Hello, and welcome to the FEMSA Second Quarter 2023 Results Conference Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. I will now hand you over to your host, Juan Fonseca, to begin today's conference. Thank you.

Good morning, everyone. Welcome to FEMSA's Second Quarter 2023 Results Conference Call. The plan today is a little different than usual because we are joined by Jose Antonio Fernandez, our Executive Chairman of the Board and CEO, who will open the call with some important messages. After that, Paco Camacho, Eugenio Garza and I will carry on with the second quarter results, as we usually do, followed by Q&A.

Thank you, Juan, and good morning to everyone on the line. Before we begin, I would like to thank all of you who have recently reached out to us with messages to support Daniel after the news of his stepping down as CEO of FEMSA to focus on his health. We truly appreciate your kind words and well wishes, which we have relayed to Daniel. We are grateful to Daniel for his many meaningful contributions to the strategic direction and high-performance standards of our company, always with a steady hand and clarity of purpose. Daniel always makes it easy for his team to rally behind him, follow his lead and achieve excellence. And beyond the strategic acumen of business success that Daniel embodies, he represents the values that define FEMSA. Thank you for everything, my friend. I wanted to be here today to take a few minutes of your time given the unique circumstances of this recent leadership transition to convey a few important messages. First, I am now fully engaged with our senior leadership team to continue implementing our strategic priorities, including FEMSA Forward. We have already executed several important steps and we are totally committed to the strategy to continue unlocking shareholder value. You should, therefore, expect full continuity focused and a smooth transition. That is very important for us to have very clear. Second, my dual role as Executive Chairman and CEO is not permanent. At FEMSA, we believe that those roles should be separate, and we plan to go back to that when ready. We know you have questions regarding the time frames, but please bear with us while we carefully go through this important process. We will let you know when we have news to report. Finally, I want to recognize our team. I am fortunate to be surrounded by a truly remarkable group of leaders and advisers that are working hard every day to keep growing and keep delivering on the potential of our great company. The opportunities ahead of us are very significant and compelling. And every business unit is executing at a high level. In fact, the strong quarterly results we announced today are a good example of what we can achieve. So with that, I will let Paco, Eugenio and Juan discuss the results in detail. Thank you very much for your trust and confidence. Paco, please go ahead.

Thank you, Jose Antonio. Good morning, everyone. Let me begin by updating you on where we are regarding FEMSA Forward. During the second quarter, we achieved two important milestones. First, we were able to divert FEMSA's remaining investment in Heineken, retaining only a residual amount of shares to meet our obligations under our existing exchangeable bonds. And second, we signed an agreement to divest our minority stake in Jetro Restaurant Depot. These milestones have come ahead of plan and under favorable conditions, allowing us to keep our momentum as we continue to pursue the FEMSA Forward strategy. As you know, FEMSA Forward is fully aligned with FEMSA's customer centricity and our broader strategic priorities for driving long-term growth, increasingly enabled by digital capability within our core business verticals and with a disciplined approach to capital allocation. With that in mind, we can report that our second quarter results showed a continuation of the positive trends seen at the start of the year, fully consistent with those strategic priorities and making progress towards the targets set by each business unit's long-range plan. Moving on to the results and beginning with proximity, it will be helpful to talk for a minute about their long-range plan and the four priorities around which it is built. The first is strengthening the core. The second is developing new growth avenues; third is developing multiple successful formats; and fourth is growing the footprint beyond Mexico. Looking at OXXO's second quarter results through this lens, we see they made great progress strengthening the core as same-store sales growth once again stellar, surpassing 15% split evenly between average ticket and traffic, reflecting structural improvements in segmentation of the store value proposition. We again saw a particularly robust performance in the thirst and gathering consumer occasions, further supported by favorable weather during the month of June. Continuing with the positive news of a stronger core, new store growth accelerated and was robust once again with Mexico and LatAm providing the highlight with adding 444 new stores during the quarter, totaling 1,400 stores during the past 12 months. In fact, once we include stores opened by Grupo Nos in Brazil, we added more than five stores for every day of the second quarter. Moving on to the long-range priority of growing beyond Mexico, during the quarter, Grupo Nos continued to advance ahead of plan, with revenues increasing over 200% year-over-year, allowing us to increase OXXO's footprint in Brazil at a dynamic pace of almost 300 net new OXXO stores during the last 12 months. Still on proximity Americas, but along the priority of developing multiple successful formats, we achieved a 23% same-store sales growth. For its part, proximity Europe again saw good local currency top-line growth and overall positive profitability trends, driven by stronger pricing growth in foot traffic as well as the higher contribution of Valora's food service outlets. Just as importantly, we continue to advance on exchanging best practices across the organization with a focus on offsetting the right conditions for future growth and value capture. Our health operations continued the stable trends we saw at the start of the year, reflecting foreign exchange headwinds from a strong Mexican peso, but again delivering robust margin expansion at the gross and EBITDA levels, capitalizing on the benefit of having an integrated Latin American platform working as a single organization. Additionally, during the quarter, our shell business continued to consolidate its competitive costs across markets, but particularly in Mexico, where it increased its store footprint by 12% against a challenging competitive landscape. For its part, our fuel business also had a stable performance with the strength in the corporate wholesale business offsetting softness in this retail platform. Regarding digital, the number of active users for Spin more than doubled year-over-year to reach 5.7 million, while active monthly users for our premier loyalty program also more than doubled, reaching 15.8 million. While 24% of OXXO Mexico sales are now associated with the program, we continue to prioritize the acquisition of higher-quality users while making progress by tuning the use cases, value propositions, unit economics and monetization strategies for each of these products as we look to ensure long-term value creation for the ecosystem. In terms of financial implications, during the quarter, we deployed close to MXN 1 billion on growing this business, roughly in line with the previous quarter as well as budget as we have indicated. Finally, Coca-Cola FEMSA's volume grew across all its territories and surpassed 1 billion unit cases for the first time during a quarter. That, combined with cost optimization and expense efficiencies allowed margins to expand sequentially. In addition, costs accumulated more than USD 1 billion of sales during the first half of the year through their omni-channel platform, Juntos+. Which represents a significant milestone in their digitalization journey as it has strengthened and deepened the connection with their customers. Before I turn over the call to Eugenio, I want to touch briefly on capital allocation, a topic that we are aware is very much on the minds of many of you today and a key component of our FEMSA Forward strategy. As our cash levels continue to rise, we are accelerating our analysis to determine the optimal capital requirements to support the short- and medium-term growth of our operations, organic and inorganic. Because that will help us fine-tune the levels of capital that we could then return to shareholders. This is a high priority for us, and we will keep working on it together with our Board to have a more specific framework for you as soon as possible. And with that, let me turn it over to Eugenio.

