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

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

Q3 2013 Earnings Call

October 25, 2013 11:00 am ET

Executives

Javier Gerardo Astaburuaga Sanjinés - Chief Corporate Officer

Analysts

Lauren Torres - HSBC, Research Division

Lore Serra - Morgan Stanley, Research Division

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

Alexander Robarts - Citigroup Inc, Research Division

Sambuddha Ray - JP Morgan Chase & Co, Research Division

Belinda Hill

Karla Miranda

Presentation

Operator

Good morning, and welcome, everyone to FEMSA's Third Quarter 2013 Earnings Results Conference Call. [Operator Instructions] During this 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.

At this time, it's my pleasure to turn the conference over to Javier Astaburuaga, FEMSA's CFO. Please go ahead, sir.

Javier Gerardo Astaburuaga Sanjinés

Thank you, and good morning, everyone. Welcome to FEMSA's Third Quarter 2013 Results Earnings Conference Call. As always, Juan Fonseca and José Castro are with us today as well.

Before we begin discussing this quarter's results, we should take a moment to recap the announcement we made yesterday regarding change to the most senior positions at FEMSA. As you know, José Antonio Fernández proposed to our board, and the board agreed, to separate the positions of Chairman and CEO. Starting in January of next year, José Antonio will be Executive Chairman and Carlos will be CEO. With John Santa María becoming CEO of Coca-Cola FEMSA. We are convinced that the changes will allow José Antonio and Carlos to focus even more on the tasks at hand, while providing continuity to what has been a very successful tenure. And to start, John will bring a unique track record to his new role. Yesterday's press release is very self-explanatory in terms of the rationale for the changes. But we will be happy to elaborate during the question-and-answer session today, if you wish so.

Moving on, as we normally do in our calls, today we will focus on the consolidated figures for FEMSA among the results of FEMSA Comercio, as many of you know probably had the opportunity to participate in Coca-Cola FEMSA's conference call yesterday. And since you have likely seen our detailed result, we will use this opportunity to share some of what we see as highlights and main trends in our business.

Beginning with some comments on the macroeconomic environment in our key Mexico market, there are some data points that suggest that some of the drivers, such as government spending and remittances may be improving but still very gradually. However, consumer demand has yet to show meaningful signs of the recovery and negative impacts from very wet weather in September are making it hard to read any strength in trends for the third quarter. In fact, the torrential rains we saw across large sections of Mexico made September one of the toughest months of our operations in a long time. We continue to believe this weakness is temporary, not structural, and we are optimistic that trends will improve and a more constructive scenario will materialize for Mexico in the medium term.

But in the meantime, we have been adjusting our plans and strategies to reflect the softer economic reality than we originally expected when the business plans were drawn up a year ago.

Having said that, and against such a challenging backdrop, our performance in Mexico has shown some resilience. At Coca-Cola FEMSA, strong execution in this key market helped to deliver stable results. However, performance in South America remained soft, particularly in Brazil, where volumes contracted, operating expenses increased and we were, again, compounded by the significant impact of foreign exchange weakness across our division.

The consumer in Brazil continues to be cautious as a response to lower economic growth, even though unemployment and inflation seem to be gradually improving. While low growth is a concern for the short term, we remain optimistic about the medium and long term, and the prospects of the Brazilian consumer. As demonstrated by our willingness to keep investing in our operations both through capital projects like the new plant in Minas Gerais and through acquisitions like the recently announced Fluminense and Spaipa transactions.

Though despite FEMSA Comercio's quarterly results reflect tough comparisons, the same soft consumer environment in Mexico and some continued pressure from the telephony category as described in recent quarters, all of which is reflected in our same-store sales growth. However, considering the challenging environment and the very wet September, our same-store sales growth is encouraging. In fact, the months of July and August showed promising signs sequentially. I will elaborate more on Comercio's numbers in a minute. But first, let me touch briefly on our consolidated results.

And I would also like to mention that given the recent acquisitions carried out by FEMSA Comercio, we are now breaking out comparable organic growth for its operations like we do for Coca-Cola FEMSA, and the organic growth data in the consolidated numbers includes both operations.

During the third quarter, consolidated total revenues increased 7% and income from operations contracted 3%. On an organic basis, excluding the integration of the beverage operations of Grupo Yoli and Fluminense and the pharmacy operations of YZA and Moderna, total revenues increased 4% and income from operations contracted 4%.

For the third quarter, the line label participation in Heineken results represents FEMSA's 20% participation in Heineken's third quarter net income, which was reported on Wednesday using the average exchange rate for the euro during the third quarter.

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