Helen of Troy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2024

There are 13 speakers on the call.

Operator

Hello, and welcome to FEMSA's 4th Quarter 2023 Results Conference Call. My name is Melissa, and I will be your coordinator for today's event. Please note, this conference is being recorded. And for the duration of the call, your lines will be in a listen only mode. However, you will have the opportunity to ask questions at the end of the presentation.

Operator

I'll now turn the call over to Juan Fosseca, Head of Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone. Welcome to FEMSA's Q4 and full year 2023 results conference call. Today, we are joined by Jose Antonio Fernandez, FEMSA's CEO and Executive Chairman of the Board Paco Camacho, our Chief Corporate Officer Eugenio Garza, our CFO and Jorge Collazo, who heads Coca Cola FEMSA's Investor Relations. The plan today is for Jose Antonio to open the conversation with some high level comments on the full year as well as the senior organizational changes announced today. Then we'll get a bit more into our strategic progress and business trends, followed by Eugenio, who will focus on the results.

Speaker 1

We will turn

Speaker 2

it back to

Speaker 1

Jose Antonio for some closing remarks and open the call for your questions. Jose Antonio, please go ahead.

Speaker 3

Thank you, Juan. Good morning, everyone. Let me begin by reflecting on a year that was like no other in recent memory, full of activity and news for the company. We kicked things off with a transformational announcement of PEMSA Forward, through which we focus on strategy our strategy on our 3 core business verticals of retail, what we call also Proximity and Health Coca Cola FEMSA and Digital. We then proceeded to execute on most of its related transactions in record time and with great success, divesting our investment in Heineken through 2 successful transactions as well as our minority stake in Jet Prop Restaurant Depot, merging Envoy Solutions with Braddy IFS while reducing our capital exposure to that asset.

Speaker 3

The effort is still ongoing as we are in the process of finalizing the remaining divestments. Furthermore, we are poised to begin deploying the capital allocation strategy announced last week that will allow us to increase our leverage towards our stated objective and to avoid capital idle to avoid to have idle capital on our balance sheet. During 2023, we made significant progresses executing on the long range plans of all our business units and in Landau's 3 strategic priorities of accelerating growth, going increasingly digital and balancing our risk return profile. We achieved these strong results by combining the right strategies with the hard work of our remarkable team. On that front and in order to better leverage the FEMSA forward strategy, back in September, we made important changes to better align the corporate organization with our more focused structure built around our 3 core business verticals.

Speaker 3

In that context and given the strengthening of the management teams of the 3 verticals, today, we announced 2 important changes in our leadership team. Paco Camacho and Eugenio Gassa have both made the personal decision that this is the right time for them to finish their cycle at FEMSA and move on to seek new professional challenges with effect at the end of April. Their contributions to our company have been many and substantial, and we thank and appreciate them today, wishing them continued success in their future endeavors. Martin Arias, who many of you know from his 25 years of fruitful association with FEMSA, will become CFO, working closely with Eugenio to ensure a seamless transition. And with that, let me turn it over to Paco.

Speaker 1

Thank you, Jose Antonio. Good morning, everyone. Let me begin with a couple of updates regarding FEMSA Forward. 1st, the Envoy IFS Brady transaction announced entity. 2nd, we have completed the process of carving out and transferring the distribution assets of OXXO and Coca Cola FEMSA from Solistica to their respective operations.

Speaker 1

And there are now active in Solistica as well as other non core operations as defined in FEMSA forward. And finally, we have fine tuned our capital allocation plans as we informed last week, putting us in a position to begin returning capital to shareholders as we begin to raise our leverage towards our stated objective of 2x net debt to EBITDA ex cost, which we expect to achieve within the within 2 to 3 years. Moving on to the results for the Q4, our numbers continued the positive trend seen during the 1st 9 months of the year, fully consistent with our strategic priorities and making progress towards the targets set by each business unit long range plan. Beginning with proximity, like we did in our last call last quarter in our call last quarter, it's helpful to talk for a minute about their own long range plan and their four priorities around which it is built: strengthening the core, developing new growth avenues, developing multiple successful formats and growing the footprint beyond Mexico. Looking at OXXO's 4 quarter results through this lens, we see they again made a strong progress strengthening more with same store sales growth of 8.5% against a double digit comparison base.

Speaker 1

This performance was again driven by a broad set of tailwinds, including stronger consumer demand for thirst, gathering and snacking occasions, solid commercial income dynamics, better segmentation of the store and the rapid adoption of the Spin Premier loyalty program. Continuing with the positive news of a stronger core, store growth was remarkable with Mexico and LATAM adding 5 14 net new stores during the quarter and 1408 during the past 12 months. Looking only at Mexico, we surpassed the 1,000 new store threshold for the first time since before the COVID pandemic, adding 1087 net openings. Moving on to the long range priority of growing beyond Mexico. During the quarter, Groupe O NOS continued its solid advance with revenues increasing over 119% year over year and with OXXO's footprint in Brazil more than doubling during the last 12 months, reaching 1716 stores at the end of 2023.

Speaker 1

Sealing on Proximity Americas, but along the priority of developing multiple successful formats, BARA grew revenues by 33.7 percent and reached a total of 359 stores at the end of the quarter. We will increasingly talk about other successful formats that are gathering momentum, such as our coffee drive throughs, our specialized OXO smart stores for control environments and our traditional trade initiatives. For its part, Proximity Europe achieving strong operating results with substantial growth in a challenging macroeconomic environment. This was driven by higher sales in the food category and the favorable effect from vertical integration. Revenues increased by a strong 16.4%, generating operating leverage.

