Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX) Q4 2022 Earnings Call Transcript February 24, 2023
Operator:
Eugenio Garza: Moving on to discuss our operation, beginning with Proximity Americas. We added 559 units during the fourth quarter to reach 1,027 net new stores for the last 12 months. This includes 120 stores from our OK Market acquisition in Chile that we began consolidating during the second quarter. In Mexico, we get up a little bit short of our target of 800 net additions, but the pace keeps improving. The pipeline is looking good for the next 12 months, and the productivity of our new stores continues to materially exceed that of previous new store cohorts. OXXO same-store sales were up 11.4% for the fourth quarter, driven by an increase of 6.8% in average customer ticket and again, a strong 4.3% growth in traffic. This continues to reflect a pickup in the recovery pace of mobility and the gathering consumption location that has continued to perform at a very strong level.
Gross margin was 44.2%, continuing a recent trend where our fast-growing loyalty program and slightly lower contribution from financial services more than offset healthy commercial income dynamics. Despite the margin pressure at the gross level, income from operation increased 17.4%, while operating margin increased 10 basis points compared to the same period of 2021 to reach 12.7%, driven by a structurally leaner expense structure and the resulting operating leverage. At Proximity in Europe, we began consolidating Valora in early October, so we are showing 84 days of results. We closed the year with 2,766 outlets. Revenues came in at MXN 9.8 billion, reflecting a recovery in traffic and ticket driven by improved customer mobility. Gross margin was 46.9% and operating margin was 3.4%, driven by the contribution of foodservice as well as the integration of recent acquisitions.
At OXXO gas, revenues maintained the recent uptrend and increased 25.4% and same-station sales grew 19.7% relative to the fourth quarter of 2021 as vehicle mobility continued to improve. Retail volumes were again supported by a robust pickup in corporate and wholesale activity. During the quarter, gross margin was 13.2%, while operating margin was 4.4%, reflecting tight expense control and improved operating leverage. Moving on to FEMSA’s health operations. During the third quarter, we expanded — sorry, fourth quarter, we expanded our drug store count by 124 net additions to reach a total of 4,095 units across our territories at the end of December and 434 total net new stores for the last 12 months, exceeding our target for the year of over 400 new drug stores.
Photo by Hamish Weir on Unsplash
Revenues increased 1%, while same-store sales decreased an average of 4.5%. However, as was the case last quarter, it is important to note that on a currency-neutral basis, revenues grew 6.2% and same-store sales increased 8.3%, a solid performance across all of our operations. Gross margin decreased 60 basis points in the quarter, mostly reflecting a negative mix effect that reflects the strong growth of our operations in Colombia partially offset by improved efficiency and more effective collaboration and execution with key supplier partners in Mexico. However, operating margin expanded 40 basis points as tight expense controls across all our territories more than offset the impact from this lower gross margin. Regarding our logistics and distribution business, revenues increased 34.2% relative to the fourth quarter of 2021, reflecting the steady pace of acquisitions made in the past 12 months by Envoy Solutions.
On an organic basis, total revenues increased 8.5%, reflecting the strong performance across Envoy Solutions segment, coupled with good demand dynamics in our operations in Latin America. Operating margin contracted significantly to 2.5%, reflecting onetime provisions related to past due institutional customer accounts and obsolete inventories at Envoy Solutions as well as higher cost of slate of labor and transportation in certain markets. Excluding these one-offs, provisions, operating margin would have been in line with recent trends. Finally, moving on to Coca-Cola FEMSA. They delivered a strong set of results to close an equally strong year. Total volume grew 4.6%, driven by growth in most of their territories. Total revenues increased 14.9% and operating income grew 15.9% as operating margin expanded by 10 basis points to reach 14.7%.
You can listen to the conference call today at 10 a.m. Mexico time. Now I will turn it back to Daniel for some final comments. Daniel?
Daniel RodrÃguez: Thank you, Eugenio. I just want to finalize by saying that I am proud of what our extraordinary team of more than 350,000 colleagues have achieved during 2022, representing the best of FEMSA company-wide commitment to long-term value creation. As we look into 2023, I’m confident that the steps we have started to take to work our FEMSA Forward vision will position our company to maximize value creation as never before, leveraging the sign buses among our 3 core businesses as well as our strong team of professionals that I am sure will again be able to navigate any challenge that we come across in 2023 and beyond. And with that, let us open the line for questions. Operator, please?
See also 10 High Growth Dividend Paying Stocks to Buy and 12 High Growth Value Stocks to Buy.
Q&A Session
Follow Fomento Economico Mexicano S (NYSE:FMX)
Follow Fomento Economico Mexicano S (NYSE:FMX)
Operator: . The first question comes from the line of Ben Theurer Calling from Barclays.
Benjamin Theurer: Congrats on the results. 1.5 if I may. And the half one is really related to some of the comments you made in press release about incremental acquisitions in Envoy. Just wanted to understand the strategy that you’ve laid out last week, Envoy being part of to be disposed assets or a business unit. But then at the same time, you put in your press release that you’ve acquired 6 different smaller players that are adding on an annual basis, $200 million. How should we think about the capital allocation, particularly into something that’s supposedly for sale go forward? Are you going to continue to add here? Or is that still one-off that we’re in the process that just happened to close in the fourth quarter?
Eugenio Garza: Thanks for your question. With regards to Envoy, I mean, as you know, part of the investment thesis there is that there’s still a long runway of acquisitions to engage in there to create value by consolidating into the system. So that was no different of a strategy in the fourth quarter. Given what we announced in terms of forward, our strategy for Envoy is again, to continue for the business to continue to be executing on this strategy. Having said that, the capital commitment from FEMSA would be relatively lower until we find an ultimate solution for the Envoy business. So again, we’re letting the business execute on its strategy, but the capital commitments coming from FEMSA as we look for strategic alternatives you should not expect those to be significant going forward as we look for strategic alternatives for the asset.
Benjamin Theurer: Okay. That make sense. And then if we take a look at the — just the composition of same-store sales data, can you give us a little more color on what’s been so supportive to traffic through during the quarter. Because a little over 4%, obviously, is a very strong number. It’s above the last 12 months average. So just to understand what you’ve done differently in the fourth quarter at the convenience stores to drive traffic?
Francisco Camacho Beltrán: Yes, Ben, the fourth quarter is usually stronger in the convenience store because it’s the holiday area. That’s number one. Number two, as we highlighted in the comments, there is a significant recovery in terms of post-pandemic consumer behavior, and that is also helping. And last but not least, in a number of our stores, we started the sale of the complete portfolio of beer and that also increased the traffic in the stores.
Juan Fonseca: Yes, I think just complementing what Paco just said and this is Juan. As we mentioned in the Daniel’s original remarks, the gathering location is certainly key in the fourth quarter. And to Paco’s point, beer is a category that has been performing very, very well. We just finalized the last wave. You remember the opening of the stores to the ADI portfolio, with Nuevo León a few weeks ago. World Cup, which even though it wasn’t really as because of the timing of the matches some of them happened early in the morning and not a lot of people drink beer early in the morning. But still, it all kind of came together to drive double-digit growth in that category, which is one of our most important. And just overall, I think the team was working precisely because traffic I mean when we look at the past 24 months, we have been talking with you guys and with the market about how ticket has been performing very, very well, but traffic was coming up a little bit short.
