Fomento Economico Mexicano SAB de CV

NYSE:FMX

Earnings Call Transcript 2020-Q4

[Operator]

Good day, and welcome, everyone, to FEMSA's Fourth Quarter and Full Year 2020 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 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 call over to Juan Fonseca, FEMSA's Director of Investor Relations. Please go ahead.

[Juan Fonseca, executive]

Good morning, everyone. Welcome to FEMSA's fourth quarter 2020 results conference call. Today, we are joined by Francisco 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.

The plan for today is to have Francisco comment on some higher level trends and more strategic considerations, and to have Eugenio walk us through the numbers for the quarter. And we will follow the remarks with Q&A as we always do.

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 in good health. In today's call, I will start by reflecting on the year 2020, including some specific comments about the fourth quarter. I will then share a few thoughts on how we will continue to navigate throughout the short-term volatility. Eugenio will then get into the details of the performance, and I will come back to share a few thoughts on why we remain confident about the future.

I guess I do not have to tell you that the year 2020 was a difficult one because of the global pandemic. The volatility and the overall changes faced throughout the year certainly tested everybody's ability. With no doubt, our company proven resilience, flexibility and agility across the board in these trying times. As an organization, we have to prioritize, collaborate, become more agile and do the decision-making to the operations and the teams on the ground like never before, all while trying to stay and keep everybody safe.

Moving on to discuss our performance. During 2020, each of our businesses quickly adapted their operations, applied learning from the different stages of the pandemic and were fast to recognize shifting local needs. In OXXO, the challenge was to make sure that our almost 20,000 stores remain top and operational, while facing supply imbalances, regulatory restrictions and drastic reductions in mobility across the market.

In Coca-Cola FEMSA, the teams moved quickly so that the millions of clients across our geographies were always served with the right beverage portfolio. This, even as consumers shift their preferences, looking for more affordable options, different shopping venues and moments of consumption. In our distribution business, the teams ensured that our thousands of clients across the Americas were serviced properly and the products shipped and received in a timely manner regardless of the situation, be it a pharma company in São Paulo, a global CPG player in Mexico City or a large hospital in Chicago or San Diego. This was successfully done every day throughout the year despite ever-changing conditions and requirements from our clients.

Moving on and focusing on the fourth quarter. While we were dealing with operational challenges I just described, we still managed to make progress on the capital deployment front. At FEMSA Comercio, we announced an agreement to acquire Ok Market, a proximity store chain with more than 120 locations in Chile. This transaction, which is still advancing through the customary regulatory approval process, will allow us to improve the way we serve our Chilean customers where we continue to grow our OXXO platform in this market.

Importantly, in our specialized distribution operation in the United States, we made further progress right before the end of the year by making 2 acquisitions that give us a strong presence in the Central and Southeastern regions of the United States. We are steadily driving our strategy of creating a relevant national platform. This will allow us to improve the value proposition for our clients who will provide us with the benefits of increased scale.

Let me take this opportunity to take a moment and elaborate a bit on our capital deployment strategy and about complexity. We are aware of market's questions regarding some of our recent investments and the fact that there might now be a more moving parts to the FEMSA story. The key message for you on this topic is that we now have a solid presence in the business verticals that we have identified as attractive and that importantly, offer an unequivocal and excellent match with our capability set. As Juan likes to say, we are past our peak complexity. And now the task will be to grow these verticals to increase our scale and profitability. In so doing, we intend to provide you with more visibility.

Moving up. As you could see, 2020 was not an easy year to say the least, but we emerged stronger out of it. We learned, we adopted, we pivoted. We achieved an encouraging set of results, and I am convinced we are a better and stronger organization. This was only possible because of the dedication, resilience, agility and engagement of the more than 300,000 colleagues and friends. A big thank you goes to all of them, particularly those on the phone line.

With that, I will now turn the call over to Eugenio, who will go over the fourth quarter results.

[Eugenio Garza Garza, executive]

Thank you, Paco Camacho, and good morning to everyone online. Starting with FEMSA's consolidated quarterly numbers, total revenues during the fourth quarter decreased 1.5%, while income from operations decreased by 3.5%. On an organic basis, total revenues decreased 5.3% and income from operations decreased by 3.8%. For this quarter, the difference between reported and organic figures reflect the results of AGV in Brazil as well as also WAXIE in North American Corporation in the U.S. FEMSA's net income decreased 88%, driven by lower income from operations, as I just described, a negative impact due to FEMSA's participation in Heineken's results, a noncash operating exchange loss related to FEMSA's U.S. dollar-denominated cash position and high-end interest expenses. In terms of our consolidated net debt position, during the fourth quarter, it increased 4% to MXN 76 billion at the end of December, reflecting payment for the acquisitions carried out during the quarter. For its part, CapEx was down 26% as every operation continue to rationalize noncritical investments.

Moving on to discuss our operations and beginning with FEMSA Comercio's Proximity Division. Let me start by updating you on OXXO store openings. During the fourth quarter, we opened 93 new stores, and we reopened 80 stores that were being remodeled or receiving major maintenance. At the same time, 6 stores remain temporarily closed and 234 stores were permanently closed. As you might recall from previous calls, during 2020, we took a hard look at certain stores that were already performing marginally even before the lockdowns. Throughout the year, we made attempts to further reduce their expense base to drive up returns, but some of them we eventually decided to close for good to avoid them becoming a bigger drag on OXXO's overall profitability.