Speaker 1

As of the end of the year, Proximity Europe had 2,808 points of sales, a net increase of 42 units over the comparable period. Our health operations showed mixed performance trends and again reflected foreign exchange headwinds from a strong Mexican peso relative to local currencies in South America. In Colombia, we are gradually shifting our business towards more retail and less institutional exposure, given the challenges the institutional health industry is facing the current political environment. While in Mexico, we continue to see competitive retail activity across territories. In both cases, adjustments to our strategy are in progress, and we will keep you appraised.

Speaker 1

In line with our evolving strategy, during the quarter, our health business continued to push the consolidated competitive position in presale across markets, increasing its store footprint to reach a total of 4,474 locations. In fact, during 2023, our Shell division added new locations across its territories at a pace of approximately 1 per day. For its part, our fuel business delivered a strong set of results with our dynamic corporate wholesale business continuing to outperform relative to retail. Comparable sales were robust with good contribution from traffic and ticket growth. Regarding Digital Atfemsa, the number of active users for spin by OXXO reached 6,900,000 during the quarter and active users for our premium loyalty program reached 19,300,000.

Speaker 1

Importantly, approximately 31% of OXXO Mexico sales are now associated with the program. We continue to privilege acquisition of higher quality users while we make progress fine tuning the use cases, value propositions, unit economics and monetization strategies for each part of the ecosystem. In terms of financial implications, during the quarter, we deployed around MXN 1,000,000,000 on growing this business, roughly in line with the previous quarter as well as budget. Finally, Coca Cola FEMSA delivered a remarkable set of results for the 4th quarter, driven by Mexico, Brazil, Colombia and Guatemala, enabling costs to surpass 4,000,000,000 unit cases of non alcoholic ready to drink beverages for the full year. And with that, let me turn it over to Okemian.

Speaker 4

Thanks, Paco. Good morning, everyone. As we continue to execute on our FEMSA forward strategy, we've made some adjustments to the initial statements throughout the year to reflect the divestiture of our non core businesses. During the Q4, we recorded Acunto and the 3rd party component of Solistica as discontinued operations. To maintain comparability, we modified our consolidated financial statements for the Q4 of 2022 to reflect this change.

Speaker 4

Let's begin with FEMSA's quarterly consolidated results. During the Q4, total revenues increased 4.6% and EBITDA rose 3.6% compared to the Q4 of 2022. Net consolidated income decreased 20.7% and stood at COP6.3 billion, resulting from higher gross profit and lower net interest expenses during the quarter. This was offset by a non cash foreign exchange loss of MXN 6,300,000,000 related to our U. S.

Speaker 4

Dollar denominated cash position and impacted by the appreciation of the Mexican peso and a $3,200,000,000 net loss from discontinued operations, mostly reflecting the accounting remeasurement from historical cost to fair value of FEMSA's investment in Solistica and Alfunto net of impairments. Shifting gears to our business unit results and starting with Proximity Americas. During the Q4, we incorporated 5 14 stores, bringing our total to 14 0 8 new stores for 2024, which includes 1087 new stores in Mexico and 321 in South America. This robust growth has propelled us beyond our annual growth target, renewing our confidence that our growth strongly remains long for OXXO across all markets and the opportunity for our multi format strategy is equally compelling. OXXO same store sales increased 8.5% in the 4th quarter, cycling strong double digit growth from the same quarter of last year.

Speaker 4

This result was led by a 6.3% increase in average customer ticket and a 2.1% increase in traffic as the trend gradually reverts to more sustainable levels after 8 consecutive quarters of double digit growth. Gross margin grew 17.2%, an expansion of 120 basis points, led by healthy commercial income dynamics and higher income from Financial Services. Income from operations rose by only 1%, contraction of 150 basis points, driven mainly by higher labor expenses in Mexico, including adjustments made ahead of further regulatory changes expecting during 2024. Moving on to Proximity Europe, total revenues grew by 9.5% in local currency, resulting in 16.4% growth in peso terms boosted by the food category across all units and the positive effect of vertical integration particularly through the B2B pretzel business. Gross margin stood at 44.9%, while operating margin expanded by 180 basis points to reach 5.2%, reflecting the same drivers that supported revenue growth as well as higher promotional income.

Speaker 4

Turning to FEMSA's health operations, we expanded by 127 net new drugstore additions during the Q4 to reach a total of 4,474 units across our territories in 2023. Total revenues increased 2.6%, while same store sales grew 5.1 percent in Mexican pesos. On a currency neutral basis, revenues and same store sales increased by 9% and 3.1% respectively, driven by a positive performance across most of our territories, which was partially offset by a challenging macroeconomic environment in Colombia and Ecuador. Beyond the top line, however, gross margin decreased 110 basis points and operating margin was down 240 basis points, largely reflecting a deteriorating environment in the Colombian institutional business where we took a charge of MXN 527,000,000,000 for uncollectible accounts. As a result of the structural headwinds, we are actively evolving our Colombian operation to rely more on a dynamic and fast growing retail component and less on the structurally complex institutional operation.

