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. 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 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 our purpose to continue what he started. To that end, Jose Antonio transitioned 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, 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 this November. We are all aware that this is an item on the 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 toward the targets 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 about 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-and fourth-quarter gatherings, 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 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 OXXO's footprint in Brazil more than doubling during the last 12 months. 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 from 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% 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 one per day. For its part, our fuel business delivered a stable performance with the strength in the corporate wholesale business continuing to outperform relative to the 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 million while more than 28% of OXXO Mexico sales are now associated with the program. We continue to prioritize 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 the 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 online. Before we dive into the numbers, I want to acknowledge our colleagues in Acapulco and nearby areas who were impacted by Hurricane Otis. Their efforts in helping the community recover over the past few days have been truly heroic. Now, regarding our results, as of the third quarter, we are now booking onboard solutions related to the discontinued operations. To maintain comparability, we will adjust our consolidated financials for the third quarter of 2022 to reflect this change. Now turning to FEMSA's consolidated quarterly results, total revenues during the third quarter rose by 19.3%, while income from operations grew by 12.7% compared to the third quarter of 2022. Our net consolidated income reached MXN 12.8 billion, which reflects higher operational income along with a non-cash foreign exchange gain of MXN 5.4 billion due to FEMSA's U.S. dollar-denominated cash position, impacted by the depreciation of the Mexican peso during the quarter. This increase was somewhat offset by a decline in net income from discontinued operations, particularly related to our investment in Heineken in the same quarter last year. Moving on to our operations, we added 283 units in Proximity Americas this quarter, bringing our total to 1,453 net new stores over the last 12 months. This achievement not only highlights our momentum in Mexico but also our strong pace in Latin America, especially in Colombia, where we recently opened stores in our fourth city, Cali. OXXO's in-store sales grew by 15.1% in Q3, supported by a 6.6% rise in average customer spending and an impressive 8% growth in customer traffic. This performance reflects favorable trends in core categories, effective commercialization strategies, improved segmentation, and the increasing impact of the Premier loyalty program, all set against a strong consumer environment. Our gross margin increased by one percentage point to reach 41.2%, benefiting from robust commercial activity and promotional partnerships, coupled with a favorable comparison base from last year. Income from operations rose by 14.7%, although our operating margin decreased by 50 basis points to 8.9%, influenced by heightened labor expenses due to reforms in Mexico. In Proximity Europe, revenues increased by 8.7% in local currency to MXN 11.2 billion, reflecting a rebound in traffic and spending driven largely by improved customer mobility. The gross margin stood at 41.8%, thanks to a positive mix effect from Valora's food service and B2B operations. Operating margin was 3.1%, indicating better operational leverage, although this was partially offset by rising expenses due to inflationary pressures. Regarding FEMSA's Health operations, we expanded our drugstore count by 80 net new units, totaling 4,347 across all territories by the end of September, with 365 net new stores added in the last 12 months. Revenues saw a slight increase, but same-store sales averaged a 3.6% decrease. However, it's worth noting that on a currency-neutral basis, revenues would have risen by 13.6% and same-store sales would have increased by 4.7%, despite a challenging comparison base in Chile and stiff competition in Mexico. The gross margin contracted by 30 basis points, mainly due to a negative mix effect from our Colombian operations, which typically have lower margins. Meanwhile, operating margin increased by 60 basis points, largely due to rising labor costs across most markets. At OXXO Gas, revenues rose by 14.2% with same-station sales growing by 8.1%. Retail volumes were bolstered by strong corporate and wholesale activity. The gross margin for the quarter was 12.4%, and the operating margin was 4.5%, reflecting effective expense management, although this was offset by increased labor costs. Lastly, Coca-Cola FEMSA, as you may have seen recently, reported outstanding results for the third quarter, with total volume increasing by 11.6% across all regions. Total revenues rose by 10.1% and operating income climbed by 15.3%, with the operating margin expanding by 70 basis points to reach 13.5%. You can listen to a replay of their conference call held last Wednesday on their Investor Relations website. With that, let’s open the line for questions. Operator, please?

Thank you. Our first question comes from Ben Theurer from Barclays. Please go ahead.

Hi everyone. Thanks so much for the call. Thanks for the quick update on capital allocation as well. 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, Ricardo, for the question. I'm not quite sure what it means to go back in the queue, but thank you. I'll begin with the first part of the discussion.

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 Juan 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, 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 is 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 close 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. 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 adjustments are taken care of as part of that process. As for the second part of the question, Juan, yeah.

