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Wal-Mart de México, S.A.B. de C.V. (WALMEX)

Webcast Results for the Third Quarter 2018

Mexico City, October 18, 2018 (FREE TRANSLATION, NOT TO THE LETTER)

MARÍA HORTEGA:

Good afternoon. This is María Hortega, Investor Relations Senior Manager for Walmex. Thank you for joining us today to review the results for the third quarter 2018.

On today’s call with me are Guilherme Loureiro, President and Chief Executive Officer for Walmart de México y Centroamérica, and Olga González, Chief Financial Officer.

The date of this call is October 18, 2018. Today’s call is being recorded, and will remain available at www.walmex.mx

Before we start, let me remind you that the content of this call is property of Wal-Mart de México S.A.B. de C.V. and is intended for the use of the company’s shareholders and the investment community. It should not be reproduced in any way.

This call may contain certain references concerning Wal-Mart de Mexico S.A.B. de C.V.’s future performance that should be considered as good faith estimates made by the Company.

These references only reflect management’s expectations and are based upon currently available data. Actual results are always subject to future events, risks and uncertainties, which could materially impact the Company’s actual performance.

Now, I would like to turn it over to our CEO, Gui Loureiro.

GUI LOUREIRO:

Thank you María and good afternoon everyone, thanks for joining us today for our earnings call to review the third quarter of 2018.

This quarter was very special for us, it was marked by innovation and evolution. Retail is changing fast, we are evolving with our customers and we are going through a transformative period that is requiring us to change from the inside to deliver even stronger results.

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We’re working very hard to position the company for continued success, and we’re doing it from a position of strength.

Let me talk about some of the projects that we announced on the third quarter:

As most of you know, Walmart Inc. (NYSE: WMT) acquired Cornershop Inc. and Walmex will acquire from Walmart the Mexican business of Cornershop, the leading online marketplace platform for on-demand delivery from supermarkets, pharmacies and specialty food retailers.

Cornershop’s unique low-cost IT development, world class app, replicable business model and on-demand crowd-sourced picking and delivery service, will allow us to step-up our efforts in on-demand. By adding new capabilities to our already robust infrastructure will allow us to move even faster.

As a remainder, this platform will remain open for all retailers, suppliers and customers.

The acquisition is subject to regulatory approvals and is expected to close by the end of this year.

Additionally, we entered into a commercial agreement to list Walmex merchandise on Cornershop at the same price as in our stores in Mexico City, Guadalajara and Monterrey.

I am also very excited to share with you that we launched our eWallet, Cashi. Driving a seamless omnichannel experience is one of our three priorities, and Cashi is a great example of how we are moving fast to deliver for our customers in terms of access and experience.

Cashi simplifies the use of cash and gives access to online shopping and service payments to unbanked customers, it will be a key driver for omichannel sales in the future.

Cashi also allows us to understand our customers better, and by knowing our customers more thoroughly, we will be able to serve them in new and better ways to continue to win their loyalty.

Stay tuned to see how Cashi evolves. We started with a minimum viable product, but there are multiple functionalities that we are planning to add to reinforce the product.

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Now let me talk about one of the projects that excites me the most…

During the last quarter we launched our business incubator Zona 18, with the goal of delivering value quickly and continuously to support the execution of our strategy and our digital transformation.

Zona 18 is composed by four areas:

The labs, whose main purpose is to develop digital products;

A design center, in charge of developing new experiences and services;

Agile squads, which are multidisciplinary teams formed to work on strategic projects;

And Walmart Laboratoria, through which we create disruptive solutions together with external collaborators.

We are building in the present projects that are the future of the company, combining the greatness and enthusiasm of Walmart with an alternative and disruptive way of thinking, to reinvent the rules of retail.

We are also exploring new traffic drivers, as an example, in August we started a pilot test of 6 gas stations in Bodega, Walmart and Sam’s Club.

The idea is to complement our value proposition and save our customers time and money.

Currently the gas stations are operated by a third party, and we will measure the response to customer- traffic to inform our decision on how to move forward with the project.

Now let me start with sales performance. Please consider that when I talk about Central America, I am referring to figures on a constant currency basis.

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On the third quarter the positive momentum in the business continued.

At a consolidated level, total revenues increased a solid 7.9%.

Mexico delivered total revenue of $120.7 billion pesos, an increase of 7.6% over last year.

In Central America, total revenue reached $27.0 billion pesos, which implied a 4.8% growth.

For the 9 months from January to September, Walmex total revenues grew 8.5%: 9.0% in Mexico and 6.9% in Central America.

Healthy traffic performance is driving strong same-store sales growth; year to date comp traffic has increased 2.2% in Mexico.

In Mexico, same-store sales grew 6.3% during the quarter and 7.5% on the 9 months.

In Central America, same-store sales grew 1.5% during the quarter and 3.0% on the 9 months.