Speaker 4

Moving on to Havas. Same station sales increased 4.8% and total revenue grew by 9% as we continue to develop our corporate business. During the quarter, gross margin was 13.4% and operating margin was 4.6%, reflecting tight expense control and operational efficiencies. Finally, moving on to Coca Cola FEMSA that again delivered an outstanding set of results in the 4th quarter. Total volume increased 6.1% driven by growth across most of its territories.

Speaker 4

Total revenues grew 8.1% and operating income grew 7.4%, while operating margin was 14.6%. On a more strategic note, they did reach a milestone in their digital transformation journey, reaching more than 1,100,000 monthly active users through the Juntos Plus platform with more than $2,500,000,000 for the year. You can listen to the replay of their conference call held yesterday in their website. Now let me turn it back to Jose Antonio for some closing remarks. Go ahead, Jose Antonio.

Speaker 3

Thank you, Gagnon. Before we close, let me talk a little about our progress on our sustainability efforts during 2023. As we made progress on several fronts, as an example, in recognition of our ongoing efforts to advance our sustainability agenda, FEMSA was included in the Standard and Poor's Global Sustainability Yearbook for the first time in 2024. We were a model for our continuous improvement in water management, resource efficiency, packaging circularity and business integrity metrics. The yearbook recognizes corporations that serve as a reference in global sustainability standards.

Speaker 3

On the governance front, we continue to evolve the composition of our Board of Directors with the nomination this year of 2 new independent directors, Elaine Stock and Olga Gonzalez Aponte. They are remarkable executives whose experience, acumen and expertise will surely benefit our company for years to come. Non recap of 2023 could be completed without mentioning our great friend, Daniel Rodriguez. For all the strategic success and operational achievements we have talked about today, our hearts are heavy are heavy and our mood is tempered by Daniel's passing. Daniel was key in defining the strategy and setting these positive trends in motion, and we hope we are making him proud today.

Speaker 3

As we look ahead, we are fortunate to have a broad set of opportunities to continue growing in every one of our core verticals. There is no doubt that the year that begins will bring some headwinds such as higher labor costs in Mexico but also the tailwinds of higher economic activity from an electoral period in the short term and from encouraging macro trends like near shoring and in the medium and long term. Across our markets, we will again navigate a mix of challenges and opportunities, and I have no doubt that we will again find a way to thrive and create value for all our stakeholders. We'll start 2024 keeping our eye on the ball as we carry good momentum into what will surely be another interesting year. All our business units are well positioned for continued growth.

Speaker 3

I am particularly excited to see the many ways in which we will continue to apply our growing data analytics and AI capabilities to drive better performance and incremental growth across our 3 core verticals. We are just getting started. Finally, I want to take this opportunity to thank our entire team for a job well done in 2023 and to thank all of you joining us today for our continued support and interest in our company. And with that, we are ready to open the call for questions.

Operator

Thank you very much. Our first question comes from Ben Sawyer of Barclays. Please go ahead.

Speaker 5

Hi. Good morning, everyone, and thanks for taking my question. Just wanted to follow-up a little bit on the performance at OXXO, the same store sales composition in particular. Could you talk a little bit about the deceleration sequentially that you saw in store traffic? Because obviously, we had a fairly strong 1st 9 months period with same store sales growing somewhere in the mid single digits on the track side.

Speaker 5

But now it kind of came down and even with the base comparison that wasn't too high. So any color you can share on that, that will be much appreciated. Thank you.

Speaker 4

Sure, Ben. I think it has to mostly be with the fact that we had a very strong Q4 last year related to the World Cup and other events coming due. So there's a fair bit of that. So that, call it, excess traffic from last year did not repeat. Having said that, the underlying trend in traffic, if you see the services category, that is coming up significantly.

Speaker 4

So it's a little bit of the mix of both. And fortunately, the average ticket continues to maintain at a much higher level than it did pre pandemic given the changing customer taste. And I think that combination is what I think drove same store sales to their fantastic performance throughout the year. But specifically, Q4 has to do with lapping of the World Cup and a change in the composition of that traffic.

Speaker 1

And Ben, also just to add a couple of things and provide some more color on that. Structurally, the performance of the stores is very strong, and we saw very good performance across segments and across categories. And obviously, that also generates a strong performance in the traffic. So we feel confident about the structurally the traffic trend being strong and as we enter into 2024. Yes.

Speaker 1

I would just add, Ben, this is Juan. To be honest, I expected this to happen back in April. You remember at the call back in April, where I was already guiding people to not put a double digit same store sales number in their model. And then I was wrong for 3 quarters, but eventually the math kind of catches up with you. I think you're also looking at what was a very long recovery post COVID, right?

Speaker 1

I mean the traffic fell off a cliff in 2020 and it's been coming back. And there's a lot of stuff as Paco was saying, I mean segmentation at the stores and the drivers for growth are very much in place. But I think the mix that we see today is a more normal mix, quite frankly, and more looking forward, I think our mix is going to look more like what we reported today than the 6%, 7%, 8% that we were showing 3 or 6 months ago.

Speaker 2

Okay. Thank you.

Operator

Thank you. Our next question is from Ricardo Alves with Morgan Stanley. Please go ahead.