Yes. Hey, Ricardo, it's Juan. Regarding the number of openings, this is quite strategic. Over the past few years, particularly during the COVID period, we experienced a significant slowdown in store openings in Mexico. We had to close several stores and were only opening about 800 per year. There were concerns about whether we could return to the previous levels of four-digit openings in Mexico. However, in the last 18 to 24 months, as we established our pipeline with new standards that allow us to open more effective stores, we are already back to opening 1,000 stores annually in Mexico. I believe this is the figure we should use in our models. I'm not sure we will return to the higher numbers of 1,200, 1,300, or 1,400 we once had in Mexico, so I suggest sticking with the 1,000 figure for now. Additionally, the Latin American region has matured during this time. We are now in four markets in Colombia: Bogota, Bucaramanga, Pereira, and Cali, and things are progressing well. We have integrated successfully into the Chilean market, where we anticipate further growth. Peru is also reaching a point where we could potentially accelerate openings. In aggregate, the numbers could increase, driven more by developments outside of Mexico than within it. I would maintain the figure for Mexico at 1,000 for the time being, while noting that these 1,000 stores will be more productive than those we opened two to five years ago.

I just want to emphasize that as we continue to implement our long-range plan, we are achieving success in all our initiatives, both in terms of revenue and profitability. This is resulting in improved unit economics, especially in Mexico, which is better than we initially expected. I believe we have a longer opportunity to maintain our growth pace, and any challenges we may face will mostly revolve around how we allocate resources and prioritize across the various regions under management. Therefore, it’s primarily a matter of prioritization. I am confident that we will be able to sustain our growth rate for a longer duration compared to the previous unit economics.

And 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 building out 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. I'll address that. The proximity health model is compelling from a capital allocation standpoint because it acts as a true compounding engine. It generates substantial cash flow, and we currently have a store base across all regions that effectively self-funds this growth with high marginal returns. This business model is exceptional at this stage. Over the next five years, we could invest around $4 billion to $5 billion in growth capital expenditures, which will encompass new store openings, distribution centers, and infrastructure projects, all of which will be self-funded by the business unit. We will still have sufficient cash left for shareholder distributions. This means that the cash on our balance sheet is readily available for both inorganic expansion and returning capital to shareholders. We are fortunate to have two highly cash-generative assets with attractive reinvestment opportunities for cash flow generation, alongside a growing digital business that consumes only a small portion of the cash generated by the other two businesses. This also gives us the flexibility to pursue value-creating acquisitions and potentially deliver substantial returns to shareholders.

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 to a profit center, please?

Hey Bob. This is Juan. I think you highlighted something that I'm really excited about, which is the rapid growth of Premia, the huge number of users, and the internal impact on average ticket. This has implications for the auto business as well, especially in the early stages of collaborating with partners. You mentioned Volaris and the streaming service from Televisa, along with potential additions in the future, including internal partners like OXXO Gas. It's impressive to see how this resonates with a demographic that has historically had limited access to loyalty programs. The average ticket for Premia is significantly higher than the standard average ticket. We're also exploring avenues like retail media and digital media, where we can monetize interactions like checking point balances through advertisements from our major suppliers. We're already monetizing our physical real estate for commercial income, and now we're starting to tap into digital real estate for similar purposes, which offers limitless opportunities. It's still early, but we're making progress and moving faster than I anticipated.

Yes. Bob, if I could add a couple of points to that. The most exciting aspect of the OXXO Premia is our ability to identify the various journeys of different consumer segments. There is a distinct way in which a consumer interacts with an OXXO Gas station to accumulate points on the Premia platform compared to someone who uses it daily for coffee purchases. Our team is thoroughly exploring every possible journey to enhance personalization for consumers in the midterm, which is our ultimate goal alongside what Juan mentioned. Currently, the high tender reflects consumers learning how to use their points and the overall ecosystem. This understanding is influenced by factors such as age, economic status, and lifestyle, whether they are students, young professionals, or gig workers. These journeys enable us to comprehend our consumers better, allowing our team to customize promotional activities with OXXO Gas and our partners. This is the truly exciting aspect beyond just the large number of active users we have. Looking ahead, there are many possibilities that the team is exploring, all of which are part of our long-range planning. We will certainly provide more detailed updates on our digital strategies in the months ahead. 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 able to gather and obviously, for the first time, have the data assigned to a person for whom we know who they are, 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 businesses, 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 smaller bucks to 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 is 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.

I just want to add that I remember six months ago sitting in this same conference room and advising you not to factor a teens number into your model. I've been wrong for the last two quarters, as we delivered a 15. To range's point, it's still unclear how sustainable this is, but there seem to be structural factors contributing to the positive results rather than just a recovery from COVID. As we look ahead to 2024, I anticipate that the figures will trend downward. I think we might be looking at high single-digit same-store sales growth, and we'll update that in February. While double digits aren’t out of the question for the early part of 2024, we’ll see. However, the deceleration has been much slower than we expected six months ago, which is encouraging news.

