Fomento Economico Mexicano SAB de CV

NYSE:FMX

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, and welcome, everyone, to FEMSA's First Quarter 2019 Financial Results Earnings 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, I will now turn the conference over to Eduardo Padilla, FEMSA's Chief Executive Officer. Please go ahead, sir.

[Eduardo Padilla Silva, executive]

Good morning, everyone, and welcome to FEMSA's First Quarter 2019 Results Conference Call. Juan Fonseca and Maria Dyla Castro are also with us today. Like we usually do, we will focus the call on the consolidated figures for FEMSA and on FEMSA's commercial results since many of you probably had the opportunity to participate in Coca-Cola FEMSA's conference call last Friday. We want to use today's call to add some color and some qualitative elements to discussion as well as to hear your views and answer your questions.

During the first quarter, we were able to leverage the resilience and confidence of the consumer in Mexico to deliver a robust set of numbers at FEMSA's Comercio Proximity Division despite a difficult comparison base driven by the Holy Week calendar shift. The Health Division delivered strong growth in Colombia and a steadily improving operation in Mexico even as it faced a soft quarter in Chile and foreign exchange headwinds across South America. And the Fuel Division faced supply disruptions early in the quarter that put some pressure on revenue growth. For its part, Coca-Cola FEMSA delivered top and bottom line growth in Mexico and Central America as well as particularly encouraging volume growth in Brazil.

Before getting to the numbers, we should comment on the adoption of the IFRS 16 and the impact this is having on our reported results. As you know, as of the first quarter, Mexican companies adopted this international accounting standard that materially changes the way we account for leases on this particular revenue for retailers. Directionally, the changes tend to increase our operating and EBITDA margins but reduce return invested capital. To facilitate the analogies of our results during this first year of adoption, we are providing you with a set of comparable figures for 2018 that allow us to show our performance trends more clearly. Accordingly, our comments on growth rate and performance strengths during this call will directly lead to the comparable figures of 2018. Once 2020 rolls along, these adjustments will no longer be necessary.

Moving on to discuss FEMSA's consolidated quarterly numbers. Total revenues during the first quarter increased 5.6%, and income from operations increased 0.4% on an organic basis. That is excluding the results of the operations in Guatemala and Uruguay at Coca-Cola FEMSA and Caffenio at the Proximity Division. Total revenues increased 3.7%, and income from operations decreased 2%.

Net income increased significantly, reflecting an easy comparison base caused by a foreign exchange rate loss related to FEMSA's dollar-denominated cash position during the first quarter of 2018.

In terms of our consolidated net debt position during the first quarter, it decreased by approximately MXN 20 billion compared to the previous quarter to reach a net debt of MXN 40 billion at the end of March, reflecting a reclassification of certain short-term investments as they mature, coupled with a reduction of Coca-Cola FEMSA's debt.

Moving on to discuss our operations, and beginning with FEMSA's Comercio Proximity Division. We opened up 234 net new OXXO stores during the first quarter, reaching 1,460 net store openings for the last 12 months. This figure includes new stores in Mexico, Colombia, Chile and Peru. Revenues for the division increased 9.3% on an organic basis. Revenues grew 8.7%. OXXO same-store sales were up 3.2% driven by a 2% increase in average customer ticket and almost 1% growth in store traffic. These numbers reflect a resilient consumer environment in Mexico, especially along the border region, taking advantage of higher wages and lower taxes and offsetting the negative calendar shift of the Holy Week vacation period.

Moving down the income statement. For the first quarter, gross margin expansion was, again, strong at 270 basis points, reflecting, number one, sustained growth of the service category, including income from financial services; number two, healthy trends in our commercial income activity; and number three, increased and more efficient promotion of programs with our key supplier partners.

Income from operations increased 12.5%. On an organic basis, it increased 10.2%. Operating margin expanded by 20 basis points, reflecting the gross margin expansion I just described, partially offset by our continuing and gradual shift from commission-based store teams to employee-based teams; two, high secure cash-handling costs driven by increased volume and higher operational costs; three, a tough comparison base in electricity tariffs; and number four, the continued growth -- or the continued organic growth of OXXO's international operations, which have yet to reach its desired scale.

Moving on to FEMSA's Comercio Health Division. We added 23 drugstores during the quarter to reach 2,384 units across our territories at the end of March and 149 total net new stores for the last 12 months. Revenues increased 2.4%. Same-store sales increased an average of 1.3%, reflecting steady trends across our markets, which were partially offset by a negative currency translation related to a strong Mexican peso.