Thank you, Paco, and good morning to everyone on the line. Beginning with FEMSA's consolidated quarterly numbers, total revenues during the second quarter increased 18%, while income from operations increased 8% compared to the second quarter of 2022. On an organic basis, total revenues increased 9.5% and income from operations increased 4.5%. Net consolidated income was MXN 8.926 billion, reflecting higher income from operations, a MXN 9.4 billion non-operating income, mostly reflecting the divestment of FEMSA's minority investment in Jetro Restaurant Depot and a decrease in net interest expense during the quarter. These were all partially offset by a non-cash foreign exchange loss of MXN 6.5 billion related to FEMSA's U.S. dollar-denominated cash position, as impacted by the depreciation of the Mexican peso and a net loss of discontinued operations of MXN 3.9 billion, driven by the market value fluctuation of the Heineken shares underlying our outstanding exchangeable bond. Moving on to discuss our operations and beginning with proximity Americas, we added 444 new units during the second quarter to reach 1,391 net new stores for the last 12 months. This quarter's strong expansion set us ahead of our yearly expansion target and it underscores OXXO Mexico's strong growth potential. Having said that, we will stick to an objective of 900 net new OXXO stores just in Mexico for the time being, and the expansion curve for the rest of the year should be smoother than usual. OXXO same-store sales were up 50.3% for the second quarter, driven by an increase of 7.4% in average customer ticket and a strong 7.4% growth in traffic. This underscores the solid performance we saw across OXXO's categories throughout the quarter, especially by the strong showing of the gathering and thirst locations. Gross margin was 41% and reflected a lower contribution from financial services, which more than offset healthy commercial income dynamics. Income from operations increased 18%, while operating margin decreased by 20 basis points compared to the same period of 2022 to reach 10%, reflecting an increase in labor expenses stemming from labor reforms in Mexico. At Proximity Europe, as Paco mentioned, revenues increased 8.4% in local currency to reach almost MXN 11 billion, reflecting a recovery in traffic and ticket driven by improved customer mobility. Gross margin was 42.1%, reflecting a mix effect driven by the positive performance of Valora's foodservice and B2B businesses, while operating margin was 2.9%, reflecting better operating leverage partially offset by an increase in expenses driven by operational disruptions. Moving on to FEMSA's health operations, during the second quarter, we expanded our drugstore count by 81 net additions to reach a total of 4,267 units across our territories at the end of June. And 369 total net new stores for the last 12 months. Revenues increased slightly, while same-store sales decreased by an average of 3.7%. However, as was the case last quarter, it is important to note that on a currency-neutral basis, revenues grew 14% and same-store sales grew almost 8%, driven by good performance at most of our operations but partially offset by a demanding comparison base in our operations in Chile and Mexico. Gross margin increased by 170 basis points in the quarter, mostly reflecting positive margin dynamics across our operations, especially in Mexico. Operating margin decreased by 10 basis points, reflecting an increase in labor expenses in most of our markets. At OXXO Gas, revenues increased 9.3% and same-station sales grew 3.2%, reflecting a dynamic competitive landscape across our footprint. Retail volumes were again complemented by a robust pickup in corporate and wholesale activity. During the quarter, gross margin was 12%, while operating margin was 3.9%, reflecting tight expense control offset by increased labor expenses. Moving on, Coca-Cola FEMSA also delivered a strong set of results in the second quarter. Total volume grew 7%, driven by growth across all territories. Total revenues increased 7.2% and operating income grew 13.4% as operating margin expanded by 50 basis points to reach 13.9%. You can listen to the replay of the conference call held yesterday. Finally, our Envoy Solutions saw total revenues increase 23.1%, relative to the second quarter of 2022, reflecting some of the acquisitions we made last year together with solid execution, even while operating margin contracted by 120 basis points, impacted by extraordinary expenses related to synergy capture across the platform. That's it from my end. With that, we can open the line up for your questions. Operator, please?

