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Fomento Economico Mexicano S.A.B. de C.V. (NYSE:FMX)
Q3 2019 Earnings Call
Oct 28, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to FEMSA's Third Quarter 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, there will be a question-and-answer session.

During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which can materially impact the company's actual performance.

At this time, I will now turn the conference over to Eduardo Padilla, FEMSA's Chief Executive Officer. Please go ahead, sir.

Eduardo Padilla Silva -- Chief Executive Officer

Hello. Good morning, everyone and welcome to FEMSA's third quarter 2019 results conference call. Juan Fonseca is with us today and as always from Coca-Cola FEMSA, we have Maria Dyla Castro, who is saying goodbye to Investor Relations and Jorge Collazo, who is taking responsibility going forward. Thank you, Maria Dyla and welcome, Jorge. As we usually do, we will focus the call on the consolidated figures for FEMSA, and FEMSA commercial results, since many of you probably participated in Coca-Cola FEMSA's conference call last Friday. The third quarter was a positive one on both operations and strategic fronts. Operationally, we saw solid performances across our business units.

OXXO Mexico continued to invest in its growth at a steady pace, and we again saw encouraging data from its international operations. The Health division continued to see a soft patch in Chile, but we are quickly making progress in the integration of GPF in Ecuador, while the Fuel division did not add to its number of stations but still managed to deliver encouraging results during the quarter. For its part, Coca-Cola FEMSA saw a resilient consumer environment in Mexico and solid growth in South America, combining to deliver a positive operating performance. Strategically, we made two important announcements, first, on our new joint venture with Raizen in Brazil, and more recently on the MOU for our investment and joint venture with Jetro Restaurant Depot. These are relevant steps in our quest to deploy capital in high growth, high return retail assets, and we are very excited about it.

Let me spend a few minutes on these new opportunities. As you know, we have been looking for a longtime for the right entry model into Brazil with proximity stores. We knew we wanted to do it with a strong local partner and we also knew that gaining certain scale liquidity will allow us to develop the right value propositions for the Brazilian consumer with some critical mass to protect our profitability. We believe Raizen itself a joint venture between Cosan and Shell is the right partner for us. We are keen to start working on what will be our two-pronged strategy. Growing the existing base of Shell, Select, convenience stores on Raizen gas stations locations and in parallel, beginning to develop the valuable position for stand-alone proximity stores under the OXXO brand. We are excited to begin working on what will surely be a challenging, but hopefully rewarding progress.

Regarding Jetro Restaurant Depot, we're aware that this announcement was not unexpected. As a private company JRD is very low profile, but we will need it [Phonetic] to present one of the most attractive retail assets we have identified in any market developed or emerging. As you know, our rationale from investment is two-fold. They allow us to reinvest in this formidable high growth and high return platform. But also it offer us a compelling new growth avenue to explore of new work to bring this successful cash and carry platform to Mexico and eventually other Latin American markets down the road.

Moving on to discuss FEMSA's consolidated quarterly numbers, total revenues during the third quarter increased 10.2% and income from operations increased 18.1%. On an organic basis, total revenues increased 8.1% and income from operations rose 17.7%. Net income increased 52.9% driven by the increase in our income from operations and non-cash foreign exchange gain related to FEMSA's US dollar denominated cash position. In terms of our consolidated net debt position, during the third quarter, it decreased by approximately MXN26 billion compared to the previous quarter to reach a level of MXN20 billion at the end of September, mainly reflecting pacification [Phonetic] of certain short-term investments as a mature harvester [Phonetic] of cash.

Moving on to discuss our operations beginning with FEMSA's Comercio Proximity Division, we opened 232 net new OXXO new stores during the third quarter, reaching 1,362 net store openings for the last 12 months. This figure includes new stores in Mexico, Colombia, Chile and Peru. Revenues for the division increased 10.1%, OXXO same-store sales in Mexico were up 5%, right in line with our long-term mid-single digit expectations. This was driven by a 6.5% increase in average customer ticket, partially offset by 1.4% decrease in historic traffic. In terms of the composition of same-store sales, during the quarter, we continued to see meaningful price increases in some of our destination categories. As a result, we continued to see consumers adjusting the frequency of their visits to our stores.