Gross margin contracted by 100 basis points in the first quarter, reflecting a tough comparison base in our operations in South America where gross margin expanded above trend in 2018; number two, new pricing regulations in Colombia; and number three, increased commercial activity in Chile. In spite of this, the Health Division operating margin contracted by only 10 basis points, reflecting improving trends in Mexico on cost efficiencies and tight expense control across our operations.

For its part, FEMSA Comercio's Fuel Division added 1 gas station during the first quarter to reach 540 units at the end of March and 73 net new service stations for the last 12 months, which represent a 60% year-over-year increase in our OXXO GAS network. Same station sales decreased 7.5% in the first quarter, reflecting the broad disruption at the fuel distribution [ centers ] in January.

Gross margin amounted to 10.2%, while operating margin reached 2.8% of total revenue, with operating expenses increasing almost 28% above revenues, reflecting improved compensation levels for our wind station personnel as well as expenses related to the accelerated remodeling of our stations.

Finally, moving on briefly to Coca-Cola FEMSA. As John highlighted in the press release last Friday, Mexico and Central America delivered solid growth across the income statement, and we were particularly encouraged by the strong volume growth achieved in Brazil, which continues to signal an improving picture in that key market. If you were unable to participate in Coca-Cola FEMSA's conference call, you can access a replay of the webcast for additional details on the results.

Moving on, our first quarter results reflect positive consumption trends across many of our operations in spite of an adverse calendar effect as well as macro headwinds in some markets. This make us cautiously optimistic about the quarter that begins with resilience of our businesses and our ability to execute our strategy to navigate market uncertainty. Also, we remain aware of our responsibility as we work to allocate our capital to have an opportunity being as disciplined as ever while we grow our platform across markets with a view on long-term economic and social value creation.

And with that, we can open the call for your questions. Operator?

[Operator]

[Operator Instructions] Your first question will come from the line of Luca Cipiccia with Goldman Sachs.

[Luca Cipiccia, analyst]

I was hoping you could expand a bit on the OXXO gross margin performance. I think you attribute that to several factors. If you can maybe clarify the contribution of each directionally. And also, if we should consider this to be the new normal going forward and potentially, even higher given operating leverage, the new deal with Modelo. If you could spend maybe some time on breaking down, again, the OXXO gross margin expansion and the prospects going forward. We discussed it in the past, but it would be great to have an update, and we've seen that progress continuing. So any more color you could give us on that would be great.

[Eduardo Padilla Silva, executive]

Very good. Luca, the Modelo arrangement, it just happened in April. So it is not yet reflected in the numbers. So I will let Juan to clarify and go -- and details -- in detail way your question about OXXO results.

[Juan Fonseca, executive]

Luca, so I think, certainly, this year, it's been in place for the last couple of quarters, and we still have this quarter and maybe 1 more quarter to go. The consolidation of the coffee business has created a little bit of a distortion because it helps the margin expansion, and then, of course, it also puts some pressure on the SG&A. And so the numbers are a little bit bigger than usual, and that's definitely a onetime thing.

But you raised a valid point that this -- what we could probably call the structural margin expansion at the growth level has been higher now for a number of quarters. And I would say the 2 main drivers for this are the growth in financial services, which continues to grow at roughly 20%, sometimes 20-plus, as well as the commercial income. The division's sustainability or even increasing ability to interact with suppliers and -- in a way, become an extension of their marketing arms as more and more suppliers realize the benefit of using our stores to have their brands, to have promotions, to have SKUs that they may be launching. So it does seem like it's a bit more structural than we originally thought that we are...

[Luca Cipiccia, analyst]

Juan, if I may -- so on your second point, sorry to interrupt, if I may, is that primarily a function of scale? The leverage that you're gaining with suppliers, is this more of a -- execution-driven? Or are there other variables? Because if one would look at it, it should only get stronger going forward. So is that for growth -- yes, sorry.

[Eduardo Padilla Silva, executive]

Execution-driven because the way to perform is a very -- is a paradox because the bigger we are, the more agile that we are. And we can -- the more strategic we can be doing specific things in specific stores. With that, we can be, as Juan said, a stronger marketing arm for our suppliers and help them to target specific segmented actions to specific markets. So some of them -- some of it has to do with that.

[Juan Fonseca, executive]

Yes. And I would maybe provide an example. Not that long ago, we were only able to do 4-week promotional periods, right? So you would see the banner on top of the stores change every 4 weeks, and that was pretty much it. And then IT was suddenly involved on execution, and eventually, we became able to do a number of different transactions kind of on top of each other or simultaneous to each other. This allows you to do, for example, a promotion for a given weekend, right? So if it's a Mother's Day or Valentine's Day or if there's a specific sports event, the playoffs of the Mexican soccer tournament, that sort of thing, which are attractive for certain suppliers, and they can launch a promotion without having to keep it in place for the full 4 weeks. So I think that's just one example of things that we are now able to do that we didn't used to be. And then, of course, as you say, I mean, the scale itself is a big part of this. And I think what you're implying, I think you're correct, is the bigger we continued to become, directionally, this should increase our ability to capture this.