The last group of stores -- of such stores was closed around the end of the year. So there will still be about 30 closed stores that will show up in the January numbers, but this will be the end of the pruning of the tree exercise in our OXXO division. The net result of these openings and closings was minus 67 stores for the fourth quarter for a total of 236 net additions in the last 12 months. While this is not the type of number that we're all used to seeing from OXXO, we should highlight the fact that we managed to open 652 gross new stores during 2020, not quite at the historical run rate, but still a remarkable achievement in the context of COVID and one that bodes well going forward. On that note, we would expect to open approximately 800 net new stores in Mexico this year, much more in line with historical trends.

In terms of the operating environment, a significant percentage of our store base remains subject to COVID-related restrictions and measures that put further pressure on our sales, such as limited time windows to sell alcoholic beverages. These restrictions increased in nature and geographical reach during the fourth quarter, so that as of the end of December, around 45% of our stores were under some kind of restriction. These numbers are expected to come down as the overall picture of COVID cases and outcomes begins to improve in the coming months. OXXO same-store sales were down 4.3% for the fourth quarter, a sequential improvement of almost 480 basis points, reflecting a 17% decline in-store traffic and an increase of 15% in average customer ticket.

Gross margin expanded by 60 basis points, reflecting a pickup in commercial income linked to the December holiday season, coupled with the dynamic performance of our services category. Income from operations decreased 16.5%, and operating margin contracted 180 basis points driven by operating deleveraging, but again showing a meaningful sequential improvement from last quarter.

Moving on to FEMSA Comercio's Health Division. During the fourth quarter, we expanded our drug store count by 119 net additions to reach a total of 3,368 open units across our territories at the end of December and 207 total new stores for the last 12 months. Revenues increased 15.4%, while same-store sales increased an average of 15.3% in Mexican pesos. This reflects good momentum at our operations in Mexico as well as a low comparison base and brisk economic activity in Chile, fueled by consumers able to tap a portion of their retirement funds. Gross margin contracted by 90 basis points in the quarter, driven by an increase in the demand of lower-margin COVID-related products and higher institutional sales in our operations in Colombia. Operating margin expanded 50 basis points, reflecting increased operating leverage.

Moving on to FEMSA Comercio's Fuel Division. We note that vehicle mobility remained well below normal market levels. In that context, we saw some sequential improvement even as many of our locations skewed towards residential neighborhoods that have recovered more slowly than commercial ones. During the fourth quarter, we continue to see pressure on our same-station sales, which decreased 31%. Gross margin reached 13.3%, while operating margin was 2.5% of total revenues, reflecting tight expense control that partially offset operating deleverage.

Finally, moving on briefly to Coca-Cola FEMSA. They took advantage of favorable raw material dynamics and achieved broad expense containment, achieving double-digit growth in operating income despite significant foreign exchange headwinds. And speaking of Coke FEMSA, we should note the very good news announced last Wednesday on the redesigned partnership between the Coca-Cola System in Brazil and Heineken, bringing clarity to the relationship and setting the stage for continued fruitful collaboration for years to come.

And with that, let me turn it over to Paco Camacho for some final comments.

[Francisco Beltrán, executive]

Thank you, Eugenio. Thinking about 2021, it is clear that near term, there will still be volatility and uncertainty related to the virus in most of our markets. However, directionally, our expectation is that mobility and gas consumption will improve as the months go by, particularly as vaccination efforts gain traction and more normalities brought back towards the second half of this year. We know that the vaccination pace will be different by country, and we are prepared to adjust and adapt to this different recovery rate.

Relative to 2020, the comparison base for most business units will get easier in the summer and will level off towards the end. Our expectation is that OXXO and OXXO GAS will continue to improve through 2021, gradually closing the gap and reaching performance levels in the fourth quarter that begin to match the pre-pandemic ones. For its part, the Health Division set a new benchmark in 2020, and we will seek to build on that.

The pandemic has accelerated the digital momentum. We are poised to capitalize on this opportunity as we embrace and accelerate our digital initiatives across the board. For example, in OXXO, efforts are led by the launch of our digital wallet, spin by OXXO. We are doing an initial deployment in San Luis Potosí as we speak, with the objective of the national rollout in the coming months. We will keep you posted on our projects.

In terms of dividends to be paid during 2021, the Board of Directors will determine its proposal to shareholders what it will be in a couple of days. So we do not have the number yet. But we will share with you as soon as we can.

And for capital expenditure expectations, we are modeling our consolidated total CapEx of around 5% of revenue for 2021, of which approximately 2/3 will be deployed in Mexico. This, of course, will be subject to how the year progresses. We are confident about the future of our company and energized by the prospects behind our clear and defined business verticals.

I would like to thank you for your continued support and trust in FEMSA.

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

[Operator]

[Operator Instructions] Your first question will come from Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

Just wanted to follow up a little bit on the dynamics in the Proximity Division. And I mean, clearly, same-store sales was very -- I would say it was almost a positive surprise with just about a 4% decline. But could you elaborate a little bit about the trends you've seen throughout the quarter of -- last quarter 2020 and what you've been seeing in the first 2 months of January, February, and particularly in light of what basically last year in March started to kind of be impacted because of COVID?

So just to give us a little bit of a better sense of how restrictions have impacted during the quarter, at the beginning of the year and what your expectations going forward? And then within light of that, the 800 stores of opening, I would assume a vast majority of that being back-end loaded, but if you could elaborate a little bit about the pace of those openings throughout the year, that would be much appreciated.