We'll now take our first question from Thiago Bortoluci at Goldman Sachs.

Yes. Thank you for the presentation and taking the questions. Just before we get started, I just want to share once again our best wishes for Daniel and also welcoming back Jose Antonio. Good luck on the forward look. I have two questions that I'd like to explore. The first one has to deal with capital allocation, right? Obviously, we understand that you need to be cautious about the communication and the movements, right? But putting in perspective where you are versus what you communicated in terms of the forward plan, you were already running at roughly $5 billion in excess cash position on the balance sheet, right? So unless there is any large acquisition on the horizon, which we don't think is the case, growth shouldn't be a bottleneck or an overhang for a stronger capital distribution, right? And this is not to mention the organic cash flow that the business is generating. So I would just like to understand internally, right, what is the kind of debate and different deals that you're facing that is still preempting a step-up on shareholders' recurring returns? And the second question is, we know there is scope for pretty decent expansion of OXXO, not just in Mexico but across other regions potentially, including the U.S. When we look into Mexico and Brazil, which are both countries where you already have a diversified footprint while rolling out, your company stores overlap your bottling operations, right? How important is it for you to develop in a country to also have some asset integration internally in the beverage space? This is just to imagine how the growth scope might move into new regions. Thank you very much.

Hi Thiago, it's Eugenio. Thanks for the question, and we'll definitely send along your thoughts to Daniel and the team. With regards to your first question on capital allocation, fortunately, we are well ahead of the divestiture program that we announced back in February. So we are in that privileged position that you mentioned, having already been well below our 2x net debt-to-EBITDA target. So we are having very serious discussions at the Board level as to what kind of framework for capital allocation we are going to be implementing. Having said that, you can feel comfortable that we will be looking at several alternatives. And for the most part, as you know, organic growth within the businesses we have decided to focus on with FEMSA Forward still continues to be strong, and we feel that over the next 5 or 6 years, we could deploy $7 billion or $8 billion easily in terms of the new store openings, further additions to our Coca-Cola bottling operations, et cetera. So there’s plenty of room to put capital to use in low-risk projects with very high returns to continue growth. Having said that, and to your point, most of this will be funded with just internally generated cash, and we'll still have this cash left over. So the second part of the capital allocation will be reserving some amount of capital, again, within the construct of a 2x net debt-to-EBITDA capital structure at the end, but reserving some capital for strategic optionalities that might arise, again, within the core businesses that we have identified and also sticking to very tight financial return guidelines so that the capital allocation into new initiatives, whether it be proximity, whether it be at KOF, whether it be in Latin America or elsewhere, that they stick to not only strategic criteria but also to very strict financial and value creation criteria. Then finally, there is a very high likelihood that after allocating this capital to strategic initiatives, there will be some capital left over, and we will consider what the best way to return that capital to shareholders will be, be it an ongoing share repurchase program, a bigger share purchase program and/or extraordinary dividend. So those are all of the things that we are discussing at the Board level. We hope to have some more clarity for you, hopefully, by the end of the year, if not very early next year. But again, we're being patient. We're focusing right now on executing on the divestment part of the FEMSA Forward strategy and then shifting our attention to this, but you should feel comfortable that through the combination of organic, inorganic and capital returns to shareholders, we will continue to ensure that shareholders can maximize their value in their stake in FEMSA, and at the end, when we reach this final 2x net debt-to-EBITDA ratio, you will be exposed to a portfolio that has fantastic growth and cash flow generation characteristics. So that’s it on capital allocation. I don't know, Paco, if you want to take the other question on the expansion of OXXO and beverages.

Yes. Actually, Thiago, on the second question on OXXO, can you repeat it? The line wasn't totally clear when you phrased the question the first time around.

Sure, Paco. The question is when we imagine you penetrating other regions with OXXO, how important is it to also have some integration with the beverage operations in those new regions?

Thank you, Thiago. This is Juan. Regarding proximity, we are quite flexible. In Mexico, we have a legacy with our beer business that became Heineken, which explains why we initially only sold the Heineken portfolio. However, when we established our office in Brazil, we also worked alongside Heineken. I don't believe it's necessary to form a special partnership with a beverage company in every location where we consider opening retail. For instance, we don’t operate that way in Europe, nor should it be a requirement. While we have relationships with many beverage companies, it is neither a necessity nor an advantage to have a relationship in every case. These two aspects operate independently.