Moving down to income statement, gross margin expansion was again strong at 120 basis points, reflecting sustained growth for financial services; number two, positive trends in our commercial income activity; and number three, more efficient promotional programs with key suppliers. Income from operations increased 9.4%. Operating margin contracted by 10 basis points reflecting the gross margin growth, I just described, being offset by number one, the continuing strengthening of our compensation structure in a tight labor market, including the gradual shift from commission-based store teams to employee based teams; and number two, higher secure cash handling costs driven by increased volume and higher operational costs. During this quarter, energy cost again were a source of relief as we continued to increase the number of stores and are now getting the electricity from wind sources and that now represent more than half of our stores in Mexico.

Moving on to FEMSA's Comercio Health Division, we added 69 drugstores across our legacy territories. By the end of September, we have 3,130 units across our territories, reflecting the addition of 827 total net new stores in the last 12 months, including the consolidation of Corporacion GPF from Ecuador. Total revenues increased 26.6%, while on an organic basis, revenues increased 6.2%. Same-store sales decreased by an average of 0.7%, reflecting soft trading in Chile and a negative currency effect from depreciation of the Mexican peso relative to the Chilean and Colombian pesos. Gross margin contracted by 90 basis points in the third quarter, reflecting new pricing regulations in Colombia, increased promotional activity in Chile, and number three, the consolidation of GPF in Ecuador. These were partially offset by improved efficiency and more effective collaboration and execution with key suppliers in Mexico.

Operating margin contracted by 60 basis points as cost efficiencies and tight expense controls across our legacy territories were more than offset by the consolidation of GPF. For its part of FEMSA's Comercio Fuel Division station count remained flat at 541 unit at the end of September, as we continue to face a regulatory backlog in the approval process for new franchises. While this is a not ideal, we have a robust pipeline of net of new stations waiting for the green light from regulators. In fact, I think during October, we have four new permits. Same-station sales decreased 3.9% in the third quarter and gross margin was 10%, while operating margin reached 2.7% of total revenues. Operating expenses increased 14% above revenues, reflecting improved compensation levels for our in-station personnel as well as expenses related to the gradual transition of our stations to the new OXXO GAS brand name.

Finally, moving on briefly to Coca-Cola FEMSA, as John highlighted in the conference call last Friday, operational results for the quarter were encouraging, driven by a solid top line growth in Mexico and volume gains in Central America, and Brazil, where also -- where we also have an positive non-recurring tax benefit. If you were unable to participate in the call you can access a replay of the webcast for additional details on the result. Summing up, our third quarter results were again robust leveraging a resilient consumer environment in our key Mexican market while also delivering encouraging numbers in Brazil and across many other geographies. We are approaching the end of the year with good momentum and are looking forward to solid close.

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

Questions and Answers:

Operator

Thank you. The question-and-answer session will begin at this time. [Operator Instructions] Our first question comes from Antonio Gonzalez of Credit Suisse. Please go ahead.

Antonio Gonzalez -- Credit Suisse -- Analyst

Good morning, Eduardo and team. Thank you for taking my question. I wanted to ask about the Proximity division right and the margins that we saw this quarter, which were flattish year-on-year. You cited on the press release some of the headwinds that you saw during the quarter, which -- I think we've been talking about for quite some time now, the compensation scheme and costs of handling cash, which I think are very similar, actually to the headwinds that you cited during the first semester right. Yet during the first semester, we saw these margin expansion that we thought was quite consistent driven by some other tailwinds, right, your services category and your commercial income and so forth. So I just wanted to ask, Eduardo, if you can help us quantify perhaps directionally which of these tailwinds or headwinds changed so that the margin expansion now reverted and any comments as to what you would expect for the next few quarters in this respect? Thank you so much.

Eduardo Padilla Silva -- Chief Executive Officer

Hello, Antonio. I think, Juan will be able to help me on this -- to be more specific.

