U.S. Markets open in 3 hrs 6 mins

Edited Transcript of FEMSAUBD.MX earnings conference call or presentation 27-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Fomento Economico Mexicano SAB de CV Earnings Call

Monterrey Feb 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Fomento Economico Mexicano SAB de CV earnings conference call or presentation Monday, February 27, 2017 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Eduardo Padilla

Fomento Economico Mexicano SAB de CV - Chief Corporate Officer

* Juan Fonseca

Fomento Economico Mexicano SAB de CV - IR

================================================================================

Conference Call Participants

================================================================================

* Robert Ford

Bank of America Merrill Lynch - Analyst

* Luca Cipiccia

Goldman Sachs - Analyst

* Antonio Gonzalez

Credit Suisse - Analyst

* Lauren Torres

UBS - Analyst

* Alexander Robarts

Citi - Analyst

* Mark Swartzberg

?Stifel - Analyst

* Pedro Leduc

JP Morgan - Analyst

* Carlos Laboy

HSBC - Analyst

* Luis Miranda

Santander - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning and welcome everyone to FEMSA's fourth quarter and full-year 2016 financial results conference call. All lines have been placed on mute to prevent any background noise. After the presentation, we will be having a question-and-answer session.

During the 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. As a reminder, today's conference is being recorded.

At this time, I will now turn the conference over to Eduardo Padilla, FEMSA's Chief Corporate Officer. Please go ahead, sir.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [2]

--------------------------------------------------------------------------------

Good morning everyone and welcome to FEMSA's fourth quarter and full-year 2016 results conference call. Juan Fonseca and [Margerila Caster] are also with us today.

As we usually do, we will focus the call on the consolidated figures for FEMSA and on FEMSA's Comercio results, as many of you probably had the opportunity to participate in Coca-Cola FEMSA's conference last Friday. So we want to use the call to try to add some color and some qualitative elements to the discussion as well as to hear your views and answer your questions. Hopefully, you will find it useful.

Overall, our Company continued to make solid progress during the fourth quarter that closed, what turned out to be a strong 2016 across operations, especially with regards to revenue growth and particularly in Mexico. FEMSA Comercio as a whole including its three divisions increased revenues by 22% versus the fourth quarter of last year. At the retail division, we saw high single-digit growth in same-store sales and also against a very tough comparison base.

However, as was the case in the third quarter, operating margin also faced a difficult comparison given a significant expansion of 60 basis points a year ago. Combined with an increase in certain selling expenses, this produced a contraction this quarter. We will get more into details in a few minutes. But the key message is that once we isolate the typical high margin expansion of the second half of the last year, the long-term trend of very gradual expansion remained in place in 2016.

Our drug store operations in Mexico continued to perform well on a top line basis, allowed us to continue making progress in the integration of our single operating platform in Mexico, even as some oil dependent markets in the southeast continued to underperform significantly. And in South America, we continued to run ahead of our base case.

For its part, the fuel division saw some consequential -- some sequential and year-on-year improvements in profitability, largely reflecting high prices even as we continue with our expansion strategy and with the rebranding of our existing stations into the new OXXO Gas image.

Finally, Coca-Cola FEMSA continues to develop and deploy the tools at their disposal across markets, some of which continued to present significant challenges, particularly in South America. Re-pricing, improved packaging architecture and increased efficiency were not enough to fully offset adverse consumer dynamics and a challenging currency and raw material environment. However, top line was resilient in Mexico and the consolidated reported figures reflected positive translation effects from several currencies that gained against the Mexican peso.

Moving on to discuss FEMSA consolidated quarterly numbers, total revenues during the fourth quarter increased 22.8% and income from operations increased 9.8%. On an organic basis, total revenues increased 20% and income from operations increased 5.9%, reflecting margin contractions in most of our operations.

Net income increased 20.9% in the fourth quarter, reflecting growth in FEMSA's income from operations and a foreign exchange gain related to FEMSA's dollar-denominated cash position as impacted by the depreciation of the Mexican peso during the quarter. As you may recall, this dollar cash position is comprised largely of the proceeds from our euro bond issuance from March of last year.

Our effective tax rate was 31.6% for the quarter, within the expected range. In terms of our consolidated net debt position, during the fourth quarter it increased by MXN28.1 billion compared to the previous quarter to reach MXN87 billion at the end of December, mostly reflecting the debt issuance for the acquisition of Vonpar at Coca-Cola FEMSA.

In terms of dividends to be paid during 2017, we will be submitting to shareholders our proposal for an ordinary dividend payment of MXN8.64 billion, representing full pass-through of the dividends from Heineken and Coca-Cola FEMSA as well as a portion of the free cash flow generated by FEMSA Comercio in 2016 consistent with the mechanics of recent years.

Coming on the back of a double-digit increase paid last year, this proposed amount represents a more moderate increase in line with general inflation in Mexico of 3.4%, consistent with our view that the poor macroeconomic environment calls for a conservative approach to balance sheet management.

We usually take the opportunity in our first conference call of the year to talk about the expected levels of capital expenditures. For 2017, CapEx at Coca-Cola FEMSA should reach $770 million, FEMSA's Comerico retail division should deploy approximately $390 million, the health division should deploy approximately $60 million and the fuel division should invest around $40 million. Having an estimated $75 million for our logistics and refrigeration businesses, we reach a consolidated total of $1.3 billion.

This is marginally higher than the figure we expected for 2016 a year ago, with a slightly high number of Coca-Cola FEMSA and a lower number for logistics and refrigeration. In practice, actual deployed CapEx figures tend to come in slightly below budget.