Our performance has been consistent and same-store sales continue be our main growth driver.

As of September, Mexico’s two-year stack for same-store sales growth was a solid 13.7% and in Central America it was 7.9%.

Growth was broad-based in Mexico.

The Center region posted the strongest growth, followed by the South and the North regions. The Metro area had a lower, but yet solid growth. On the third quarter we faced a difficult comparison base in the region, as last year we saw a positive impact on sales given an increase in demand of goods for donation after the earthquake.

In Central America we continue to gain share in a market that is growing at a slower pace.

Honduras was the country with the highest same-store sales growth, followed by El Salvador and Guatemala.

Costa Rica delivered a lower, but positive growth. Less favorable economic conditions in the country are pressuring customers’ budgets and decelerating consumption.

Sales in Nicaragua continue to be challenged by the socio-political conflict in the country that is affecting economic conditions in general.

The commercial strategies that we implemented in the region are starting to show results, but given the nature of the challenges that we are facing, we expect growth to resume at a slow pace.

In addition to reinforcing commercial activities, we expanded the roll-out of the Centers of Excellence program to 176 stores and we improved the price

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gap methodology to offer even better prices to our customers and boost growth in the region.

Our team in Central America is working really hard and I want to thank them for their commitment and effort.

Now let’s look at the performance by format in Mexico:

Bodega delivered the highest same-store sales growth. Once again we had a successful “Morralla” campaign. This price-point program is now considered the largest promotional campaign in Mexico. “Morralla” is a huge traffic driver, and even though it lowers average ticket, once our customers are in the stores they are surprised by our great merchandise and unbeatable prices.

Walmart also posted strong growth. The solid execution of the Summer and Back to School seasonal events, together with the successful execution of the “Markdowns for Everyone” campaign, were key to the format’s performance.

This quarter was also special for Sam’s that launched “Sam’s Club Plus” membership, which offers a superior value proposition for our members. Together with a 2% cash back, it gives Plus members access to exclusive events and prices, as well as to special benefits and discounts through Benefits Travel.

Superama delivered strong growth. Winning in Fresh is one of the top priorities of the format. During the quarter, the team developed in-store activities such as “The Sandwich Club” and “BBQ Masters” where our customers and associates had fun at the stores while learning new cooking techniques. These type of events are allowing Superama to differentiate itself from competitors while capitalizing new purchase occasions.

From a merchandise perspective, we saw strong growth in all divisions, particularly in our core division Food and Staples, where Dairy and Consumables had an outstanding performance.

We are experiencing headwinds from lower food inflation, especially in the Produce departments, but we are being able to drive volume to partially offset this impact.

General Merchandise and Apparel also had solid performance.

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Now let’s talk about omnichannel…

Our marketplace continues to grow: we increased the number of sellers almost 10 times since the launch in September 2017, and now we have more than 690 sellers offering great merchandise on our site. We are making good progress, but we need to further increase our assortment in order to expand our reach to new customers.

The omnichannel business in Bodega is also growing fast, we now have 290 kiosks where we offer customers an extended catalogue and easy payment and pickup. Considering the progress in Bodega we now have more than 560 kiosks operating in our stores.

As Olga mentioned in last quarter’s webcast, we are updating our General Merchandise platform. We already performed some of the updates, however, we expect to have the new platform ready after the holidays season is over.

During the quarter, omnichannel sales grew 41% and GMV grew 49%, General Merchandise posted even a higher growth.

Omnichannel sales now represent 1.1% of total Mexico sales and they contributed 40bps to total sales growth.

Moving to new stores…

On the third quarter we opened 25 stores, 15 in Mexico and 10 in Central America.

We are very pleased with the quality of new-store growth. Our store portfolio is very healthy and we are growing in a disciplined way to ensure our stores’ profitability is sustainable in the long therm.

New-stores contribution in the quarter was 2.1%, which, considering the normal sales ramp-up of a new store, positions us to reach the expected contribution for the year.

Now, looking at the performance vs. the market…

We have outpaced the self-service and clubs market measured by ANTAD for 15 consecutive quarters.

Our associates are doing a great work in improving the shopping experience and operating with discipline, and customers are rewarding us with their loyalty. Year to date we have grown 410 bps ahead of the market, the largest gap since 2009.

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Our strong performance has been broad-based: all formats and divisions individually outpaced ANTAD.

In summary, we are very pleased with the progress we are making across our business. We are positioning our company for sustained growth while delivering strong results. Thanks to our customers and associates, the fundamentals of our business are strong.

We are entering the busiest time of the year, our associates have been preparing, and I am very happy with what I see at the stores and online. We are ready to surprise our customers with great merchandise, amazing prices and an enhanced experience.

With that, I wish you a happy and safe holiday season and I turn it over to Olga who will cover the financial results for the quarter.

OLGA GONZÁLEZ:

Thank you Gui, and good afternoon everyone.