[Eugenio Garza Garza, executive]

Yes. If you remember last year, the second quarter was clearly the worst part where we experienced significant drops in traffic. And over the summer months, it got better, and we reached a little bit of a plateau in terms of negative comps during the year. For the fourth quarter, we did see significant pickups in -- mostly in traffic as the holiday season approached, especially in November and December, and that's what caused the good surprises, obviously, that we saw in our numbers in the fourth quarter for OXXO.

Having said that, as you know, the contagion numbers during the holiday season for the COVID pandemic increased significantly, and that caused the authorities to impose restrictions with regards to alcohol sales, operating store numbers, et cetera, and those hit the first few weeks of January. Having said that, most of those restrictions with the case counts now under control and the better progression of the pandemic are -- have been listed for the most part.

So at this point, we are back to where we were. And then in March, we would expect to see the beginning of the easier comps because of the COVID restrictions. So that would be with regards to the dynamic of the same-store sale and the comps. With regards to the opening pace, we do expect a little bit of a front-loading this year. We will obviously wait and see how the comp stores are doing at the beginning of the year. But as opposed to years in the past, because of the pipeline of real estate that we have and the locations that we now have fine-tuned towards the new COVID reality, we would expect more front-loading of the openings in the first half of this year as compared to the years prior.

[Francisco Beltrán, executive]

And Ben, this is Paco. The one thing that I will add to your question is that we also need to remember that there is a difference by cities in how each of the cities are reacting and implementing specific things on mobility restrictions and every city is behaving differently. So it's important to remember that OXXO is very actively deaveraging the situation to adapt to the very specific way and things that are happening in each of the cities. And I believe that it is very important to keep doing that as we start the new year. And that is exactly what the team is doing.

[Juan Fonseca, executive]

And I think I would add -- Ben, this is Juan. Just following up on what Paco and Eugenio just said, to keep in mind that if you look at some of the restrictions that were put in place final weeks of the year and throughout January, where you had, for example, the state of Nuevo León, where we have more than 1,000 stores and Mexico City, where we also have probably more than 1,000 stores, you could not open at all on Sundays, where you had a number of states in the country under red code in terms of the traffic light rankings.

And in the opposite direction just a few days ago, as I'm sure you're aware, there was a big improvement in the color codes across the country. There are no more reds. Almost 20 states are in yellow, a couple of greens in the Southeast. So we'll obviously play it by year. And as Paco was saying, look very closely at what's happening in each locality because these restrictions are local for the most part. But it is looking a little bit better, and that's part of our cautious optimism.

[Operator]

We'll take our next question from Miguel Tortolero with GBM.

[Miguel Angel Tortolero, analyst]

My one question would be regarding Brazil. Could you share your first impressions of the market after opening your first office there? It seems like a market that could open room for relevant growth and capital deployment as it continues to be highly dominated by the mom-and-pop stores network. So in this regard, what's the potential you see for this market? And how aggressive should we expect you to be in terms of capital allocated to this region for the developing of the OXXO front?

[Eugenio Garza Garza, executive]

Sure, thanks for the question, Miguel. I mean as you know, we started to roll out the proximity concept in the outskirts of São Paulo late last year with a few stores now open. So far, the results have been according to what we expected. It's a different value proposition that we got the Brazilian consumer is used to, and we're still tinkering with the model to make sure that it adapts to local takes and customs.

We are very, very optimistic that as we start to learn more and the Brazilian consumer starts to become accustomed to this, that we will be able to grow this in the broader São Paulo and other regions in Brazil as we go forward. So we do have a capital allocation plan for the venture. But you should recall, we also own and operate a franchise network of over 1,000 stores that are already generating cash. So a big portion of that will be hopefully self-funded with the operation that we already control in conjunction with Cosan and Shell. So we do see a very, very attractive growth platform going forward in Brazil. And so far, we're going according to plan.

[Juan Fonseca, executive]

Yes. And I would add, Miguel, that as Eugenio was saying, on the gas station front, we have been able to open more quickly, right, because the value proposition of the gas station stores, which are operated under the Shell Select banner. We're not really changing their value proposition nearly as much. And so the opening of those stores is moving more quickly. Some of those will be under the franchise mechanism, and some of them will be company-owned and operated. And then on the OXXO front is where we need to do a lot more kind of fine-tuning of the value prop.

And we've opened a handful of stores in Campinas, and we've opened a distribution center, which is also, I think, a big a big part of the equation that the critical mass that we have going in because of the 2 types of stores is allowing us to have a distribution center pretty much right off the bat, which is a big advantage relative to what we've been able to do in other countries where we've started 100% from scratch. So that's also part of the reason why we're pretty optimistic.

[Operator]

We'll take our next question from Alan Alanis with Santander.

[Alan Alanis, analyst]

First a housekeeping question. I mean this is the first call that Eduardo Padilla, CEO, is not on the call. It's okay. And the first question, and I guess just checking, he will no longer be in this call, correct?

[Francisco Beltrán, executive]

Look, we are just too many cook, too many people in the kitchen. So I'd rather say I've had the...