We'll take our next question from Bob Ford at Bank of America.

Jose Antonio, Paco and Juan. Please note that our prayers are certainly with Daniel and his family. Paco, you mentioned the MXN 1 billion in digital investment. Can you discuss areas of focus in terms of functionality, how you're thinking about the development roadmap and where the consumer and small business credit reside in that sequence?

Yes. In fact, the investment that we're making is a part of that is basically going into the expenses of operating that business and growing it. So we have put a significant amount of money into making sure that we have the right team and that we bring in the right people, and those are part of the operational expenses that are taking part in that investment. As we move forward, and we continue developing the three verticals in digital that we have told you about over time: first, our fintech or wallet; second, our loyalty program; and third, enabling the B2B business, what we are creating is really an ecosystem. So at this stage, what we are focusing on is making sure that the consumer experience of those users navigating through the different services and through the whole ecosystem improves with every experience and with every use of the platform. When you look at Spin, for example, clearly, we are focusing on getting a better use of the platform through the services that we have today, which is basically the wallet. The team has become increasingly knowledgeable about the different use cases for each of the cohorts that they have identified both demographically, socio-graphically, and geographically, and that will continue to be the case. Second, optimizing the expenses. So when you look at the cost of acquiring new users, it has reduced significantly sequentially over the last quarter. But importantly, we also know that once we've established these new services, it is very likely that we will need to move to additional services such as insurance and credit, but that is in the pipeline, and it's not something that we are rushing into without making sure that the first stage of the business is completed successfully, which is making sure that we have the right consumer experience. Then when it comes to the loyalty program, it's similar; we feel confident about what we are providing today. As we said, the tender is at 24%, 25% right now, and we are already seeing improvement in OXXO sales behind the loyalty program. So making sure that we continue improving the consumer experience is important for us to get the same for the partners that we have today, as you know, we have Volaris, for example. So we are focusing on improving the experience for consumers behind that. And that is the focus at this stage.

The other thing I would add, Bob, just so you don’t get scared with this MXN 1 billion per quarter operating loss in digital is that digital is generating revenues at the Proximity Division as well. So for the overall FEMSA ecosystem, the cash burn is less than what you see reflected in the loss in the others column for us. So right now, there is a transfer price that's being assigned because of the use of the retail network. But overall, the cash burn in the ecosystem is what you just see there.

We will now move on to our next question from Ricardo Alves at Morgan Stanley. Please go ahead.

First of all, of course, all the best to Daniel, and Jose Antonio, it's nice to hear from you again. I think that your message at the beginning of the call on the FEMSA Forward plan was really important to appreciate that. First, a very quick follow-up, Eugenio. You mentioned the buybacks, the dividend policy or eventual extraordinary dividends. Qualitatively speaking, is there kind of a preference you guys are leaning towards here? I don't know if you have been studying these issues, why is there anything that you guys learned perhaps on the buyback front? Anything that you could share in terms of what you have learned so far this year when you're discussing those topics? And then my other question is more related to OXXO. Obviously, very impressive same-store sale. The gross margin was also good, but we had a little bit of a higher expectation for EBITDA. So can you guys expand a little bit more on the SG&A dynamics for OXXO specifically? Labor obviously has been a factor in Mexico, but is there anything else that you care to highlight? I don't know if maybe the stepping up of the new store openings that you had from the first quarter to the second quarter. I don't know if that's relevant enough to move the needle on the scale front, but just a little bit more thoughts on the SG&A level?

Sure, Ricardo. Thanks for the questions. Regarding buybacks, we have been reviewing various academic studies on how the market reacts to large dividends or share repurchase programs, and they can provide insights that may be biased. Ultimately, our priority is to create value for our shareholders and effectively use excess capital to maximize that value. There is a tax aspect we are considering, but I feel confident that tax implications will not significantly influence our choice. The decision will depend on the scale of the capital return program, the market dynamics, the valuation of our stock at that time, and how we can optimize value on a per-share basis for FEMSA shareholders who choose to stay with us long-term. We are examining academic research while primarily focusing on what offers the best per-share value for our shareholders. Regarding OXXO and SG&A, there are multiple factors at play. Starting with gross margins, we are experiencing a mix effect with a decrease in services and an increase in merchandise, which negatively impacts gross margins. However, this decrease is offset by a boost in customer traffic and ticket size due to our loyalty program. While we are seeing lower gross margins, the increase in sales is a positive factor. On the SG&A front, labor reform is the main influence. Besides new store openings that are ramping up in the second quarter, we are also pursuing various initiatives that have higher initial costs. We are implementing new operational models in stores for greater efficiency among supervisors and investing in cash-recycling machines to improve cash availability in OXXO stores. Many of these initiatives are being funded heavily in the first half of the year, and some expenses cannot be capitalized, contributing to the softness in the second quarter figures. Overall, labor reforms are the primary driver of these changes.

