Fomento Económico Mexicano, S.A.B. de C.V. (FMX) Q3 2023 Earnings Report, Transcript and Summary

Hello, and welcome to the FEMSA's Third Quarter 2023 Results Conference Call. Please note this conference is being recorded. And for the duration of the call, your lines will be on listen-only. However, you'll have the opportunity to ask questions. [Operator Instructions] I will now hand you over to Juan Fonseca to begin today's conference. Thank you.

Good morning, everyone. Welcome to FEMSA's third quarter 2023 results conference call. Today, we are joined by Paco Camacho, our Chief Corporate Officer; Eugenio Garza, our CFO; and Jorge Collazo, who heads Coca-Cola FEMSA Investor Relations team. The plan is for Paco to open the conversation with some high level of strategic comments on trends and results, followed by Eugenio, who will focus more on the detailed numbers, and we will then open the call for your questions. Paco, please go ahead.

Thank you, Juan. Good morning, everyone. Let me begin by thanking you once again for all your kind messages of support and sympathy around the passing of Daniel last quarter. He left a big hole for us, but also a big legacy and we renewed purpose to continue what he starts. To that end, Jose Antonio transition seamlessly and is now fully engaged in his dual role as Chairman and CEO, steering the ship as we continue to execute our ambitious strategy. On that note, and as an update on where we are on FEMSA Forward, we can inform you that regarding the Envoy IFSBrady transaction announced at the end of August, the regulatory process has advanced according to schedule, and we expect the transition to close soon. Additionally, we have launched the divestiture process for the next layer of assets, including those related to Solistica and Inder [ph], and we have already made progress on those early efforts. Furthermore, last month, we announced changes to FEMSA's senior leadership team, as well as an evolution of the organizational structure of our retail business vertical. Once these changes take effect in November, we will have one leader for each of the three-fold business verticals in full consistency with FEMSA Forward, enabling our organization to operate with maximum focus and effectiveness. As we have mentioned before, FEMSA Forward is fully aligned with FEMSA’s customer centricity and our broader strategic priorities of driving long-term growth, increasingly enabled by digital capabilities all the way within our core business verticals and with a disciplined approach to capital allocation. On this last topic, we have made significant progress in our analysis, and we will share and discuss our filings with our Board coming November. We are all aware that this is an item top of mind, and we will keep you posted as appropriate. Moving on to the results. Our third quarter numbers continued the very positive trends seen during the first half of the year. Fully consistent with our strategic priorities and making progress towards the target set by each business unit long-range plan. Indeed, 2023 is shaping up to be a banner year for our core business vertical. Beginning with Proximity, like we did in our call last quarter, it's helpful to talk for a minute, their own long-range plan and the four priorities around, which it is built; strengthening the core, developing new growth avenues, developing multiple successful formats and growing the footprint beyond Mexico. Looking at OXXO third quarter results through this lens, we see they again made stellar progress strengthening the core as same-store sales growth remained above 15% against a demanding comparison base with average traffic contributing more than half of the growth, which is remarkable. This strong performance continues to be driven by a broad set of tailwinds including a strong consumer demand for third, gathering and nations, solid commercial income dynamics, better segmentation at the store and the rapid adoption of a spin premier loyalty program. Continuing with the positive news of a stronger core, store growth was robust once again with Mexico and LatAm adding 293 net new stores during the quarter and 1,453 during the past 12 months. Looking only at Mexico, we are on pace to meet or exceed the 1,000 new net store threshold for the first time since before the COVID pandemic and with more productive stores. Moving on to the long-range priority of growing beyond Mexico. During the quarter, Grupo Nos continued its solid advance with revenues increasing over 150% year-over-year and with OXXOs footprint in Brazil more than doubling during the last 12 months [ph] Proximity America, but along the priority of developing multiple successful formats, Bara grew revenues by 36.7% and reached a total of 309 stores as of the end of the quarter. For its part, proximity Europe increased revenues by 8.7%, reflecting traffic recovery and positive pricing initiatives as well as the growth of Valora food service and B2B business. As of the end of the period, Proximity Europe has 2,810 points of sale. Our health operations continued the trend we saw in the first half of the year. Reflecting foreign exchange headwinds from a strong Mexican peso relative to local currencies in South America as well as mixed results with flat numbers in Chile and positive trends in Colombia and Ecuador offset by pressure in a more competitive Mexico. Importantly, during the quarter, our health business continues to push to consolidate its competitive position across several markets, increasing its footprint by 9% and to reach a total of 4,247 locations. In fact, during the last year, our Shell division added new locations across its territories at a pace of MXN1 per day. For its part, our fuel business delivered a stable performance with the strength in the corporate wholesale business continuing to perform relative to region outperformed relative to region. Regarding digital, the number of active users for Spin reached $6.4 million during the quarter. An active user for our Premier loyalty program reached $17.7 millionwhile more than 28% of OXXO Mexico sales are now associated with the program. We continue to privilege the acquisition of higher-quality users while we make progress fine-tuning the use cases, value proposition, unit economics and monetization strategies for each part of the ecosystem. In terms of financial implications, during the quarter, we deployed close to MXN 1 billion in growing this business, roughly in line with the previous quarter as well as budget. Finally, Coca-Cola FEMSA delivered a remarkable set of results for the third quarter, driven by double-digit volume and revenue growth as they accelerate their pace of investment across markets. And with that, let me turn it over to Eugenio.