Juan Fonseca -- Investor Relations Officer

Yeah. Hi, Antonio. I think of the headwinds that you mentioned, the one that I believe is persisting as a significant point of pressure has to do with compensation and labor costs generally. Obviously, the closer you are to the border where we have a lot of stores, there has been -- wage increases were high. And I think, if you ask me, not only -- during the quarter, but also going forward, I would say the cost of handling cash, the amounts I think are going to start -- to get smaller in terms of lapping the biggest increases that happened a few quarters ago.

And I think based on some of the initiatives that we are taking I think the cost of handling cash will be less of an issue going forward. We were already talking this quarter and I think, we started last quarter, talking about electricity cost as being no longer a headwind, but actually turning into a tailwind. And I think, this will also accelerate a little bit as we get to the end of the year, where the number of stores connected to the wind supply will continue to grow.

Actually, I think the fourth quarter is going to be an important one for that, because we are -- right now we're very close to 60% and maybe even a little bit above 60% of the stores connected and by the end of the year, we're going to be much closer to 80%, so that will continue to help. But the one that kind of remains without any significant improvement, I think is labor. And we also have to wait and see already what happens with minimum wage increases next year. Generally, though, I think we would describe it as a pretty competitive market. And so, of the three, one has already become a tailwind. Cash handling will get smaller in the next few months and quarters and I think labor is the one that remains this year [Phonetic].

Antonio Gonzalez -- Credit Suisse -- Analyst

That's very clear. And just very quickly, if I may, can you remind those -- have you quantified in anyway, labor as a percentage of your total expenses or revenues and the costs of handling cash for both, have you given any metric that you can remind us, please?

Juan Fonseca -- Investor Relations Officer

Not really. I mean, we used to obviously make the reference to rent, being the -- obviously, the biggest expense and then after that, I mean you have -- you had labor and then rent. We never actually given the number, but it's, labor is a significant, is a significant component.

Antonio Gonzalez -- Credit Suisse -- Analyst

All right. Thank you, John

Operator

Our next question comes from Alvaro Garcia of BTG. Please go ahead.

Alvaro Garcia -- BTG -- Analyst

Hi. Good morning. Thanks for the call. My questions on Jetro and JRD. I was wondering, if you could walk us through some of JRD's competitive advantages through your rationale for entering into this business? And whether or not, you'd be looking to increase your stake in this business going forward? Thank you.

Eduardo Padilla Silva -- Chief Executive Officer

We found -- we think it's parallel, that is -- it's an asset that is very much in, because [Indecipherable] company is very much -- is not very much exposed. But is -- it tackles our market that we are very much involved, which is the restaurant market or the grocery, small mom-and-pops, a market. And we found that the way these management team approaches the market is very much aligned with -- the way, we approach the things, the values of organization is very much aligned with us. And the history is a very positive one. We were -- they've been increasing share, increasing their participation in all over the United States.

And I think we found a place where we could add value to them in Latin America and then, at the same time participate very much aligned with the only issue that we have in this stage [Phonetic]. We want to have those two basis together in order to be fully aligned because we don't want to have not miss alignments by having the JV down there -- down North America [Phonetic] and being over there. And you are asking, we would love to increase our share in -- it will depend on the price and depends on the sequence terms of producing. Currently, the way we're set up, we're very happy. And I think there will be a lot of opportunities for growth in the long run.

Operator

Our next question comes from Leandro Fontanesi of Bradesco. Please go ahead.

Leandro Fontanesi -- Bradesco -- Analyst

Hi. Thanks for the question. I have two questions as well. The first one, you commented about cash handling that it will be less of an issue going forward. Just to understand, what measures have you taken to reduce this problem? And also you mentioned in the previous conference call, you were considering potentially investing in this business. So just to understand which measures have been done in that front? And the second question, it's actually a follow-up on your investment in cash handling. Just to understand this is sort of a new segment for you, for the company. So if you still need you still have a lot of cash that could be deployed. Just thinking about, if you could enter other segments that FEMSA is still not operating at this moment? Thank you.

Eduardo Padilla Silva -- Chief Executive Officer

Well, with regard to the first part of the question, we think by understanding the cost structure of the current cash collecting business, we're now having some small operations to understand it better and see where we can reduce the cost by overseeing the system and not only the transaction cost of the van and the store. And we're finding out that there are a lot of different places where we could work together in a systematic way and to prove it. And I think we could even consider making some invest -- some of smaller investments with some of those operators, where we could be more aligned, understand the cost structure better. So that's really what we would love to -- that's why we are hopeful that there will be a better things for the future. I don't know if [Speech Overlap].