To add to that, the two main factors are the labor cost and the new store openings. It's also important to note that the increasing sales in OXXO are helping to offset these costs. As you compare quarter to quarter, we see a decrease in administrative expenses as a percentage of revenues, for instance. The performance of OXXO continues to be very dynamic, and as we grow revenue, costs are also managed effectively.

Very helpful, gentlemen. Just one quick, I think I misunderstood. But is the loyalty program still affecting OXXO? I understood that it was not.

Very little.

We'll now move on to our next question from Alan Alanis at Santander. Please go ahead.

My question is for Jose Antonio. First, I want everyone to keep Daniel in their thoughts and prayers, as that's the most important thing. I'd like to ask about the company's long-term vision and strategy for the next five years. It would be valuable for all investors to hear directly from you how you envision the company's evolution over this period. Specifically, could you discuss the relationship with the Coca-Cola Company and Coca-Cola FEMSA? As many on this call know, this year marks thirty years since Coca-Cola FEMSA was established in 1993, and currently, you are the largest Coca-Cola bottler by volume. How do you see the relationship and your ownership with Coca-Cola FEMSA developing in the next five years? That would be my question.

Yes, Alan, thank you. This is Paco. I will just start answering your question, and then I'll pass it on to Jose Antonio in case he wants to add something. So on the first part of the question related to the next five years, I would like to go back to what we have discussed a couple of times, which is the long-range plan exercise that we put together recently and that we have explained to you on a number of occasions. That continues to be our guiding light for the next five years. Each of the businesses has a very thorough, very complete five-year plan that they developed. They are working towards those plans in 2023, and they will continue to do that in the next years. Part of the results that you are seeing is precisely behind the plans they have developed. So you should expect that this is not going to change. We are, of course, as in any process such as long-term planning, we will review the plan so as to check that, if anything changes in terms of competitive activity, et cetera, so you should expect that that might happen. But we have very strong plans in place, and each of the businesses will continue to do so. At the FEMSA level, as we aggregated the plan, I mean we clearly saw the opportunities to continue our target of doubling the size of the business every five years. So that shouldn't change either. So we feel confident about the LRPs, and you should expect that we will stick to them, both at the business level and at FEMSA level. Part of it, as you know, is finishing and making sure that we continue deploying the FEMSA Forward strategy, and you will hear news about that as they come along. But you shouldn't see any surprises on that.

Here is Jose Antonio. Thank you, Alan, for your question. On behalf of what we foresee for the next five years in Coca-Cola FEMSA, I can tell you, and you know that I've been around with Coca-Cola and FEMSA since Roberto took over; we cannot be happier with the situation of our relationship with Coca-Cola today. We have completely aligned critical success factors, and our executives have common perspectives about what is coming. We want to continue growing. We just want the opportunity to be assigned to execute, and This is certainly a fantastic period for us, and we won it again, many, many times. And we are very happy because we see a very good and profitable relationship for the future with Coca-Cola.

Got it. So some of the capital deployment can grow also in expanding the franchisees. I know you've talked that maybe Coca-Cola FEMSA doesn't need that money; they can do their own capital, but if needed, you will continue to support the expansion of Coca-Cola FEMSA.

Yes, Alan, this is Paco. KOF is always looking for inorganic opportunities, and they will continue to do so. Obviously, we will support them as needed, but there is no change in that. They have always been actively looking for opportunities.

And I think, Alan, this is Juan. I mean, the nature of the relationship and the clarity that we now have in terms of the business and the cash flows is prompting the business itself to invest, right? And you heard the team at KOF yesterday talk about their CapEx. I mean, they've been talking about it for months. They're investing more this year and the next couple of years than they ever have in adding capacity and just growing the business. So it really is looking like we have a time ahead of us when KOF is going to be deploying more capital. And as Paco just said, we would be ready to step up under the right conditions for M&A.

Thank you, Alan.

We'll now move on to our next question from Luis Willard at GBM.

Welcome back, Jose Antonio, and I join my colleagues in wishing Daniel the best for his family, of course, as well. So this one is a bit philosophical. I would love to pick your brain and ask you which characteristics you think the next FEMSA CEO should have, especially as a relevant part of the FEMSA Forward strategy would likely be already underway, if not completed. Then I have another one on Spin, very short one.

Thank you, Luis. Firstly, we would love to have Daniel back. We remain hopeful for his recovery and return. If he cannot come back, we will need to find someone who can effectively take on the role of CEO, which involves coordinating various CEOs and ensuring strong follow-through. This person would need to be adept at gathering ideas from the entire team and integrating them. Our current situation is quite different from the challenges we've faced in the past 20 years; we have a surplus of cash and many geographic opportunities for growth in Latin America, the U.S., and Europe, especially through new store openings. Prioritizing these opportunities will require careful analysis and decision-making regarding which projects to pursue first, as we can't predict where the best opportunities will arise globally. We will monitor the growth across all divisions closely. The digital space has significant potential, and we need to delve deeper into it, as it represents a completely new direction for us compared to our traditional business segments. The CEO must remain receptive to new ideas while being cautious with investments and project selections. However, I truly hope Daniel returns, as that is my expectation.

