Fomento Economico Mexicano SAB de CV

NYSE:FMX

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, and welcome, everyone, to FEMSA's Second Quarter 2021 Financial 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'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 Juan Fonseca, FEMSA's Director of Investor Relations. Please go ahead, sir.

[Juan Fonseca, executive]

Good morning, everyone. Welcome to FEMSA's second quarter 2021 results conference call. Today, we are joined by Paco Camacho, FEMSA's Chief Corporate Officer; Eugenio Garza, our Finance and Corporate Development Director; and by Jorge Collazo, who heads Coke FEMSA's Investor Relations effort.The plan for today is to have Paco comment on some higher-level trends and more strategic considerations, and then to have Eugenio walk us through the numbers for the quarter. And we will follow the remarks with Q&A, as always.So with that, let me turn it over to Paco Camacho.

[Francisco Beltrán, executive]

Thank you, Juan. Good morning, everyone. Thank you for joining us today. We hope you and your families are safe and doing well. As you know, the health emergency is not over. Despite these, our operations posted solid results for the second quarter of 2021. While these partially reflects increased mobility and some economic recovery, it is also driven by the team's superior operational capability and a top-notch ability to execute.Exactly 1 year ago, we were discussing the full impact of the COVID pandemic and the effect of the resulting lockdowns in our operations. Energy and resources were being quickly reallocated to prioritize the safety of our employees and customers, to help our communities, to preserve our cash and to ensure the continuity of our business. Once these priorities were addressed, we look for opportunities and ways to come out stronger on the other side of this crisis.Some of our operations, particularly OXXO and OXXO Gas, were affected by the significant reductions in consumer mobility. Some orders like Coca-Cola FEMSA and our drugstore operations were more resilient and managed to deliver a solid performance in 2020. Today, 6 months into 2021, all of them are achieving much better results than they were a year ago, and in some cases, we are really at levels that match or exceed 2019 results.Clearly, we are not out of the woods yet. Vaccination levels have been uneven across our geography, operating restrictions still exist in many markets and consumers will generally increase or decrease their activity in inverse proportion to the level of concern. In fact, as you know, there is a bit of a rebound in cases right now in what seems to be a third wave. So it continues to be a bumpy ride, but there is a clear recovery taking place in Mexico and in most of our markets. This recovery, combined with the learnings and efficiencies developed during the crisis by our teams, is helping us deliver an encouraging set of numbers today and setting the stage for compelling growth going forward.In our Proximity Division, less stringent restrictions have led to an increase in customer mobility. In turn, this has translated into a steady recovery of OXXO's most relevant categories like beverages in single-serve presentations.We have also been able to maintain the momentum that some other categories picked up during 2020, such as spirits and some traditional pantry items. Importantly, we are seeing our customers come right back to the store as soon as they regain some sort of normality in their routines.At our Health Division, we continued to leverage our consolidated platform capabilities to increase our market share in key territories, such as Mexico, Chile and Colombia. Even our Fuel Division that saw the deepest fall in demand last year as consumers largely stopped driving their vehicles, is showing a recovery as demand gradually comes back, even if the pace is lower than we would like. For its part, our logistics and distribution operations continue to see better demand trends across markets. Although some end user segments in the U.S., such as hospitality, education and office facilities are not yet back to normal activity levels.Finally, Coca-Cola FEMSA kept finding ways to drive volumes, while its adoption of digital platforms continue to help develop the business in Brazil and Mexico. At the same time, product mix is recovering towards a smaller, more profitable presentations. Ultimately helping the bottom line.With that, I would now turn the call over to Eugenio, who will go over the results in more detail.

[Eugenio Garza Garza, executive]