Thank you, Paco, and good morning to everyone on line. Before going on to the numbers, I also want to give a quick shot out to our colleagues in Acapulco and surrounding areas that were affected by Hurricane Otis. There have been true heroes in helping the community to get back on their feet over the past couple of days. Thank you for that. Going into the results in more detail, I also want to bring your attention before that, that -- as of the third quarter, we are now booking onboard solutions as of the discontinued operations. Therefore, for comparability purposes, we are adjusting our third quarter '22 consolidated financials to reflect this change. Moving on to FEMSA's consolidated quarterly results. Total revenues during the third quarter increased 19.3% and while income from operations increased 12.7% compared to the third quarter of 2022. Net consolidated income was MXN 12.8 million billion, reflecting higher income from operations a non-cash foreign exchange gain of $5.4 billion related to FEMSA's U.S. dollar denominated cash position as impacted by the depreciation of the Mexican peso during the quarter and a decrease in net interest expenses during the quarter. This was offset by a decrease in our net income from discontinued operations, which mainly reflects the results of our investment in Heineken during third quarter 2022. Moving on to discuss our operations and beginning with proximity Americas. We added 283 units during the quarter to reach 1,453 net new stores for the last 12 months. This puts us ahead of target and underscores not just the momentum we have achieved in Mexico, but also the strong pace we now have in Latin America, particularly in Colombia, where we recently began opening stores in our fourth city Cali. OXXO in-store sales were up 15.1% for the third quarter, This was driven by an increase of 6.6% in average customer ticket and a very strong 8% growth in traffic. As Paco mentioned at the outset, this performance reflects a broad set of tailwinds related to core categories performing well. Healthy commercial income dynamics, better segmentation efforts and the growing impact of the Premier loyalty program, all of this against the backdrop of a robust consumer environment. Gross margin expanded by a full percentage point to reach 41.2%, reflecting strong commercial activity and promotional programs with key suppliers as well as an undemanding comparison base from last year. Income from operations increased 14.7%, while operating margin decreased 50 basis points compared to the same period of 2022 to reach 8.9%, reflecting an increase in labor expenses stemming from the labor reforms in Mexico. At Proximity Europe, revenues increased 8.7% in local currency to reach MXN 11.2 billion, reflecting a recovery in traffic and ticket, driven mostly by improved customer mobility. Gross margin was 41.8%, reflecting a mix effect driven by the positive performance of Valora's foodservice and B2B businesses. Operating margin was 3.1%, reflecting better operating leverage, partially offset by an increase in expenses driven by inflationary pressures. Moving on to FEMSA's Health operations. During the quarter, we expanded our drug store count by 80 net new additions to reach a total of 4,347 units across all of our territories at the end of September and 365 total net new stores for the last 12 months. Revenues increased slightly, while same-store sales decreased an average of 3.6%. However, as was the case last quarter, it is important to note that on a currency-neutral basis, revenues would have grown 13.6% and same-store sales would have increased 4.7%, partially offset by a demanding comparison base in our operations in Chile and a very challenging competitive environment in Mexico. Gross margin contracted 30 basis points in the quarter, reflecting a negative mix effect, driven by the increasing contribution of our operations in Colombia, which have structurally lower margin. Operating margin increased 60 basis points, reflecting an increase in labor expenses in most of our markets. At OXXO gas, revenues increased 14.2% and same-station sales grew 8.1%. Retail volumes were again complemented by a robust pickup in corporate and wholesale activity. During the quarter, gross margin was 12.4%, while operating margin was 4.5%, reflecting tight expense control, offset by increased labor expenses. Moving on, Coca-Cola FEMSA, as you saw a couple of days ago, delivered a stellar set of results in the third quarter. Total volume grew 11.6%, driven by growth across all of its territories. Total revenues increased 10.1% and operating income grew 15.3% as operating margin expanded by 70 basis points to reach 13.5%. You can listen to the replay of their conference call held last Wednesday on their Investor Relations website. And with that, let us open the line up for questions. Operator, please?

Thank you. [Operator Instructions] Our first question comes from the line of Ben Theurer from Barclays. Please go ahead. Ben Theurer from Barclays. Please go ahead. Our next question comes from the line of Ricardo Alves from Morgan Stanley. Please go ahead.

Hi everyone. Thanks so much for the call. Thanks for the quick update on capital allocation as well. I'll leave follow-ups on that to another colleague. I wanted to take advantage of such strong topline at OXXO as well as the new leadership with Jose Antonio in the Retail vertical. I wanted to take advantage of that and try and ask a more strategic question. I mean, FEMSA opened nearly 300 stores this quarter, right? We're running at 1,500 last 12 months. So in the context of the FEMSA forward announcement, the prominence that OXXO is gaining the senior management changes, is there a revised medium to long-term growth plan for OXXO? Wanted to see if you can break it down again into what are the latest thoughts for Mexico, South America, ex-Brazil and even Brazil, if you will, but mostly proximity Americas? Basically, after these numbers quarter-over-quarter of beats on the topline front, we feel that there's upside to the numbers that we've discussed over and over again over the past couple of quarters. So, just curious to hear the latest strategic thoughts ahead for OXXO coming from Jose Antonio and the proximity team overall? And then I'll go back in the queue. thank you.

Thank you. Thank you, Ricardo, for the question. Not sure what it means to go back in the queue, but thank you. I'll just start with the first part of--

I want to limit myself to one question.