[Luca Cipiccia, analyst]

And if I may, related to the question. We've seen some investments, a number of investments that you've been making in payments, in small startups and sort of tech digital initiatives, could you maybe help us understand how relevant these are prospectively? What type of focus? What type of infrastructure are you building around this? And how closely should we monitor it for the future of OXXO in Mexico?

[Eduardo Padilla Silva, executive]

We -- well, think that it's become a major opportunity for us. And if we want to go, it could become effect because we rely a lot on the physical store. So basically, what they're trying to do is how to have this rationale we already have in the store level, how to become more digital and be a [ 2-arm ] effort of being very close to our customers to impact. And some of those debts are marginal debt that we're betting to understand, to deal the play and to connect with some other players. So in a way, Luca, we are trying to define an ecosystem, but we don't know yet what shape it would take. But without doubt, it's very important for us to be a major player in that environment. I don't know if you want to add any, Juan?

[Juan Fonseca, executive]

I mean, just with the strength of the brand and, I guess, the trust that we are already receiving from our customers as a payment, as a physical payments platform, obviously, the aspiration is that we can migrate those 2 attributes to -- beyond the four walls of the store. And obviously, a lot has to -- had to be done on our side, but yes, the aspiration is that OXXO could become an important player in the payment space beyond the kind of cash-driven role that we are already playing today.

[Operator]

Your next question comes from the line of Bob Ford with Bank of America Merrill Lynch.

[Robert Ford, analyst]

In the press release, you mentioned a change in the regulatory environment in pharma in Colombia. Can you expand on that and maybe talk a little bit about how this influences your plans to grow in that place?

[Juan Fonseca, executive]

Hey, Bob, it's Juan. Yes, I mean, there's a -- there are certain SKUs that there's now more regulation in terms of the prices that you can charge for those. It's not a huge part of the portfolio, and it's more than offset, I would say, by the dynamism of the growth that we're seeing in Colombia and the attractiveness of the market. So I would say, to answer the second part of your question, it absolutely does not dampen of our enthusiasm about Colombia. In fact, I think, this year, it will be an important one. At least our internal expectations are for a very, very solid growth in that market. And I think the first quarter was probably a step in that direction. But we will have to live with this incremental regulation on certain basket of products.

[Robert Ford, analyst]

That's very helpful. And then when it comes to kind of the split between your commission-based store or concessionaires and your full employees in the stores, can you talk a little bit about where you are in that process and where you see the equilibrium?

[Eduardo Padilla Silva, executive]

Yes. In a way, it really is a very optimistic base. As we have seen in the past, employee-based stores execute better. And the commission is they are more entrepreneurs and yields an entrepreneurial spirit to the stores that sometimes we lose with employees. And really, it's not really a mantra of doing one or the other fully, but it's a according to the circumstances and opportunities that we see in certain markets where -- when you experiment a fully employed market, the commission you spend to tend to have a more difficult time than us to finding employees. So I really think it's circumstantial, and we don't pretend to, one, go after the other totally, but it's just about being very sensitive per plaza, understanding of the market and sensing a better -- and as I said in the past, where a fully employed market is in place, commission is -- when based on losing the family members, it's very difficult for them to grab employees. So that's where we are getting and try to change the store to our -- from the commissions to the store employees.

[Juan Fonseca, executive]

And right now, we're about 55 employees, 45 commission-based. But as Eduardo said, maybe it's not that we will never get to 100 and 0 even if employee-run stores have been growing in recent quarters and probably will continue to grow in the short term.

[Robert Ford, analyst]

And just to make sure I understand it. It sounds like there's a component of you driving part of this conversion or this shift. But also your operators, right, as you mentioned, Eduardo, as some of them become -- they lose family members, they're just not going to be as effective in terms of the model as a concessionaire.

[Juan Fonseca, executive]

I think I also -- the activities that take place at the store in terms of dealing with deposits on behalf of banks and the Western Unions of the world and the click and collect activities, it's just become a little bit more complex, I guess, to work a store. And so in our efforts to bring turnover numbers down as well, that's another thing that, as you know, we've been working on. It's all become an argument in favor of in certain parts of the country, in certain plazas, as Eduardo said, accelerating the shift towards employee-based.

[Operator]

And your next question comes from the line of Benjamin Theurer with Barclays.