Moving on to discuss our operations and beginning with FEMSA Comercio retail, we opened 530 net new OXXO stores during the fourth quarter, reaching 1,164 net stores openings for 2016. Revenues increased 17.3%. OXXO same-store sales were up 8.6%, driven by a 7% increase in average customer ticket and increase of 1.5% in store traffic. This increase came on on top of a very tough comparison base of 8.6% growth a year ago.

On the subject of traffic, we continued to see the telephony category contract, but at a slower pace than before, showing increasing signs of stabilization, which is gradually allowing the growth in traffic from other categories to begin to show in the numbers. One important such category continues to be the national services, which keeps growing at a healthy double-digit pace.

Moving down the P&L for the fourth quarter, gross margin expanded 40 basis points. This expansion mainly reflects healthy trends in our Comerico's income activity and the sustained growth of the services category, including income from financial services, as just described -- as I just described.

In terms of operating margin, this quarter the retail division posted a contraction of 70 basis points, reflecting, first, the tough comparison base in fourth-quarter 2015 when retail operating margin expanded by 60 basis points; second, the recent pick up in electricity tariffs; and third, our initiatives to improve the compensation structure of the key in-store personnel.

However, if we compare the operating margin for full-year 2016 against the comparable figures of two years ago, that is 2014, we see the operating margin expanded within our long-term expected range of 10 basis points to 20 basis points per year.

Moving on to FEMSA Comercio Health, during the quarter we added 19 drug stores to reach 2,120 units across our territories at the end of 2016. We should note that the Socofar operations are now fully in the base.

Revenues increased 32%, driven by solid growth in South America and continuous store expansion across territories, more than offsetting weakness in Pemex-heavy markets in Southeast Mexico. Same-store sales increased 22.5%, growing by high single-digit in South America, remaining stable in Mexico and receiving the translation benefit from the appreciation of the Chilean peso.

Gross margin expanded 90 basis points, driven by the contribution of Socofar, which has structurally higher gross margin than the Mexican operations. Operating margin contracted by 50 basis points in the fourth quarter, reflecting once again higher expenses in Mexico as we continue to build infrastructure and prepare for further growth while we integrate our four legacy drug store operations into a single platform as well as improvements to the incentive structures for our in-store personnel and certain one-time changes in South America.

Finally, FEMSA Comercio Fuel added 34 gas stations during the fourth quarter to reach 382 units at the end of December, representing 75 net new service stations in 2016. Same-station sales were up a healthy 12.2% for the fourth quarter, as average volume increased 7.8% while the average price per liter increased 4.1%, reflecting national price increase instituted during the second half of 2016.

Gross margin expanded by 20 basis points, reflecting the benefits of price increases, and operating margin expanded 30 basis points to 0.9% of revenues, mainly driven by the national price increases as described above, as well as by higher operating leverage.

Touching briefly on Coca-Cola FEMSA, reported top line increased 21.6% during the fourth quarter and Mexico delivered top line growth driven largely by healthy re-pricing. However, transactions and volumes were weak in South America, reflecting tough macroeconomic environment, as well as the cases in the third quarter, reduced operating leverage combined with adverse dollar exchange rate trends and a higher price of some raw materials, particularly sugar, again putting considerable pressure on profitability in that region.

So good pricing and strong distribution are only partly -- partially offsetting the challenging macroeconomic trends that continue to exist in most Coke's FEMSA South American markets. If you were unable to participate in the conference call last Friday, you can access a replay of the webcast for additional details on the results.

Finally, let me talk a little about our broad expectations for 2017. Clearly, there is some uncertainty regarding the Mexican consumer as inflation levels climb and people make adjustments to their spending budget. However, our pharmacy in general and OXXO in particular have proved resilient in fields where the consumer has to defer some large ticket purchases or perhaps has to resort to smaller, more frequent transactions. So we are cautiously, but optimistic.

For FEMSA Comercio retail, we expect net OXXO openings to approach 1,200 units. In terms of OXXO same-store sales growth, we will be facing a very demanding comparison base. However, we believe we can remain within our long-term expected range of mid single-digit growth, with high traffic no longer representing a drag.

In terms of profitability, we expect to continue to expand the gross margin by 20 basis points to 30 basis points. We do not anticipate some pressure in the selling expenses, some of it external in the form of higher electricity cost and some of it by design as we continue our initiative to gradually improve the compensation structures for key in-personnel. As a result, we would expect operating margin to be flat for the year.

For FEMSA Comercio Health, we expect to expand our drug store operations in Mexico in the high single-digits excluding potential acquisitions, while the South American operations should grow in the mid single-digits. We expect same-store sales to grow in the mid single-digits after adjusting for currencies. Margins for the division should be stable to slightly expanding.

For its part, the fuel division should grow its unit count by approximately 20%. We expect margins to be under some pressure during the first half of the year, but gradually improving in the second half as maximum prices phase out across the country. Also, there is a possibility that alternative suppliers will emerge during the year as third parties are expected to lease some capacity on Pemex pipelines and storage infrastructure. So there are a lot of moving pieces, but through it all we will continue to focus on growth, take full advantage of the long-term opportunity.

For Coca-Cola FEMSA, we expect to continue to use the price lever at least in line with inflation in each market, achieving earnings growth in line with GDP.

Summing up, we continue to see many opportunities to drive growth and we are once again cautiously optimistic about the year that begins, understanding that the generally solid results of 2016 represent a tough comparison base particularly in Mexico.

We expect this key market to continue to perform well even with some added uncertainty, but we will continue to face a challenging macroeconomic environment in several of Coca-Cola FEMSA's market at least during the first-half 2017 and volatility will likely remain high across the board.