I know. Thanks for the discipline. Listen, let me start with the first part of the question, and I will let then can you provide a bit more color. But look, on the strategic side, clearly, the good news here is that on top of the goodness of the organizational alignment with [indiscernible], which is taking place as we said in November. The fact is that we have also shared with you, we have very robust long-range plans on each of the businesses, including, of course, proximity. So as of today, what is happening is that all the plans that were developed behind that long-range plan strategy, are being deployed. And every single one of them are providing results and some of those results are, of course, part of what is being reported. Now as we work right now in the budget for 2024, as we closed 2023, you can imagine that part of the exercise is to also revise or revisit the projection that was done for the next several years as part of the long-range plan. And the team is working on that. And I assure you that when – with José coming in, he's actively participating in reviewing those numbers and in checking whether they need to adjust some of the strategies, how they will start working together. So I mean, clearly, is part of the very robust process that we have in FEMSA related to the long-range plan to the budget to the business management and José is jumping in at the right moment to make sure that any adjustment is taking care of as part of that process. As for the second part of the question, Juan, yeah A –Juan Fonseca: Yes. Hey, Ricardo, it's Juan. I think in terms of the number of openings, as you correctly framed the question, this is pretty strategic in the following sense. The last couple of years, certainly through the COVID years, there was this big deceleration in the opening of stores in Mexico, right? We closed a bunch of stores, and then we were opening 800 per year. And obviously, there was this concern of -- does this mean that structurally, we can't go back to kind of the four-digit number of openings in Mexico. And of course, what we've seen in the last 18 months to 24 months is once we build our pipeline with the new standards that are allowing us to open better and more productive stores, we are already back to the 1,000 stores per year in Mexico. And I think at this point, that is the number that I would plug into a model. I don't know necessarily that we would go back to the 1,200, 1,300, 1,400 that we did at some point in Mexico. I think I would use the 1,000 number for Mexico. But the other part of the equation, which is LatAm has definitely come of age over that time frame as well. So we mentioned a few minutes ago, we are now in four markets in Colombia. So it's Bogota, Bucaramanga, Pereira and now Cali. And things are going well and you integrated okay market in Chile, there's going to be some further growth there as well. And of course, Peru is also kind of coming into a stage where we could probably accelerate the openings. So if you look at it in an aggregate numbers. So the 1,400 and change, that number will probably continue to increase, but it will be more driven by ex-Mexico than by Mexico. And I would leave Mexico at 1,000 until further notice. But again, remembering that those 1,000 stores are going to be more productive than the 1,000 stores that we opened two, three, four, five years ago. I would leave it there.

The only thing I would add just to get on to move on here, but I think it's important is that as we continue to execute on the long range plan, we are having success across all initiatives. I mean top line initiatives, bottom lines initiatives. And that is making, I think, the unit economics, especially in Mexico, better than we thought they would be when we originally executed. So if anything, I see a longer runway in terms of how long we can grow at this pace, and I think poses challenge going forward would be more of a bandwidth issue as to how we allocate I mean, human power and just -- I mean, bandwidth to prioritize across all the regions that are now encompass what he is managing. So it's more a prioritization issue than anything else. And I'm comfortable that – that we would be able to grow the pace – product for longer than we otherwise would have with the old unit economics.

And this -- none of this really includes Brazil, right? I mean Brazil is its own thing. And there, I would also envision an acceleration of the pace.

Very clear. Thanks for the comprehensive answer everybody.

Thank you.

Our next question comes from the line of Ben Theurer from Barclays. Please go ahead.

Okay. I will try this again. Can you hear me?

Yes. Perfect, Ben. Thank you.

Fantastic. So first of all, congratulations on the results. And I'd like to ask my question on just capital allocation in general. We talked right now about store openings for OXXO, you've talked about the health piece one per day, nice number 365 in the last 12 months. So if we think about these CapEx plans, right, and obviously, the cash you need for being that base new stores, be it OXXO, be it health in the different regions. How should we think about just your cash flow allocation and just the general allocation of the excess capital that you have right now post-M&A? Any update you can give us on that, that would be much appreciated.

Sure. Let me take that Ben, and then you guys can complement me if you want. I mean, the true beauty of the proximity health model from a capital allocation perspective is that they are true compounders. I mean they generate a lot of cash, and we are at a store base right now in all geographies that pretty much self-fund this growth at very high marginal voice. So it is a fantastic business model at this stage we're in. So we could be -- I mean, over the next five years, be spending, I mean, $4 billion to $5 billion of growth CapEx, not just in new store openings, but also distribution centers and now the infrastructure that will be self-funding by the business unit and still have enough cash left over for distributions to shareholders. So that basically leaves at least the cash we have on hand in the balance sheet right now available and again, cash is fungible, but -- but in that amount of the cash that we have right now for inorganic expansion and for capital returns to shareholders. So we faced, I think, with a very high cost problem of having, I mean, two very cash-generative assets at very attractive reinvestment opportunities in cash flow generation. We have one, a burgeoning business, not burgeoning, but I mean, incubating business, which is digital, which we are investing in, but it only consumes a fraction of the cash that the other two businesses are speeding off and that provides us, again, optionality to look for value-creating acquisitions and potentially, I mean, substantial returns to shareholders as well.

Thank you.

The next question comes from the line of Bob Ford from Bank of America. Please go ahead.