So another one, just very quick, I think I may have asked this in the past, but is there any relationship that you might have detected between the ongoing lower share of financial services at OXXO? It's not the first quarter; it happens, and the strong advancement of Spin users. Thinking that if there is a relevant share of financial services that are now being made or transacted through the app at a lower profitability.

This is Juan. In the long run, you can expect some physical users to shift to digital. However, what we're observing now is more connected to the fluctuations in our relationships with correspondent banks. As you're aware, a few banks have reduced their involvement, but they are starting to return. We have to be cautious about fees given inflation and how we manage our fee structure. Therefore, the changes we see currently are not necessarily driven by the overall trend of physical to digital. It’s more about the status of our major banking partners or the fee structure. I believe the shift will occur, but we haven't seen it yet.

Understood, Juan. Very clear. Thank you.

We'll take our next question from Ulises at JPMorgan.

And obviously echoing good wishes there for Daniel. So the question that we had was more if we could explore a bit on the other retail formats in Mexico, particularly around Bara. Maybe if you can comment a little bit on what the outlook is for the rollout and any short-term targets that you can share there? And obviously, any color around how profitability size is evolving, CapEx requirements, all of that, that would be highly appreciated.

Thank you for the question, Ulises. Bara is one of the formats that the OXXO team is considering as part of their multi-format strategy. It has performed exceptionally well during the quarter, with results being 22% higher than last year. We saw a 12% increase in traffic and same-store sales also rose by 12%. The private label, which is crucial to our value proposition, is doing very well, and we are continually improving the operational aspects of the stores by reducing inventory and operational costs. We are leveraging OXXO's success in segmentation and are increasing the number of store openings. Currently, there are 300 Bara stores mainly in central Mexico, and we plan to continue this expansion strongly in the coming years while focusing on our existing geographic areas and gradually moving to new ones as we refine the value proposition. We are confident that we have established a solid value proposition and are prepared to expand into more regions in Mexico.

If I may complement, with regards to the unit-level economics, I think with the gross margin structure that has been achieved through the different categories, value prop and private label penetration, we have been able to reach unit-level economics that from a marginal perspective, in terms of the store investment and the operating model, can give us returns on investments well into the double digits. And again, at the four-wall level, they're reaching and in the contribution that we originally set out for the reformulated value prop three or four years ago. So we're very comfortable that as the scale grows, distribution centers fill up, et cetera, that we will be achieving much better EBIT margins than what we're seeing right now. And that the marginal dollars that are being invested here are earning spectacular returns; so we're comfortable that the unit-level economics on Bara are working out either as or better than expected.

All right. That's super, super helpful. And if I may, just to follow up on that on the point there on private label. Do you have any sense or any level that you can share with us around how much private label actually represents there within the format?

Yes. When we look at the total sales, private label is at around 21% of the same-store. But then obviously, it changes depending on the categories. So it goes very high when you look at beverages, for example, it is around 27%. In general merchandise, it is also higher at 27%. So it changes, but it is an important part of the value proposition.

We'll take our next question from Rodrigo at UBS.

Paco, Antonio, Juan, let's limit the questions to one. I'd like to get your views on Nos in Brazil. It seems you have found a successful strategy there, achieving impressive results in same-store sales. I have two questions. First, do you envision a scenario in the medium term or even next year where you could replicate the situation in Mexico, like opening one store per day? Could that be possible in Brazil? Second, you mentioned that most, if not all, of the stores should be in OXXO. It appears that in DJ bench, nearly all we have comes from you. Could you clarify the contribution from your partners in the joint venture? That would be appreciated, and congratulations on the overall results.

Let me take the first part and then I'll let Paco complement. I think on the one store per day, I mean, I don't want to put our colleagues in the hot seat, but that's actually what they did during the first quarter, right? I mean, if we remember that in Brazil, they use a different fiscal year. Their end of the year is at the end of March because of its harvest year. So our first quarter was their fourth quarter, and they actually opened like 90 stores during that quarter. So it is doable. Now, is that our run rate for the full year? No. But is that possible? Yes, I think in the short to medium term, that’s the kind of growth that we are looking for. I'll let Paco talk about the partnership, which is really going very well.

Yes, yes. Thank you, Rodrigo, for the question. Look, I mean, first and foremost, we are extremely happy with the relationship we have in Brazil. We're extremely happy with the way the joint venture is working. We have a strong base of OXXO stores right now, but we also have a strong base of selected stores. Our partners have over 1,600 stores in Brazil, and they opened 35 units in the last quarter. At the end of the day, we have an ecosystem of stores in Brazil between the Select and the OXXO that are very powerful brands. As you know, they are experts on the fuel side, and it's something that we plan to learn more about as we move forward with our expansion plans in other places. So the joint venture we have there is going ahead of expectations. And we have a strong relationship with our partners that we plan to continue building in the future.