However, as is usually the case, there are many variables within our control and we will keep making progress on those and continue working hard.

Now let me turn it over to Juan for a moment.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [3]

--------------------------------------------------------------------------------

Hi everyone. Just a reminder that we will take just one question per caller. This has actually worked well in recent calls, so we want to make it permanent. So thank you. And with that, we can open the call for your questions. Operator, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instruction). Robert Ford, Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Robert Ford, Bank of America Merrill Lynch - Analyst [2]

--------------------------------------------------------------------------------

Congratulations on the small box execution in the quarter. My question is on OXXO and I confess it has multiple parts, but I was very impressed with the same-store sales growth in the period. I know that it's mostly ticket versus traffic, but can you comment on the segments with faster growth please, addressing the initiatives you've taken in grocery prepared foods, coordinated promotions and services?

And then how big is service for you now as a percent of revenue and how is that Western Union effort maturing?

And then lastly, if you could breakdown the SG&A pressure in OXXO between electricity and compensation? And with respect to that compensation, what specifically is being done and how are you maintaining the entrepreneurial incentives, which have distinguished your execution in the past? Thank you.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [3]

--------------------------------------------------------------------------------

Well, let me start at the beginning of the compensation structure at the store level. We won -- the more we advance with the store, the more sophisticated the store is and the more I think -- the higher the cost of turnover. We want to have a more stable workforce and we are investing in a lot of monetary and non-monetary incentives to make the store work more appealing, more fulfilling so we can really have a more stable workforce.

If we compare our industry turnover -- our OXXO turnover compared with the industry standards, we are below that. But I think we are betting that we should be even lower in the future.

In terms of categories -- well, and that will put some pressure, but I think I will see this as a medium and long-term investment; that it will cost us some at the beginning, but I think in the medium and long-term it will be a great investment.

Secondly, in -- and when you speak about categories, I think there are -- I mean as we have described, there are -- the occasions where we are -- I think we are basically the same in terms of thirst and craving and we are very stable in that and we are growing, but not on a fast pace. Some other occasions where we are growing, we are growing very rapidly in food service by deploying some -- a more complete food service offering at the OXXO stores. We are also growing in occasions that we call people gathering and also we are growing in the daily replenishment occasion. And I think those are the ones that we are really leading the growth for us.

And I think basically what the OXXO people have been doing is that the -- the value proposition becomes stronger and stronger. When you refer the amount of how well the services are behaving, I'll probably say that probably 60% of the cash in the store level comes from services. But it's not our cash. It's really cash deposited by our customers. I think, Juan, you may remember the exact amount. Saldazo, how many card holders we have now?

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [4]

--------------------------------------------------------------------------------

We got 6.3 million.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [5]

--------------------------------------------------------------------------------

6.3 million card holders. And we added 3 million I think this year?

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [6]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [7]

--------------------------------------------------------------------------------

Yes, we added 3 million this year. So I think really we are -- the beauty of it is that we are becoming -- we're making a social services because we're incorporating to financial service that people that didn't have access to financial services and on the other hand, also we're making that OXXO is becoming more and more amicable to all these people and they find that the store is a full supplier of their daily needs. And daily needs coming from financial services to merchandizing and we have positioned ourselves very strongly.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [8]

--------------------------------------------------------------------------------

Yes, I would add, Bob, on the part of your question about Western Union, that's still a very, very new initiative that was rolled out nationally a few months ago. But it is growing double-digit. It is a smaller average remittance than the national average. So I believe our --

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [9]

--------------------------------------------------------------------------------

It has been designed that way.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [10]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [11]

--------------------------------------------------------------------------------

It is designed that way.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [12]

--------------------------------------------------------------------------------

Exactly. It's about a MXN1,000 --

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [13]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [14]

--------------------------------------------------------------------------------

-- approximately, but it's off to a great start. So we should have a more relevant data --

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [15]

--------------------------------------------------------------------------------

And is less, much less costly for the user compared with the other alternatives that were in the market.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [16]

--------------------------------------------------------------------------------

And it also addresses some of what Eduardo was saying in terms of the cash accumulation at the store. If you disburse some of that through withdrawals and cash back from your correspondent banking as well as from the Western Union operation, it releases a little bit of the pressure to keep having the security trucks coming to the store even more frequently than they already do.

--------------------------------------------------------------------------------

Unidentified Company Representative [17]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Robert Ford, Bank of America Merrill Lynch - Analyst [18]

--------------------------------------------------------------------------------

That's very helpful. Thank you very much.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [19]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [20]

--------------------------------------------------------------------------------

Thanks, Bob.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Luca Cipiccia, Goldman Sachs.

--------------------------------------------------------------------------------

Luca Cipiccia, Goldman Sachs - Analyst [22]

--------------------------------------------------------------------------------

I wanted to ask about your outlook for 2017 especially when it comes to the profitability for OXXO. I was wondering how much that stability margin is predicated in fact on the same-store sales being in the mid single-digit? Or if you can expand a bit more on the type of pressures that were already clear in the fourth quarter when it comes to electricity costs, salaries, how do you see that maybe in an environment where top line could be slower just for us to quantify the operating leverage with the type of same-store sales that you delivered in the fourth quarter? I guess most of us were expecting greater margin expansion. We understand these factors. But looking at 2017, how much of the stability in margin is predicated on same-store sales being in the mid single-digit? Thank you.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [23]

--------------------------------------------------------------------------------

I think it's a combination of the two. I mean certainly where we have more visibility because it's already self initiated is what we're going to do with the compensation, right. I mean those efforts, if you recall, we started talking about adjusting the compensation mechanism a couple of quarters ago and we're still going to be doing that throughout this year. So it's a gradual approach obviously, but it's not going to be just for this quarter. It's going to be in place for a few more quarters. So there is visibility there because we decide what and how quickly we do it.