Thank you. Good morning everybody and thanks for taking the question. You seem to be generating not only scale, but engagement with premia. Could you talk a little bit in terms of where you are in terms of driving frequency and average ticket and where you are in that progression of transitioning premia a cost to a profit center, please?

Hey Bob. This is Juan. I think you focus on something that I find very exciting myself, which is the speed at which premia has grown, the massive number of users, and when we look internally at the impact on average ticket. So how this is spilling over to the auto business, but also very early stages where we are working with partners, right? So you talk about Volaris, you talked about Volaris -- the streaming service from Televisa and potentially others that may come down the road as well as the internal ones. OXXO Gas, in particular, you noticed the power of this in a demographic that historically has not really had a lot of access to loyalty programs. So there is -- the average ticket that goes to Premia is meaningfully higher than the regular average ticket. You start really looking at things like retail media, digital media, where you begin to monetize when you get on your app to check your point, balance or whatever, and you begin to get ads by some of our big suppliers. So you're transferring the real estate obviously, for a long time, we've been monetizing the physical real estate on the commercial income front, but we're beginning to monetize the digital real estate for similar purposes, which, of course, is endless. So very early stages, but moving in the right direction and probably a little bit faster than I expected.

Yes. And Bob, if I may, just to add a couple of points to that. The most exciting part of the OXXO Premia is the fact that we are being able to identify the different journeys from different consumer segments. And the fact is that there is one way in which a consumer that goes into an OXXO Gas station and accumulate points there, uses the overall ultrapremian platform versus someone that goes and use daily to buy a coffee in an office store. And the reality is that the team is digging into every single journey possibility so that they maximize the personalization for consumers in the midterm. That's really the end game here on top of everything else that Juan said. So today, when you look at the tender, which is very high already, that already reflects the fact that consumers are themselves learning how to use their point, how to use the ecosystem. And it has to do with a bunch of things related to the consumer. It has to do with the age group they belong to, the economic level they belong to, the type of light they have, whether they are a student or they are a young professional or they are a professional driving an Uber or a truck. And all those journeys are allowing us understanding them is what is allowing the team to actually tailor made some of the activities that are conducted promotions with up store, promotions with OXXO Gas, promotions with the partners. And really, that is the exciting part of all this beyond the number of active users that we have, which is really big too. So honestly, moving forward there are a lot of possibilities that are being -- that the team is tapping into, that are part of what is included once again, as I said before, in the long range planning. And I'm sure that we'll be able to share more on what is happening in digital more in detail in the months to come.

Yeah. And I think the other thing that is beginning to accumulate Bob, is the amount of data, right? I mean to Paco's point, we are being able to gather and obviously, for the first time, had the data assigned to a person for whom we know. Who are they? What is their email account? What is their phone number? And then begin to customize some of this promotional activity and incentivize behaviors with the rewards themselves. So, early stages for all of this got off to a faster start than expected.

Eugenio, just as a follow-up, are you guys making money or losing money? And I mean I'm all in. I kind of get the TAM. How should we think about evolution, though?

I think at this point, we are given the electricity from the point usage. We are better than breakeven on the PREMIA and we're still at early stages, so it's promising.

Great to hear. Thank you so much and congratulations.

The next question comes from the line of Thiago Bortoluci from Goldman Sachs. Please go ahead.

Yes. Good morning everyone. I'm glad to intimation, how to Explore and be a little bit more into growth, right? Starting with Mexico, we've been hearing year-to-date cost earning down on the strong comps for same-store sales, but the thing is quarter-after-quarter, we have been beating expectations, right, not only surpassing our own markets, but also performing by far your peers, right? With your competitors mentioning incrementally higher growth within the discounter and even on that end in by that growing in mid-teens, how should we think about FEMSA Health for OXXO going forward? How sustainable do you think above inflation ticket growth might be? How much high counters could impact traffic? This is the first question. And the second one is still on the expansion. Do you have any color on how your buildup in Brazil is performing in terms of profitability? And what are the learnings from Brazil that eventually you might take into the US. Those are two questions. Thank you very much.

Yeah. Thank you, Thiago. Let me take the first part of the question, and then I'll let Eugenio add color to that and Paco the second part. But when it comes to OXXO, and I think that sales made reference to that, the reality is that, as we said, they are executing the long-range plans that they put together. Those action plans are paying dividends, are working and are delivering results. I think that it's safe to say that they are ahead of the long-range plan projection. And they are in the process of reshaping those and working as a team to refresh those projections. And the runway, as Paco just said, we are confident that the runway for performance is longer than we originally saw. Having said that, the reality is that as you know well in many business, we have to be realistic about what can be a tailwind and what type of headwinds come ahead of us. And the operational excellence of the teams are creating a bunch of those tailwinds. And we see a lot of opportunities moving forward in growing the core and new formats and the rest of it as part of the strategic plan. Nevertheless, we also know that evidently there are things that happen beyond our control. That can be with the context, with the categories, with the activities and activation from our suppliers, commercial partners, et cetera. And that we are always prepared to do that. And all that is put into the melting pot and the things come up with a revised projection. So for the time being, we remain very positive about the possibilities in our OXXO model. They continue to polish the diamond, to put it that way in terms of the operational excellence, the operational efficiency, learning how to activate the categories better. The segmentation is working fantastic. So again, positive, but we remain conscious of all the external factors that are around us and that we have to juggle at the same time.