Juan Fonseca -- Investor Relations Officer

Yeah. I think -- Hi, Leandro, basically I think of it in terms of three different initiatives. One that has to do with processes, optimization, understanding the different process because this is not just picking up the cash putting it in a truck and taking it somewhere, that is super safe but there is a lot of counting involved and there is middle point between the stores and the end destination. And so we have found that by better understanding, which stores require what type of frequency and making adjustments to some of these processes, then you can right-off the bat reduce a little bit the overall cost of the operation.

The second -- the second of the third component is precisely what Eduardo was discussing in terms of getting a very good grasp of the cost structure of these companies and maybe contemplating, making an investment in one of them at some point. As you know, one of the things that we have faced is that the number of companies that provide the service in Mexico is limited, there is not a lot of them. And so we want to understand better kind of the industry dynamics and whether there is any improvement that we could bring about to that.

And then, finally, the third component has to do with technology in terms of certain type of machines that can be put into the stores where we have been actually running pilot for a while now and we're getting ready to be a little bit more aggressive in terms of deploying these machines to the stores. Basically what the machines do, I mean the biggest constraint we've had historically is that if you have the cash available to disburse, the customers when they're doing a financial transaction, receiving a remittance or they want to do a cash back from -- or cash out from one of their bank accounts, if you want to have the cash available to give to them, then it's also cash that is at some risk, right.

And so what these machines do, and I'm talking, these are -- imagine a machine, it's not a big machine but it made by the same people that make ATMs. So already, it's a very secure machine that is connected to the network that allows the cash to be disbursed when there is a legitimate transaction being done. And this allows us to have significantly higher levels of disbursal cash as opposed to a couple of hundred dollars or maybe not even that, that the stores have today. So that's another promising component of the strategy. Obviously, this one is going to take time, and it's also going to require a little bit of capex and so we need to be very careful about pace of rollout, but I think the three components together represents a pretty robust strategy to address this that has become already a recurring point of pressure in our opex.

Operator

Our next question comes from Carlos Laboy of HSBC Bank. Please go ahead.

Carlos Laboy -- HSBC Bank -- Analyst

Yes. Good morning, everyone. Can you shed some light please on the performance of beer growth in the OXXO stores where you are now carrying a fuller portfolio, where your same-store sales in that beer category is doing, please? Thank you.

Eduardo Padilla Silva -- Chief Executive Officer

We have had some, so -- over what we expected in some of the places. And I think it is taking -- although accordingly, I think that we -- currently, we have been able to mix five vessels. And the very first one is, first of all, it takes -- it is taking longer. So, the consumer will believe that we are handling Modelo brands in our stores. It seems like that was for so many years we were the anti-Modelo store operator there. Now when we are launching now its taking time. And -- but I think saying that in the other hand, I think we are very happy and we are very -- the results we are more promising than the ones we expected.

And so we are pretty happy that probably there will be a source for growth during this year, because of those Modelo product offering and the gross selling that we could have from that. And I think Mexico City, again, which is the last plant that we opened big value of Mexico. And again it's taking longer and are expected, because the consumer, it's difficult to make noise -- in the value of Mexico. But again, we are happy with it, and it's taking longer than expected to get the consumer grab the attention that we have the Modelo brands in our stores then there.

Carlos Laboy -- HSBC Bank -- Analyst

Is there anything you can do to drive consumer awareness?

Eduardo Padilla Silva -- Chief Executive Officer

I think in small places like, I'm interested to see, we did very well. In Mexico City its more difficult really.

Juan Fonseca -- Investor Relations Officer

Yes. And I would --hi, Carlos. It's John. I would also remind everyone. I mean that we've basically done two waves. The first one was launched in April and it included Morelia, San Luis and Guadalajara. And so Morelia, and San Luis not only are they smaller cities where maybe the communication is a little bit easier to get the word around, but they've also been -- we've had both portfolios for longer. So I think that also helps to explain why in particular those two have been -- the growth has been faster and more robust, I think than in the bigger cities. Well, Guadalajara was part of that first wave, and then as Eduardo was saying we've had Mexico City and the State of Mexico come in June. So you have a couple of months less of data.