Speaker 6

Hello, everybody. Thanks for the call. Question on the senior management change, if you could add more details, for instance, on the timing, particularly now in the middle of the SAMSA forward, just to make sure that everything is aligned with the board and so forth. We also noticed that in the part of the release you mentioned that Eugenio will launch the implementation of the capital allocation elements. Can you tell us what that means exactly?

Speaker 6

Is that related to the buyback specific? And then it also states that Eugenio will remain as an advisor. And if that would be related to the 2nd stage of the envoy that we discussed at last year or maybe new ventures in the U. S. So curious if you can elaborate to the extent possible a little bit more on the CFO and Paco move as well, evidently very relevant for today.

Speaker 6

And a follow-up to that question would be on the shareholder return and on the buyback point that I mentioned. The doubling of the authorization, the $2,000,000,000 or whatever the number is pretty significant, but we all know that there has been very limited activity to no activity depending on the timeframe. So now that the announcement is behind us, can you share with us the key hurdles or the accounting flexibility that you now seem to have overcome so that you are now really confident that you're going to be able to be active on the buybacks? Is there a timing for us to be expecting more activity there? So just a little bit more granularity on the buyback component.

Speaker 6

Sorry for the long question.

Speaker 3

Well, I will start with the first part of the question, and we'll let Eugenio and Paco to explain the second part. But on the first part, what we have agreed with Paco and Eugenio is that they will stay with us helping until the end of April. By then and starting next week, Martin Arias is already fully involved, going to start fully involved and the transition of Eugenio and Martin will go very smoothly. At the same time, Eugenio, thanks, Greg, he offered us to continue as an advisor per project. And yes, there could be some projects that we could do of investments or new investments that we could do.

Speaker 3

And obviously to continue putting an eye and advising us on all the capital allocation strategy that we have designed and have presented to you recently. On the rest, I will ask Eugenio to explain.

Speaker 4

Sure, Ricardo. Yes, definitely what I'm going to be more focused on over the next couple of months during the transition with Martin is on the implementation of the capital return portion of the capital allocation program we announced last week. So it does have to do with share repurchases and continuing monitoring the investments both inorganic and organic investments as we aim to reach that two times net debt to EBITDA over the next few months. So to your question with regards to the timing of the share repurchases, with the announcement behind us, clearly now we will start to have an open to start to use that more heavily. What we will be asking the shareholder meeting in March is to increase the capacity that we currently have.

Speaker 4

But again, we have capacity currently in place to start to operate as soon as next week. So we will be implementing that capital return strategy, as we mentioned in the release last week, in a way that maximizes per share value from an intrinsic perspective in the long term. So that will be a combination of both share buybacks and extraordinary dividends. As you saw, we already started with our first one and there will be additional ones to come if indeed we realize that through the operating environment we're not able to reach the 2 times net debt to EBITDA on our own. So those will be the levers that we will be pulling again with me at the helm for the next couple of months and then with Martin and the rest of the team helping him going forward.

Speaker 1

I would like to add Ricardo, this is Juan. Since we did not have a call kind of dedicated to the capital allocation release, so the fact that we're all here today, I understand that there may be some questions and yours is the first one on continuity, right? And so I would like to ensure that the strategy that was communicated last week is fully in place, that the 2 times net debt to EBITDA target is fully in place and that there will be no deviation from that. So I just wanted to put that out there because I know that the concern is going to be among investors.

Speaker 6

That's helpful, gentlemen. Thank you so much.

Speaker 3

Thanks, Ricardo. Thanks.

Operator

Thank you. Our next question is from Alvaro Garcia of BTG Pactual. Please go ahead.

Speaker 7

Hi, gentlemen. Thanks for the call. Eugenio Paco, all the best going forward. My question is on labor costs in Mexico. I know that FEMSA has a philosophy of paying more than the street, of paying more than competitors or similar outlets.

Speaker 7

And that's very much true of OXXO. And I'm just curious of where we are in that process upping pay for your employee base at OXXO. How much more difficult has it been to get that premium? And what's your outlook for labor costs into 2024? Thank you.

Speaker 1

Hi, Alvaro. This is Paco. Good to hear from you. I'll start and then I will let the team provide further perspective. But I guess that what we need to keep in mind when it comes to cost management, particularly in OXXO, understanding that the labor cost specifically the labor cost during the last year was, I would say, a special situation versus other years because of its magnitude.

Speaker 1

But the reality what we need to keep in mind is that Opdiv is extremely good at working consistently on making our operations more efficient. So the team has been focused on making sure that all the verticals and all the possibilities that they usually explore as part of the way they do their operations of the stores continue to progress towards further efficiencies. And I guess that has to do with store management, that has to do with headcount, that has to do with how we look into the specific cost in the stores. So this is just to reassure you that structurally speaking and the way we approach this in the stores hasn't changed. We will continue to do so.

Speaker 1

And evidently, every time something like this comes, the teams double the efforts on maximizing the efficiency. But for 2024, we have included the increases in the plans, and we are confident that we can deliver on those plans as we enter the year. So, Crainer, do you want to add something on that? Yes. I would add one thing, Alvaro.

Speaker 1

This is Juan. Just because we when you look at the numbers and you look at the OXXO P and L, we're making some comments about how

Speaker 8

the operating margin was impacted by, among

Speaker 1

other things, but largely by the labor 2024, I just want to put out there, I hate to call it guidance, but our expectation is that operating margins for the year will be flat, right? That's kind of our base case. So I think the year is going to start a little bit softer and it's going to gather strength as the year goes by. But for the full 2024, our expectation is for operating margins to be flat for OXXO Mexico, and I think that's an important data point.