[Alan Alanis, analyst]

Okay, okay. You checking that your workers are well, that's good. Okay. That makes sense. Okay. Let me -- happy to hear that everything is good, okay. My question has to do with the others business. I know you're going to bring additional disclosure next quarter. But I'm already tracking this, and I saw something that called my attention, and that might be relevant for all investors. In the others business, you are reporting a 61% increase in sales, probably mainly due to the acquisitions that you've done.

But when you see the others line, EBITDA, it seems that you had a contraction of around 51% over MXN 540 million that's almost as much as the increase of MXN 600 million in Coca-Cola FEMSA. So it's a pretty material decline in the EBITDA of the others business. So my question for you is could you confirm that these numbers are right? And then what explains this discrepancy of such an important growth in others sales, but also such a relevant decline in year-over-year EBITDA in the others business?

[Eugenio Garza Garza, executive]

Sure. Thank you for that. And yes, you'll get more clarity as we start to disclose the figures of the logistics and distribution business going forward. But on the revenue side, you're right, it is the incorporation of WAXIE North America into our financial statements. And I guess what you're referring to is a sharp drop in the EBIT, not necessarily the EBITDA. And the reason for that is because of the way we structured the acquisition of WAXIE in North America, we were able to get a significant step-up in the asset base, which is obviously advantageous from a tax perspective, but it will be putting basically part of the purchase price for those assets will be flowing through an amortization charge to the tune of around $26 million a year, hitting obviously the operating income line, but not the EBITDA line.

So that is what you see the discrepancy there. We took that charge for the entire year at the fourth quarter as we were wrapping up the purchase price allocation, but you should see that flowing -- see that flowing into the into the quarterly statements going forward once we have the full disclosure. But it is basically the purchase price being allocated partially or a big portion of the purchase price being allocated to an intangible customer assets on the balance sheet of the others division.

[Alan Alanis, analyst]

Got it. So it's basically, if I'm understanding correctly, Eugenio, it's basically a onetime off adjustment that you did on the purchasing of some of the assets that you acquired throughout the year. It took the charge in the fourth quarter because that makes sense for the business, but it's not an operating decline of that amount in the others business, right?

[Eugenio Garza Garza, executive]

I mean partially, yes. I mean it was a onetime in the fourth quarter for 2020. Having said that for 2021, we will continue to be amortizing this intangible customer list going forward. And it will -- again, the way to see it is, it's a portion of the purchase price that is flowing through the income statement. But it's not affecting either how the business is doing, how the profitability of the business is going according to our plan. But it should be about a $2 million per month charge of intangible amortization going forward for the next few years in the North American WAXIE business.

[Juan Fonseca, executive]

Which is obviously noncash. And Alan, what this means for us is that going forward, probably we're going to be focusing -- I mean, because we're going to start opening this business up on the P&L in a couple of months, is that we're going to be looking at the EBITDA line, probably more than we usually do to account for that.

[Operator]

We'll take our next question from Bob Ford with Merrill Lynch.

[Robert Ford, analyst]

Eugenio, you mentioned digitalization in your comments. And I was quickly -- I was curious how quickly payments are going from physical to digital in the Mexico -- here in Mexico during the pandemic if at all? And how you're thinking about that larger opportunity beyond just payments as you explore Fintech so far?

[Eugenio Garza Garza, executive]

Sure. Thank you, Bob. I mean, as you did see, during 2020, our services business grew significantly. Having said that, they continue to be the old-fashioned way, just I mean using the OXXO stores and using the store as a platform to do money transfers, payment, remittances, et cetera, in an analogue way. Having said that, as we did mention in the comments, we are, as of today, launching the spin product by OXXO selectively in the San Luis Potosí area. And then hopefully, be rolling out that product throughout the rest of the year in other places.

The spin product is basically just a starting point, what it allows you to do basically is I mean to do the same thing that you would have done in the stores, I mean, pay for services, peer-to-peer, paying for airtime, et cetera, but do it on your phone, be able to charge your spin card through the OXXO stores and withdraw money from the OXXO stores as well. And then hopefully, as that takes off, we should be able, as we attract more customers into that platform, be able to add other belts and whistles to the product. So we are hoping that this will be a good value prop for customers to start to take the analogue way of doing things and moving more digitally and hopefully be adding other functionalities both to that product as well as to our loyalty program, which we're also launching selectively this month -- actually last month, in a couple of cities and rolling out to be able not only to have now ticket-level data for our stores, but actually customer-level data for our stores.

So that, coupled with the Fintech products, should give us a clearer picture of who our customers are, what they're doing, what they're consuming, what their trends are, so that we can be more tailored with regards to promotions. And offering of products to them. And again, this is just a tip of the iceberg. And hopefully, we get enough adoption, we'll be able to grow this into other revenue streams going forward.

[Francisco Beltrán, executive]

And if I may, Bob, this is Paco. I would like just to add to that, that what is important is that, as you said, Mexico is obviously also part of this digital acceleration. But the good news is that we have a number of options as Eugenio highlighted, that will allow us to not only stay ahead, but importantly, adapt to what specifically consumers need and require in Mexico and in other geographies as they are different to what you see in other markets.

[Robert Ford, analyst]

No, it's very interesting. And with respect to the back end, do you have a white label bank that you're using? Or are you -- do you plan on obtaining banking licenses? And I was just curious, as you look forward to some of the functionalities, are we going to be looking for just a basic L4 account? Or is it something more robust than that?

