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28 Oct 2015

FEMSA Announces Third Quarter 2015 Results

  • FEMSA consolidated total revenues increased 8.8% and income from operations grew 2.3% comparedto the third quarter of 2014
  • FEMSA Comercio achieved total revenues growth of 37.4% and income from operations growth of27.4% compared to the third quarter of 2014
  • Coca-Cola FEMSA total revenues decreased 9.9% and income from operations decreased 6.1%compared to the third quarter of 2014

Monterrey, Mexico, October 28, 2015 — Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA”) announced today its operational and financial results for the third quarter of 2015.

THIRD QUARTER 2015 HIGHLIGHTS:

FEMSA consolidated total revenues increased 8.8% and income from operations grew 2.3% comparedto the third quarter of 2014, driven by solid growth at FEMSA Comercio. On an organic basis1 total revenuesincreased 0.7% and income from operations grew 1.9%.

FEMSA Comercio achieved total revenues growth of 37.4% and income from operations growth of27.4% compared to the third quarter of 2014, mainly driven by the incorporation of OXXO Gas operations andby 9.1% growth in OXXO same-store sales. On an organic basis1 total revenues and income from operationsgrew 17.1% and 26.6%, respectively.

Coca-Cola FEMSA total revenues decreased 9.9% and income from operations decreased 6.1%compared to the third quarter of 2014, reflecting the negative currency translation effect from the Venezuelanoperation as well as the devaluation of the Brazilian real and the Colombian peso. On a currency neutralbasis and excluding Venezuela, total revenues and income from operations grew 10.2% and 16.4%,respectively.

Carlos Salazar Lomelín, FEMSA’s CEO, commented: “During the third quarter, we continued to see gradual improvement in consumer demand in our key Mexico market: At FEMSA Comercio, the trend of same-store sales growth for OXXO reached high-single digit levels and again reflected a better mix of ticket and traffic. Activity was especially strong in the north of Mexico, consistent with perceived higher levels of manufacturing-led economic activity in that part of the country. At Coca-Cola FEMSA we are still facing difficult environments in several of our key markets, but we continue to work on the variables that we can control such as pricing and packaging and we are seeing positive results, especially in terms of market shares and profitability gains. Margin expansion in particular was remarkable in light of the foreign exchange and operational challenges we are facing in most of our markets, and we have no doubt that we will eventually emerge from this difficult macroeconomic period stronger and leaner than before.

On the strategic front, during the quarter we announced and closed the acquisition of a majority stake in Socofar. As you know, this is an exciting transaction that creates a number of opportunities for our drugstore business, adding a leadership position in Chile and a meaningful presence in Colombia, while providing a solid platform to explore and grow in other related formats in that part of our continent.”

FEMSA Consolidated

Total revenues increased 8.8% compared to 3Q14 to Ps. 78.763 billion in 3Q15, driven by FEMSA Comercio. On an organic basis1 total revenues increased 0.7% compared to 3Q14.

For the first nine months of 2015, consolidated total revenues increased 5.4% compared to the same period in 2014 to Ps. 219.996 billion, driven by FEMSA Comercio. On an organic basis1, total revenues for the first nine months of 2015 decreased 0.6% compared to the same period in 2014.

Gross profit increased 0.7% compared to 3Q14 to Ps. 30.865 billion in 3Q15. Gross margin decreased 310 basis points compared to the same period in 2014 to 39.2% of total revenues, reflecting a gross margin contraction at FEMSA Comercio driven by the incorporation of OXXO Gas operations, which have a lower gross margin than FEMSA Comercio’s other operations.

For the first nine months of 2015, gross profit decreased 1.3% compared to the same period in 2014 to Ps. 86.417 billion. Gross margin decreased 260 basis points compared to the same period in 2014 to 39.3% of total revenues reflecting a gross margin contraction at FEMSA Comercio driven by the incorporation of OXXO Gas operations, which have a lower gross margin than FEMSA Comercio’s other operations.

Income from operations increased 2.3% compared to 3Q14 to Ps. 8.513 billion in 3Q15. On an organic basis1 income from operations increased 1.9% compared to the same period in 2014. Consolidated operating margin decreased 70 basis points compared to 3Q14, to 10.8% of total revenues in 3Q15, driven by margin contraction at FEMSA Comercio.

For the first nine months of 2015, income from operations increased 2.0% compared to the same period in 2014 to Ps. 22.805 billion. On an organic basis1, income from operations remained stable compared to 3Q14. Our consolidated operating margin year-to-date decreased 30 basis points to 10.4% as a percentage of total revenues, as compared to the same period of 2014.

Our effective income tax rate was 31.4% in 3Q15 compared to 19.9% in 3Q14, reflecting the absence of last year’s one-time benefit resulting from the settlement of certain contingent tax liabilities at Coca-Cola FEMSA under the tax amnesty program offered by the Brazilian tax authorities. For the first nine months of 2015 our effective tax rate was 32.6%, in line with our expected medium-term range of low 30s.

Net consolidated income decreased 9.8% compared to 3Q14 to Ps. 6.060 billion in 3Q15, driven by (i) a foreign exchange loss related to the effect of Coca-Cola FEMSA’s US Dollar-denominated debt position as impacted by the depreciation of the Mexican peso during the quarter, (ii) a tough comparable base on income tax mainly due to the one-time benefit received in 3Q14 from the settlement of certain contingent tax liabilities at Coca-Cola FEMSA; and (iii) a swing in other non-operating expenses due to the same reason, given that the settlement of the contingent tax liabilities was recorded as a gain in the other non-operating expenses line. These factors were partially offset by an increase in FEMSA’s reported 20% participation in Heineken’s results.