Speaker 7

Okay, great. Thank you very much.

Operator

That's all. That's all. Thank you. Our next question is from Hector Maya of Scotiabank. Please go ahead.

Speaker 9

Hi, thank you very much for taking my question. So I just wanted to know about your update of the FEMSA forward plan. We saw that the execution and divestments have come ahead of time and it was exceeding expectations. So just wanted to understand why you considered it was necessary to extend the time line window for cash deployment by an additional year potentially? And would that be because maybe M and A opportunities take longer to appear?

Speaker 9

Or is there a concern for either the economic or political environment in your operations that drove the decision to keep a relevant cash position for a little longer?

Speaker 4

Hector, thanks for your question. It's okay, and you hear. Look, really nothing has changed from what we said last year and we continue to reiterate it. We are going to get to the 2x net debt to EBITDA. We can get there in several ways.

Speaker 4

One is through special dividends, the other one is through share repurchases and the other one will be through organic and inorganic investments. At this point, yes, we're sitting on a pile of cash that's accumulated at a higher pace than we expected because of the success that we've had with the divestiture so far. There will be more of that cash on both from the remaining sales of the remaining assets as well as the JETRO stake, which we sold in installments. And the operations will also be generating cash. So we are, I mean, painfully aware of the problem of holding too much cash.

Speaker 4

Having said that, we want to deploy it in a smart way that maximizes long term intrinsic per share value. So I think still within the range of the same 2 to 3 years, we will get to the 2 times net debt to EBITDA. It makes us, to be honest, feel a little bit more comfortable holding on to the cash right now at 5% interest rates that we're investing it in rather than where it was 3 years ago. So we're being patient as opportunities arise. But again, even if we do see inorganic opportunities, we've stated they will be in the core business verticals that we identified on the FEMSA forward and they will be financially accretive to long term intrinsic per share value.

Speaker 4

So we want to maximize that flexibility that we have to invest across all our businesses and in the best investment that we have, which is our own share and get to that 2x net debt to EBITDA in due course.

Speaker 9

Thank you. That's very clear. And also the conversation around the hard discount category and private label has been very hot right now, very active. So just also wanted to understand if we could expect your strategy with BARDA to become more aggressive in the future? And how relevant could press label become for your overall strategy and maybe even peroxol?

Speaker 1

So Hector, just to answer this is Paco. Just to answer that very quickly and continue with the question from the rest of the attendance. Look, as you know and as we highlighted in the opening remarks, I mean, clearly, one of the strategies that we are following in proximity and we have stated before is multi format. BARDA is an important component of the multi format vertical. Bara, we reported, has had very strong growth in 2023 and our intention is to continue strengthening that business in 2024 and in the years to come.

Speaker 1

Private label is a very important part of the question of that business. It has been performing really well. So what we are doing and what we have explained we're intending to do in that business has nothing to do with the recent announcements on that part in that segment of the retail, But basically, just following the strategy we have highlighted before. And to your point, I mean, clearly, private label is an important component. We are doing very well in that segment of the business in the results we posted, and the intention is to continue doing the same in the years to come.

Speaker 4

And again, with regards to your question on Para, I mean

Speaker 1

go ahead. No, I was just going

Speaker 4

to say on BARDA, we're happy that the market is recognizing the value in hard discount and there's a long, long way in that format ahead. And again, we're happy that now the market has another view into how that business is performing and that we'll continue to be friendly competitors in the market.

Speaker 3

Let me just add, I don't know if you're aware, we hired a new director for that area called Jacobo Callier, who is an expert on this kind of multi format and high discount stores. And he is he has been here for the last 3 or 4 months already, and he's completely convinced that the potential of our Vara project is now ready to jump and to grow fast with under him. So we are really looking for how to develop and to grow all over with Bara as we speak.

Speaker 9

Excellent. Very, very clear. Thank you very much. Thank you.

Speaker 3

Thanks, Victor.

Operator

Thank you very much. Our next question is from Alan Alanis with Santander. Please go ahead. Thank

Speaker 2

you so much for taking my question, Jose Antonio, Paco, Geno, Juan. Best of luck to Paco and Eugenio. Let me put some context on the question first. I mean, FEMSA's share is down 9% this morning in the first hour of trading. That's That's $4,000,000,000 of lost market cap.

Speaker 2

And I think that the market is reading 3 negative things on this. First, the uncertainty of the CapEx, that will be my question. I'll come back to that in a moment. The second, the unexpected management changes. I mean, I'm to know Martin Arias, and he's super competent and I'm sure he's going to do also a very good job, but the market doesn't know him yet.

Speaker 2

And the results regarding the margin contraction and the disappointment in same store sales. I think what would be very useful in this call, Antonio and team, is to elaborate a bit more in terms of how are you going to deploy $14,000,000,000 in the next 5 years of which we indicated that 70% of that is going to go to Mexico. That means that on average, you will be putting $2,000,000,000 invested in Mexico. How much how are you thinking about that in terms of in which businesses, in which sectors? And how much of that money is going to OXXO Spin and the aspirations that you have for OXO Spin?

Speaker 2

That would be my question. Thank you so much.