[Eugenio Garza Garza, executive]

Yes. At this point, we have basically obtained a Fintech license that allows us to operate on the octavo transitorio of the Fintech law. And that allows us basically to open up into accounts similar to the Saldazo accounts that we have currently. And that's what we're operating under. To the extent that we need to add other functionality that would need a different license, we will look at that. But for now, we are looking basically to do the same thing we were doing with Saldazo, except doing it digitally instead of analogue. The product, by the way, also includes a physical visa card so that people can use the balance in their account also through the debit card. So we believe that both the cash in, cash out functionality at OXXO plus the visa card will allow for maximum flexibility from a consumer perspective.

[Operator]

We'll take our next question from Álvaro García with BTG.

[Alvaro Garcia, analyst]

Two quick ones, they'll be quick. One on spin, just a follow-up to Bob's question. My question is specifically how it interacts with Saldazo, seems to be somewhat of a competing product in the sense that you're capturing debit customers much in the same way that Saldazo does, is Saldazo going to integrate into spin? Or will they be managed as separate entities?

And then just my second question on labor costs at OXXO. You continue to refer to a tight labor market in the release in Mexico. I would think maybe the pandemic might have changed that a bit. But I guess what's your outlook on the labor front for OXXO into 2021?

[Eugenio Garza Garza, executive]

Sure. With regards to Spin and Saldazo, we are maintaining 2 separate structures and really allowing the customer to decide what option is best for them, and we'll make decisions as need be with regards to how those 2 products move forward. But at this point, we are allowing the customer to basically go their own way.

And with regards to the labor market, there were 2 separate issues. One was obviously the health concerns and the fact -- last year with the pandemic and the fact that, I mean, several thousand of our employees were not able to work for a significant portion of time because they were in a vulnerable population. So we have to pick up a bunch of extra costs in terms of hiring people.

And then the concern that a lot of the new people had just in terms of being exposed to the virus and working at the store. So the labor market, specifically for the kind of labor that we need for OXXO stores was tied for the better part of the year. Having said that, at this point, because of the restrictions, more and more of the people that were in vulnerable populations are now coming back. People feel more comfortable with regards to the safety of the store with regards to contagions. As you know, most of the contagions were actually not happening in a store level, they're happening more at people's homes as they get together for social gatherings and whatnot. So more and more that pressure is easing, and we see less of that effect going forward this year than we saw last year.

[Francisco Beltrán, executive]

And I guess the other thing that we need to keep in mind is that for 2020 precisely because of what Eugenio said regarding the initial part of the pandemic, we had a onetime situations like special bonus that we pay that moving forward, we are not having.

[Operator]

We'll take our next question from Marcella Recchia with Crédit Suisse.

[Marcella Recchia Focaccia, analyst]

I have two quick questions here. The first one, taking the opportunity that Jorge is along with you. Following the redesigned agreement between the Brazilian coke bottlers and Heineken, does this friendlier agreement change anything about your willingness to -- of keeping or divesting from the remaining stake in Heineken? That would be my first question.

And secondly, about OXXO, how can we think about the margin recovery trajectory from 2021 awards. Basically, I understand the lower operating leverage has been one of the main drags. But we also understand that you continue investing in digital and shifting your commission-based store team to employee-based ones. So just to hear from you, any color you can give us about the margin outlook going forward.

[Eugenio Garza Garza, executive]

Sure. Thank you, Marcella. First, with regards to your question in Brazil, we're definitely thrilled from a number of perspectives about what happened in Brazil. But you have to remember that there are 2 separate things. One is just the commercial agreement, which between KOF and Heineken with regards to how to move forward in terms of the beer distribution agreement. And on that one, we're thrilled as shareholders of both companies, both KOF and Heineken, that they were able to strike an agreement that I think maximizes value for both of them in the medium term.

In the case of KOF, it allows them to have a base volume of the year to not reduce drop size significantly and allows them also flexibility to carry other brands going forward. And for Heineken, at least in Brazil, which is an important market for them, it gives them, I think, more clarity on the competitive situation going forward. And then it also allows them to focus on their 2 stellar brands, which are Heineken and Amstel. So we couldn't be more thrilled and happy that both of them were able to reach an agreement. And then with regards to our stake in Heineken, again, that is a separate decision. And at this point, as we said in the last conference call, we continue to like the way that they've been handling and they've been performing through the pandemic. Clearly, the on-trade exposure that they have has been a significant drag on earnings in the past few months.

Having said that, they are doing things very, very well with regards to cost containment, investing in digital. So we are optimistic about the future and continue to be happy shareholders as we believe this stake provides, I think, a significant value anchor in our portfolio at this point. But again, the 2 questions are separate. At least that's the way we see it. And on both fronts, I think we're very pleased with what has happened in the past few weeks.

The second question was with regard -- sorry, with the transport OXXO in 2021. I mean, clearly, the most important effect is the operating deleveraging. I mean you have, I mean, same-store sales down, I mean, high single digits, and that clearly has an impact with regards to operating costs, which was partially contained, frankly, and I don't think we mentioned this enough, but cost containment measures, improvement in the supply chain to be able to continue to deliver products at prices that are competitive. But in any case, that continues to be the main thing.

As we go forward, we are investing, as you said, a lot in digital, mostly on the backbone of the POS and some in distribution centers. But on digital, we have been investing some money to be able to make sure that the backbone of the stores continues to allow for continued growth, not only analogue, but also in a digital format. But having said that, there's still a lot of, I think, headwinds in our way with regards to the mixed tale of beer not being rolled out in all of the categories.