For the first nine months of 2015, net consolidated income increased 4.9% to Ps. 15.771 billion compared to the same period of 2014, mainly driven by an increase in FEMSA’s reported 20% participation in Heineken’s results.

Net majority income for 3Q15 was Ps. 1.39 per FEMSA Unit2. Net majority income per FEMSA ADS was US$ 0.82 for the same period. For the first nine months of 2015, net majority income per FEMSA Unit2 was Ps. 3.37 (US$ 1.99 per ADS).

Capital expenditures amounted to Ps. 4.673 billion in 3Q15, reflecting lower investments at Coca-Cola FEMSA.

Our consolidated balance sheet as of September 30, 2015 recorded a cash balance of Ps. 43.377 billion (US$ 2.567 billion), an increase of Ps. 7.736 billion (US$ 457.8 million) compared to December 31, 2014. Short-term debt was Ps. 13.363 billion (US$ 790.8 million), while long-term debt was Ps. 88.428 billion (US$ 5.233 billion). Our consolidated net debt balance was Ps. 58.414 billion (US$ 3.457 billion).

Soft Drinks – Coca-Cola FEMSA
Coca-Cola FEMSA’s financial results and discussion thereof are incorporated by reference from Coca-Cola FEMSA’s press release, which is attached to this press release or may be accessed by visiting www.coca-colafemsa.com.

FEMSA Comercio

Total revenues increased 37.4% compared to 3Q14 to Ps. 39.222 billion in 3Q15, reflecting the incorporation of OXXO Gas operations and the opening of 276 net new OXXO stores in the quarter to reach 1,146 total net new store openings for the last twelve months. On an organic basis3, total revenues increased 17.1% compared to 3Q14. As of September 30, 2015, FEMSA Comercio had a total of 13,541 OXXO stores. Same-store sales increased an average of 9.1% for the third quarter of 2015 over 3Q14. This performance was driven by a 5.9% increase in average customer ticket and a 3.0% increase in store traffic.

For the first nine months of 2015, total revenues increased 29.8% compared to the same period in 2014 to Ps. 104.876 billion. On an organic basis3, total revenues for the first nine months of 2015 increased 14.5% compared to the same period in 2014. FEMSA Comercio’s same-store sales increased an average of 6.3% compared to the same period in 2014, driven by a 4.8% increase in average customer ticket and a 1.4% increase in store traffic.

Gross profit increased by 20.1% in 3Q15 compared to 3Q14, resulting in a 450 basis point gross margin contraction to 31.5% of total revenues. This contraction mainly reflects the incorporation of OXXO Gas operations, which have a lower gross margin than FEMSA Comercio’s other operations. For the first nine months of 2015 and for the same reason, gross margin contracted by 340 basis points compared to the same period in 2014, to 31.4% of total revenues.

Income from operations increased 27.4% over 3Q14 to Ps. 2.980 billion in 3Q15. On an organic basis3, income from operations increased 26.6% in 3Q15 compared to 3Q14. Operating expenses increased 18.0% in 3Q15 to Ps. 9.359 billion, below revenue growth. In spite of this, operating margin contracted 60 basis points compared to 3Q14, to 7.6% of total revenues in 3Q15, driven by the lower gross margin of OXXO Gas operations.

For the first nine months of 2015, income from operations increased 24.7% compared to the same period in 2014 to Ps. 6.861 billion, resulting in an operating margin of 6.5%, which represents a 30 basis point contraction from the same period in the prior year, driven by the incorporation of OXXO Gas operations. On an organic basis3, income from operations increased 24.2% in the first nine months of 2015 compared to the same period in 2014.

Recent Developments

On September 23, 2015, FEMSA Comercio announced the closing of the acquisition of a majority equity stake in Grupo Socofar ("Socofar"), a leading South American drugstore operator, after obtaining all required regulatory approvals. Socofar is based in Santiago, Chile and currently operates over 640 drugstores and 150 beauty stores throughout Chile, as well as over 150 drugstores in Colombia.

CONFERENCE CALL INFORMATION:

Our Third Quarter of 2015 Conference Call will be held on: Thursday October 29, 2015, 12:00 PM Eastern Time (10:00 AM Mexico City Time). To participate in the conference call, please dial: Domestic US: (888) 417 8533; International: (719) 457 2697; Conference Id: 103355. The conference call will be webcast live through streaming audio. For details please visit www.femsa.com/investor.

If you are unable to participate live, the conference call audio will be available on http://ir.FEMSA.com/results.cfm.

FEMSA is a leading company that participates in the beverage industry through Coca-Cola FEMSA, the largest franchise bottler of Coca-Cola products in the world; and in the beer industry, through its ownership of the second largest equity stake in Heineken, one of the world's leading brewers with operations in over 70 countries. In the retail industry it participates with FEMSA Comercio, operating various small-format store chains including OXXO. Additionally, through its Strategic Businesses unit, it provides logistics, point-of-sale refrigeration solutions and plastics solutions to FEMSA's business units and third-party clients.

The translations of Mexican pesos into US dollars are included solely for the convenience of the reader, using the noon day buying rate for Mexican Pesos as published by the U.S. Federal Reserve Board in its H.10 weekly Release of Foreign Exchange Rates for September 30, 2015, which was 16.8980 Mexican Pesos per US Dollar.

FORWARD-LOOKING STATEMENTS
This report may contain certain forward-looking statements concerning our future performance that should be considered as good faith estimates made by us. These forward-looking statements reflect management’s expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which could materially impact our actual performance.

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