Speaker 1

Yes. Thank you, Alan, for your question. Look, I think that we need to go back to answer your question to go back to what we announced during FEMSA Forward. Because specifically speaking, we announced that we are committed to our 3 core verticals, basically retail, digital and Coca Cola FEMSA. So you should expect that the discipline that we will have in terms of deploying capital is going to be fully aligned to this strategy that we announced.

Speaker 1

So anything that we do will, 1st of all, be consistent with that. But second, importantly, we'll be extremely disciplined on how we select potential inorganic opportunities moving forward. Yes. Let me add something on the CapEx. Alan, this is Juan.

Speaker 1

I mean, if you look across formats, a lot of what you see is going to be deployed in organic expansion. What we're seeing, I mean, obviously in Mexico, we've talked about the runway, but what we're seeing in multi format and what we're seeing in other geographies is very, very compelling opportunities to accelerate the pace of growth. Even today, and we'll detail this over the next months quarters, but even today, if you look across all retail formats, we are opening in the order of 7 units per day, right? If you think about OXXO here, OXXO South America, drug stores, OXXO Smarts, coffee drive thrus, it's going to ramp up from an already very dynamic place. And that's really a big part of the CapEx numbers, right?

Speaker 1

I mean, don't straight line it horizontally, but rather straight line it it as a with a slope because that's what you're going to see. If you think about Colombia, we're about to accelerate significantly in Colombia. I was in Brazil a couple of weeks ago. The opportunity for Grupo NOS is fantastic. So a lot of the CapEx is really going to take the form of stores and DCs and distribution assets.

Speaker 1

We've said in the past on the M and A front, we're looking for a potential entry model into the U. S. On convenience. That's everybody knows that. We've been looking for drop stores in Mexico that's proven a bit more elusive.

Speaker 1

And that's pretty much it in terms of what we've identified at this point. Do we like our flexibility? Sure. But it's mostly about organic growth, Alan. And I've gotten a lot of questions we've gotten a lot of questions about the bigger CapEx numbers that were communicated last week.

Speaker 1

So hopefully, this helps understand where that capital is going.

Speaker 2

Yes. Thank you so much for that. And if you can just final question here. I mean, what would you what do you think investors are missing with such an abrupt stock reaction? And how important is that stock price for the controlling group, for the management and so forth?

Speaker 2

What's the market missing? If I maybe I misdiagnosed the reason why the stock is down 9% today, but if any color on that would be a tough quarter of clarifying and hearing your view as managers and the potential to shareholders. That will be helpful. And thanks so much for taking the question.

Speaker 1

Alan, you know us very well and you

Speaker 3

know that we all think long term. And we will continue being very disciplined on our strategy. FEMSA forward has huge potential. Cash is king. We always have said that.

Speaker 3

You remember Don Eugenio saying that. And Don Eugenio also said that the opportunity is the queen, and we have to keep both. The cash, some cash for doing new projects. Coca Cola FEMSA, it hasn't been mentioned, but it's going to invest the largest CapEx in history because of lack of capacity. We lost volume this year because we didn't have enough capacity in certain places.

Speaker 3

We have to keep that. So we are going to have a huge investment in capacity in Coca Cola, in various countries. And obviously, we will still go looking for good opportunities on our 3 verticals. That's why we our intention is there, we go all the way to 2x EBITDA and divest as much as possible or repurchase as much as possible on shares because that or give back dividends because we don't like to have idle resources just getting a very low interest rate.

Operator

Our next question is from Thiago Bordaluci with Goldman Sachs. Please go ahead.

Speaker 10

Yes. Good morning, gentlemen. Thanks for taking my question. Let me just catch back one mention from Juan related to the target leverage of to that no deviations, right? I think one of the reasons for the volatility we're seeing is lack of visibility on how you will get there, right?

Speaker 10

You're mentioning 2 times leverage. This might give you $7,000,000,000 $8,000,000,000 in excess cash. But at the same time, you're mentioning you're committing to give back up to 6% of your market cap, which is 3%, right? How will we add back to 2x and to where this incremental $4,000,000,000 $5,000,000,000 might be going? This is the first question.

Speaker 10

And if I may just take advantage of Jose Antonio being in the call. Jose Antonio, today, you have 2 interim positions, right, the CEO and the CFO. How is the Board thinking about this? And how important it might be to fill definitely dispositions in order to keep the plan moving forward? Those are the questions.

Speaker 10

Thank you very much.

Speaker 4

I'll start with the first one and then I'll turn it off to Jose Antonio. Yes, my math is a little bit different than yours, but ballpark it's the same. I think to get times, we're talking about a number close to $6,000,000,000 $6,500,000,000 in that neighborhood, Thiago. And yes, 6% of the market cap as of last week was $3,000,000,000 So there is still some undefined allocation of resources. Having said that, we still believe we're going to get to 2 times and that excess amount plus the cash that will come in from the operations will be looked at very closely between organic, inorganic and additional return to shareholders.

Speaker 4

So it's going to be a mix of all of that, that will get us to 2 times. I understand the anxiety about not being it all spelled out in stone about where that additional $3,000,000,000 to $4,000,000,000 are going. But the commitment is to get it 2 times while maximizing shareholder value. So we don't have all the answers yet. What we can tell you is that at least the $3,000,000,000 will go to shareholder return point and the rest we will deal with it as opportunities arise.