Where there is uncertainty obviously is on the same-store sales number. If indeed inflation is higher and suppliers end up taking bigger price increases which we then pass on to the consumer, then the same-store sales number could be a little bit higher than what we said. And obviously, margins are very sensitive to sales levels. So I suppose there is a little bit of a upside risk on the margin. But we felt after many, many years of talking about this 10 basis point or 20 basis point margin expansion at the operating level that this is the year where between the things that we know and the things that we believe may happen. It's just more -- it makes sense to be a little bit more conservative and talk about stable margins as supposed to that expansion.

Again, I think this is not something that changes the long-term projections. I believe in time we will go back to the expansion trend that we've had for over a decade. But just this year there are enough moving parts that we felt better talking about stable margins.

--------------------------------------------------------------------------------

Luca Cipiccia, Goldman Sachs - Analyst [24]

--------------------------------------------------------------------------------

Okay. Very clear. Thank you.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Antonio Gonzalez, Credit Suisse.

--------------------------------------------------------------------------------

Antonio Gonzalez, Credit Suisse - Analyst [26]

--------------------------------------------------------------------------------

My question is on gas stations. I understand your comment about the second semester having better profitability as prices are fully liberalized in Mexico, et cetera. I wanted to ask if you can give us a little bit more details of the progression of this EBITDA margin trend throughout the year. Do you think that actually in the first semester EBITDA margin could be flat or even down? Obviously, there was this price increase in Mexico, but your gross profit per liter hasn't moved. So I wanted to ask how do think that's going to impact margins in the first semester?

And sorry, Eduardo. I just also wanted to add on that, when do you think the infrastructure will be ready so that you buy gasoline from third parties, not just leasing Pemex capacity, but actual pipes or else from third parties? Do you think that can happen in the next 18-24 months or you think it takes longer?

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [27]

--------------------------------------------------------------------------------

Basically, I will say that the -- this price increase have -- the margin -- the secretary of energy and Pemex reduced the margin in terms of percentage. I mean they kept the same margin in absolute terms, so in percentage wise it has been reduced. But the problem for us is that some of the expenses that we have are related to total sales and that has -- that is going to have an impact in the very first semester that probably margins will be reduced. In the second semester though, because of the price liberalization, we will be in a better position to increase our margins again and take advantage of that.

Our same-store sales at the gasoline station keep moving very well. We have a very strong image and we have a very strong brand and the consumer has a major -- well, they trust us and that trust easily reflects on increasing volumes.

In terms of what is going to happen with the availability of diesel and gasoline is that as time goes by we keep discovering and we keep just adjusting of what the new rules of the game will be. We are on top of that. We are very close to some external sources and very close to Pemex too in order just to be positioned to take advantage of the best scenario possible.

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

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [28]

--------------------------------------------------------------------------------

Yes. I mean I just -- sorry, I wanted to make sure that from a -- on the margin question. So first half we do expect the EBIT and EBITDA margins to contract a little bit. And then to Eduardo's point on the infrastructure, we do think that more of a medium to long-term. It's hard to see --

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [29]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [30]

--------------------------------------------------------------------------------

-- with the way things have been changing coming from CRE and Pemex, it will be a while before people make the investments. And so we're not banking on that in the immediate future I would say.

--------------------------------------------------------------------------------

Antonio Gonzalez, Credit Suisse - Analyst [31]

--------------------------------------------------------------------------------

Thank you so much. And will you quantify the margins for the fuel division this year or too difficult to tell at this point?

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [32]

--------------------------------------------------------------------------------

I mean obviously internally we have our numbers, but with the amount of moving pieces and uncertainty --

--------------------------------------------------------------------------------

Antonio Gonzalez, Credit Suisse - Analyst [33]

--------------------------------------------------------------------------------

Sure.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [34]

--------------------------------------------------------------------------------

By the end of 2016 -- in 2016 we were very optimistic and then January came and then the whole thing changed. But it is --

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [35]

--------------------------------------------------------------------------------

Yes, obviously what happened in January of this year, it just made everybody very cautious in terms of how the rules had been tweaked kind of on the fly. So we would just rather play it by year --

--------------------------------------------------------------------------------

Antonio Gonzalez, Credit Suisse - Analyst [36]

--------------------------------------------------------------------------------

I understand.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [37]

--------------------------------------------------------------------------------

-- in terms of the year -- the communication.

--------------------------------------------------------------------------------

Antonio Gonzalez, Credit Suisse - Analyst [38]

--------------------------------------------------------------------------------

Thank you so much.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [39]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Lauren Torres, UBS.

--------------------------------------------------------------------------------

Lauren Torres, UBS - Analyst [41]

--------------------------------------------------------------------------------

I understand and I guess appreciate your comments and your view on Mexico this year and I think -- well, I know we are hearing it from several other companies in Mexico also, but I think the early read at least for the first two months of the year still seem quite positive. So I know two months doesn't set the trend, but curious from a operational standpoint or a consumer standpoint for the two months of this year, if you're still seeing some impressive growth that we saw last year?

And then I guess just a second part of that question, in your press release you did mention you exercise caution as you continue to execute your growth strategy for this year. Just wanted to get more details behind that, depending on how the environment is in Mexico this year. Is it where you direct your spend or how you direct spend that could change? Thank you.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [42]

--------------------------------------------------------------------------------

Well, I would say that the January and February trends look very positive. And although the quarter where we had a-- we will have a difficult comparison quarter because Holy Week will be -- Holy Week last year was in the first quarter and now Holy Week and Easter will be in the second quarter. But if we take that out, I think just in terms of comparison base and in terms of daily sales, I think we are doing well. We're happy, we're optimistic with the results.