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

Thanks, Karl.

Before we proceed to the following questions, a final reminder. The next question comes from Álvaro García from BTG. Please go ahead.

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 of increased labor expenses in connection with labor reform. But I was wondering if there's any other dynamic going on there, maybe quicker growth outside of Mexico? 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.

Thank you for the question, Álvaro. Primarily, the main factor is labor. However, many of the initiatives in our strategic plan involve exploring better methods for managing cash flow in our stores. We are adjusting our operational model regarding staffing levels, including how many employees are fixed versus variable in terms of shifts. This is all part of an experimental approach as we aim to enhance our cost resiliency moving forward. These experiments are reflected in our P&L as operating expenses. Additionally, there's a mix effect from South America, which is less profitable than Mexico on a margin basis. Overall, I would say that about 80% of the issue is related to labor, with the remaining 20% attributed to the other factors I mentioned.

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 labor 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.

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 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 would be highly appreciated. Thank you so much.

Yes, Alan, let me address the first part of your question about Bara. Firstly, we do not view Bara as a supermarket; it is a completely different format. It is a small box with a limited selection designed to meet specific consumer needs related to their shopping habits. Therefore, it is not comparable to a traditional supermarket; it represents a different segment and format. Regarding opportunities, we are speeding up store openings, and with strong performance, we are confident in our value proposition, which has been validated and appreciated by consumers. This encourages us to accelerate further. However, we are also committed to doing this thoughtfully. Our focus geographically includes not only specific areas of Mexico but also expanding in regions where we can capture all available growth. We are utilizing our established model and are confident that this different format and value proposition for consumers will result in minimal cannibalization with our OXXO stores. That sums up my comments on the format. Eugenio, would you like to add anything?

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 back to where they were, if not higher than prior to the pandemic, but the consumption pattern, with people trying higher graduation drinks, is still there and is still strong.

And the other thing, just to add one bit of additional color, 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 question. So a couple of months ago, our Banorte friends came back to LAX, 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 to take data should the retail media 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 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 the 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 app 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.

I believe your question highlights the numerous opportunities that arise whenever we discuss the digital aspect and its connection to the store. Our interpretation is that the integration of digital and physical experiences offers a significant competitive edge for our digital strategy. The ecosystem we are building holds substantial value for consumers. Our team's priority is to leverage this to create value while also enhancing consumers' lives, assisting them in their daily routines, and exploring new possibilities, both financially and in their overall consumer experiences.

I understand that clearly. Thank you for the explanation. However, I want to ask specifically about retail media. For example, Walmex has already established a €2 billion pesos business that has high margins. I'm curious about your perspective on this. Do you believe they are still in the early stages, and how much potential do you see for growth in retail media?

Yes, Rodrigo, it's Juan. I think retail media is just beginning for us. We're in the early stages, similar to how teams throw a few pitches at the beginning of a game. This is just the start, as I see it. Ultimately, it comes down to the significant number of interactions our stores will have, which will keep increasing. The potential here is substantial. We haven't discussed some fulfillment developments lately, particularly regarding our e-commerce partnerships. We have 21,000 to 22,000 stores, and we've been working with Amazon for several years now, and we're also looking into lockers and other participation methods. Additionally, we've done thorough work identifying certain transactions that can cover delivery costs. Behind the scenes, there are various other initiatives in our long-term strategy where 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.

Hi. Thank you for taking my question. It’s encouraging to see the strong results in Mexico, congratulations on that. It’s also interesting to note the growth in Spain. It appears you are on track to meet the 10 million user target mentioned a year ago. Given this, I wanted to know if you have more clarity on how much you could accelerate this and what the potential economics could be in your plan to leverage this substantial user base to supply small traditional stores in Mexico. Thank you.