Thank you, Paco. Given the operational challenges we faced in many of our operations last year, growth figures relative to 2020 do not tell the full story. And we will, therefore, complement them with some comparison data relative to 2019, where we consider this to be helpful.Starting with FEMSA's consolidated quarterly numbers. Total revenues during the second quarter increased 19.7%, while income from operations increased 87% compared to the second quarter of 2020.When we compare results versus the second quarter of 2019, total revenues increased 7%, while income from operations increased 17%. FEMSA's net income increased significantly and reached MXN 5.3 billion, reflecting the generally undemanding comparison base from the effects of COVID in 2020. This was made even lower by the extraordinary payment of almost MXN 8.8 billion agreed with the Mexican tax authority, certain asset impairments and a decrease in our participation in associates, which mainly reflected the results of our investment at Heineken.In terms of our consolidated net debt position, during the second quarter, it reached MXN 75 billion at the end of June. For its part, CapEx increased 18%, reflecting a comparison base that is not relevant in the second quarter of 2020, when most of our operations suspended noncritical investment activities.Moving on to discuss our operations and beginning with FEMSA Comercio's Proximity Division. We opened 128 net new OXXO stores during the second quarter to reach 276 openings for the last 12 months. While we are not yet full -- while we are not yet up to full speed with our expansion pace, we are on-track to achieve our full year target of 800 net new stores in Mexico, and our existing pipeline supports an acceleration in the months to come. We have also put in place an even more rigorous approval process that will ensure the high-quality of future store locations.OXXO same-store sales were up 15.6% for the second quarter, reflecting 7.4% growth in store traffic and an increase of 7.6% in average customer ticket, both against 2020.When compared to the second quarter of 2019, same-store sales declined 2.5%. The gross margin increased 190 basis points to reach 41.6%, reflecting a recovery in commercial income from promotional programs with our key supplier partners.Income from operations and operating margin increased significantly compared to the same period of 2020, reflecting improved operating leverage and strict expense discipline across the Proximity Division's operations.Relative to the second quarter of 2019, operating income decreased 1.4%, while operating margin contracted 80 basis points. These are encouraging numbers given the still challenging operating environment.Moving on to FEMSA Commercial's Health Division. During the second quarter, we expanded our drug store count by 54 net additions to reach a total of 3,459 units across our territories at the end of June and 270 total net new stores for the last 12 months.Revenues increased 17.6%, while same-store sales increased an average of 14.9%. We continue to see good momentum at our operations in Chile, Mexico and Colombia, coupled with slowly but steadily improving conditions in Ecuador.Gross margin contracted by 100 basis points in the quarter, reflecting increased promotional activity and higher institutional sales in our South American operations, partially offset by improved efficiency and more effective collaboration and execution with our supplier partners in Mexico. Operating margin expanded 250 basis points, reflecting increased operating leverage.Moving on to FEMSA Comercio's Fuel Division, revenues increased 56.3% and same-station sales grew 53.7% relative to the second quarter of 2020. When compared to 2019 numbers, we are not yet there, reflecting mobility levels that remain low.During this quarter, gross margin was 13%, while operating margin was 3.6% of total revenues, reflecting tight expense control that partially offset operating deleverage.Now let me talk a little bit about our logistics and distribution business. In the U.S., we continue to see different speeds of reopening in different regions. And while some end user categories, such as hospitality and entertainment have increased their activity, they are still lagging their historical performance. We expect trends to continue improving further in the second half of the year.On the logistics front, our operations again showed good trends across its main Latin American markets of Brazil, Mexico and Colombia. Even as economic recovery continues to be slower in those countries than in the U.S.Finally, moving on to Coca-Cola FEMSA. Revenues increased 10.9%, driven by portfolio and execution initiatives, along with recovering mobility and improving price/mix trends. Mexico and Central America delivered double-digit top line growth, while South America's strong volume performance was driven mainly by solid growth in Brazil, coupled with recovering trends in Colombia, Argentina and Uruguay.As a result, consolidated volumes already exceeded 2019 levels by 1.3%. You can listen to a webcast of their quarterly call that took place yesterday.And with that, let me turn it back to Paco for some final comments.

[Francisco Beltrán, executive]

Thank you, Eugenio. Before we open the call for questions, let me give you a quick update on the rollout of our digital initiatives. First, let me begin with an update on our OXXO PREMIA loyalty program rollout, which after a test period in the state of Chihuahua is now being deployed more broadly. So far, the results have been quite positive, and this is even more relevant as OXXO PREMIA complements our spin by OXXO product.As you may recall, the spin is testing and validating its value proposition through our subsidiary, [ Control de calidad ], which is operating under the Article of [ Travel Transitorio ] or Mexican regulation. This means we are still waiting for the definitive regulatory approval to fully launch and market the spin OXXO product.Wrapping up, a few comments. We are, of course, encouraged by these results. We feel that way, mainly because they reflect the strength of our value proposition and our team's operating abilities. The deltas are big, but as we have discussed, we still have a bit more work to do here and there when we compare versus the 2019 levels. So we need to keep our heads down and keep pushing hard, executing our action plans and moving forward. We are confident about our strategy. We are certain we are on the right path. And importantly, we have over 300,000 resilient, extraordinary team members that help us to move forward every day.Thank you for being here today and for your continued support. And with that, we can open the call for your questions. Operator?