Speaker 1

And let me just comment on that before, Jose Antonio. Another way of what Afeni just said is and this is the question we've been getting, could there be some upside to the EUR 3,000,000,000? Dollars And I think El Pena just said, in other words, yes. But like I said a few minutes ago, we really value our little bit of flexibility. And so those questions will be answered over the next couple of years.

Speaker 3

And on the second question that you had, we have discussed this at length with the Board, and we have agreed that on the CEO position, I have I am willing and open and very happy to stay for at least 24 months as CEO and Chairman at the same time. I'm making this effort. I'm enjoying it, and I will stay doing it. While we are going to start the process of looking for a new CFO, as you could imagine, it will take us hopefully less than a year or maybe a year or 18 months at the most, but we will find a new CFO for the company. As we speak, we will start the process of looking forward.

Speaker 4

And then just to be more clear about this, and I'm sure Paco will have his own views. But I think in my personal decision to leave the company at this point has more to do with kind of my personal interest. I think the skills that I brought to bear were put in place during the FEMSA Forward program over the past 18 months. And we and the team had, I mean, a lot of success doing it. And at least for me, it's on to the next project.

Speaker 4

So nothing more than that, and I'll continue to be close to the company as an advisor over the next few years hopefully.

Speaker 1

Yes. Thiago is taking the opportunity. Also, this is Paco. Look, I'm extremely proud of what the team has accomplished in Ufemcza, developing the long range plant, having a clear perspective on what the future looks like. And in reality, my decision is something that didn't come I didn't take that lightly.

Speaker 1

And it's exclusively related to what I want to do with the next station in my professional career. FEMSA is an incredible company with a bright long term perspective that I will certainly miss. I will miss the team. I will miss Jose Antonio. I will miss everybody here.

Speaker 1

And the prospects of our company, I believe, are brighter than ever. So that made the decision even more difficult. But again, it's exclusively personal and FEMSA will always be a highlight in my over 35 year career in many big companies and Fremsa clearly stays at the top of that.

Speaker 10

Thank you. And we'll

Speaker 4

also miss the book to

Speaker 10

put you in for you. Thank you very much, Pat. Corrigan, thank you very much.

Operator

Our next question is from Luis Willard with GBM. Please go ahead.

Speaker 1

Mr. Willard, your line

Operator

is open. Please go ahead.

Speaker 8

Hi, guys. Can you hear me?

Speaker 4

Yes, we can.

Speaker 8

Thank you. Perfect. So my question is quite mundane and perhaps I'm reading this all wrong, but I just wanted

Speaker 2

to ask you if you

Speaker 8

could go over a bit on the changes that you mentioned on your remarks, Eugenio, I think it was you, about the disconsolidation of operations. Because I mean you're reporting on a consolidated base of 4.6% growth in sales. But if you look at the each of the subsidiaries that you break down, all of them in pesos grow except for Health, all of them grow above that average. So I just wanted to make sure that I'm reading this correctly in the Europe that perhaps there's some deconsolidation that's not registered in the base, but it is in the 4Q 2023 numbers. Is that correct?

Speaker 8

Or what am I missing on the, let's say, undisclosed breakdown of that? Thank you.

Speaker 4

Yes, Luz, we can touch base offline if you want and walk you through the exact numbers. But there were, as you know, because of the peso, some currency mismatches. So depending on whether you're looking at it on a currency neutral basis or on a peso basis, some numbers are weird, especially this quarter in a lot of alliance, including the non cash items and the taxes. And then there is also the deconsolidation. As you all said, it doesn't move the needle that much, but at the margin, it does.

Speaker 4

We deconsolidated both the Alfunto business as well as the part of the Solistica business that is in the part of in the process of being divested right now. But yes, those averages do work out and the 4% number after all these adjustments is correct, despite the fact that the retail businesses and most of the other businesses are growing higher than that average.

Speaker 8

All right. Well, that was it. Thank you.

Speaker 1

Thank you, Luis. Thank you, Luis.

Operator

Thank you. Our next question is from Luis Jens with Santander. Please go ahead.

Speaker 11

Hi, guys. Thanks for taking my questions and good luck Paco Antonio on the next projects. My question is a follow-up on what Alvaro asked about the margin pressure and I guess in particularly driven by the pressure on labor. I mean could you talk a little bit about where exactly is that did that pressure come in the Q4? Was it perhaps preparing for the minimum wage increases?

Speaker 11

Is it related to, I guess, the vacation or the pension reform that has an impact there? Or and you did mention that also part of it has to do with adjustments ahead of expected regulatory changes. I guess you meant perhaps the potential change in working hours. So just trying to understand a little bit what drove the additional pressure in the Q4? And I guess a related question to it is, Juan mentioned that and I appreciate the color on the margins being kind of maybe flat for this year, but maybe start soft and get better.

Speaker 11

Just trying to understand what would be the driver of the improvements in margin as we move towards the second half of the year? And I guess related to that, but also on proximity, I mean very strong margins on the European side of the equation. Wondering what we saw there is kind of like a sustainable level that we should think going forward. Thanks.

Speaker 4

Let me start, if you want, please, on the margin pressure in Proximity Americas. On a like for like basis, what you said is correct. I mean, we are contemplate we already obviously implemented all the changes related to labor reform, including vacations and whatnot, keeping up in place with just minimum wage increases and others. So that is, I think, the driver of a like for like comparison. But you have to remember that on top of that, we are starting a multi format business that is quite ambitious as well.