[Benjamin Theurer, analyst]

Just 1 question, just on the Proximity Division. I got a little confused with what we've seen in the press release last year in terms of sales and stores actually being open. And then looking at the 1Q '19 and even the reported numbers, I'm missing about MXN 1.1 billion. So it would be nice if you could clarify a little bit the difference between what was revenues reported last year versus then this year. And also, where does the store count difference come from? Has there been adjustment made? So that's just in general on that. And then within the traffic number, I was surprised by the strength in store traffic. Is that something you can quantify in regards to some of the new initiatives, i.e., with Amazon and so on? If you could elaborate a little bit on how that is going and what's behind that store traffic that was surprisingly strong through the quarter.

[Juan Fonseca, executive]

Hey, Ben, it's Juan. On the first part of your question, I believe the -- what you're seeing is when we make the change from the Retail Division to the Proximity Division, there were some operations that were shifted away from that division, having to do with our 2 restaurant chains, the Doña Tota in Mexico, specialties in the U.S., as well as the Bara chain and the discount format that we have in Central Mexico. So that may be the difference that you're seeing, and obviously, we can kind of get into the nitty-gritty offline to make sure that we're in alignment.

The other part of the question, in terms of traffic, yes, I mean, absolutely, the -- every time we add a service, I'm sure that the Amazon thing is helping, but it's one of many, right? I think the one key to grow the most and probably drive the most people to the store are probably the ones that we do from the financial services category. But yes, we're seeing a healthy mix of ticket and traffic.

[Eduardo Padilla Silva, executive]

We also think in the medium and long run, the Modelo brands will also help us to build traffic in some of the areas where the Modelo brands are very important. And in that point, without doubts, it will help to build traffic, let's say, in the central part of Mexico where the Modelo brands are stronger than Heinekens.

[Benjamin Theurer, analyst]

Okay. Yes, that makes sense, totally. And then just lastly, on -- any explanation why the average ticket was basically half of what inflationary levels are pointing to? Because all the other retailers we've seen on the reporting side, they've all been somewhere in the 4-ish, close to 5% on the tickets. So has that mainly to do with some of the differences in purchasing because of Semana Santa? Or was it really something that you haven't been as aggressive in pass-through in terms of pricing to maintain that traffic?

[Eduardo Padilla Silva, executive]

There is some of our accounting things that we're probably getting over to that. Whenever we do strong promotions, the revenue is affected, and that affects the tickets. But that one lends to it.

[Juan Fonseca, executive]

Yes. I think one thing that has been happening, Ben, now for a while is actually directly connected to what we were discussing earlier with the services category. Because the -- in services, on financial services in particular growing at 20-plus percent now for a few years, as you know, the average transaction for all of OXXO is kind of in the mid-30s in terms of pesos. But if you look at the services transaction, that's a much smaller transaction, right? I mean, if somebody comes in and just pays a bill or just makes certain financial transaction, chances are that ticket is about 1/3 of the normal ticket price. So the faster we grow financial services, the more pressure that puts on the average ticket, but now we get compensated somewhat on the traffic side because it's an incremental business as well.

[Operator]

Your next question comes from the line of Antonio Gonzalez with Crédit Suisse.

[Antonio Gonzalez, analyst]

I wanted to come back to the payments investments that you've been making, specifically, we've seen your investments in the local media being announced in Shopnet and Konecta and so forth. And I wanted to see if you can give us a little bit more color on top of the previous question that you already answered. And specifically, I was looking for the following: first, I wanted to know if you'd feel comfortable sharing any differences in the functionalities and the competitive advantages that you see in these different companies you've invested in; secondly, whether you think you should merge them at some point in order to have, I guess, a larger-scale payments effort; and then just lastly, I wanted to get a little bit of perspective. These are segments where other retailers are investing heavily, right, MercadoLibre and Walmart and so forth. So I just wanted to get a sense of magnitude here. Do you think you need to speed up the pace of your payments efforts in order to remain relevant from a competitive standpoint? Or at this stage, do you see this, just as Juan was mentioning before, this is also just one of many services that you will be offering in the future?

[Eduardo Padilla Silva, executive]

Well, let me try to start on the last one. I really think that we are really looking forward to redefine and define the ecosystem that we want to build around the stores. We, as having more than 18,000 stores all over Mexico, that give us really a footprint that is very good to be connected with the consumer. We understand that some of the investments that we do, we help them by giving them access to the stores, and we might enhance the position just because of that. And we have to be very cautious that we could understand well how good really the platform is by itself and how good is the platform because there is also a value that gauge to the platform. So we are really doing this little by little understanding it, and it's a very delicate process. I don't know if you want to add anything, Juan?