However, as you said, two months -- well, it's difficult to make a trend out of two months, but I think we are -- that's why we were optimistic. I think also value proposition keeps evolving, is very strong. And I think we are very well positioned for the different economic environments that we face.

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

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [43]

--------------------------------------------------------------------------------

Yes, the comment I would like to add is -- has to do with regional differences. I mean, as you know, historically the north of Mexico tends to outperform the south and that continues to be very much the case. So definitely right now even with everything that's going on message wise, manufacturing activity continues to be robust in the north. And then in the south, you have the additional negative factor of the slowdown in the Pemex region, Tabasco, Veracruz, Chiapas. So that geographical difference is perhaps more acute right now than it usually is.

But also I think on a more macro level, I believe what we're seeing -- and this is interesting for us and I am sure for you as you talk to your own clients -- you have that situation where even though the situation on the ground continues to be quite good in Mexico, sentiment and expectations already have turned somewhat negative based on the discourse coming out of Washington. And yet Brazil things on the ground are not yet that good and yet the sentiment has certainly turned towards Brazil.

So obviously we're living through that, but the fact remains that things on the ground for consumption and certainly for our type of consumption, the small ticket item, not that discretionary, is actually very strong.

--------------------------------------------------------------------------------

Lauren Torres, UBS - Analyst [44]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [45]

--------------------------------------------------------------------------------

Yes, thank you.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Alexander Robarts, Citi.

--------------------------------------------------------------------------------

Alexander Robarts, Citi - Analyst [47]

--------------------------------------------------------------------------------

I guess my one question would really be about the same-store sales growth at the drug stores. So there is a couple of pieces here. Is there a way that you could just break down the fourth quarter number between Chile and Mexico and comment a little bit as to where you saw the growth coming from?

And then, yes, I got a few of the numbers for your 2017 guidance. But just to understand, is the mid single-digit number that you outlined for same-store sales and drug stores this year, is that right, is it a group number, are you providing Mexico versus Chile? So sorry, it's also kind of a clarification. If you kind of just go over the same-store sales outlook that you just gave us with a little bit more detail for 2017? Thanks very much.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [48]

--------------------------------------------------------------------------------

Sure. I mean what we're trying to do is look at the data from the health division as a unit rather than go too much into the weeds in terms of the different countries. Certainly, what we just mentioned or Eduardo just mentioned in his remarks is that of the 20% plus growth in the aggregate, you can de-compose it into high single-digit for South America and basically flat for Mexico.

And of course this quarter, we are getting a pretty significant bump from the currency effect, which down the road we are probably going to see a lot of fluctuations there. But right now the peso did weaken against most of the currencies and so you get very, very high same-store sales numbers.

So I wouldn't want to go into any more detail than that. I think that's illustrative of what's happening on the ground in each one of the countries. So very, very healthy in South America. And in Mexico, clearly we are facing the challenges of having what is a new brand that begins to go national. You're facing some increased competition in some markets. You're facing the growing pains really of what is still a very fledgling operation in Mexico.

So I would say for -- our expectation as described for 2017, I would again expect South America to contribute not only because it represents 80% of the operation, right, let's remember that, that our health division is 80% South America. So I would again expect Chile and Colombia to grow more than Mexico, not because Mexico from a macro standpoint is not doing well, but because of all the stuff that's going on as we build our Company and also our continued exposure to the southeast where we are somewhat exposed to Pemex continuing to lay off people and kind of trim itself into a more lean competitor.

So I would say next year probably looks a lot like this, like 2016 without necessarily the benefit from the currency translation.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [49]

--------------------------------------------------------------------------------

Yes. One of the benefits that we are really betting on installing this common backbone with the Mexican operations is really to start having the benefit of scale by purchasing together these four chains that currently are not connected. And I think by probably third quarter, fourth quarter this year we'll have a more stable and common platform so we can really enjoy the benefits of having a larger chain of four -- the four independent ones that we already have now being integrated and start working as a single chain here in Mexico.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [50]

--------------------------------------------------------------------------------

And you're going to see the brand start to be rolled out more aggressively in the second quarter. So as Eduardo said, I think as the year goes by our Mexico operation will begin to look and behave more as a stable unified company and that should also benefit same-store sales. But as I said, right now I feel more confident just saying Chile is probably going to pull the cart more in 2017 just like it did in 2016.

--------------------------------------------------------------------------------

Alexander Robarts, Citi - Analyst [51]

--------------------------------------------------------------------------------

For sure. Okay. No, I -- but just to understand, so the full-year 2017 same-store sales growth at health you're saying the guidance is mid single-digit. Is that right?

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [52]

--------------------------------------------------------------------------------

You're right -- on a currency neutral, let's call it, basis.

--------------------------------------------------------------------------------

Alexander Robarts, Citi - Analyst [53]

--------------------------------------------------------------------------------

Okay. And -- got it. And just the last piece on this question is, the thinking between flattish to perhaps slightly expansion vis-a-vis the margin, would it be safe to say that one of the big factors between that -- inside that range is just generally the rate of top line growth or there are other elements that kind of explain that range that you've got for flat to slightly expansion on the margin? Thank you very much.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [54]

--------------------------------------------------------------------------------

Well, I mean certainly the Mexico -- I mean I hate calling it transformation because that word gets used too much. But certainly drug stores in Mexico would qualify as a transformation. So I think the efforts there should begin to taper out in the second half. I mean we will be done with some of these things that we've been working on. We will begin to lap some of the things that we've been doing. And so I think, yes, part of that probably comes from a nice top line growth, but also the fact that we're going to stop spending or lap certain initiatives that allow the margins to recover on the back half.