I would add that, I mean, if you look at what's happening over the past three quarters, Diego I think it is a reversal of the trend we saw during the pandemic of consumption patterns shifting from the small bucks to the larger bucks. And now that's coming back with a vengeance. And that is coming back higher than we anticipated, frankly. So we're seeing traffic trends pick up, and also tickets and pricing stick to what we have. So I don't know if this is a secular trend or if it's a temporary trend, but it is what causing the short-term results. Having said that, with the value growth that we have and with the unit economics we're getting, we're comfortable that we can continue on that path going forward. I think you mentioned Bara and the other multi-formats. I think we're growing there as well, and we see a lot of promise, having said that they're still too small to make any kind of cannibalization threat to the expansion path we see in OXXO. Again, there are more than a million non-impossed in Mexico, tens of thousands of larger formats and stores across Mexico. So I think there's room for all of the formats to continue to grow in this way. And the second part of the question was with regards to Brazil. And again, what I can say is from a four-wall perspective, the stores are performing much better than we expected when we originally entered into the partnership with Raízen. It's still an issue of scale. As you know, our model is distribution driven and distribution investments are front loaded. You have to put the distribution center first and then fill it up. So there's still a big runway of stores before we can get to the economics we expect for the region. But the fact that the four-wall model is working well gives us a high sense of confidence that we will get to these numbers and that we will be able to replicate these units of distribution centers/stores in the region of Sao Paulo and hopefully more regions in the future. And to what extent we can export that to the US, I think the US is a different market and we'll get to that. But -- that's the learning so far in Brazil.

Yeah. I would just add, Diego, this is Juan. I mean, going back, I'm kind of guilty of charge because I remember six months ago sitting in this same conference room on the call and telling all of you to not put into your model kind of a teens number. And then I've been wrong for the following two quarters, because we've delivered 15. I think to range's point, Jerry is still out in terms of how much of this is sustainable. But it increasingly looks like there's a lot of structural reasons why things are as positive as they are as opposed to just the bounce back from COVID. As we begin to look at 2024, again, I would -- I think the numbers are going to continue to trend down. So in my mind, it would probably -- we'd probably be thinking more about a very high single-digit same-store sales growth, and we'll revise that in February. But I don't think double digits or out of the question, at least for the early stages of 2024, we'll see. But the deceleration has certainly been a lot less rapid than we expected six months ago. So that's all very good news.

That's super clear. Thank you very much, everyone.

Thanks, Karl.

Before we proceed to the following questions, a final reminder. [Operator Instructions] The next question comes from Álvaro García from BTG. Please go ahead. Álvaro García: Hi guys. Thanks for the question. My question, we haven't focused on margins at OXXO, profitability came down a bit. SG&A accelerated sequentially. You mentioned the release sort of increased labor expenses in connection with labor reform. But I was wondering if there's any other dynamic going on there, maybe sort of quicker growth outside of mix? I know it's still very, very small, but I'm not sure if that's starting to maybe move the needle a bit? Or is it really solely a people thing in Mexico? Thank you very much.

I would say, Álvaro, thank you for the question. First, primarily, it is labor, as we said. Having said that, a lot of these initiatives in the strategic plan including we are looking at better methods for recycling cash for cash in, cash out in the stores. We are -- we -- I mean, rejiggering the operational model with regards to how many people, I mean, operate the store, how many are fixed, how many are variable in terms of shift, et cetera. And all that is experimentation, as we look to build, I mean, more resiliency from a cost perspective going forward. And all those experienced -- all these experiments are flowing through P&L as OpEx. So that is a little bit of the factor that you also see there. There is, as you said, also just a mix effect with regards to South America, which is less profitable than Mexico at the margin. But I would say, I mean, 80/20, it's labor 20% the rest of the stuff I just talked about.

I would add one more thing, Alvaro, this is Juan. Gross margin historically has been the main source of margin expansion at OXXO. And usually, we do very well at the growth level. And then we lose some of it in the SG&A, and we end up with a smaller expansion at the operating level. I was personally very happy to see this quarter as going back to an expansion at the growth level. We've talked about services, having been volatile, similar correspondent banks coming and going. We now have Banorte back. We talked for a number of quarters about Premia, the impact of how we were booking the points this prior to us moving the whole loyalty program outside of OXXO and into the digital P&L. But to have them exited those to kind of noisy situations, at least right now, it looks like we're back to a place where commercial income begins to be strong enough that it helps expand the margin at the growth level. And if we were able to continue that, then that bodes well to our ability to then offset labor pressures, which, as you know, going into 2024 there are outstanding questions in terms of Congress and what's going to be passed around Laser Legislation. So we'll see. But we're much better going into that situation with an expanding gross margin coming from commercial income, which is where we are right now. Álvaro García: Great. Thank you very much for the color.

Thanks, Alvaro.

The next question comes from the line of Alan Alanis at Santander. Please go ahead.

Yes. Thank you so much. Good morning. Congratulations for the results. My questions got to do with Bara and the fact that it's growing 50 -- more than 50% faster than the rest of the supermarkets. I mean I understand what Jorge said that the remain spending and so forth. So you see that on the traffic but clearly, you now have a winning model on Bara on the supermarket. So what are the ambitions with this change? How fast can you grow it and how much this changes your strategic thinking regarding moving to different formats? That would be my question. And if you could also just quickly comment on the trend on spirits demand in Mexico in the last quarter in OXXO or in Bara that will be highly appreciated. Thank you so much.