If I may add to Juan's earlier point, I want to emphasize that the 90 stores we opened in the last quarter are only in Sao Paulo and Campinas since we currently have just one distribution center. Eventually, we will expand to Rio and other regions. I am trying to be a bit more aggressive than Juan, and I won't put our Brazilian colleagues on the spot. Once we have three or four areas where we are saturating the market at the same time, we should be able to achieve that growth. Additionally, to complement Paco's point, it's important to note that the first three years of the joint venture were managed by someone from Raizen. Their local expertise has been invaluable in implementing the value proposition in Mexico, and we will continue to leverage their insights as we move forward in the region.

I understood that clearly. Are you at breakeven there, or is there still negative operating income? It would be helpful if you could share more about that.

Sure. At this point, even though we are a public company, we prefer not to disclose the numbers. However, regarding free cash flow, despite our ongoing expansion, we are still free cash flow negative, but it's a positive situation. I can say that the business's economics are better than we anticipated when we started three years ago across all income statement lines.

Thank you. We'll move on to our next question from Ben Theurer at Barclays.

Thank you very much, and congrats from my side. Just wanted to dig into recent dynamics at OXXO. Clearly, we saw a very strong second quarter, and a continued very healthy combination between ticket and traffic. I was wondering if you could explore a little bit of how much of maybe the traffic was driven just weather-related more going into stores just because of the heat buying certain beverages and so on and what the trend into the third quarter and how you're feeling about the traffic more recently.

Ben, this is Juan. We were talking a little bit about this even last quarter. We were talking about the gathering location, the thirst location. I remember making a comment in the call three months ago about beer being very relevant now that we've opened fully the territory, all of Mexico to both big families of brands and beginning to move the needle even though the openings to the API portfolio happened several years ago or began happening 3 or 4 years ago. We obviously were under COVID and people weren't really living their lives normally. But now we are, right? And so people are getting together a lot more consuming a lot more. We see those trends where the beer category and the soft drink category and the snacks category and the liquor category are all performing very, very well. Now I think if we looked at it intra-quarter, certainly, the month of June was the strongest, and you point to the right reason; I mean the heat and the weather we've had for June and the better part of July, obviously, has been an additional tailwind to the consumption of beverages. So it looks like July kind of took off where June ended. So we continue to see good trends. But again, I think the broader reason is people fully going back to living their lives. I mentioned the other time concerts and fairs like the one in really all over Mexico, just people gathering and consuming normally where we have not done so for several years. That would be my comment.

No, Ben, this is Paco. The only thing that I would like to add to that is that when we look at traffic, it has been improving, as you know, sequentially for a few quarters now. The strong performance that we are seeing, the additional good news is that it is coming behind the general merchandise. Basically, every single segment of the store is growing and adding traffic. And that is being reflected also in the market share. OXXO continues to gain market share, and that has to do with the basic and the core value proposition of the store. So that is the good news. Yes, all the segmentation work that is being done is paying its dividends. And I guess that the consistency of it is what is helping the traffic. And that's why we believe that in the quarters to come, hopefully, we’ll continue to see the same.

Thank you. We'll move on to our next question from Alvaro Garcia at BTG.

Good morning. Thoughts and prayers with Daniel. Just one quick one on Spin. I was wondering, you're seeing higher transactions per user. In the release, you mentioned increased transactions per month. But I was just wondering if the concerns cohorts you're seeing just higher balances and just higher movement on a per-user basis. Thank you.

Yes, Alvaro, thank you for your question. Regarding Spin, we are noticing that different user groups, particularly the newer ones, are engaging more actively in terms of transaction volumes as they discover various uses for the product. While cash in and cash out remains the primary use, peer-to-peer transactions are gaining traction, which is beneficial as it fosters a network effect and enhances user loyalty. Overall, we have seen a desirable increase in transactions per user. Users are recognizing the functionality of peer-to-peer payments, as well as using the service for multiple online transactions after a single top-up, rather than making separate visits to the cashier. This trend is progressing positively, as we anticipated. There may be some impact on the financial services segment, but economically, it's not significantly dilutive. More importantly, we are experiencing increased engagement on the platform, which is our main goal.

We'll now move on to our next question from Sergio at Citigroup.

Yes. It's Sergio Matsumoto from Citi, and my thoughts and prayers are with Daniel and his family. My question is about the Premier loyalty program. How does its strength in driving traffic to the stores compare to the traditional nondigital or analog methods you mentioned earlier, such as services, payments, and mobile phone top-ups? Additionally, how does the presence of OXXO stores influence customer acquisition and retention on these digital platforms?