--------------------------------------------------------------------------------

Alexander Robarts, Citi - Analyst [55]

--------------------------------------------------------------------------------

Got it. Okay, thanks.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Mark Swartzberg, ?Stifel.

--------------------------------------------------------------------------------

Mark Swartzberg, ?Stifel - Analyst [57]

--------------------------------------------------------------------------------

A couple of questions on OXXO and then one on the soft drink business in Brazil. On OXXO, it's nice to see the foot traffic turning positive in the quarter and you gave us a little bit of a read on what's driving that. Could you talk a little bit more about your confidence that that turn to positive in ones and twos that that will sustain and might even cause it to accelerate as you think about the larger same-store sales number of mid single for the year? And then I had another question on OXXO about remittances.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [58]

--------------------------------------------------------------------------------

Yes, I think on the traffic -- hey, Mark. It's Juan. On the traffic, I mean we've been talking for a long, long time about how telephony was this drag, tremendous drag that obscured the good stuff that was happening in pretty much every other category. And so right now, it's not necessarily in our hands. I mean if the two big telcos in Mexico were to start going at it again in terms of the price competition, then we would probably begin to suffer again on the traffic front. But it doesn't look like that's happening.

Wireless telephony has become better in Mexico, one of the cheapest markets in the world for wireless. And again, I mean I'm not going to talk for these companies, but certainly it does look like they brought prices down to levels that I don't know that they could continue to fall too much further.

So I do think we're confident that that problem compounded with the fact that telephony has become a lot smaller for us than it used to be, I think we're worrying a lot less about that than we were a year ago or two years ago. Now the more important part I think is that everywhere else, from financial services to prepared food to grocery and daily replenishment that Eduardo was talking about few minutes ago, we have been seeing some very healthy traffic trends for those categories for a while now. So we do feel good about the equation. Obviously, if throughout the year we begin to see traffic accelerate more, then we'll adjust the expectations.

Now we have to -- there is a caveat. I mean if inflation does go up by a lot in Mexico this year and the consumer has to make these adjustments to purchasing habits, then that would probably also affect the traffic numbers. So we feel good talking about the -- kind of the low single-digit contribution coming from traffic. But I would say we feel better about that than we have felt in the last couple of years.

--------------------------------------------------------------------------------

Mark Swartzberg, ?Stifel - Analyst [59]

--------------------------------------------------------------------------------

That's very helpful. And then kind of building on that and your comment about inflation and Lauren's question about January and February, for many of us sitting here in the United States seeing the way the dollar has performed against the peso and of course the role that remittances play in your own business, when you think about November, December, January, February, would you describe that currency exchange rate, the peso depreciation as having had a significant impact in remittances and the behavior occurring in the OXXO store since the election of Donald Trump?

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [60]

--------------------------------------------------------------------------------

No, we haven't seen it.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [61]

--------------------------------------------------------------------------------

Yes, I mean the thing -- I mean, the print itself -- there was -- the last print I saw was 50% plus growth in remittances in peso. So that's a humongous number.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [62]

--------------------------------------------------------------------------------

But that was because of the peso devaluation --

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [63]

--------------------------------------------------------------------------------

Exactly, exactly.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [64]

--------------------------------------------------------------------------------

-- in December and January. And now the peso is stronger.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [65]

--------------------------------------------------------------------------------

Yes, the peso is getting stronger in the last few weeks. Also, I think we need to remember that remittances don't affect all of Mexico the same way. The states that export labor the most tend to be in the center and the south, where we probably under-index in terms of our stores.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [66]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [67]

--------------------------------------------------------------------------------

So we are still more exposed to manufacturing than remittances. Having said that, I mean if remittances start growing 30%, 40%, 50% in peso terms, that's not going to hurt anyone. So we're happy to see that. But it's not one of the bigger factors in our numbers.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [68]

--------------------------------------------------------------------------------

Yes. And also on the other hand, we are very strong in some of the northern states where we have a very strong presence of OXXO stores and convenience stores. In fact some of the more saturated markets that we have are in the north and we keep growing in those saturated market, even though that we keep growing in the number of stores and we keep improving the same-store sales number.

--------------------------------------------------------------------------------

Mark Swartzberg, ?Stifel - Analyst [69]

--------------------------------------------------------------------------------

Great. That's clarifying and encouraging. Last thing on OXXO, just to be super clear, the 10 bps to 20 bps comment about operating margin, it sounds like you think that resumes in calendar 2018. I mean I know you don't have a crystal ball, but from a planning perspective that's how you're thinking about it?

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [70]

--------------------------------------------------------------------------------

Yes, let's leave that there for now and see how this year progresses.

