. To the deployment of CapEx, which is also a main component of our allocation strategy, we seek to prioritize this allocation, to its core organic growth initiatives that offer the highest potential for long-term value creation.
In the first quarter, our CapEx reached MXN7.4 billion, representing 5.3% of total revenue and 45.1% growth over the comparable period of last year, reflecting in part the accelerated expansion at Proximity, as well as increased investments in production, and distribution capacity at cost. Through these organic investments, we aim to enhance our competitive position and maximize returns for our shareholders, while preserving a strong financial foundation. In the event that these organic investments are not producing the expected returns, we reassure you that we will re-evaluate the levels of CapEx. Let's turn now to FEMSA's consolidated quarterly results. Total revenues increased 11.3% and EBITDA rose 14.4%, compared to the first quarter of 2023, reflecting strong growth at Proximity and Coca-Cola FEMSA.
Net consolidated income decreased 88.3% to MXN5.9 billion, mainly explained by a challenging comparative base in the first quarter of 2023, which included a gain of MXN40.6 billion from the reclassification of investment in Heineken to discontinued operations, and also reflects an increase in the net financial expenses line, reflecting a wine-tang gain from the repurchase of our debt in the first quarter of 2023. Excluding these effects, net consolidated income would have remained flat year-over-year. Moving on to discuss the results of our operations, Proximity Americas delivered quite a strong set of numbers in the first quarter. The year-over-year growth was solid, but it looks even better when we consider the tough comparison base they faced, after a banner quarter in 2023.
Also, same-store sales increased 9.7% in the first quarter, driven by an increase of 7.3% in the average customer ticket and 2.2% growth in traffic. Certainly, we had the small advantage of an extra day in February, as well as the full impact of Holy Week that tends to help the average ticket, but these are strong numbers nonetheless. This growth reflects multiple initiatives implemented relating to revenue management, as well as the results of our loyalty program that are driving increased visits and purchases, by our most loyal customers. Gross margins expanded 170 basis points to reach 42%, the highest ever for a first quarter, which is normally the weakest of the year, reflecting strong trends in commercial income, a positive contribution from financial services, our growing revenue management initiatives, and strong performance from gathering related categories such as soft drinks, beer, and snacks.
Income from operations increased 11.5%, while the operating margin contracted 20 basis points to 7.1%, reflecting higher labor expenses and faster store growth across markets, including those in LatAm, that are still diluted margins as they ramp up their scale, obviously all mitigated by effective expense containment. On the store expansion front, OXXO also posted strong numbers, adding 495 net new stores during the quarter, which includes 356 FICO [ph] and 139 stores in South America. This figure for South America incorporates 71 openings by Grupo Nós in Brazil, where OXXO has already surpassed the 500 store mark. Historically, the first quarter has been laggard in terms of store expansion, catching up during the second half. This year, the Proximity team did a great job of making sure that we hit the ground running, as compared to the expansion of 254 stores in the first quarter of 2023.
Moving on to Proximity Europe, total revenues grew 12.6% in local currency, translating to an 8.2% increase in pesos. This growth was driven by strong performance of the Swiss convenience business and good momentum in the B2B pretzel business, partially offset by lower demand in transportation hub stores affected by extended labor strikes in Germany. Gross profit grew 11% in pesos, while gross margin expanded by 100 basis points to reach 43.2%. At the operating income line, Valora posted extraordinary growth, but we know that the B2B business had an outsized contribution to gains in the quarter's profitability, at growth rates that would not necessarily be replicable going forward. Shifting focus to the Health division and following up on José's comments a few minutes ago on the challenges we currently face, total revenues contracted slightly by 2.3% and same-store sales remained flat in Mexican pesos.
This was driven by an ongoing disruption within the institutional business in Colombia, and a challenging competitive environment in Mexico, as well as a tough comparison in Chile. These disappointing trends in the top line translated into weak operating results for the quarter, as operating income fell 40% in pesos and operating margins contracted, by 210 basis points to reach 3.3%. As you might imagine, we are focused on the situation at the Health division. We have a highly skilled team running that operation, and they are rapidly adjusting their country-specific strategies to mitigate, and eventually revert these negative trends. For example, we are accelerating the retail component of our Colombia business, changing our mix to a more profitable, less structurally vulnerable operation.
In Mexico, we are making important adjustments to our consumer value proposition, following templates used in Ecuador and Chile. We will keep you posted on the evolution of these strategies. Moving on to OXXO gas. Same-station sales increased 6.9% and total revenues increased by 13.9%, reflecting solid trends in our institutional sales. During the quarter, gross margin reached 11.6% and operating margin was 3.5%, reflecting lower profitability from our institutional business, partially offset by operational efficiencies and strict expense control. Turning to Digital FEMSA, we continue to make progress during the quarter. The number of active users for Spin by OXXO reached 7.4 million or 77.9% growth year-on-year, demonstrating steady trends in consumer adoption, while also experiencing increased transactions per user.
For its part, our Spin Premia loyalty program has also experienced good growth of 71.3% year-on-year, reaching 21.7 million active users. Notably, approximately 35% of OXXO Mexico sales are now linked to Spin Premia, as are 40% of the sales of OXXO gas, strengthening the foundation for our data gathering and utilization capabilities. As we continue to prioritize the acquisition of higher potential users, we are also making strides in the evolution of our digital operations into an ecosystem that is focused and geared to deliver maximum value to our users, while driving sustainable growth and profitability for FEMSA. From a financial perspective, we spent close to $50 million during the development and expansion of our Digital ecosystem during the quarter.
This is in line with previous quarters and below-budget projections. Of note are the multiple insights that Juan Carlos Guillermety has brought to the business, which have allowed us to contain costs and focus our efforts on those initiatives, with the greatest potential. Finally, Coca-Cola FEMSA posted another set of remarkable results in the first quarter, with double-digit growth in revenues and EBITDA against significant foreign exchange headwinds, supported by volume growth across most of their markets, as well as revenue growth management initiatives. Congratulations to the Coke FEMSA team and the Coca-Cola Company for such a strong quarter. You can listen to a replay of their quarterly call, which took place last Wednesday. Coming up, FEMSA's first quarter results show that our two largest business platforms, OXXO and Coca-Cola FEMSA, remain operating at a very high level, generating great results by refining their tools and business models to go after an extended runway of opportunities.
While we continue to nurture newer, smaller business units to get them ready for faster growth, and we tend to the few elements of the FEMSA platform that need some immediate adjustment. As José had mentioned at the outset, we look forward to a permanent open dialogue with you, as we continue writing FEMSA's next chapter. And with that, let's open up the call for questions. Operator, please.
See also
20 Countries with the Largest Urban Population in the World and
13 Best Reddit Stocks to Buy Now.
To continue reading the Q&A session, please click here.