[Operator]

[Operator Instructions] And our first question comes from the line of Bob Ford with Bank of America.

[Robert Ford, analyst]

Congratulations on the results. It's great to see you making so much progress.Paco, with respect to spin, it appears to be accelerating very nicely right now in San Luis Potosi. And I was curious if you could talk a little bit about what's behind that, and any A/B testing that you're doing? And what do you need to get your final regulatory approval so you can roll out nationally.And then you mentioned PREMIA, and I was just curious, from an app architecture perspective, how you plan to maybe integrate that with spin? Or will you -- I'll leave it there, just how you plan to integrate that and maybe drive some cross-channel usage.

[Francisco Beltrán, executive]

Well, on the regulatory front, we are just making sure that we proceed according to the requirements that we have to get all the necessary approvals. You know that this takes time and on other side, what we need to do is to make sure that we comply with what we are being requested, and that's exactly what the team is doing.Then as for PREMIA, as you know, loyalty programs will allow us to -- the loyalty program will allow us to give a spin a significant boost in terms of consumer preference. And I guess that that's the way to look at it.Eugenio, you want to add to that?

[Eugenio Garza Garza, executive]

Sure. From an architecture perspective, they're separated right now, but they will be put together as we roll out the spin product more broadly. And again, with the regulatory approval, what it does not allow us to do is to still engage in heavy marketing campaigns or full out marketing campaigns. So we're taking advantage of this time, and we've had success, at least with regards to early use, but what it does allow us to do is do A/B testing with different features, with pricing elements and different demographics to make sure that we tinker around with the product features and the value prop as we prepare for the full rollout. But so far, so good, and we are encouraged with the results we're seeing in the initial cities where we rolled out.And we also, by the way, expect -- go ahead.

[Robert Ford, analyst]

I'm sorry. I was just going to say, you mentioned city, so it sounds as if you're beyond San Luis Potosi now.

[Eugenio Garza Garza, executive]

Correct. At this point, we are beyond San Luis Potosi, still rolling out in a number of different cities, and we expect to be nationwide by the end of the year. PREMIA right now has been launched in Chihuahua, Aguascalientes and Leon. And spin has basically, I would say, 5 other cities besides San Luis, where we started. And again, all with positive results. And we also expect that as we roll out with more cities, the use case of the peer-to-peer product will clearly be more compelling as we start to broaden the reach.

[Operator]

Our next question comes from the line of Alan Alanis with Santander.

[Alan Alanis, analyst]

My questions has to do with capital deployment. And I mean, you have -- okay, you have $9 billion, a little bit more than $9 billion of debt, but you have $5.4 billion of cash. So you're basically -- I mean, you have a lot of ammunition still. So the question has to do with, has anything changed? Or can you give us an update regarding what you're thinking in terms of capital deployment criteria, the size of the acquisitions that you could be thinking? Are we still thinking mainly in terms of logistics in the United States? And if that is the case, what is the indication, what are the indications that you're seeing from the logistics business in the United States that it's worth continuing with the strategy of consolidating that business. That would be my question.

[Eugenio Garza Garza, executive]

I mean, as you know, our portfolio presents, I think, I mean, very attractive optionalities in terms of future capital deployment. You mentioned the logistics and distribution business, that being one of them that -- I mean, we do participate in a very fragmented industry, and we continue to look at targets that are complementary and synergistic, both small and large. So that presents, I think, a good avenue for future capital deployment as well as many of the other traditional businesses where we've been and as well as the other investments we've made in Mexico in cash and carry.So overall, I would characterize our portfolio as being very convex in the sense that it provides a lot of downside protection, both in terms of us being a consumer-oriented company and also with diversity of markets and exposure to currencies, but then also provides nice optionalities for upsiding capital deployment. That's why we're keeping the liquidity on the balance sheet for now, looking for those opportunities, but also at the same time, keeping in mind to have the right capital structure to ensure adequate returns for shareholders. But we do see, I mean, ample opportunities for value creation in deploying more capital in the verticals that we're in already without, as Juan has mentioned before, increasing the complexity.We've reached the complexity in terms of industry participation already, and the idea is to deploy additional capital within the areas where we described, not only within the FEMSA portfolio, but also at Coke with its own balance sheet where the announcement of our new agreement with Coca Cola, I mean allows for also, I think, great optionality for further investment and value creation opportunities.