Speaker 4

So there are a lot of staffing needs, new facilities that we're staffing up, etcetera, that are coming up as well as all the other costs, which as you know, we don't capitalize on the balance sheet. So it's a little bit of a mixed bag on a like for like basis explains, I would say, maybe half of the effect, but the other half has to do more with how we're ramping up for that.

Speaker 1

Yes. And I think the word you mentioned, Luis, preparing for, obviously, there are still some uncertainties in terms of the lawmaking and some potential changes to the labor law that we're obviously all monitoring closely, but there's a lot of getting ready for 2024 that took place in 2023. And in the case of Europe, I mean, I think this was obviously a very good quarter. I wouldn't necessarily expect all quarters to be that strong. There are some currency issues at work too.

Speaker 1

I mean, if you look at the numbers in local currency, it's a high single digit as opposed to a double digit top line growth. But having said all that, there's no question that the team in Vallora is executing very well in the midst of a challenging environment. So very encouraging. But again, and this is Paco Luis. I guess that the overarching element of all this is that structurally, the teams have done a terrific job both on this side in Americas, but also in Europe in terms of strengthening the operation itself to make it more efficient.

Speaker 1

And that's as you know, those are things that stay and that you need to keep in mind.

Speaker 11

Great. Thanks a lot, guys. And maybe as a follow-up, I know you've done most of the divestitures, at least the big ones. I mean, but there's still a few non core assets that you've mentioned in the past that you're willing to sell. Any updates on that?

Speaker 11

And can we expect that to perhaps being achieved this year

Speaker 12

as well?

Speaker 4

Yes. We're cautiously optimistic that they will get done, I mean, much earlier than when we expected and probably faster than most people think. So we're making good progress in that.

Speaker 11

Great. Thanks a lot guys.

Speaker 1

Thank you, Luis.

Operator

Thank you very much. And our next question is from Federico Ghulasi with TRG. Please go ahead.

Speaker 12

Thank you guys for taking my question. One question related and you took this part of the answer if you want. But the question is related to Mexico and same store sales in the different formats that you have. You're talking about books, etcetera. But do you believe that this is more related with any format in particular?

Speaker 12

Or do you see some deceleration in the consumer in Mexico? Maybe the if you can explain, Agweta, is what are you seeing in the healthcare business when do you have 2 quarters of again in Mexico, 2 quarter of negative center sales? That's the question. Thank you.

Speaker 1

Did you say in health Federico?

Speaker 4

That was the second question. Second question?

Speaker 12

I'm referring to yes, sorry.

Speaker 4

Sure. I mean the first part of the question just with regards to Mexico, I mean the consumer continues to be strong. I mean you're seeing it again, on a lapping basis, maybe it's the traffic is not as strong. But on an absolute basis and compared to what we saw in, I mean for a long time, the consumer continues to have cash available and at least with the everyday items that we sell it off. So we continue to see, I mean, strength there.

Speaker 4

And the margin pressure, again, has to do more with what we just discussed on labor. And it's consistent throughout all formats. I wouldn't say it's specific to either hard discount or proximity. And then with regards to your second question on health, we are seeing a more aggressive competitive environment, generally speaking, in Mexico. Expansion of stores of our competition continues

Speaker 11

to be at a very healthy pace. We're keeping up.

Speaker 4

Of our competition continues to be at a very healthy pace. We're keeping up, but you're seeing a much healthier competitive environment and different value propositions propping up that are making the operating environment a little bit more challenging from a gross margin perspective.

Speaker 1

Yes. Federico, just to add couple of additional points. This is Paco. Look, I mean, when you look at the results, Mexico posted very strong results. And when you look at TOXA, when you look at Coca Cola FEMSA, we didn't talk a lot about digital, but we had also very good results.

Speaker 1

So in general, the businesses are doing really well in Mexico. The situation with health is punctual, and it happens every now and then. You have a competitive situation or you have a specific plan that even goes as you were thinking. In this case, I mean, really, as Joaquino said, it's something related to how active competition has been being. Honestly, it's good news because that means that the market is healthy, that we are in an interesting segment of the market.

Speaker 1

And the teams are working on adjusting our strategies to face that. Honestly, we are confident that the situation will get better. But again, we are not concerned on how the businesses are performing in Mexico. On the contrary, we remain confident that 2024, even though we have some headwinds as usual, but we'll deploy our LRP. We'll deploy the plant and we should expect good results.

Speaker 1

Yes. And I would add, Peder, I mean, we mentioned it in the remarks, but Mexico and Colombia on the health side, yes, there have been some issues in terms of competitive landscape and the shift from institutional to retail in the case of Colombia. But in both cases, the strategies are defined and we're starting to address that very, very diligently. So hopefully, in the not too distant future, we'll have different things to report on those fronts.

Speaker 12

Okay, guys. Thank you so much.

Speaker 1

Thank you. Thanks, everyone, for attending today for your permanent interest in our company. Obviously, the team and I are always available for follow ups, and we'll be in touch. Thank you.

Operator

Thank you very much. That concludes today's conference. You may now disconnect. Hope you may stay on the line.

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Earnings Conference Call
Helen of Troy Q4 2023
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