I think when you look at the trend, I don't think there's anything that deviates hugely from our expectations other than as Eduardo says, I think in the greater metro areas, it's taking a little bit longer than we thought. Having said that, another thing to discuss or comment on, is that what we're seeing is that when we are getting the -- we're getting the consumer that was buying that beer elsewhere, but we're also getting the rest of that transaction.

And what I mean by that is, you are seeing in adjacent categories or related categories such as tobacco and snacks, you're getting growth that you probably would not be getting if you weren't getting the beer transactions. So in other words, the consumer is shifting their entire purchase to also which obviously makes sense. But once you see the actual data, it's very good to see.

Eduardo Padilla Silva -- Chief Executive Officer

Yeah. I might also add Carlos that Morelia [Phonetic] really was not fully prepared, and in fact we are in different chain, with different protocols, with different processes. And I think they are also in the learning curve, how to take care of us in a better way.

Juan Fonseca -- Investor Relations Officer

Yeah. And I think on that point, one important data point has to do with return ability versus one ways. Over time, it also has shifted a little bit more toward the one way packs and the multi-pack the 12-can SKU whereas Morello [Phonetic] historical, traditional customers are usually returnables and so that's also part of the adjustments that they have needed to make in their supply chain to be able to serve such a massive customer that has a different mix than what they have historically done with their more traditional trade.

Eduardo Padilla Silva -- Chief Executive Officer

Yes.

Carlos Laboy -- HSBC Bank -- Analyst

Thank you.

Operator

Our next question comes from Martha Shelton of Santander. Please go ahead.

Martha Shelton -- Santander -- Analyst

Hi. Thanks for taking the question. Very quickly regarding Chile, if you could give some more color regarding the soft patch that you mentioned in the prepared remarks regarding what's going on in Chile? And also given some of the recent social unrest that we've seen there, just wanted to see if you could quantify the effect on your operations there during this fourth quarter? Thanks.

Juan Fonseca -- Investor Relations Officer

Hi, Martha. This is Juan. Yeah. I mean, when we talk about the soft patch, I think generally, the Chilean macro has been soft now for several quarters. And we -- in particular in the drugstore space, we have been making changes to how we interact with de sabre [Phonetic] these institutions that have a certain number of affiliates and then you bid for de sabre and once you're working with one of these things, those customers become kind of your captive market. And last year, we started moving away from that or beyond that, and trying to innovate in terms of our sales providing some of the discounts directly and coming up with our programs to in a way -- build on the de sabre model.

Eduardo Padilla Silva -- Chief Executive Officer

Yeah. It was more like a supporting our loyalty programs. And instead of going through de sabre where the loyalty went through de sabre and not directly. So we are really trying to change our relation with the consumer, getting more involved with the loyalty program directly with [Indecipherable] and not through de sabre. And I think, we are taking my cost a little bit in the short-term, but I think it's the right part [Phonetic] for the medium and long-term connection with the consumer.

Juan Fonseca -- Investor Relations Officer

Correct. And obviously, we've also faced this quarter, what the case FX, both the Chilean peso and the Colombian peso versus the Mexican peso, when you look at our data coming out of Chile, certainly that was part of the softness I guess, when you look at it in Mexican peso terms. If we talk about same-store sales, actually, in Chile, they were basically flat or even very, very low-single digit negative. But I would characterize it as a flat in local currency.

Obviously, the second part of your question is relevant also mostly through Socofar exposure to Chile is much, much larger to Socofar to OXXO. And it's a bit of a fluid situation, obviously the protest and the situation continues to happen. And as you might imagine, I mean, we have more than 600 stores, most of them in greater Santiago. And so we definitely had some stores affected with different degrees of kind of costs. On the positive side, we can say that the insurance coverage that we're having in Chile for Cruz Verde is a very robust and so probably have to use it. But we've had a number of stores, I would say probably several dozen stores that have been impacted by the events of the last few days.