--------------------------------------------------------------------------------

Mark Swartzberg, ?Stifel - Analyst [71]

--------------------------------------------------------------------------------

Okay, fair enough.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [72]

--------------------------------------------------------------------------------

I would really try to say that really what we are doing in electricity is very much related to the dollar. If the dollar, the exchange rate is the way it is, I will say that probably electricity will not -- is very -- will be stable. But again, it depends more of how the dollar and the peso exchange rate looks.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [73]

--------------------------------------------------------------------------------

And we are depending more and more on renewables and we keep growing what percentage of the electricity comes from the wind farms.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [74]

--------------------------------------------------------------------------------

We have a very strong bet on wind farms for OXXO supplies. And at the time that the electricity went down, that alternative was a little bit more expensive. But nowadays it is going up again and I think we'll work out the final stabilizer for future prices.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [75]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Mark Swartzberg, ?Stifel - Analyst [76]

--------------------------------------------------------------------------------

Helpful. Okay. Last thing from my perspective and this is as much a --

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [77]

--------------------------------------------------------------------------------

You're going to get us in trouble, Mark. You're going to get us in trouble with your --

--------------------------------------------------------------------------------

Mark Swartzberg, ?Stifel - Analyst [78]

--------------------------------------------------------------------------------

Okay. Well, then I'll come back in the queue. I'll come back in the queue. I had a soft drink. I'll back in the queue.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [79]

--------------------------------------------------------------------------------

I apologize. We're trying to keep --

--------------------------------------------------------------------------------

Mark Swartzberg, ?Stifel - Analyst [80]

--------------------------------------------------------------------------------

No problem. Thank you for taking my questions. I'll get back in the queue.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [81]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Mark Swartzberg, ?Stifel - Analyst [82]

--------------------------------------------------------------------------------

Thank you, gentlemen.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [83]

--------------------------------------------------------------------------------

Obviously, for all of you guys, if there is stuff that is -- other questions that come up, we can obviously talk about it later. We will be happy to take your call later. But we just don't want this call to drag on forever.

--------------------------------------------------------------------------------

Operator [84]

--------------------------------------------------------------------------------

Pedro Leduc, JP Morgan.

--------------------------------------------------------------------------------

Pedro Leduc, JP Morgan - Analyst [85]

--------------------------------------------------------------------------------

It will be regarding capital and balance sheets and the dividend announcement this morning, only 3%, 4% above the one done last year and just mentioned it as well. In the lights of a good operating outlook, a CapEx which is not too aggressive, there would be room to see a higher dividend some could say unless there is anything larger in the pipeline. So how did you balance these potential M&A opportunities with the dividend announcement? Is it perhaps that if nothing comes up we could see more dividends throughout the year or just for us to imagine this?

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [86]

--------------------------------------------------------------------------------

No, I think the comment we made on the dividend -- I mean certainly as we said, last year was a year where we increased the dividend double-digit. And just given the uncertainties this year having to do with NAFTA, foreign direct investment into Mexico, exchange rate, what could happen on the tax front in the US that would have implications for Mexico, there is a lot of stuff that needs to happen. And I would say in the meantime our Board, as probably other boards around the country, are just taking things a little bit more cautiously than usual, never mind that our Board is pretty cautious as it is.

As you saw in the -- or heard from Eduardo a few minutes ago, we are not making adjustments or cutting down on kind of the operational investment, right. I mean we're shooting for 1,200 OXXO stores. We're growing double-digit pretty much every format. You just saw on the CapEx front the $1.3 billion, which is a lot more pesos than the almost $1.3 billion that we were talking about a year ago.

So we are going to grow the Company as much as we always grow it. But when you think about M&A, there is certainly one more layer of caution and analysis. We feel comfortable with increasing the dividend by general inflation. If this means that cash accumulates a little bit or Coke FEMSA has some deleverage that they need to do, then so bit it. I don't think we're foregoing attractive opportunities. We're just looking at things one more -- giving it one more round of analysis relative to what we always do.

I don't think we would adjust the dividend as the year goes by. This is a decision that is made once a year and we always like to -- whatever cash is being returned to shareholders, we like to channel it through the ordinary dividend as opposed to coming out with extraordinaries. And buyback is something that we're always open to do from a shareholder approval standpoint, but we haven't really done it and the share price it would really need to get very, very low for us to pull the trigger on that.

So right now I would say just expect us to accumulate a little bit of cash and then pull the trigger when it really, really makes sense.

--------------------------------------------------------------------------------

Pedro Leduc, JP Morgan - Analyst [87]

--------------------------------------------------------------------------------

Understood. Thank you very much.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [88]

--------------------------------------------------------------------------------

Thanks Pedro.

--------------------------------------------------------------------------------

Operator [89]

--------------------------------------------------------------------------------

Carlos Laboy, HSBC.

--------------------------------------------------------------------------------

Carlos Laboy, HSBC - Analyst [90]

--------------------------------------------------------------------------------

Eduardo, I have a big picture question about how the Company's leadership is evolving. There is a lot of new consumer channel and sites work being done at Coke FEMSA. At the same time, there seems to be a lot of changes in the senior leadership at Coke FEMSA with new country managers in Mexico and Brazil. Can you comment on the competencies that you seek from this generation of Coke FEMSA leadership, these new leaders? In other words, what do these leaders need to do to succeed that maybe is different from what the people they are replacing had to do to succeed?

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [91]

--------------------------------------------------------------------------------

I will say that we have incorporated two very good -- two very strong executives in the past months, one for the all the new businesses, [de Lomas] in Coca-Cola FEMSA. And the other one is replacing [Ernesto Silva] after a successful career for lots of years here in FEMSA, he is retiring. And the one that is replacing him is [Semor Ferasuya], which is a guy from the Coca-Cola system. He was working for the Coca-Cola Company. He knew the Mexican market very well and then he spent some time in Colombia and the rest -- and he spent about six or eight years in Brazil and he is a great guy and he has a very strong alignment with the culture.

Always when you bring executives from outside the Company, there are two things that we look for; one is that the -- obviously that the guy is very competent and he will bring some more new insights into the Company, and the other one, that he could align with the same values and culture that we have in FEMSA. So I think these two executives stand -- in the other hand, he was involved in the beer industry and with some alcoholic beverages and before he was part of PepsiCo and he was responsible for Lipton Tea.