[Juan Fonseca, executive]

Yes. I mean, I would just like to take a step back and talk a little bit about the entire digital strategy. I mean, certainly, digital is something that has gained, as you might imagine, a high level of focus from senior management. And the amount of resources that are being deployed behind the digital strategy, and I mean, human and otherwise, is quite significant. But as you say, I mean, there are a number of retailers, a number of players trying to come get it right. We do have, as Eduardo was saying, a bit of a differentiating factor in terms of our own capillarity and the physical number of interactions with the consumer, which should work to our advantage. But it covers everything from kind of the last mile situation, what -- for what type of transactions do we need to be working on last mile, and there's some work that's being done there. The development of the myOXXO app, which, as you know, is already telling the friends and family test phase, hitting Monterrey, getting ready to be rolled out more broadly. The aspiration, of course, is that our app eventually satisfies a number of needs and becomes one that most of our customers, if not all of them, eventually have on their smartphones.

So a lot of things happening at the same time. As you know, our investments in the different fintech companies are not majority stakes at this point. They're not insignificant investments, but we don't necessarily own more than 50% of them. We will see what happens down the road, and there's probably more things to invest in. So very much a work in progress. But I think the next thing that I would like to leave with you and with everybody listening to the call is that the sense of urgency and the level of resources that the company has put behind digital is probably higher than you might imagine, and that we are taking this very, very seriously.

[Operator]

Your next question will come from the line of Alan Alanis with UBS.

[Alan Alanis, analyst]

I want to try to reconcile an answer that you gave previously regarding the ticket coming below inflation given the promotions, Eduardo, that you mentioned. And I want to connect it, actually, with the pricing action that Coca-Cola FEMSA and other staples in Mexico have been doing. I mean, we've seen these food and beverage companies taking a lot of pricing in the year-over-year this first quarter. So it's a bit of a surprise to see that the ticket so much below inflation, as was previously asked. Could you expand a bit more in those kinds of promotions? And does that -- should we read -- what should we read regarding the consumer demand for the remainder of the year in Mexico?

[Eduardo Padilla Silva, executive]

Yes, Alan, let me take a stab at this. For years now, we've been -- if you work the map in real terms, the ticket versus traffic equation for OXXO, our average ticket has actually contracted over time. And this would be kind of counterintuitive given how well all the numbers are performing. And one thing that's certainly has been happening, I believe, is as the number of stores has continued to grow, we know for a fact that consumers are splitting their purchases, right? So if you used to have 1 OXXO near your home or your office, you would probably go there once in a given day. But now you have 1 across from your home, 1 near your office and a couple along your commute. And so the same consumer is coming into the store more than once a day, and they're making smaller purchases, right? So I think that's in addition to the comment about the services transactions being about 1/3 of the average ticket. You have a consumer that used to come once and buy x, and now he's coming twice, and he's buying half x each time already, hopefully, 0.6x or 0.7x each time that he comes. So definitely, a number of variables impacting the result.

But here is a valid point that when suppliers take pricing, obviously, already we pass that, too. I mean, we -- one question that we get is when you -- especially when you have FX weakness and people expect inflation to be at certain level and then it doesn't materialize, most of the time, the suppliers have been swallowing the devaluation themselves. We never do that. We basically just pass the price increases through. So I mean, hopefully, this is useful. We do see a robust consumer. We see a confident consumer. But as we said in the beginning, this was a better, I think, a better first quarter than some of us expected given the calendar shift. So that's really what we're looking at.

[Alan Alanis, analyst]

Got it. That's useful. Now a quick follow-up on the topic of the capitalization of leases. The MXN 50 billion that you're putting there as write-off use, could you remind us, give us some ballpark figures in terms of how many of the stores are leased and are included in that MXN 50 billion versus the stores that you already owned before this accounting change?

[Eduardo Padilla Silva, executive]

I would say 85% to 90% are leased. And Alan, one thing that really is -- we try to make a case for OXXO with the accounting authorities, but it was not -- it was very difficult. Our leases, the leases that we have in the distribution centers are long-term leases, and we're obliged to stay there the 10-, 15-year period that we stayed, that we settled. But the stores, we don't have that. And in fact, we can -- although we never do that because -- we're almost not doing that because our value proposition is stable, and we have a strong appeal to the consumer. We stayed there. But I mean, contract-wise, we can get out of that store whenever we want. But even though, in spite of that, the accounting authorities did allow us to play the game differently with the distribution centers with the long-term where we are obliged to stay there or the stores.

[Juan Fonseca, executive]

Which are also pretty long term. I mean, a normal contract for a store is also probably 15 years. In the beginning, I think the weighted average life of a lease is probably closer to 10 at this point. But it's still a long time, and that's very relevant to the numbers that make it to our financials.