Hey, Héctor. Yes, I believe that with Spin, we've discovered that the store has been more beneficial for acquiring customers than we anticipated. This has positively impacted our acquisition costs, as some initial incentives and strategies have proven unnecessary. We seem capable of expanding our store presence at the current rate without incurring significant costs. Additionally, the network of physical stores and the fact that 13 million users are being asked if they have a Spin account has been extremely effective. We're continuing to grow, adding around 400,000 stops each month for Spin, with even faster growth on the premium side. The main challenge now is improving engagement and providing more activities for users in the app to increase their time spent there. This, in turn, will enhance our digital media metrics as users will be more engaged. Hence, our primary focus is on boosting engagement and monetization rather than just increasing subscriber numbers, which are growing steadily on their own. This is Paco, and to add to Juan's point, we are putting more emphasis on active users for Spin rather than total users. What truly matters is those making at least one transaction a month. Once we identify these active users, our focus shifts to the transaction size and frequency. The team is currently working on understanding consumer behaviors, such as how different sociodemographic groups use the card, whether they prefer physical or digital cards, and their reasons for using it—be it for transferring money, making payments, or receiving funds. The way consumers use Spin will influence the types of offers and experiences we provide them. During the last month, transactions increased by nearly 16%, and we've found that users with higher frequency also tend to have larger transaction amounts. For instance, the usage differs between students and a worker in Tijuana sending money to Hatay. Thus, various usage patterns of Spin will affect our store activations and targeted offers for different consumer segments. The key takeaway is that our focus is more on user engagement and activity level rather than simply increasing user numbers.

The second part of your question about B2B relates to the success we have achieved primarily in the consumer segment, which is crucial for completing our ecosystem strategy. We recently acquired NetPay, giving us the necessary infrastructure to support this trade and leverage Coca-Cola FEMSA’s strong relationships with small businesses in southern Mexico. This will allow us to distribute non-Coke products through our existing distribution centers and commercial partnerships, enabling us to offer digital solutions tailored to the needs of small businesses. This includes services like credit and digital payment acceptance, empowering these businesses within the Spin ecosystem. Our goal is to connect both consumer and small business segments to create a cohesive ecosystem.

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. We have pilots running in some regions of Coca-Cola FEMSA, and we're still refining the value proposition on how to proceed. It's too soon to establish a complete timeline. This initiative obviously has different implications regarding acquisition costs, which were simpler on the B2C side with OXXO. We're still navigating through that. However, we believe that the potential for value creation in a mutually beneficial relationship with the small mom-and-pop shops and small restaurants in the Coca-Cola FEMSA network is significant enough for us to develop a business model that works for everyone involved.

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 questions. 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.

On that front, yes, Banorte just returned a few days or weeks ago, so it wouldn't be reflected in the numbers. We also lost Citi, which added some volatility. Looking back, that's certainly contributed to some noise. However, moving forward, we expect a more balanced or stable dynamic. There is no new information regarding changes in our partners or how we interact with them.

One reason for the observed weakness, Ulises, is that we have intentionally managed our pricing to be not only competitive but also to provide value for customers. However, this pricing has not kept pace with inflation for services. Consequently, during the period of high inflation over the past few quarters, there has been a decline in the significant profitability these services typically offer. This profitability has decreased because we chose not to adjust our pricing accordingly.

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’d like to follow up on Álvaro's concern about labor cost pressures. We are observing this trend throughout Mexico and anticipate that next year will bring even more pressure. There are changes in labor laws and modifications in demand payments, so I want to understand how the company is planning the budget for next year. Is there any way OXXO can become more efficient than it currently is, or how are you considering mitigating some of the potential impacts for the upcoming year? Thank you.

Yes. Thank you for your question, Alejandro. When examining OXXO's strategies, a key focus is the optimization of their stores, which they have done effectively over the years. Regardless of the cost pressures that are always present, particularly with labor costs which can fluctuate from year to year, the optimization process is ongoing and consistently helps to reduce operational costs. They have a strong track record in this area, and you can be confident that they will continue to prioritize it as part of their long-term plans. Regarding costs, they are indeed projecting some increases for 2024 in their budget planning. While there are various scenarios to consider, the team is evaluating these possibilities and planning accordingly. However, it's important to note that there is limited visibility on what will transpire in each area for 2024. Thus, as a business, the goal is to prepare for different scenarios, whether through existing plans or by developing new ones.

Well, I just going to add that, I mean, taking my head off as an 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 Mexicans. 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 costs 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 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, there are really no significant updates. You haven't missed anything important. That said, we are getting closer. We're conducting more detailed analysis, and there are still ongoing discussions internally about our long-term targets for different businesses, potential acquisitions, which ones would truly add value, and which ones would not. We're also contemplating the best strategy for distributing any excess capital to shareholders, among other things. Although there's not much to update today, we are making progress, and everyone in management and the Board is aligned in ensuring that whatever actions we take will aim to maximize the intrinsic value per share for long-term shareholders of FEMSA. We're committed to that and will not stray from it. As is typical, we usually hold our third quarter Board meeting after the third quarter results, which is coming up in the next couple of weeks. We will discuss this at that time. While I can't promise any specific news will emerge from that meeting, we are making good progress and will share our final thoughts as initially planned in due course.

Thanks a lot, Eugenio.

And Ricardo, thank you very much for the discipline of lining up again like a Harry Potter 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.