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

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Wall Street Breakfast

Fomento Econmico Mexicano, S.A.B de C.V (FMX)
Q2 2007 Earnings Call
July 30, 2007, 2:00 PM ET


Javier Astaburuaga - CFO of FEMSA
Juan Fonseca - IR


Andrea Teixeira - JP Morgan
Robert E. Ford - Merrill Lynch
Loredana Serra - Morgan Stanley
José Yordán - UBS
Alex Robert - Santander
Reinaldo Santana - Deutsche Bank
Celso Sanchez - Citigroup



Please stand by. We are about to begin. Good morning everyone and welcome to FEMSA Second Quarter 2007 Earnings Results Conference Call. As a reminder, today's conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions-and-answers after the presentation.

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's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which may materially impact the Company's actual performance.

And at this time, I would like to turn the conference over to Mr. Javier Astaburuaga, FEMSA's CFO. Please go ahead, Javier.

Javier Astaburuaga - Chief Financial Officer of FEMSA

Thank you. Good morning everyone and welcome to FEMSA's second quarter 2007 earnings conference call.

Joining me today are Jose Fernandez and Juan Fonseca, both of whom you know well. Our second quarter results reflect progress made in every one of our businesses in the context of continued challenges such as tough comparisons as well as inflation pressures in certain key raw materials. Despite the slowdown in our key Mexican market, we again delivered strong consolidated top line growth of 7.4% in real terms.

Consolidated income from operations grew a slight 0.6%, combining soft but improving results of FEMSA Cerveza, a solid quarter for Coca-Cola FEMSA and another good quarter for Oxxo, with gross margin expansion compensating for some weakness in same store sales growth.

Below the line, a reduction in our expense and the positive effect of a strong Peso more than offset an increase in interest expense. And the lower effective tax rate contributed to an increase of consolidating net income of 32.5%.

Moving on to our business units. At FEMSA Cerveza beer volume growth in Mexico again started the quarter very slow. Resembling the dynamics of the first quarter as a slightly lower consumer demand across the country was accentuated by unseasonably cold and rainy weather in the North, specifically during the first half of the quarter. Again, as the quarter progressed, so did volume growth. And for the quarter, we were able to deliver a 3.2% growth in Mexico.

In Brazil, we achieved volume growth of 8.1% with our brand Sol delivering the majority of the growth even though it was launched only nine months ago. Year-to-date, we are up 11.4% and continue to grow ahead of the industry. In exports, volumes grew a robust 27%, driven not only by the rapid growth of Dos Equis in the Eastern U.S. and Tecate in the Southwest stronghold, but also by a solid performance of Sol in other key markets.

In terms of pricing in Mexico, we implemented a selective price increase starting in late May and through the month of June. And therefore, the quarter’s revenue per hectoliter figure of 2.2% down does not reflect the full benefits of this increase. It will do for the third quarter.

In Brazil, where we implemented a price increase late in the first quarter, revenue per hectoliter increased 2.8%. While in our exports, revenue per hectoliter fell 3.6% as the effect of inflation and a strong Peso offset, an increase of 3% in Dollar terms.

Finally, revenue for packaging fell during the quarter reflecting the fact that at this point, we are not making any third party sales of glass bottles. Our full capacity is being used for FEMSA's own requirements. So, total revenues grew 2.7% for the quarter.

On the cost of sales front, we saw an increase of 7.3%, resulting mainly from total volume growth of 6% and from higher prices for grains as the price of aluminum is gradually trending towards last year’s levels and is no longer the main raw material problem. To a lesser extent, we were also impacted by the fact that we are buying some glass bottles from third parties as our own glass facilities are working at full capacity. In the short-term, this we will continue to be the case as our volumes keep growing.

Income from operations increased 16.8%, reflecting our moderate ability to take pricing in Mexico as well as increase of grain expenses in northern markets. Our administrative expenses were welcome thing during the quarter growing by only 1.4%. However, selling expenses increased 11%. Brazil contributed three of the 11 points increase and yet we managed to breakeven of the operating income level in Brazil for the quarter. Selling expenses ex-Brazil grew slightly below the trend of previous quarters. This road is linked to our continued investment initiatives aimed at strengthening our market position in Mexico and developing our brands in Mexico and the U.S.

In Mexico, we continued to strengthen our Cola Sol and Tecate franchises, while we further develop our portfolio with new brand expansions such as Sol Cero, our non-alcoholic beer as well as Bohemia Escura, a high end dark lager with super premium positioning. And in the U.S., we are increasing the support for Dos Equis on launching Tecate Lite in selected markets.

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