[Alan Alanis, analyst]

Got it. That's very useful. So just to be clear, I mean, basically, you have to capitalize these leases despite you having optimality of leaving each of the stores in case there's a change in whatever traffic of the street or something changes where you're required to move our. Okay.

[Eduardo Padilla Silva, executive]

Yes. Because with that India counterparty, it really helps understand the long-term obligations of the company. And I think that pretty much what's in mind.

[Juan Fonseca, executive]

And it's something that we've dealt with for years when -- for example, we've interacted with rating agencies. If you're in markets where the counterparties for real estate transactions tend to be large, REIT companies or REIT-like entities with a lot of scale and leverage, maybe this -- the dynamic is different. And I know for a fact, breaking a commercial lease in the U.S. is a big deal. It's a big problem. But the flexibility that we have Eduardo was describing based on how attractive we are as a tenant for landlords, that gives us a lot of flexibility in terms of exiting a lease in the rare occasions where that becomes necessary.

[Operator]

And your next question comes from the line of Álvaro García with BTG.

[Alvaro Garcia, analyst]

My question is on the other business line, which includes logistics and others. And there's been a couple of changes given the new advent of this Proximity Division. We estimate revenues fell in peso terms, EBITDA, a bit more. Maybe -- I know Brazil has a very heavy weight in this line item and some FX headwinds there. But I was wondering if you could discuss these results of this business unit, particularly in a little more detail.

[Juan Fonseca, executive]

Hey, Álvaro. Yes, let me give you a little bit of information about that. I mean, basically, the -- within that other, as you know, we have a logistics business, and we also have the refrigeration business. And there's a couple of things that have been happening. On the logistics side, specifically in Brazil, as you point out, it's obviously been a market with kind of ups and downs. And if we take a couple of steps back, our logistics operation really starts as a dedicated carrier business, right, moving 18 wheelers of beer across the land and then 18 wheelers of Coca-Cola, and it's now become a much more sophisticate operation where you have less than truckload operation becoming more and more relevant, especially like warehousing, transportation, management. A number of aspects of logistics that are -- generate higher returns than the kind of legacy-dedicated carrier operation.

And one thing we're doing right now in Brazil is we're moving away from some of those legacy-dedicated contract agreements precisely because we're shifting towards the more profitable parts of the business. So some of the effects of that, moving away from some contracts is -- manifests in our numbers this quarter, as it only has for the past couple of quarters.

Another element that we -- on the refrigeration side, as you might imagine, we have a lot of exposure to the Coke system. We are the largest supplier of coolers for the Coke system. And certainly, with the refranchising in the U.S. and some of the assets that have changed hands in recent years, the CapEx levels have come down. Some bottlers are investing less than they used to in coolers. And we are also seeing that in our numbers a little bit, and it's also some of what you see this quarter. So I would say, in a nutshell, those 2 effects, which I will imagine, certainly the one in logistics is not structural, and we also would expect from the cooler side for volume to pick up as bottlers kind of get their step back in terms of growth. But neither of these things really is kind of long term. So those would be the comments on that.

[Operator]

Your next question comes from the line of Alex Robarts with Citigroup.

[Alexander Robarts, analyst]

I wanted to just start off with the OXXO kind of top line effects that you've been seeing along the border states. I know in the last call, with this lower VAT and doubling of the wages in those borders states, I guess, that's 10% or 15% of your stores in this area. But could you walk us through how that had an impact in this first quarter, that would be great, and how it related to your overall top line growth? That's the first question.

[Eduardo Padilla Silva, executive]

I mean, from the cost structure perspective, we were safe. I mean, the sales team, the salary increases were not really, what was published in the papers because we were already paying well in -- to the store employees.

[Juan Fonseca, executive]

Yes. I think, are you referring, Alex, more to the kind of the top line effect or the SG&A effect for us?

[Alexander Robarts, analyst]

Correct, top line effect. Just kind of wondering how the lower VAT and the higher salaries kind of had a net impact, positive, neutral or negative on the top line.

[Juan Fonseca, executive]

Yes. For sure. I mean, if you have -- higher wages and lower taxes are powerful levers for consumption. So directionally, I think you're absolutely right. When we look at the list of all the plazas that OXXO has kind of split into, certainly, most of the highest-performance plazas during the quarter are in the north and near the border crossings, which is normally a very dynamic part of the country and, of course, right now probably more so because of what you're describing. So I mean, putting it in perspective, as you say, it's probably about -- it's somewhere 10% to 15% of the store base. And so it is punching above its weight but offset somewhat by some regions in the Center and the South that were not benefiting from that. So yes, in that sense, we'll take the benefit of the comps, and hope that it lasts.