[Alan Alanis, analyst]

Actually, that last part that you mentioned was my follow-up. So you already answered it. So that was very, very clear and very useful.

[Operator]

We'll go next to Luis Willard with GBM.

[Luis Willard, analyst]

Congrats on the results. So as you know, there have been quite recent, some platforms are starting to tap into express deliveries, that's less than, let's say, 10, 15 minutes. I know it's still very early and probably still unprofitable for most of them. But I would appreciate your thoughts regarding the evolution of the industry towards these types of services and then maybe how do OXXO evolving also within this context in the next years?

[Francisco Beltrán, executive]

Yes. Go ahead.

[Eugenio Garza Garza, executive]

Sure. I mean, clearly, express delivery, as you know, as during the pandemic, I mean, a lot of the e-commerce platforms across all channels grew their volumes exponentially and last-mile delivery continues to be something that we look at very, very carefully.I think in terms of the proximity value proposition, that, from a drop size perspective, it's really hard to justify and compete against some of the players that are focused on that segment. And at this point, still in kind of start-up financial mode, burning cash, trying to adopt consumers to go into scale. But we are, I mean, competing there in a smaller scale with our new OXXO app, trying to attack in a certain way that category and learn a little bit more about that.I think the higher drop sizes are probably going to be in the reunion categories, so larger gathering, that could be an option.Having said that, I think in the categories where it is making sense, in our Logistics division, we are seeing more and more traffic, both in our Warehouse Division as well as in our LTL Divisions of using e-commerce platforms for not just CPG companies, but general, I mean, whether it be apparel companies, health care companies, et cetera, where they are using our warehousing services and our less-than-truckload services to fulfill that e-commerce. And there, we see a very clear opportunity more in the short term, and it's actually partially responsible for the good results you've seen in our Logistics portfolio in Latin America. So we see more of an opportunity there than in the Proximity Division's value prop.Having said that, we continue to double there, do also A/B testing to see how that goes, but we see greater promise, I think, in the Logistics Division than we do in offering the end-to-end last-mile at a profitable business model, except in the cases of the higher drop size occasions.

[Francisco Beltrán, executive]

And if I may add, Luis, I think that we need to keep in mind that this is a rapidly changing environment and our business operations remain very close to understanding what consumers are looking for, how this whole thing is evolving. And clearly, because we have a broad platform, if we see any opportunity in the future, you can rest assure that we will take it. I mean just as Eugenio said, today, in our Health Care Division, they do have actually some last-mile delivery that is performing really well in Latin America. So you can imagine that moving forward, we see the opportunity, but we want to take it when it's convenient in terms of having a sustainable business. And we'll keep our eyes open, and we will move when the opportunity comes.

[Operator]

We'll go next to Antonio Hernandez, Barclays.

[Antonio Hernández Vélez Leija, analyst]

Congrats on your results. My question is regarding your performance basically in OXXO, the overall different formats. Are you seeing any acceleration on the gradual recovery that you've seen throughout the last couple of quarters? Are you seeing any acceleration there because of the rising COVID-19 cases? And also, are you seeing in those formats, I mean you mentioned in your press release that you're having promotional activities in some regions and some formats. Are you seeing some pressure there also because of maybe competition or inflationary environment?

[Eugenio Garza Garza, executive]

Sure. I will start with -- I mean, if you go month by month, clearly, we've seen a month-on-month improvement overall in volumes. With the recent uptick in cases, to be honest, there hasn't been as much closure or restrictions in terms of mobility, as we saw in the past waves of the pandemic. So we've been fortunate there. I mean, having said that, there are still certain restrictions in terms of alcohol sales, the hours of operation in certain of our stores. In June, for example, we had the ley seca because of the elections, also for -- so a weekend there was lost. So it's still going to be a bumpy ride going forward.Having said that, we are not seeing a drastic change in measures taken by the government from what we've seen in the past. And from what at least we've been reading from the government's stance, we don't expect a full-fledged lockdown like we saw last year. So those are encouraging signs. Again, we will see, certainly, I mean, ley secas and maybe other operating restrictions in terms of hours going forward. So it will be a bumpy road, but we're encouraged by 2 things. One is that as the traffic comes back, the use case for pantry and other items that were not as typical before the pandemic, those trends will stick. And then also that we frankly took advantage of this pandemic to really be more efficient on the cost side, and that those cost savings will continue into the future and provide for a more profitable OXXO once traffic and ticket levels normalize.