And I think the incorporation of these two guys I think is going to help us to move. We need more strategic thinking and probably we're being challenged to do things in a different way. The Coca-Cola Company is evolving and we are also evolving and the more that we could involve together, the better we will be to tackle all the opportunities that we foresee.

So I think those will be my bets on these two guys. I think they are great people. Semor Ferasuya, when I was involved in OXXO I used to know him well and so we did have a lot of work together when he was in Mexico and I was in OXXO by aligning and tackling the Mexican market. But I think the great thing, as I said, is that the Coca-Cola Company is evolving, we're also evolving and we need to evolve to tackle all the opportunities that we foresee for the future.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [92]

--------------------------------------------------------------------------------

I also like to add one comment. I mean I was just remembering as Eduardo was talking just now when you and I used to talk some years ago and you would say that FEMSA and Coke FEMSA obviously had aspirations of being a regional or a multi-regional Company, eventually perhaps even a global Company and that this was going to be really hard to achieve as long as the management was comprised of middle-aged men from the north of Mexico that had attended the Monterrey Tech. Obviously, a lot of the higher --

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [93]

--------------------------------------------------------------------------------

No offence taken, Juan.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [94]

--------------------------------------------------------------------------------

No. Hey, look, we've come a long way based on those men. But if you look at the list of hires, we have hired people from Venezuela, from Spain, from Chile, from other parts of Mexico. It really has enriched the fabric of the management team and brought different perspectives. So obviously all of them stand on their own individual merits, but I also think it has enriched the mix a lot in terms of just the diversity of backgrounds and skill sets.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [95]

--------------------------------------------------------------------------------

As you are saying, Juan, we also incorporated [Santiago Rosales]. He was involved with Wal-Mart at one time. He was involved in fast food and also he was involved with (inaudible) in the United States. So he is the one that is going to be heading all these new business ventures, new commercial ventures that we have --

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [96]

--------------------------------------------------------------------------------

On the retail side.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [97]

--------------------------------------------------------------------------------

-- on the retail side. And I think we are very optimistic. He is bringing a very fresh view. Again, very important to be aligned with the culture, because this culture that is based on trust among all the guys that we incorporate in this corporation is very important to keep evolving. But again, new mindsets, new experiences, new knowledge.

--------------------------------------------------------------------------------

Carlos Laboy, HSBC - Analyst [98]

--------------------------------------------------------------------------------

Thank you very much.

--------------------------------------------------------------------------------

Operator [99]

--------------------------------------------------------------------------------

Luis Miranda, Santander.

--------------------------------------------------------------------------------

Luis Miranda, Santander - Analyst [100]

--------------------------------------------------------------------------------

Eduardo, my question is regarding OXXO and labor cost, as you mentioned. When you try to put this structure of compensation to the new level of the complexity of the stores, is this process going to be implemented and finalized during 2017 completely or do you think it could expand or extend furthermore?

And a related question is, when you are evaluating this structure of compensation in OXXO and considering the recent pressure that we are seeing in inflation in several fronts in Mexico, do you see any risk of additional pressure in the other divisions? And I understand that health care is not going to move the needle, but also it would be interesting to see if you're seeing some pressure there. Thank you.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [101]

--------------------------------------------------------------------------------

Okay. Basically, it's a very subtle balancing act of the management team in OXXO because they want to keep the margins improving, and the other one, they want to have a very stable sales force. And those two things combined is something that they have to made the trade-offs in a way every quarter.

There are a lot of things that have to be related with the compensation that we offer to these group of employees and -- or the people that work for the commissioning because again we have been improving the commissions base and helping them understand that it is not only the commission that is going to be -- has to be improved, also what they offer to their own teams. So those are the things that we've been working together.

And based on the results that we see by moving each of the levers, we will see that if we should be expanding the pace or -- I mean reducing the pace or making it fast. And really this is something that they are doing. But again, this is a long -- medium and long-term view and again we cannot sacrifice the short-term strongly for the medium and long-term and we don't want to do the opposite either. So it's a very delicate balancing act that these people do.

But let me tell you what are the things that we are discovering. I mean if we reduce -- most of the store people -- some of the store people take two buses to arrive to the workplace. If we were very -- more intelligent to align where they live and they work by just reducing one bus -- instead of taking two buses to arrive to the store to work, only taking one, it will be a major impact for the income. And I think those kind of things are the ones that are really challenging us. And we have the capabilities now because we know exactly where they live and where the stores are and how we can make this balancing act better to deploy all these great people to all the stores in a more efficient way.

--------------------------------------------------------------------------------

Luis Miranda, Santander - Analyst [102]

--------------------------------------------------------------------------------

Okay, thanks a lot. That was helpful.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [103]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [104]

--------------------------------------------------------------------------------

It appears there are no further questions at this time. Mr. Padilla, I'd like to turn the conference back over to you for any additional or closing remarks.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [105]

--------------------------------------------------------------------------------

Thanks very much for attending the conference. Thank you very much for taking care of us. I don't know, Juan, you want to add --

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [106]

--------------------------------------------------------------------------------

Yes -- no, just like we said a few minutes ago, if you have follow-ups or clarifications, we'll be happy to talk to you guys later today or whenever you need to. And have a great week.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [107]

--------------------------------------------------------------------------------

Yes, all the best to you all.

--------------------------------------------------------------------------------

Juan Fonseca, Fomento Economico Mexicano SAB de CV - IR [108]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Eduardo Padilla, Fomento Economico Mexicano SAB de CV - Chief Corporate Officer [109]

--------------------------------------------------------------------------------

Bye now.

--------------------------------------------------------------------------------

Operator [110]

--------------------------------------------------------------------------------

That does conclude today's presentation. Thank you for your participation. You may now disconnect.