Martha Shelton -- Santander -- Analyst

Great.

Eduardo Padilla Silva -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Luca Cipiccia of Goldman Sachs. Please go ahead.

Luca Cipiccia -- Goldman Sachs -- Analyst

Good morning, Eduardo and Juan. Thanks for taking my question. Just two quick follow-ups. First on the traffic trends in Mexico considering -- and for OXXO considering the Modelo addition considering some of the initiatives, the fact that you reiterate the positive contribution of services. Could you quantify maybe a bit more how -- what are the drivers of maybe the softening that we've seen lately, evidently tickets and prices in general have been quite strong, but maybe any additional or comments you can give us on the ticket trends, it would be interesting?

And secondly, on the US move entrance, could you put the balance of the appeal of this opportunity comparing your first in-roads in the US market. I guess that's quite relevant as compared to bringing this business into Mexico and the rest of Latin America. And on the US, again, this is the first entrance you typically have somewhat of a portfolio of strategy when you enter the market. I don't think there's any market where you only have a single business or you don't aspire to have more. So how should we think about this prospective maybe over the medium-term, now that you have some exposure to the US market? Thank you.

Eduardo Padilla Silva -- Chief Executive Officer

Yeah. Let me go -- to directly answer the second question. Really what we is -- we do see as a big opportunity for growth. And we want to be aligned in both places in the JV, and also in the corporate headquarters, and because it will be very difficult not be in line we already understand how difficult things are and when the two entities are not fully aligned. With these I think the alignment was very important.

Number two creation of value. We do consider that there will be a value creation opportunities in the JV, and also in the US operation. We understand the market in a different way they do. We have a partnership that where we could exchange ideas and learn from them too, in order to replicate what they have done in the US to do in Latin America. And I think by aligning these management style and value system of those two companies, we feel very confident that this is a very nice way to be involved in the US and having a business side in Latin America, by having those two entities aligned.

And again value creation is important. Value creation is important for us in the JV, as well it's important in this partnership that we have this more minority interest, that we have in United States. And I can assure you the value creation is a mantra for us and we haven't seen that opportunity for value creation. We have not invested in this asset. I don't now, you want to add anything, Juan?

Juan Fonseca -- Investor Relations Officer

Yeah. Just I think obviously at kind of time zero right now, the orders of magnitude are pretty different, right. I mean we made or we signed the documents to make the $750 million investment, which it's obviously not an insignificant amount of money, but it is 2%, 2.5% of the market cap of the company. So keeping things in perspective. But really the point I want to make is compare that to the Mexico JV where we are going to start looking into the format and the opportunities and eventually I mean I think just in terms of ballpark you could probably expect each one of the partner, some of the -- in the beginning, we're going to open two or three stores, maybe all told that requires $50 million and so each partner puts something like $20 million or $25 million. So clearly in terms of orders of magnitude, the US represents a much more significant amount of investment in the beginning. But to Eduardo's point down the road, ideally, the two would gradually converge in terms of relevant for FEMSA.

One other comment to make, I mean, we're obviously very, very respectful and given that JRD is a private company, the amount of information that is out there is very, very small and that obviously, creates a little bit of a challenge for us as a public company, but the message that we want to continue to try to drill into you guys is that this is a very remarkable asset in terms of its growth trajectory, its growth opportunities, profitability, ROICs so on and so forth.

In terms of the other part of your question, or rather the first part of your question having to do with the traffic at OXXO Mexico, certainly, we've made these comments about destination categories having taken price increases and I think the consumer in some cases -- in the case of the beverages, for example, moving a little bit more to bigger kind of from single serve to multi-serve, we have seen these price increases and I think there is reason to believe that they might continue to come in some of the main categories at OXXO. And you'd have to ask some of the suppliers why they're doing this, but I think some people might be trying to get ahead of FX moves or just trying to lock in price increases before the end of the year.

And so that means people can come to the store a little bit less frequently. Because the reasons why they are coming to the store, they're making bigger ticket purchase because prices went up or they might be buying bigger volume presentations and basically just changing that where they probably used to come in a little bit more frequently for the single-serve. So that's what we're seeing, it's obviously theory from our side, but it's now been in place for a few months, and we think there is something to it.