[Alexander Robarts, analyst]

Okay. So it's fair to say that, overall, in those states, it was a net positive impact on the top line? Is that fair?

[Juan Fonseca, executive]

Yes. Yes, that's fair. That's fair to say.

[Alexander Robarts, analyst]

Okay. Okay. That's helpful. And just secondly, I mean, I wanted to see if you could comment a little bit about what the energy bill might look for the stores now as this year I understand a big chunk of the wind energy comes on grid. And electricity is one of your important cost components at OXXO. And I guess, what I'm understanding is that you go from about 40% renewable at the end of last year to, I guess, 80%, if I have my numbers right. If you could confirm that. And secondly, is there going to be an impact on your overall energy bill? I mean, is it going to be sourced at maybe on a front-ended basis more expensively and then -- and the cost comes down? If you could talk to that. And then maybe where we might be going in the outer years in the medium term with renewable energy.

[Juan Fonseca, executive]

Hey, Alex, yes, you've got the numbers right. So we are going to move from a little bit less than 40% at the end of the year to something like 80% by the end of this year. Most of that capacity coming online did not happen in the first quarter. It's going to happen in the next few months and quarters. So first quarter, actually, kind of tough comparison. I would say, in terms of the drivers for pressure on the SG&A in the first quarter, energy was actually there, even though we don't expect it to be going forward. Now we need to keep in mind, the wind capacity gives us visibility and cost levels that are predictable. Right now, it's definitely an advantage. And I think for as long as the price of oil remains high or if we were to see kind of FX volatility, that's obviously useful to have the wind capacity. I guess there are scenarios where it could become less of an advantage if the price of crude and just fossil energy were to come down for some reason, then the delta becomes smaller. But right now, it's definitely going to help us save some money, probably from the second quarter forward.

[Operator]

Your next question comes from the line of Ulises Argote with JPMorgan.

[Ulises Argote Bolio, analyst]

One quick one just from my side here. Is there any way you could give us some color on how the profitability would have evolved in each of the divisions if we look at the numbers in the -- under the old accounting, I mean, before the implementation of IFRS 16?

[Eduardo Padilla Silva, executive]

In a way, we -- the percentage numbers that we explained through the -- through my presentation, were really with that in mind. And specifically, I mean, we're to...

[Juan Fonseca, executive]

Yes. Hey, Ulises, I mean, if you look at our tables, we provide you with both 2018 sets of numbers as reported and comparable. So the comparable are applying the changes of IFRS 16. And the as reported is basically without -- basically, as we reported them a year ago. And some of the -- I mean, the reason that we made the comparable column is because otherwise, the numbers are not very helpful for you to understand what's really happening in the underlying business. And you will see some very dramatic, in some cases, increases in margins, right? So you see double- and triple-digit increases in operating and EBITDA margins.

Now I would like to kind of remind everyone, this adjustment is a bit estimate that our accounting team prepared, and of course, you can use it as such. It's not a full 100% restating the numbers according to IFRS 16. But the idea here was to provide you with growth rates that actually mean something in terms of like, as an example, the 20 basis points of operating margin expansion at the Proximity Division gives you a much better idea of what happened than the 100-plus basis point expansion that we would have reported if we hadn't shown both sets of numbers.

[Operator]

Next question comes from the line of Carlos Laboy with HSBC.

[Carlos Alberto Laboy, analyst]

Juan, Eduardo, when you think of e-commerce, financial services, Modelo beers, there's so much activity evolution happening at OXXO. How do you evolve the brand's image and proposition to the public in terms of how the brand is evolving itself? And on a related basis to that, any insight you can give us on how you will promote the awareness around the availability of the Modelo beers and how you will use that to drive greater traffic into your stores deliberately?

[Eduardo Padilla Silva, executive]

Well, really, all the changes announced are changes that, after years, you notice it. But in any given year, if everything is so evolutionary that in a way, the consumer and the connections that we have with all these business that we have to the stores, 12 million visits a day, it really help us to get very much connected with the consumer. And only the evolution of the value proposition is being -- has been done that way throughout the years. The -- I don't know -- I'll let -- Juan will give you more details on that or at least his point of view. But I will tell you, the Modelo, first of all, was a great accomplishment for us to have this contact with 2 of these such competitive suppliers, the Heineken people and the Modelo people. And have this contract now in place has been a major accomplishment for us because we had a view that it was going to be very difficult after this long releasing with Heineken. And I would say, probably, at the beginning, I would say, probably Modelo didn't believe that we were serious about it. And I think now, we are serious about it. We have done it. And I think so far, they want a high experience, they are the ones that are making the noise about it. So in a way -- and it's like the consumer discovering that now they have our fruit-flavored beers whereas before, we didn't have it. So I think it's -- we're learning. They are learning. Heineken is learning. And I think the category will be benefit. We don't really -- we don't have -- we have this in mind that the throughput of OXXO will grow because of these 2 great suppliers and working to enhance the category for OXXO. I don't know if you want to add anything, Juan.

