Fomento Economico Mexicano S.A.B. de C.V. (FMX)

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Fomento Económico Mexicano, S.A.B de C.V (FMX)

Q4 2012 Earnings Call

February 28, 2013 12:00 pm ET

Executives

Javier Gerardo Astaburuaga Sanjinés - Corporate Vice-President

Juan F. Fonseca -

Analysts

Robert Ford - BofA Merrill Lynch, Research Division

Alan Alanis - JP Morgan Chase & Co, Research Division

Karla Miranda

Lore Serra - Morgan Stanley, Research Division

Antonio Gonzalez - Crédit Suisse AG, Research Division

Lauren Torres - HSBC, Research Division

Alexander Robarts - Citigroup Inc, Research Division

Alexandre Miguel - Itaú Corretora de Valores S.A., Research Division

Presentation

Operator

Good morning, and welcome, everyone, to FEMSA's Fourth Quarter Earnings Results Conference call. [Operator Instructions] During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.

At this time, I will now turn the conference over to Javier Astaburuaga, FEMSA's CFO. Please go ahead, sir.

Javier Gerardo Astaburuaga Sanjinés

Thank you. Thank you, and good morning, everyone. Welcome to FEMSA's Fourth Quarter 2012 Results Conference Call. Juan Fonseca and José Castro are with us today, as always. As is usually the case, during this call we will focus on the consolidated figures for FEMSA and on FEMSA Comercio's results since many of you probably have the chance to participate in Coca-Cola FEMSA's conference call yesterday. As you have also likely had the chance to go over our detailed results, we will take this opportunity to focus on the highlights and main trends in our business.

As we mentioned in our press release, during the fourth quarter, we saw both of our core operations performed very well, wrapping up a solid 2012. Our Coca-Cola FEMSA experienced some margin pressure earlier in the year. In the second half, we were able to capitalize on stable volumes, solid pricing and improving raw materials on foreign exchange dynamics that finally, led to achieve double-digit operating income growth not only including new territories but organically as well.

For its part, FEMSA Comercio delivered on the expectations of surpassing 1,000 net new stores and also posted double-digit operating income growth on the back of balanced same-store sales dynamics and a consistent level of execution.

As you know, at the end of March, we reported our 2011 quarterly and full year financial information under IFRS to facilitate comparability. During the year 2012, there were minor adjustments to this comparable set of numbers as we transitioned fully to IFRS. If you have any questions about these changes, please get in touch with Juan and our Investor Relations team, who will be glad to follow up on this.

In terms of the macro drivers and our perception of the consumer environment, particularly, in Mexico, we see that inflation is under control and consumer confidence is very, very high. While GDP growth and manufacturing activity have gone down from the recent highs. Generally, however, the business mood remains positive, aided by expectations of structural reforms materializing down the road.

Conversely, the picture is decisively less clear in other markets where we operate. In Venezuela, as you know, we are dealing with the recent evaluation of the currency, and we continue to see high levels of inflation with low growth, as is also the case in Argentina. In Brazil and Colombia, the growth seems to be stabilizing but at low levels. Generally speaking, the macro backdrop is not very constructive in any of the markets where we operate. However, we have faced similar environment in the past and we believe we have the tools to navigate such waters successfully.

And moving onto our consolidated quarterly numbers. During the fourth quarter, total revenues increased 12%, and income from operations grew 25%. On an organic basis, that is excluding the integration of the beverage operations of Grupo Tampico, CIMSA and FOQUE, total revenues and income from operations increased by 9% and 22%, respectively. For the fourth quarter, the line labeled participation in Heineken results represents FEMSA's implied 20% participation in Heineken's fourth quarter net income. Importantly, for the full year, the line represents FEMSA's actual 20% participation in Heineken's net income derived from Heineken's full year numbers reported approximately 2 weeks ago.

Net income increased almost 68% in the fourth quarter. As we mentioned in our press release, this increase reflects the growth in FEMSA income from operations, as well as the net effect of nonrecurring items, including the sale of Quimiproductos mentioned in the third quarter. The number also incorporates the variation in FEMSA's 20% participation in Heineken's fourth quarter net income versus the figure reported from the comparable period of 2011. Importantly, Heineken's fourth quarter 2012 net income included a noncash exceptional gain related to the revaluation of certain equity interests held by Heineken in Asia.

In terms of our consolidated net cash position, during the fourth quarter, we went from having MXN 3.1 billion at the end of September to a position of MXN 1.8 billion at the end of December, reflecting outflows related to certain back-ended loaded capital expenditures at Coca-Cola FEMSA, as well to our second dividend payment for the full year, all of which were partially offset by strong cash generation at both our businesses.

And staying on the subject of dividends, our Board of Directors agreed yesterday to propose a dividend of MXN 6.7 billion to be paid in 2013. This is subject to approval by our shareholders at our meeting to be held in March. This amount includes basically a full pass-through of the dividends we received from Coca-Cola FEMSA Heineken, as well as a relevant portion of the cash flow generated by FEMSA Comercio. It is consistent with our long-term objective of increasing our return of cash to shareholders, while retaining our financial and strategic flexibility. And the dividend of this year will represent more than 4 times the amount we paid in 2009, the year before the Heineken transaction took place.

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