[Francisco Beltrán, executive]

And if I may, Antonio, the other thing that I will add is that the pandemic on top of efficiencies has allowed the team to be significantly flexible to adapt to specific situations of operations. So that means that whenever there is a situation coming up, whenever there is a need on the consumer side, the teams have become even more flexible and adaptable to capture the opportunities and to react to whatever is happening out there. And clearly, these increased capabilities will stay around. And even if governments and people, as Eugenio said, are less prone to likely heavy lockdowns moving forward. Nevertheless, the habit will continue changing and shifting, and the teams are, I would say, better equipped than ever to respond to these situations.

[Eugenio Garza Garza, executive]

Antonio, you have to remember, schools and universities, for the most part, are not open yet. It seems that they will this coming semester. So that hopefully will also -- and if there are already further restrictions in terms of hours and lock down, we will at least bring back some customers that haven't come to our stores for that use case since March of last year. So that is also encouraging.

[Antonio Hernández Vélez Leija, analyst]

Perfect. And then on the promotional activities and inflationary side and maybe competition, are you seeing any pressure there?

[Eugenio Garza Garza, executive]

Sure. Sorry, forgot about that. We are seeing increased promotional activity on behalf of our supplier partners, and that has tinkered around with our gross margin. As usually, you will see the top line decrease, but then we make it up back in commercial income. So the gross margins look probably higher than you guys are used to. But it's more on the CPG side, really trying to promote consumption in the different occasions.We are seeing some inflationary pressures, not, to be honest, not so much at OXXO as we're seeing in other of our hard goods, like in the imbera and the AlPunto Division. But for the most part, I think the inflation at the retail level has been, I think, a little bit more subdued than it has in the other hard goods. And so far, we've not seen any price elasticity impacts in our consumer and no impact on our margin so far. Our thought is that this inflation phase, hopefully will be transitory and not permanent. And for now, we are not seeing an elasticity impact in terms of the consumer behavior.

[Operator]

[Operator Instructions] We'll go next to Ãlvaro GarcÃa with BTG.

[Alvaro Garcia, analyst]

My question is on the Health Division, on your gross margin in the Health Division. Thanks for clearing up sort of that gross margin strength at OXXO. But in the Health Division, we did see a contraction, and you mentioned sort of more institutional sales and more promotional activities. So I was wondering how recurring that might be going forward?

[Eugenio Garza Garza, executive]

Sure. That has to do, frankly, also with mix. And last year, at this quarter, we will see -- we were seeing a lot of COVID prevention or COVID treatment options with higher margins. So that in and of itself is one of the reasons more institutional sales, especially in South America are hurting our mix as well. And the promotional activity has to do, I think, a lot more with the nondrug products that we're selling. And that's a little bit more in terms of trying to adapt to customer taste and driving -- continuing to drive traffic to the stores, especially in South America and in Chile, where disposable incomes, given the liquidity that has been pumped in the system through the pension fund withdrawals that you've seen and where we have adjusted that to -- adjusted pricing to drive more traffic into the stores.So I wouldn't say that I would continue to see a longer trend in this. I think that's more temporary than anything else. But yes, a bunch of different factors affected that gross margin, including also just the mix of now non-COVID related products.

[Francisco Beltrán, executive]

On the positive side, just to add to that, you need to also keep in mind that this was compensated -- the situation that we faced in the gross margin in South America was compensated by significant efficiencies on the Mexico side, working with our suppliers. So that we will, of course, keep moving forward.

[Eugenio Garza Garza, executive]

Yes. In Mexico, we're seeing, I mean, month-to-month, I mean, recoveries of 100 basis points or more at similar product categories in gross margin. So that in and of itself is encouraging for the Mexico business.

[Alvaro Garcia, analyst]

That's great to hear. And that's a function of just greater buying power on your end given your greater scale --

[Eugenio Garza Garza, executive]

Correct. Greater pricing power, and then also, I think, a shift in terms of our commercial strategy with regards to working with suppliers to put out the right -- concentrating the purchasing power in less SKUs, the ones that move the greatest where we can get better margins.