Eduardo Padilla Silva -- Chief Executive Officer

I might add -- there might be some tension in some markets where permits, it seems like in the different countries in Mexico, the Federation is distributing less cash than they were in the past. And some of them are pretty much in need for some cash and they might be look to some alcohol permits as a good source of cash. And with that in mind, we have had some tension in some markets, where the previous schedule for selling alcohol have been reduced and now we're in the process of negotiating really what the idea is. And I think there was probably some of the minor effect that we have had also.

Juan Fonseca -- Investor Relations Officer

Yeah. I think that's something, for example, like we've seen in Cancun. Where the window to buy beer has gotten significantly smaller than it used to be.

Eduardo Padilla Silva -- Chief Executive Officer

Yes.

Luca Cipiccia -- Goldman Sachs -- Analyst

At this, if I can -- very clear. Just a quick follow-up on the US discussion. So we are all aware of the fact that you have looked in the past to bring OXXO into this market and there are other some legal hurdles for that to happen. Is this transaction a way to get a foothold in the market in anticipation of maybe additional sort of retail in roads, down the road, long term, medium term where ever that would be possible? Or is this something that came up as an opportunity in itself? But what I'm trying to ask is, how much of this is a first step of a sort of longer sort of US exposure or inroad expansion or opportunity that may come down the road? Because we knew there was -- there is a history as well there of previous attempts.

Eduardo Padilla Silva -- Chief Executive Officer

We -- I think by itself is something that has value and has the thesis that I already explained. But going forward and understanding the US market, I think, yes, it might give us a hit -- a way to the start entering here and understanding the dynamics of the industry. And yes, we would love to get into United States in the convenience sector, but we're just finding the best way to do it.

Juan Fonseca -- Investor Relations Officer

Yeah. And I think if you kind of trying to take a 30,000 feet view, I think what we're also seeing is incremental steps in the process or by FEMSA moves toward the -- in our quest for that delta between ROIC and WACC, right. I mean the retail part of the company offers very compelling spreads in that sense and so obviously, there is the US component. I think it was explained, this is the first step, and we're going to keep trying to see how we can eventually hopefully be able to invest on the convenience sites -- convenience store side, excuse me,

But more broadly, I think, it's again proof that we are very serious when we talk about putting capital in assets that have a very good chance of generating a bigger spread between return on capital and cost of capital. And those are the parts of our business that will grow the fastest. And so this is another step in that shift toward -- we've called it in some conversations, the retailization of FEMSA, which is a gradual process but OXXO is the fastest growing part of our company and so, every day, we are a little bit more of a retail operator.

Luca Cipiccia -- Goldman Sachs -- Analyst

This is very clear. Thank you, both. Thank you.

Operator

Our next question comes from Alan Alanis of UBS. Please go ahead.

Alan Alanis -- UBS -- Analyst

Thank you so much. Hi, Eduardo, Juan. My question has to do with your investment in Coca-Cola FEMSA. Could you speak a bit of how do you see that investment going forward and I mean as the controlling shareholder of Coca-Cola FEMSA, what is your preference for the use of their cash generation in terms of capital deployment? And I mean I guess it's a more strategic question, how do you see that asset in the long run? And if you can connect the answer with a relative comparison in terms of versus Heineken, you have had [Phonetic] the Heineken more than -- over the -- you run one of them Coca-Cola FEMSA in a way and you are more of a minority in Heineken, but how do you think of those assets just strategically? Thank you.

Eduardo Padilla Silva -- Chief Executive Officer

Well, with Coca-Cola FEMSA, we are happy with Coca-Cola FEMSA the way Coca-Cola FEMSA is trying to restructure itself and beat them and realign to tackle these Latin American market in a better way. And I think Coca-Cola FEMSA is finding a way to evolve with these growing market circumstances and in a better way by centralizing, by establishing platforms and being more efficient and effective in the strategies. And also is Coca-Cola Femsa is changing it's culture to tackle these new opportunities and be more aligned with the markets that we are involved.