We do believe that with this new spin product, that there will be, I mean, an increase in the customers' attractiveness to this product to be able to boost the category as well as other modes of consumption, fast food and -- sorry, hunger and first of the needs that have not been met during the pandemic, which will come back once the pandemic -- once we're on the other side of the pandemic with hopefully better terms for us. So we do see, again, these headwinds in costs being compensated through other growth avenues in the store going forward.

[Juan Fonseca, executive]

Yes. I would add. Marcella, this is Juan. I would add on top of what Eugenio described. Some of the structural initiatives that we've been working on for years remain, right? And so we are at the point where we can, again, look at those initiatives and continue to invest behind them. And what I'm talking about, I think you touched on it as you were framing the question. This gradual shift from commission-based to employee-based which, among other benefits, has the advantage of addressing turnover and improving long-term turnover numbers. So we're going to continue to work on that.

And the other I would highlight is international, which are things that in the past, we've discussed that put a little bit of pressure on the margins pre-pandemic, and this is also something that we'll continue to go on. So for example, if we talk about 800 stores at OXXO in Mexico for this year, international actually has another 10% on top of that, that is planned for, especially for Chile and Colombia. And until we get to the critical mass that we need in those countries, they are slightly dilutive to the overall margin.

So I think it's for the right reasons, obviously, because we continue to see a lot of attractiveness in growing OXXO outside of Mexico, but we are returning to the growth path as Paco said in the beginning, and part of that includes continuing to grow international. In addition to the transaction that he mentioned that we're doing in Chile and is in the process of being approved.

[Marcella Recchia Focaccia, analyst]

That's pretty helpful. Just a quick follow-up, if I may. Can you give us just an update on the current stats of your workforce between commission-based and employee-based?

[Juan Fonseca, executive]

I think something like 55-45 employee versus commission. So we're slightly now more employee than commission.

[Marcella Recchia Focaccia, analyst]

Okay. The target is 100%?

[Juan Fonseca, executive]

No, no. This is dependent on geography. There are some markets, a lot of them in the North, where the commission format actually works incredibly well. And there are some places, some of them happen to be in Center and the South, where we have found the employee format as a better fit. So there's not one size fits all. There's no goal to have 100% of either one, it will very much continue to be market by market.

[Operator]

We'll take our next question from Rodrigo Alcantara with UBS.

[Rodrigo Alcantara, analyst]

I have two quick ones, if I may. First one, if you have any special consideration regarding the upcoming energy reform and labor reform, any potential impact that we should be aware that would be my first question.

[Eugenio Garza Garza, executive]

Sure. I'll start with the labor reform. Clearly, we're keeping an eye on that. I said that it's been deprioritized from we hear in Congress. So -- but we don't see what happens with that and we are obviously -- we will obviously respond the way we need to. We believe that we have enough margin to be able to comply with whatever regulation or the different things that are being discussed there. So I think it's less of a concern.

With regards to energy reform, clearly, as you know, we've been investing heavily, especially with regards to wind energy. We had an ambitious goal of 85% of our energy units in Mexico coming from renewable sources, and we basically almost got there. So we will continue to see what happens with that. And if we need to make a change, we'll make a change, but we will continue to be heavily committed towards having a significant portion of our energy needs going forward be in renewable energy.

We've also been testing in other areas, testing electric vehicles for our small vehicle fleets. So I'm sure there will be -- continue to be challenges on both the legal and regulatory fronts, but we will obviously continue to comply with those frameworks, but again, continue to keep pushing forward towards achieving these targets of getting most of our energy from renewable sources.

[Rodrigo Alcantara, analyst]

So let's say, considering the draft just as it is now from the energy reform, do you see any friction at this point from where you operate and from what the draft is mentioning, any friction that we should be aware of?

[Eugenio Garza Garza, executive]

It will all depend on how the private generation and consumption of energy portion of the sales comes out of. And if there -- if that will not continue to be allowed or will continue to be allowed. But at some cost, we will have to evaluate then and there how to adapt to that new regulatory environment. But as I said, we continue to be committed to supplying a significant amount of our energy with renewable resources.

[Rodrigo Alcantara, analyst]

Okay. And the second one would be very quickly, just to follow up on Alan's questions on the others business division, right? So very quickly, what appears to me that beyond the D&A -- well, adjustment and amortization also appears that a large increase in administrative expenses also happened during the quarter. So not sure it has to do also with integration of North American WAXIE, I'm not sure what drove this increase on administrative expenses. And also taking a look to the same line at Proximity Division. I mean it has been a line that has been growing a lot over the last few quarters, low double digit, I would say, in the last 4 or 5. So I was wondering if you can comment a bit about what's happening here and the main drivers of this line.

[Eugenio Garza Garza, executive]

Sure. The admin expenses of the others business, in part, has to do with just the addition of WAXIE North America, but there were also a couple of onetime charges taken at Solistica with regards to restructuring as we adapted to the pandemic, so basically headcount restructurings from the pandemic.

And with regards to the Proximity Division, yes, the admin expenses there has to do -- some of that has gone to CapEx and some of them has gone to OpEx and has to do basically with the continuing building of the pipeline for the growth in digital. And then the provision of certain bonuses that were pandemic-related bonuses to employees during the course of 2020.

[Operator]

We'll take our next question from Leandro Fontanesi with Bradesco.