[Juan Fonseca, executive]

Yes. And I mean, certainly, of the 2 parts of your question, Carlos, the second part is, I think, easier to answer just because as challenging just from the scale of it, as kind of bringing in the Modelo portfolio will be -- it's something that we've done before, right? I mean, it's something that is more of the usual blocking and tackling in terms of finding the right space within the store and advertising the right way and having large suppliers compete against each other and take advantage of our network. And as Eduardo mentioned, the fact that 10% of the population -- or the equivalent of 10% of the population of the country will buy something at our stores on any given day, so the level of excitement is high internally and, obviously, in terms of the Modelo team, we believe. And you begin to see it in social media. And as Eduardo was saying, people come in, and they take pictures, and they send it to their friends, and it becomes a trending topic that you can now find the Modelo brands at OXXO in Guadalajara or in San Luis Potosi. So that's been fun to watch, and I'm sure it's going to be fun to see how that all impacts our numbers going forward.

In terms of the evolution into this next stage, which, for the first time, is taking us beyond the 4 walls and more into the kind of cyberspace and in people's phones, it has been remarkable how, as Eduardo was saying, it really is about looking for ways to understand what consumers are doing and try to satisfy those evolving needs. And when the consumer realizes it, they're performing 10 different things at OXXO where they maybe only used to perform 1 or 2. And it wasn't a quantum leap. It was just something that happened over time. The Mexican consumer is still very much a cash-driven consumer. Mexico is a cash economy, and that benefits us today. But we're going to have to move fast to anticipate the gradual evolution that probably has to happen at some point where people will rely more and more on digital currencies and e-wallets and these -- the notion of the super application where you're using the same app for a number of different things. And there are lots of examples in other countries of successful platforms. The companies that have posted from the telco side, from the ride hailing side, very different ways. But obviously, we hope and they're working hard to make sure that we become one of them.

[Operator]

[Operator Instructions] Your next question comes from the line of Leandro Fontanesi with Bradesco.

[Leandro Fontanesi, analyst]

Just 2 quick questions. The first one, can you just provide the exact amount that was reclassified due to IFRS 16? I know you mentioned about the historical figures, but if you could comment about the first quarter of '19. What was the amount? And the second question is regarding -- you added only 1 store in the quarter. I understand that this was due also to the disruption that you had in the supply chain. Just comment going forward, if we should see this few stores opening coming back to the numbers that we were seeing before.

[Eduardo Padilla Silva, executive]

With regarding to the Fuel Division, I think we will probably have to define in the future, the near future, really the amount of investment we'll have to make in order to source our store, our service stations. And that is something that we are really -- well, we have to understand really what will be the rules of the game forward and to make those investments. So I will say that in the Fuel Division, that will be the -- what we have to discover throughout the future. And in terms of the IFRS...

[Juan Fonseca, executive]

Yes, exactly what number are you looking for, Leandro?

[Leandro Fontanesi, analyst]

Well, I mean, the amount that was reclassified under IFRS 16 in the first quarter '19. Let's say, the amount that was added to EBITDA, the benefit to your EBITDA. Like Coca-Cola FEMSA, they reported in the first quarter release, what was the amount that was reclassified? I mean, what would be your EBITDA if you didn't have this IFRS 16 change?

[Eduardo Padilla Silva, executive]

Oh, okay. So doing it the other way as opposed to the way we talked of it. I don't have the number in front of me, Leandro, but can we call you back in a few minutes offline and see if we can calculate that number? I mean, it should be a straightforward calculation. It's just that...

[Leandro Fontanesi, analyst]

Sure. Thank you.

[Operator]

Ladies and gentlemen, that is all the time we have for questions today. I will now turn the conference back to Mr. Padilla for additional remarks.

[Eduardo Padilla Silva, executive]

Well, no, thank you very much for your attention, and we look forward to hearing from you in the next quarter.

[Juan Fonseca, executive]

Thank you, guys. Have a good week.

[Operator]

And ladies and gentlemen, if you wish to replay the webcast for this call, you may do so at FEMSA's Investor Relations website. This concludes our conference for today. Thank you for your participation. Have a nice day. All parties may now disconnect.