Yes, Alan, let me take the first part of the question about Bara. First, I mean Bara is -- we don't consider Bara to be a supermarket. I mean we -- Bara is a completely different format. It is a small box. It has a limited assortment in -- it meets very specific consumer needs related to their shopping routine. So I would say that there is no comparison versus what we know as a regular supermarket. It's a different segment, different format. As for the opportunities, I mean, obviously, the fact that we are accelerating the store opening, the fact that the performance is good, we feel confident that we state that we have a value proposition that is relevant that is tested and approved by consumers, liked by consumers, and that's why our intention is to accelerate that. At the same time, we are also aware that we have to do this in a disciplined manner. And that's why our state, for example, focalizing geographically not only certain areas of Mexico we'll continue to expand in the regions where we are -- make sure that we capture all the growth that is there. We are applying the model that we have. We are confident also at this stage that given that this is a different format and a different value proposition for consumers that there is no or very limited cannibalization with our OXXO stores. So that's what I can say about the format itself. Eugenio, do you want to add something?

Yes. No, just with regards to your second question on spirits, I mean, clearly, the pandemic kind of brought that category to the forefront of the OXXO value prop, and that continues to be strong. Beer sales are now I mean back to where they were, if not higher than prior to the pandemic, but the consumption pattern, people trying higher graduation drinks is still there and is still strong.

And the other thing, just to add one bit of color, additional color and I guess that we spoke about it in another meeting we had. But remember that in Bara, for example, just to talk about the format and the value proposition, there is a big component of private label. So private label, it's an important part of the equation. It is more important in certain categories. It keeps growing in general. So that speaks to the type of format and value proposition that we have in Bara.

Got it. That's critical. Thank you. Appreciate it. Congratulations.

The next question comes from the line of Rodrigo Alcantara from UBS. Please go ahead.

Hi. Good morning, good afternoon. Thanks Paco, Eugenio, Jorge, for taking my quesotin. So a couple of months ago, our Banorte friends came back to LAX [ph], right? I mean this clearly demonstrated the relevance of your proximity format. So my question would be on the opportunities you see or you are working on for to take data should the retail made opportunities at the store level or perhaps partnering with e-commerce guys other strategies or then you see to take the most from the proximity format that you have in Mexico results? Thank you.

Yes. I mean, Rodrigo, those are all been very relevant points, and that's kind of part of the agenda for the ongoing plan, more and more the digital business. Obviously, it's a business in and of itself, but the digital opportunities associated with the store model and the digital element of combination of physical and digital is something that is part of the plan and something that also slowly rolling out. I mean, there are very significant efforts going on with regards to building out a retail media network within the stores and using the insight of the stores also as specific advertising platforms to generate traffic. We will have eventually the ability to determine which customers are coming into the store. If they have the spin up or not and then tailor the advertisements to the actual demographics of the store customers that are at any given point in time. So all of that is creating, I mean, tremendous opportunities on that side as well. And again, the more the digital platform is growing, the more we know that there are opportunities well above just the basic products that we offer right now, which is wallet basically with a loyalty program attached to it. I mean there are significant opportunities there on the credit side, on different financial products and in the future with a broader SKU mix and just the OXXO stores to deliver to those customers through other channels and other means. So those are all very exciting initiatives that I think are being slowly opened up, and we're just at the tip of the iceberg at this point.

And Rodrigo, I think that you have -- your question, it reflects basically the number of opportunities that that pop up every time we talk about the digital and the connection with the store. And the way we are reading that is that, I mean, clearly, for our digital proposition the link with the story is an enormous competitive advantage. And that vegetal ecosystem, as Eugenio reference to, is of tremendous value for the consumer. And all the -- and the priority of the team is to make sure that we not only tap into that to create value, but also importantly, to help consumers' lives and to help them in their day-to-day and to open new possibilities for -- on the financial side, but also importantly, on their journey as consumers.

I see that. That's very clear. Thanks for that. But I'm asking on the retail media per se, right, because we have seen how the retailers, let's see, Walmex, for instance, already have €2 billion pesos business, right, highly margin accretive. So just curious if for you guys, do you think that -- I mean, they are still in an early stage about that? And how far do you think we could get on the retail media?

Yes, Rodrigo, it's Juan. I mean, I think, retail media is -- I mean basically, we've thrown two or three pitches in the top of the first inning to talk about something that's kind of involved these days with World Series starting. No, this is just tip the iceberg, as I can say it. I mean, at the end of the day, a lot of it goes back to the 30 million times today somebody is going to interact with our stores. That number will continue to grow. And so the potential is really important. We haven't really spoken a lot lately about a couple of other things that are happening on the fulfillment side, you'd mentioned partnering on the e-commerce side. Obviously, the 21,000, 22,000 stores, whether it's directly as we've been doing it with Amazon for a number of years or exploring the use of lockers or other ways that we can participate. And the last milestone point, which, again, we've done a lot of work on that, and we've identified that it's for a certain subset of our average transactions that are really big enough to kind of sustain the cost of delivery. But there are other things that are happening kind of in the -- behind the curtain, all of which are part of the long-range plan and along all of which we are making progress.

I see. Exciting. Thank you, Juan, Paco. Congrats on the results.

Thank you.

Thank you.