Thank you, Sergio, this is Paco. I will address the second part of your question and touch on the first as well, with Eugenio providing additional input. It's evident that OXXO stores are crucial for both Spin and the loyalty program. The combination of a physical store and the digital strategy we are implementing enables us to enhance our fintech services and loyalty offerings significantly. This approach benefits both customer acquisition and the consumer experience, along with the types of offers and programs we develop. Currently, our intention is to continue utilizing the physical presence of the stores. The teams collaborate closely because the staff in the stores play a key role in communicating with customers about the loyalty program and highlighting special offers. For instance, there are unique coupons available only through the application, and often, cashiers will recommend that customers check the app for these deals. The connection between the stores and digital platforms is strong now, and we expect it to strengthen even further in the future. Regarding the first part of your question, a significant portion of transactions within the Premier program still occur physically. Customers go to the store, provide their phone numbers, and access their accounts through those numbers at the cash register. However, we are seeing more customers using the application for their transactions. Ultimately, we believe that the future will involve a blend of both methods.

Yes. If I may add, just in the ubiquity point, there are 62,000 ATMs in Mexico, and only 28,000 or 29,000 of those 62 are actually outside of a bank branch. If you think about OXXO, we have 21,000 ATMs. So technically, we've got, I don't know, 40% of the outside bank ATMs in Mexico. And if you go to the more rural areas of Mexico, it would probably have to be the only ATM in town. So clearly, that is a significant portion of the value proposition, especially in a cash-rich economy in an informal-based economy like Mexico is. Our job obviously is to take that advantage and turn it into a unique user experience that flows across not only Spin, of course, but also with the loyalty program to drive that symbiotic relationship between the digital and the physical store. Right now, on loyalty, again, it's early days, but I mean, you saw in the press release, we're at 24% tender. So of all the sales at OXXO are being done through the loyalty program. And we're still running some numbers, but these customers are running tickets and traffic and purchases that are significantly higher than they otherwise would have been for a comparable cohort without the loyalty program. So I think this symbiotic relationship again between the physical store, the digital wallet and the loyalty program is causing exactly the kind of network effect that we wanted to have.

We'll take our last question from Héctor Maya at Scotiabank.

Thank you for your time. Apologies if I get disconnected; I'm having some issues with my line. I just wanted to say first, our thoughts and prayers are with Daniel, and we are wishing him all the best. Also, the question I have is related to FEMSA Forward. In the announcement, it was mentioned the potential of the traditional channel. So I would like to know how you're looking to become the supplier of the traditional channel. Do you have some clarity on the economics or how you would organize or perhaps the red trucks with the Coca-Cola Company? In the end, I mean, do you believe that we could eventually start to think of FEMSA as a relevant supplier or even as a one-stop shop for the relational channel in Mexico?

Héctor, this is Paco. Thank you for your question. The line was breaking up, so I will try to answer the best I can. But basically, we continue to believe that there is a lot of opportunity enabling the traditional channel and solving the key pain points that for many, many years they have had. First of all, clearly, pricing is a concern for them. That's an important part of the value proposition. On that side, you can imagine that we are well equipped to solve that one or at least address it simply because we have a very strong commercial relationship on the OXXO side. But there are a number of other pain points that this segment has suffered over the years. One is the availability of products and the delivery; today, what they have to do is most of the time they have to go and look for the product themselves, open stores late because they have to go to the wholesalers or others to supply their products. That means that they lose sales as they go and they come back; they have to pay for transportation, et cetera. So having an ecosystem in which you can actually receive the product, place the order the day before or two days before when you have closed your operation for the day and then receive it in full at the right price is going to solve a very big pain point for them. The second one, which is not minor, is that every time they go and buy, they have to buy full cases. That is an issue because many times, they only need to buy a few units. Given that they don't have access to credit, they don't have access to any source of financing; they have to work with their own working capital to pay for these things. If they buy a full case of something, that is going to take 2 months for them to sell. So you can imagine they have money tied up that they can use for their other things. A real ecosystem can actually offer them to buy by the unit because we have been doing that by supplying their stores by the unit. So that's not a minor thing. It's a difficult thing to do because you have to make money as you do it. And it requires expertise to do that. Clearly, we are planning to continue exploring all the alternatives we have to provide a platform that will solve these issues for our traditional channel. The traditional channel continues to be an important segment for retail in Mexico, and we expect it to continue to be as such. So clearly, all playing a role in helping them is going to be important.

I think what I would just add, this is Juan. And I know this is a question that has come up on the co-front side as well. Just remind everybody that it's still early days in terms of how we build this thing and how roles and responsibilities and capabilities and interactions, a lot is still to be defined. So it's looking very promising, but it's still early days.

There are no further questions in the queue. I will now hand it back to Juan for closing remarks. Thank you.

Thank you, everyone. Thank you, obviously, for all your kind words again regarding Daniel. We will definitely relay them to him; he might very well be listening to the call, so maybe he already heard you. We’re always available, as always, myself and the team, Jose Antonio, if you want to also sign off. Have a great end of the week and weekend, guys, and we’ll be in touch.

Thank you, Juan. Thank you for your time. Thanks for your interest in the company. I will try to be at least on a call of this kind of conference calls per year, not in all of them, unless there is important news that we have to announce. Gladly, I will come. And also, you should know that, through Juan, you can contact us all the time. We will stay in touch. Thank you very much, and see you soon.

Thanks.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Continue to stay safe. You may now disconnect.