[Leandro Fontanesi, analyst]

The first question I have is with regards to the definitive closures at OXXO stores. It was almost twice as much as the number of stores we closed in the third quarter. So just trying to understand why you increased that much the number of definitive closures if you think the performance is improving.

That's the first question. And the second question is with regards to the financial services, and you mentioned a lot of measures you are doing that -- there are interesting measures. But I understand you had some challenges with cash handling. And just trying to get an update if you have something on that front, if you have come up with new solutions with regards to cash handling.

[Eugenio Garza Garza, executive]

Sure. First, with regards to definitive closures, I mean, as we said, during the year, we took advantage to basically prune the portfolio of stores. So some of them were very obvious, like the ones in shopping centers, where we saw traffic was not coming back because certain of the stores were closing, et cetera. So we did give them some time. So we finished that pruning exercise for the most part in the fourth quarter. As I mentioned in my comments, there were 30 stores that were closed very late in January that would still show up in our January numbers this year. But for the time being, we are done with that pruning exercises. But again, the reason it was back-ended rather than through the quarters was because we gave some time to marginally performing stores to see how they behave as mobility was coming back, and then we might -- we made the decision at the end of the year.

But for the most part, you should not see that number of store closures. In a lot of these situations, we also had negotiations with landlords. I mean we opened up negotiations with landlords saying, look, the store's traffic is never going to come back to the same thing and some landlords were flexible, and we decided to keep them open. Some landlords were not flexible, and we decided to close them. So we made the decisions as time goes -- as time went by. And at this point, we wouldn't expect anything major for at least this year.

And with regards to your second question on financial service and cash handling, there was, as you know, over the course of 2018 and '19, significant increases in the cost of handling cash. For the most part, those increases have now been absorbed by the stores. And we saw the brunt of that impact in terms of loss and profitability already, probably in the late 2019 and early 2020. And at this point, we are running other programs and pilot programs to see how we could use alternative sources of cash handling and exploring ways in which we could contain those costs into the future. But at this point, we're not seeing any additional pressure from what we saw back in 2019.

[Francisco Beltrán, executive]

And just, Leandro, to add on the comment on the OXXO stores, as we said before, pruning is an exercise that is a good exercise to do as we try to become more efficient. And it is also an exercise of deaveraging, as I said before, and it is a fact that some type of stores having affected more than others, some regions have been affected more than others. And I think that what we need to keep in mind is that we need to remain flexible to be truly looking at the stores that are not performing and then take decisions, the need be. But at the end of the day, it is a matter of making sure that we follow closely what is happening and stay close to the market.

[Juan Fonseca, executive]

I would just add, Leandro. On the cash handling, another thing to focus on, the best way to address cash handling is to disburse it to customers, right, as opposed to putting it in a truck and sending it to the bank. And so we've been working to increase the maximum amount that people can withdraw from their accounts. This involves, obviously just the regular banking but also remittances. We are looking for ways to increase those numbers without -- or being very mindful of the security aspect of having more available cash. It's a bit of a fine-tuning exercise. But that's something now that we are working on, which is take care of as much cash as possible by giving it to customers because also when you probably make a fee both ways when you receive it and when you disburse it. So that's something else that you're going to continue to hear us talk about.

[Leandro Fontanesi, analyst]

Just a follow-up on the first one. It's clear. Just -- were those stores already underperforming before COVID or COVID changed the profitability of those stores and then it became -- you took the decision to shut them down?

[Eugenio Garza Garza, executive]

Sure. The way we started was we had a list of marginally performing stores even before the lockdowns, and those were the ones that we started to take a closer look at, see if there was anything we can do with regards to the fixed expenses, the rent charges, with the landlord and where we were able to make changes. We gave them another chance. We were not, we closed them. And then even if we gave them another chance and traffic just did not pick up because of the location, those were, I mean, the blunt of what we did in the fourth quarter.

[Operator]

We'll take our next question from Rodrigo Echagaray with Scotiabank.

[Rodrigo Echagaray, analyst]

Just a quick question on OXXO. And this, I guess, you have answered directly or indirectly throughout the call but I'm just curious if you think that the strategy and the sales mix at OXXO could change post-pandemic, whether in terms of the SKUs that you carry, the price points, locations where you open new stores, cities where you focus? Are there any -- is there any impact from the pandemic on the OXXO commercial strategy?

[Francisco Beltrán, executive]

Rodrigo, this is Paco. I mean, clearly, as we said, this has been a very dynamic exercise that the teams in OXXO have done tremendously well. I mean just to take a few examples to your question. On one hand, consumers have been more careful with their out-of-pocket expenses. So you can imagine that when it comes to, for example, our private label offering, we have been doing a very good exercise in terms of understanding what additional things we need to offer. That's one.

Second, you can imagine also that when it comes to beverages, for example, the office stores are usually very strong on single-serve. But as the pandemic came, people were limiting their consumption of single-serve because the traffic was lower, and they were buying bigger sizes, returnables and sometimes even multipacks. And once again, the portfolio has changed accordingly.

And these are the kind of things that we need to continue doing as we move forward. I mean you have seen that the ticket, for example, has increased. And this is partially because of all the things that we're doing. So it is probably fair to say or safe to say that some of them will remain once the mobility comes back, once the pandemic slowly starts moving away. Some of these new ways in which the portfolio has moved will remain, which ones? I think that what is important is that we stay close to what consumers are doing, and what the shoppers want. And we are confident that what we have done and the things have done, that will continue to be adapted accordingly.