[Francisco Beltrán, executive]

The team has, as you can imagine, also working strongly on getting efficiencies and having a better operation. So that is also helping.

[Operator]

Next question comes from the line of Ricardo Alves with Morgan Stanley.

[Ricardo Alves, analyst]

I'll limit myself to 1 question as well. And insisting a little bit on OXXO same-store sales, if we could go back there. I mean, you alluded to some of these sectors. But when you think about your performance in OXXO post-COVID, and we discussed this in the previous call, what were your key findings with OXXO same-store sales in the second quarter? I mean, a lot of discussions center around the fact that traffic will improve, right, as mobility increases. But then the question is how your average ticket will perform? So curious to hear what you have to say about that, your performance, if maybe your average ticket performance surprised you to the upside, given how strong the top line was? I don't know if maybe you have further evidence that some of the items that you alluded to are going to be stickier going forward?

[Francisco Beltrán, executive]

I will start and then let Eugenio add to it. Clearly, I mean, when you look at the ticket in OXXO, it is being aided by some of this -- what you're calling a sticky product that we added in the portfolio in the past year. I mean, just we mentioned spirit being one that we continue to see helping in the ticket price. But importantly, as we were mentioning, the team has been very quick adapting to consumers' needs in the offering that we have in the stores, and that has made also some of the more traditional pantry items, as we alluded in the call, are also helping in the ticket price. So consumers are coming back to the stores, but at the same time, they find more solutions in the stores. And that is helping the ticket price.It is -- we expect that these are things that will stay moving forward because consumers have adjusted their shopping to what they find in stores. So there is a reason why you shouldn't stay there. Eugenio?

[Eugenio Garza Garza, executive]

Sure. I mean, I would say, in terms of what's sticking, I think pantry items, I would say, spirits and services. I think those 3 are probably the ones that are trends that will continue in the future and the ones that I think are amortizing, I think, also the fact that the consumers with personal -- that are buying like the personal soft drinks and smaller snack items are coming back to a store and lowering the average ticket from what we saw in the heat of the pandemic. But those 3 items, I would say, are the categories that are keeping the ticket higher than it otherwise would have been. And hopefully, that will continue into the future.

[Operator]

Our next question comes from the line of Rodrigo Alcantara with UBS.

[Rodrigo Alcantara, analyst]

I will limit myself to 1 as well. So just about the integration of the U.S. assets. I was wondering if you can comment any update here and about this sequential improvement that we saw on margins on a quarter-over-quarter basis. I was wondering if you can comment on how much we can attribute these to operating leverage or cost control initiatives or any synergies there? And what level of EBITDA margin we may expect for the full year? That would be my question.

[Eugenio Garza Garza, executive]

Sure. If you want, I'll start, and Paco you can complement. I mean, there was, during the pandemic, I think, the same as in OXXO, a very strong review of cost savings of Solistica. So a lot of efforts on the management part in terms of lowering both SG&A as well as being more efficient on OUS. And that is, I think, a good chunk of it. And then volumes came back. I think we're obviously comparing to -- remember, the second quarter last year. There was no beer transportation whatsoever. So that volume also contributes to operating leverage.And then more and more, I think we are getting stickier contracts with better margins on both on the warehousing side as well as on the LTL side. So there's been, I think, significant pickup in higher quality, higher-margin products. So I mean those are encouraging news into the future, and we do expect, again, the margins to continue to move to the upside, which, again, will be balanced with the logistics -- sorry, the distribution business in the states that operates under different margin dynamics, but you should see some improvement there going forward.

[Francisco Beltrán, executive]

Yes. The only couple of things that I will add to what Eugenio just said is that our Solistica business, it is consistent with what the other operations are doing, is benefiting from the fact that they have become significantly more efficient in the way they operate. And that, we should continue to see the benefits moving forward.And second, when it comes to the integration of the distribution businesses in the U.S., and we made reference to that in previous calls, the integration is also coming along with the synergies that we had expected. And that is also coming along according to plan, and that should help also as we continue to integrate those businesses in the months to come.

[Operator]

Our next question comes from the line of Rodrigo Echagaray with Scotiabank.