Our next question comes from Héctor Maya from Scotia Bank. Please go ahead. Héctor Maya: Hi. Thank you for taking my question. So it's definitely very encouraging seeing the robust result in Mexico. So congratulations on that. It was also very interesting to see the growth with Spain. I mean it seems you are well on track to reach the 10 million user target that you have mentioned a year ago. So seeing this, I just wanted to know if this -- I mean if at this stage, you have more clarity in how much more you could accelerate this? And what could be the potential economics in your plan to leverage these very critical mass to integrate part to supply mom-and-pop stores in the traditional channel in Mexico? Thank you.

Hey, Héctor. Yes, I think regarding spin, one of the things we have learned is -- and we had kind of the thesis that the store would be helpful in the acquisition of customers. But to be honest, it's exceeded our expectations. And this has translated into the cost of acquisition, right? Because some of the incentives and some of the strategy that we had at the beginning have turned out to not really be necessary. You know, it looks like we can continue to add sorts at the pace that you're seeing without incurring on a very high cost. So to finish comment on digital, the actual network of physical stores and these 13 million times somebody is getting asked today, if you already have a spin account, that has turned out to be very, very powerful. And so yeah, we are continuing to grow. I mean, on the Spin side, I think we added -- we're adding something like 400,000 stops per month. And on the premium side, it's significantly faster than that. So going back to an earlier question a few minutes ago, I think the bigger challenge is on engagement, on generating an engagement and having more things for people to do while they're on the app, spending more time. And then, of course, this is going to translate into better digital media numbers as well, because people are going to be there for longer. So that's really the number one item on the agenda is increasing engagement and monetization as opposed to just sheer number of subs, because that's happening more or less on its own.

And in fact, Héctor, this is Paco. But just to add to Juan's point. The fact is that as a metric, for example, today, we focus significantly more on active users rather than total users for Spin, because what is important is those that are making at least one transaction a month, and then once you have those transacting at this once a month, then you focus on the size of the transaction and the number of transactions that they make. And that's where the team is localizing at this stage, which is understanding what is the journey of the consumer, how a consumer in one location of a certain sociodemographic uses the card, do they use a physical card, do they use a digital card, do they use it to transfer money, do they use it to pay, do they used it to receive payments from other people. And depending on how they are using that card, then is the type of offering and the type of journey that we put that consumer into. So when you look at the transaction, the reality of the transactions grew almost 16% during the month. And what the team has learned is that those users that have a higher frequency are, obviously, the ones that have each interaction at higher ticket, too. So -- but again, as I said, clearly, it is different if you are students, how you use the card versus if you are someone that is working in Tijuana and you're sending money to Hatay [ph]. So I mean, clearly, all those different ways of using Spin will play a role in terms of how we activate it in the store and what type of offers we do to each of these consumer segments and cohorts. So again, lots of possibilities, but once again, the focus shouldn't be on some merchant than recruiting, but it's significantly more on the frequency and how active those consumers are using the platform.

I think the other part of your question, Héctor, had to do with the B2B. And as you know, that's the second element, all we've talked about right now and the success we've seen so far has been on the consumer to close the loop in the ecosystem. That's the other big part of the strategy. As you know, we acquired NetPay, which basically gives us the infrastructure, so the rails on which to build this trade and the good relationships that Coca-Cola FEMSA has obviously with all mom-and-pops in the southern part of Mexico. And with the ability to distribute non-coke products through also distribution centers and also commercial relationships trying to bring a digital solution so that, that mom-and-pop through the Spin ecosystem with obviously a differentiated product more tailored to their B2B needs with different -- I mean, ability to provide services, potentially credit, et cetera, and have access through the digital framework to accept payments to order from cost or to order from other products, that would be, again, using the [indiscernible] that we built with Pepsi, that would be kind of the other side of the prong – of the prong sorry, that could bring both sides together and close the loop and try to provide an ecosystem, both on the consumer side, as well as on the mom-and-pop/little restaurant side. So that's a little bit of what we're trying to do there. Héctor Maya: For that part, is there a timeline when is it that we could possibly be seeing that or more details on that?

We're still in the early stages. Again, we have pilots running in some of the Coca-Cola FEMSA regions, and we're still tinkering with the value proposition on how to do it. So it's still early days to – to have a full timing. That initiative obviously has different implications from an acquisition cost perspective, which was the easy part with the B2C side on OXXO. So we're still working our way around that. Having said that, we do believe that the value -- potential value creation in a win-win with the mom-and-pops and small little so restaurants in the Coca-Cola FEMSA network is large enough for us to be able to devise the business model that works for all of us. Héctor Maya: Thank you. Thank you very much.

Thanks, Héctor.

The next question comes from the line of Ulises Argote from JPMorgan. Please go ahead.

Hey, guys. Good morning. Thanks so much for space for question. Just one quick one here from my side. On the release there, you're mentioning on the proximity formats, the decrease in the contribution of financial services. So just to understand there, if there's any change in competitive landscape or dynamics or if there's any kind of specific situation that are impacting that part of the business? I mean when you spoke already about kind of Banorte going back and forth, but it would be great if we could get just some extra color there. Thank you.

I mean on that front, yes, Banorte literally just came back like a few days or weeks ago, so it would not be in the numbers. And of course, we had lost Citi and we -- there's been some volatility there. So I think looking backwards, certainly, there's been -- it's been one of the reasons where we've had some noise. But yes, going forward, we are expecting, I think, more balanced or stable dynamic. There's nothing -- no new information regarding a shift in the partners or how we interact with them.