On the other hand, we are working a lot with the Coca-Cola Company, because Coca-Cola has the best platform for distribution in Latin America. And we are world-class in that matter. And I think really it has to do with the Coca-Cola Company, how better we can align by introducing or introducing products, delivered by Coca-Cola Company or support some others as the way we do it in Brazil to have a better economics for load sharing distribution.

So I think those might be some interesting opportunities for the future. And -- but again, we are very hopeful that the Coca-Cola Company and the Coca-Cola FEMSA will be more aligned in the future to create more value creation. In the long -- in the middle and long run, I think we have had some difficulties and some headwinds. But again, I think Coca-Cola FEMSA is an extraordinary company, and we see that there are still lots of opportunities for growth in Latin America, I don't know if you want to add anything Juan?

Juan Fonseca -- Investor Relations Officer

Yes. No, I mean, I think, John and Constantino mentioned this on their call on Friday in terms of the early stage testing of some alcoholics in Brazil and obviously, the topic of load sharing came up in a couple of the questions. Another characteristic obviously, of Coke FEMSA is the very, very significant cash generation capability. And so one of the high quality problems I suppose that we have is to the figure out how to best -- for Coke FEMSA how to best utilize that cash. Obviously some of it going to their own growth, but they've also created, as you know, significant equity issuance capacity. They have over $3 billion that they could issue with the new restructure that they did in their shares, a few months ago. So clearly, there's the growth bias and the search for growth opportunities at KOF. But there is also a lot of cash being generated by the operation and so I think the analysis will be done in terms of whether there is opportunities or what are the best ways to use that cash. Those would be really my observation.

Alan Alanis -- UBS -- Analyst

Thank you so much. Juan, could you -- could you, I mean categorize, I mean that one of the priorities in your view as a FEMSA in terms of the cash usage of that strong cash generation of Coca-Cola FEMSA?

Juan Fonseca -- Investor Relations Officer

Yes, I mean, obviously, we -- historically, we've taken the dividend from Coke FEMSA and passed it through as we do with the Heineken dividend and forgot to address. Your previous question you asked about Heineken, I mean obviously that's a different situation in that we have much more limited scope in terms of how the company has grown and how the capital is deployed. But in both cases, we've just taken dividend and passed it through. At this point, I don't think I have any reason to think that, that will change in the short to medium term.

Alan Alanis -- UBS -- Analyst

Got it. Got it. But so, is it fair to say just to conclude, is it fair to say that, then we should expect, I mean if they -- if Coca-Cola FEMSA doesn't find any opportunities or let's say, how the negotiations with the Coca-Cola Company evolved in terms of the use of this as a distribution platform for other kind of product that we should be seeing as a -- we could see an important increase in the dividend?

Juan Fonseca -- Investor Relations Officer

I think it has to be in the -- on the menu, right. It has to be a possibility.

Operator

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

Eduardo Padilla Silva -- Chief Executive Officer

Well, thank you very much for your participation today. Have a great week, everyone and...

Juan Fonseca -- Investor Relations Officer

Yeah. Just to give another shout out to Maria Dyla. Thank you, Maria Dyla for this years of help. Good luck in your new responsibilities and obviously Jorge, I'm sure, we're going to -- we're going to continue to do good things together, and welcome to -- I mean you've been a part of the team for a long time. But, welcome to you in your new capacity as Head of IR for Coke FEMSA. So thank you guys and have a great week.

Eduardo Padilla Silva -- Chief Executive Officer

Yeah. Congratulations, Maria Dyla.

Juan Fonseca -- Investor Relations Officer

Thank you, guys.

Maria Dyla Castro -- Investor Relations, Director

Thank you, Eduardo and Juan. Thank you, everyone.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Eduardo Padilla Silva -- Chief Executive Officer

Juan Fonseca -- Investor Relations Officer

Maria Dyla Castro -- Investor Relations, Director

Antonio Gonzalez -- Credit Suisse -- Analyst

Alvaro Garcia -- BTG -- Analyst

Leandro Fontanesi -- Bradesco -- Analyst

Carlos Laboy -- HSBC Bank -- Analyst

Martha Shelton -- Santander -- Analyst

Luca Cipiccia -- Goldman Sachs -- Analyst

Alan Alanis -- UBS -- Analyst

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