I am extremely excited about where we're going as a company, we are doing the right things for our customers and we have incredible financial strength that enables options.

As a reminder, our financial strategy is based on value creation:

We are focused on delivering quality growth across all countries, regions, formats and categories in which we operate; on evolving our way of working to drive productivity and reinvest in the business; and on refining our capital allocation and working capital management to deliver shareholder value.

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I’ll start with Mexico…

We delivered another solid performance in the third quarter.

Total revenues grew 7.6%

Gross profit increased 7.7% and remained at 23.0% of sales.

SG&A grew 7.4% and we achieved 10bps of leverage. By focusing on “Every Day Low Cost” and productivity, we were able to grow expenses at a slower pace than revenues.

As a result, operating income and EBITDA grew double digit, 11.7% and 10.3% respectively.

EBITDA margin expanded by 20bps to 10.3%.

Regular operating expenses leveraged by 9bps. Expenses related to store remodeling and maintenance declined by 10bps, and we invested 17bps in new stores, eCommerce and digital.

In order to position our company for continuous success, we are going through a period of heavy investments, but our disciplined expense management is allowing us to self-fund these investments while maintaining our world-class EBITDA margin.

The 5 areas that we are re-investing are in prices, associates salaries, eCommerce and technology, logistics and new stores.

An example of the investments we are doing in technology, is the update of our POS system to Flex POS.

The new POS allows us to drive sales by expediting the processes we make to implement commercial strategies and by boosting financial services.

On the other hand, it increases productivity by reducing manual processes and enables omnichannel initiatives that help us to serve our customers better.

All Walmarts, Superamas and Sam’s Club now operate with the Flex POS, we also started the roll-out in Bodega, and we expect to finish it in the coming months.

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Now let’s review the performance in Central America…

Please consider that when I talk about Central America, I am referring to figures on a constant currency basis.

As Gui mentioned, the commercial strategies we are implementing are starting to show results, but sales growth continues to be low and we are not satisfied, there is still a lot of work to be done.

Total revenues increased 4.8%.

Gross profit expanded by 40bps, driven by strategic pricing.

Given the sales situation, the team took a very disciplined approach toward expenses and focused in productivity, as a result we achieved 20bps of expense leverage.

Operating income grew 14.7%, and EBITDA margin increased 60bps to 9.0%.

At a consolidated level, total revenues grew 7.9%.

Gross profit increased 8.3% to a 23.3% margin.

SG&A grew 7.7%, below total revenues growth.

Operating income posted double-digit growth of 12.8%, and EBITDA margin expanded by 30bps to 10.1%.

Fluctuations in currency exchange rates and discontinued operations negatively impacted net income, but it is important to emphasize that our business on a constant currency basis, remains strong.

Income from continuing operation increased a solid 8.5%.

Now let’s look at the results for the 9 months from January to September 2018.

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Year to date top line growth in Mexico has been strong. Total revenues increased 9.0%.

Gross profit grew 9.1% and gross profit margin remained at 22.7%.

We achieved 10bps of expense leverage as SG&A grew 8.1%, below total revenue growth.

As a result, operating income increased 12.3% and EBITDA 11.0%, to reach a 10.0% margin.

Despite a challenging environment, Central America has improved profitability.

For the 9 months total revenues increased 6.9%.

Gross profit expanded 10bps to 24.2% and SG&A grew 6.4%.

Operating income increased 9.6% and EBITDA margin expanded by 30bps to reach 8.7%.

Consolidated revenues increased 8.5%.

Gross profit margin remained at 23.0%.

After reinvesting in the business, we achieved 10bps of expense leverage and SG&A grew 7.6%.

Operating income grew 11.8% and EBITDA 10.8% to reach a 9.7% margin.

Income from continuing operations increased double digit, 14.6%, but net income was impacted due to the sale of Suburbia recorded in 2017.

Moving to the balance sheet…

We closed the quarter with $33.1 billion pesos, $6.6 billion pesos or 25.0% more than last year driven by the strong cash generation from our operations.

Inventories increased 5.5%, significantly below total revenue growth, and accounts payable increased 13.1%, as a result of an increased focus in working capital management.

As we grow and reinvest in the business our financial strength increases.

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Operating cash flow grew 12.0%, ahead of total revenues growth, reaching $59.3 billion.

After investing $17.5 billion pesos in higher return projects, we returned $23.7 billion pesos to our shareholders in the form of dividends.

In summary, our performance in the quarter and throughout the year has been strong. I am proud of the progress we have made on several fronts, and I am very excited about all the growth opportunities for Walmex going forward.

We will continue to focus on three priorities:

- Deliver a seamless shopping experience - Drive traffic to our stores - Change how we work to be more digitally

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Thank you very much for your interest in our company, I wish you a happy holiday season and, as always, we will make ourselves available to receive your calls to answer any questions you may have.