[Rodrigo Echagaray, analyst]

If I understand it correctly, I mean -- sorry, go ahead, Juan.

[Juan Fonseca, executive]

Rodrigo, this is Juan. I think also in terms of locations, following up on what Paco just said, adjustments that you should expect given that there will be a percentage of consumers that maybe spend more time at home, maybe working from home and less time in a proper office building as such, that in terms of our own segmentation of stores, probably overemphasize stores in certain residential neighborhoods and deemphasize the opening of stores in office parks or inside office buildings, where we have a model of store that was going into the basements or the parking lots in the basement of some office buildings to get the captive traffic from that particular building, probably is there's going to be fewer of those, and we're going to have to take a look.

We are already taking a look at those stores that are in neighborhoods, where people are actually spending some time during the week because they're working from home, what else do they need throughout the day, right? And I think to Paco's point, the same-store sales number that we see today for the quarter involves a double-digit increase in ticket and a double-digit decrease in traffic, and we've seen the categories that are kind of pantry loading or supermarket type items, driving some of that increase in ticket, things like spirits as well, which we've discussed in the past. I think the absence of beer in the middle of the year made people discover that we carry a portfolio of spirits. So if we are able to retain some of those increases in certain categories and the average ticket remains above trend and then we recover most of the traffic, then that will put us in a pretty good place.

[Francisco Beltrán, executive]

And if I may at the least follow, Rodrigo. The fact is that what is important is that the team has demonstrated to be very flexible to adapt the portfolio, to adapt the offering for the shopper. And that basically means that, that's why we are very optimistic about what the future looks like because that flexibility would allow once the mobility is back that the traditional categories, which are very strong for us, such as a third fast food, the fast craving, those will be back. Those will be back as mobility comes back. And so we'll be in a better position. Understanding that consumers will might continue to be in some difficulty regarding the cash out-of-pocket, we are in a perfect condition to offer all sorts of solutions for them. So we are very confident that more than ever the OXXO format is very relevant for consumers as we start moving out of the pandemic. So we remain very positive.

[Rodrigo Echagaray, analyst]

Got it. Very helpful. And so from the comments you've made, the comments around deemphasizing office and emphasizing more residential probably sounds like the more -- a more structural versus a tactical shift. Any other structural changes? I mean perhaps in terms of regions, as people work from home, perhaps they -- some of things I have seen in other countries are they are leaving the cities and are essentially buying houses that are cheaper in the interior and elsewhere. Have you seen some of that? Do you think that will happen in Mexico?

[Francisco Beltrán, executive]

As we said, Rodrigo, that the averaging that you are highlighting is something that has become a day-to-day for the OXXO team. I mean just adding to what you just said because it's true that, that is happening, it is also true that you will see differences in the case of Mexico, for example, when it comes to tourist areas, for example. I mean it depends on how the traffic is -- the tourist traffic is going, then obviously, we will adapt, and we will see some new differences.

The same applies to by region. But once again, depending on what you have seen on the restriction that the local authorities are doing because it's different. As Juan said, in the North of the country, we have certain restrictions throughout the month of December that were not in place for other parts of the country. So at the end of the day, what we need to ensure is that this flexibility that the teams have shown to adapt and to offer the shopper and to comply with the regulations and take the opportunity to add new categories, we need to stay like that in 2021. And I assure you that, that is the plan.

[Operator]

We'll take our next question from Carlos Laboy with HSBC.

[Carlos Alberto Laboy, analyst]

I think you said earlier that you're pretty much done with the expansion to new businesses. Does it mean that you will not go to some stores in the U.S.? And if you are going to go into some stores in the U.S., the M&A of some stores become prohibitively expensive. And the reason I ask is because organic growth can be really slow. So is there a point at which the Heineken stake just represents too much opportunity cost for you and not being able to go into the U.S.? I mean we're already worried about 11 years of sitting on the U.S. sidelines in the U.S. same-store business, are you okay for another long run of not purchase exceeding in that business?

[Eugenio Garza Garza, executive]

Yes. I mean from a portfolio perspective, as you know, Carlos, we have mentioned that we would speak complexity, but proximity continues to be one of the main pillars in which we expect to fund growth. So clearly, there's room to grow in Mexico still. There's going to grow in the rest of the countries that we are presenting in Latin America and elsewhere, so we continue to actively monitor convenience formats and proximity formats throughout the world, including the U.S. We are aware, of course, of the restriction that the Heineken stake brings us there.

But having said that, as you well mentioned, I mean some of the assets there will have to evaluate on a one-by-one basis and see what the opportunity cost of having one asset versus the other is. And if opportunities come along that warranted, we'll take a look at them. But again, there are plenty of opportunities, I think, still outside of the U.S., including in our regions and in regions, we're not currently in that at least would allow us with our current business model to create value. So we'll look at any and all. But again, always looking at it from just a relative risk/reward perspective in our portfolio. So for now, that hasn't materialized, but we continue to actively monitor all situations.

[Operator]

That will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Francisco Camacho for any additional or closing remarks.

[Francisco Beltrán, executive]

Thank you all for attending the call. Thank you all for your support -- continued support to FEMSA, and we wish you to stay safe and see you next time.

[Eugenio Garza Garza, executive]

Thank you, everyone.

[Operator]

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.