[Rodrigo Echagaray, analyst]

I wanted to revisit the spin launch. And I guess the question is, what should be the full capabilities at spin at launch beyond loyalty? And will there be any changes on Saldazo strategy, for example, as a result of this launch? I'm also particularly interested in the last-mile initiatives, which you briefly mentioned, but if you could add more color on what could we expect on the last-mile, especially given that you've had some learnings through FEMSA ventures and the exposure to start-ups like Houston. So I'm just curious as to how can we put it all together?

[Francisco Beltrán, executive]

Well, I'll start, and then let Eugenio add to it. But first -- look, it's been, as we said, we are in the process of using the test market as to really fine-tune the value proposition. And so we are, at the moment, understanding what is that consumers want, how they are using the service, what modifications and changes and improvements we need to make to it. And that's precisely the purpose of the pilot test. And that we open up other cities and will improve the experience and the services we provide based on these learnings.As for the last-mile, as we said in one of the previous questions, we see that consumers are, of course, using that service as part of the experience out of the pandemic. But we said at this stage, we don't see a way in which we can actually have a sustainable business with the type of economics that those practices have today. We clearly see that this whole environment is changing a lot. Consumers are changing their habits. We see that an opportunity may arise using our whole platform as to -- as a way to provide better economics. And we will do that, as Eugenio said, when we see that the ticket size makes it attractive so that we can have a sustainable business.Now yes, indeed, we have learnings with either some of the participations we have in through FEMSA ventures, and also My OXXO, as Eugenio said before. And we're taking those. And I'm sure that we will see a way to use those learnings in the future. But Eugenio, you want to add to that?

[Eugenio Garza Garza, executive]

Sure. Your last question with regards to Saldazo, by the way, Saldazo remains open as a product, and we're letting basically consumers decide whether Saldazo spin makes sense for them. So they will coexist at the store.Just quickly on spin. I think also you asked kind of what functionalities are being launched right now. The MVP includes basically -- I mean, the ability to pay at OXXO stores through the wallet, the ability to do peer-to-peer and cash in and cash out of those transfers at the new OXXO store. And then it allows also for bill payments. And it is integrated at OXXO PREMIA, so you can earn points and then transfer them to our OXXO PREMIA account. So that's what the MVP includes. Clearly, the optionality there going forward, I mean, is limitless. We can do -- I mean, credit. We can do -- I mean, a lot more stuff from the platform, but that's where we're starting right now.And just adding on in to last-mile, I mean, we're learning a lot in the investments we're making, both in [ Gusto, Che Per ] and other, call it, distribution heavy last-mile companies that are attacking not only the end consumer, but also the mom-and-pop stores. And -- but as Paco said, I mean, the key thing is, is there will be certain use cases like in Gusto, that has a very high average ticket volume and also for certain of our categories like Reunion and other bigger ticket items that where it will make sense, and there will be others where it won't make sense. So we'll make sure to have a robust product offering through our digital channels to the consumer, but we will also be very wary of just burning cash or being unprofitable just for the sake of having customers adopt and come into our platform. I think there's -- I mean, there's a lot of value to be added from the OXXO network and a lot of convenience that we can offer, both in terms of speed, delivery and product availability that the other platforms cannot offer, and we'll try to do the right things from an economic perspective.

[Rodrigo Echagaray, analyst]

Got it. Makes sense. It sounds like the ticket, obviously, is a very important component of the equation.

[Operator]

Next question comes from the line from Marcella Recchia of Crédit Suisse.

[Marcella Recchia Focaccia, analyst]

My question is more related to OXXO here in Brazil. We know that RaÃzen has been in roadshow talking to the market about your expansion plans. But it would be great to hear from you and updated expectations on that.And ultimately, I have also seen a lot of more new stores here being open as well. So it would be great if you can share your initial impressions about the market dynamics and how it compares to Mexico? And what are the main difference on that, that will be likely to get adapted.

[Eugenio Garza Garza, executive]

Sure. We're very happy with the way the partnership is going with RaÃzen there. As you know, during the pandemic, the select stores, I mean, over 1,000 of them, remained relatively solid throughout the pandemic. They adopted, of course, value props in operations, but those remained relatively solid, and we're happy with that.And with the initial rollout of the proximity concept to the OXXO stores, I mean, we've only got a handful of stores at this point, but -- which are very different from a mix perspective than the traditional Mexican OXXO stores they have, I think, a lot more food service, a lot more bread, a lot of more occasions that are not necessarily the consumption. It is more akin to compete with the local paqueterÃas, I think, than with the traditional mom-and-pop store in Mexico. But so far, I think -- I mean, we're very happy with the performance. They're being able to compete with, I think, a good product offering on the bread side, especially and uncertain of the beverage categories as well. So we're encouraged. But again, it's still too early to tell. We've only been rolling out in the outskirts of São Paulo at this moment, but they're going and maturing. The stores are maturing according to plan, and we're encouraged about the expansion plans there.