One of the reasons you are seeing a little bit of that weakness, Ulises, is that, I mean, we have purposely also managed pricing to be -- I mean, not only competitive, but also provide value for the customer and pricing has not kept up with inflation for services. So that's why with the high inflation period we've experienced over the past few quarters, as you look through the income statement, that there is a loss in the very high marginal profitability that this services bring. There has been some decay in that profitability because we haven't kept up pricing on purpose.

All right, perfect. Thank you, guys.

Thank you.

The next question comes from the line of Alejandro Fuchs from Itaú. Please go ahead.

Hello, Paco, Eugenio, Juan. Thank you for taking my question. I could follow-up maybe to Álvaro's question on pressures on labor costs, right? We're seeing this across the board in Mexico and think that in next year, there would only be more pressure, right? We have changed it maybe to the working leads. We have many changes on the demand payment -- so I wanted to get a sense in how the company is thinking to the budget next year, if there's any way sort of OXXO and even more efficient than it already is or how you guys thinking maybe of trying to mitigate some of the potential impacts coming into next year? Thank you.

Yes. Alejandro, thank you for the question. Indeed, I mean, when you look at OXXO's strategies, one of the strong action plans that they have is the optimization of the store itself. And they have historically been very good at it. So, the reality is that regardless of whether or not there are cost pressures, which there will always be some and then obviously, like the labor one, they can be higher in one given -- in any given year. But the reality is that, that is a continuous process. And also its continuously saving costs out of the operation. And that is something that they have done for many years. They have -- they are very good at it. And you can rest assure that moving forward, they will continue to actively pursue that is part of the long-range plan actions that they have Then as for the cost themselves, they are, in fact, modeling some increases for 2024 as part of the budget generation for next year. The reality is, as you know, there are different assumptions that you can have. So, at this stage, the team is considering a few of the scenarios and then planning accordingly. But the reality is that today, there is limited visibility in terms of what exactly is going to happen in each of those lines for 2024. So, the best you can do as a business is to make sure that you have the different scenarios that you plan for it and then you are ready with the specific action plans either because you already have them or because you will deliver or I'm sorry, develop specific ones. Eugenio?

Well, I just going to add that, I mean, taking my head off as employee and just looking at it as Mexican, I think, I mean from a macro perspective, I mean, the economy will have to adjust in certain segments of the economy will have to make tougher choices. Fortunately, in retail, it's a little bit easier than in other sectors. But at the end of the day, there will be more money and a better lifestyle for most of the Mexican. So, I mean, there will be more money to spend and hopefully more topline growth in the economy as well. So, I think it's the right investment. We're just going through the growing pains of adapting to the new reality of relative labor cost to all of the costs in the economy.

No. And I think following up on what Eugenio just said, I mean we should kind of think of separately what minimum wage increases and then whatever happens with vacation and hours and the work week and so on and so forth. Obviously, -- and we've seen it for the past five years. The big increases in the minimum wage do have a silver lining as a retailer, obviously, because there's more money circulating in the economy, and that will happen again. So going back to the double-digit growth of the top line, clearly, this happens in an environment where people, in real terms have actually increased their earnings by and large. So that's kind of something that needs to be put into the equation, because we do get slack through the top line.

Thank you very much.

The final question comes from the line of Ricardo Alves from Morgan Stanley. Please go ahead.

Thanks very much for the follow-up. Eugenio, I got cut off. So I'm sorry if you addressed this already. And I know you're still studying the issue of shareholder returns, but I feel that I need to ask, is there any even a small update, any change, for instance, on the framework and execution we've been discussing the possibility of extraordinary dividends, buyback and eventually a new dividend policy as kind of a potential framework. A quick update on that on your recent thoughts as you're doing your work is progressing on that? And just quickly, I think that in the preliminary remarks, you mentioned the Board meeting. I just wanted to confirm the date, if that's possible? Thank you so much.

Yes. On the first topic, really no major update. You didn't miss anything what you would cut off. But having said that, we are getting closer. We are making the -- I mean, the more detailed analysis, and there's still -- I mean, debates going on internally about how -- what the long-term kind of targets are for the different businesses, acquisition possibilities. How many of those are really value accretive? How many are not? What the right strategy is for distributing any excess capital to shareholders, et cetera. So not a lot of update today that we're getting closer and the purpose of everyone here in management and the Board, we're all aligned that whatever we will do will be in the interest of maximizing the intrinsic per share value of the long-term shareholder for FEMSA. So we're very clear on that. And we will not deviate from that. And as is customary, we usually have the third quarter Board meeting after the third quarter results. So that's coming up in the next couple of weeks. We will be discussing this. I won't give you any guarantees that there's going to be any specific news that will come out of that, but we are making good progress, and we will be, I mean, unveiling what our final thoughts are as we originally anticipated in due course, so.

Thanks a lot, Eugenio.

And Ricardo, Thank you very much for the discipline of lining up again like a Harry Porter ride and just writing it again and reading it again. Thank you.

Appreciate that. Thanks Juan.

Thank you. There are no further questions. So I'll hand you back to your host to conclude today's conference.

Thanks, everyone, for your interest today. Happy to have you along for the journey and have a great weekend.

Thank you for joining today's call. You may now disconnect your lines.