[Operator]

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

[Ulises Argote Bolio, analyst]

So just a quick one on my side. I wanted to ask on the performance around OXXO in Mexico, maybe on a bit more segmented basis. So if you can provide some color there on how trends are, let's say, in the city or big city locations versus the ones in the tourist center that had been lagging a bit behind. Any comments there on the details on evolution and performance will be really helpful.

[Eugenio Garza Garza, executive]

Sure. I think -- I mean, regionally, it's certainly one part of it. And as you said, I mean, the tourist locations have been very tough during the heat of the pandemic over the last summer. They are coming back. Having said that, we are seeing significant traffic in the beach areas in the southeast and in the Pacific Coast of Mexico.The city, it depends on which ones you look at, the ones that are close to bus stops and traditional transportation hubs, they're doing well. Clearly, the office locations are still suffering as well as the school locations. So I think it has more to do with specific locations, generally speaking. But again, we are encouraged by the trends that with the new product mix that they are doing relatively well.

[Francisco Beltrán, executive]

And what I will add, Ulises, is that we see broad recovery in this last quarter on a city basis for OXXO. And it is more within the city, the type of mobility and traffic that affects consumers way of doing and conducting their lives. If we have a store that is close to, for example, a school, you can imagine that that is still affected even if the city is doing well. When we see a store that is closer to an office area and that office area is back into a more normal working hours, then, of course, we also see an improvement.So this whole way of operating in which we manage the store and depending on what is happening around it, as you can imagine, is helping us a lot in terms of performance, because we have that ability and that type of capillarity.

[Operator]

Our last question comes from the line of Carlos Laboy with HSBC.

[Carlos Alberto Laboy, analyst]

So once reviewed the Heineken stake is strategic, and later it became more tactical and you started selling it down. And now FEMSA has new leadership members. Heineken has a new CEO, Coke, Heineken, Coke FEMSA. You all see cross-category collaboration growth and partnership opportunities very differently than just 2 or 3 years ago. Does this change your view of the medium to long-term merits of holding on to the Heineken stake? Is it becoming more strategic and less tactical now?

[Eugenio Garza Garza, executive]

I think -- I mean, as we said before, Heineken does -- I mean, number one, it does provide a very, very stable downside protector in terms of revenue generation stability and developed market exposure to the portfolio. And on the other side, we are also, I mean, as you know, growing our partnership for a number of years now in Brazil and hopefully in other markets going forward. So it is, I think, both a strategic relationship as well as a good financial play from our perspective.I mean having said that, we evaluate the Heineken stake, the same way we evaluate all of our businesses and are continually revising kind of what returns we expect from the current valuation levels vis-à-vis other opportunities as well as the cash on our balance sheet as we continue to look at capital deployment opportunities and balance the funding requirements for those opportunities, looking not just at our current portfolio, but also our debt capacity and figure out what -- how the portfolio would look like pro forma. That's the way we did it, of course, when we entered the Janssen space in the States. That's the way we funded our investment in Jetro Restaurant Depot.And going forward, we will continue to evaluate any and all funding opportunities as we look to deploy capital from many sources. Again, for now, we remain happy shareholders in Heineken. And we still think that it provides, I mean, a good backdrop and safety net to the portfolio as well as having strategic implications. But that asset as well as any other asset is going to be looked at in the event that we look at a larger capital deployment opportunity going forward.

[Francisco Beltrán, executive]

And the one thing to add, Carlos, is that, as you said in the way you phrased your question, we do have a very good relationship with the management of Heineken. And we have a very good relationship with the management of Coca-Cola Company. So those are things that are also there and are important.

[Operator]

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

[Francisco Beltrán, executive]

Well, I think that that's all for today. Thank you very much for your participation. Thank you for your support, and have a great day.

[Operator]

Thank you. 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, and have a nice day. All parties may now disconnect.