Hello and welcome to FEMSA's second quarter 2024 Results Conference Call. My name is George. I'll be the coordinator for today's event. Please note this conference is being recorded, and for the duration of the call, your lines will be in listen-only mode. However, you will have the opportunity to ask questions once you have the presentation. And I'd like to hand it over to your host today, Mr. Juan Fonseca, Head of Investor Relations, to begin today's conference. Please go ahead, sir.

Thank you, George. Good morning, everyone. Welcome to FEMSA's second quarter 2024 results conference call. Today we are joined by Martín Arias, our CFO, and Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations team. The plan is for Martín to open the conversation with some high-level comments on our strategic progress and business trends, followed by a more detailed discussion of the results, and finally opening the call for your questions. Before I hand over the call to Martín, I want to address the disclosure at the end of today's press release related to changes to our first quarter results as reported. In the press release for the first quarter of 2024, we classified certain results related to non-core discontinued operations on several incorrect lines, and we are reclassifying them today. The changes only impact the consolidated income statement and mainly cause a decline in income from operations. However, they do not impact consolidated net income and do not impact any of the results of the business units reported separately. You can find a detailed table at the end of today's press release, and Martín will briefly explain the main differences before we open the call for your questions. Martín, please go ahead.

Thank you, Juan. Good morning, everyone. Before we review our quarterly results, I would like to update you on the most recent steps we have taken as we continue to execute on the FEMSA forward strategy, varying initiatives related to capital returns for shareholders, as well as asset divestitures. As you are aware, we remain actively engaged in share buybacks. In the second quarter, we completed our first accelerated share repurchase program for $400 million and initiated a new program for $600 million. Additionally, during the first six months of 2024, we have bought back approximately $180 million in shares in the Mexican stock market. Earlier this year, we also secured shareholder approval for an extraordinary dividend of approximately $600 million, half of which has already been paid. This brings our extraordinary return of capital to shareholders for 2024 to nearly $1.8 billion, equal to approximately 60% of what we committed to by the end of 2026. These figures do not include the ordinary dividend of approximately $800 million, half of which has been paid to date. This is all consistent with the capital allocation framework we communicated last February, and we will continue to advance towards our stated objectives. In terms of our progress on asset divestitures, we announced last week that we have reached a definitive agreement to divest our refrigeration and food service equipment operations in Imbera and Torrey, for a total amount of approximately $450 million. This transaction is expected to close before the end of the year. And finally, in the first week of July, we received the remaining payments from our divestment in Jetro Restaurant Depot, totaling $945 million. This means we have now received the full amount from the Jetro transaction. This is not reflected in our financials reported today, but the cash is now on hand. We will continue to analyze opportunities to return capital to shareholders beyond our ordinary dividend, consistent with our stated objective of a total of approximately $3 billion by the end of 2026. In addition, as we gain greater clarity on all the organic and strategic opportunities available, and in light of developments on the macro front in the coming years, we will analyze the possibility of launching additional capital return initiatives. Let me turn to the general trends we saw in our operations. In the second quarter, we continued to see good momentum and strong performance from our core business units. Once again, most of our operations, including the two that contribute most to our results, delivered a solid set of numbers. Proximity Americas saw a deceleration in the pace of same-store sales growth in Mexico against a tough comparison base, due in part to a shift in the timing of Holy Week celebrations relative to last year, as well as volatile weather, but was offset by stellar gross margin and solid store expansion. For its part, Coca-Cola FEMSA delivered a remarkable performance, showing double-digit increases across its own income statement, driven once again by strong volume and revenue growth in its major markets. We continue to see good results at Valora and OXXO Gas, with both businesses delivering double-digit growth in the income from operations. At our health division, we saw sequential improvement in our fastest-growing retail operation in Colombia, combined with stable results from Chile, but we again faced competitive headwinds in Mexico, and we are laser-focused on our plans to change the trajectory in that market to bring it in line with the positive dynamics we see elsewhere at FEMSA. Finally, at digital, we continue to add users and advance towards our ecosystem objectives. Now let me go over the quarter's results in more detail. Let's begin with FEMSA's consolidated second-quarter results. Total revenues increased 12.2% and operating income rose 15.8% compared to the second quarter of 2023, driven largely by strong growth in Proximity, fuel, and Coca-Cola FEMSA, and despite weaker performance in our health division. Net consolidated income increased 75.5% to MXN15.7 billion, mainly explained by improved operating income, a non-cash foreign exchange gain of MXN6.1 billion related to our U.S. dollar-denominated cash acquisition and derivative financial instruments, and a higher interest income related to an increase in our average cash balance. This was all offset by a significant shift from a large other non-operating income to a small non-operating expense related to the receipt of Heineken dividends and the gain from the sale of JRD in the second quarter of 2023, and was also offset by higher interest expense, reflecting a benefit in the second quarter of 2023 from a one-time gain related to the repurchase of debt. Now turning to our operational results. Proximity Americas delivered a solid performance in the second quarter. OXXO's same-store sales increased 4.1% in the second quarter, driven by an increase of 4.7% in average customer ticket and a decrease of 0.6% in traffic. The second quarter was an atypical one, where each month reflected a unique set of mixed effects, generally more negative than positive. For example, the month of April had a tough calendar effect due to the shift in the Holy Week celebrations, while May benefited from extremely high temperatures across Mexico, and June faced a comparison base of approximately 20% growth in '23, as well as some early tropical storms and the restriction of alcohol sales ahead of the national elections. Ultimately, these factors combine to contribute to the deceleration of same-store sales. However, gross margin expanded by 310 basis points to reach 44.1%. Driven by strong trends in commercial revenue, income in commercial income, a positive contribution from financial services and revenue management initiatives. Income from operations increased 7.6%, while the operating margin contracted 10 basis points to 9.9%, reflecting higher operating expenses as we build our platform in South America, higher labor costs across markets, and investment behind capability building and strategic initiatives, such as store segmentation and revenue management. On the store expansion front, OXXO added 404 net new stores during the quarter, of which 332 were opened in Mexico and 72 in South America. This figure includes 14 openings by Grupo Nos in Brazil. Historically, store openings typically have lagged in the first half of the year, complicating our operations in the second half and resulting in lower incremental revenues from those stores for the full year. Therefore, in an effort to improve the shape of our annual expansion curve, we have shifted our focus this year to opening as many stores as we can during the first half. This approach will enhance the efficiency and productivity of the new stores and avoid the operational congestion in the key fourth quarter. This means a full year target for OXXO Mexico remains between 1,000 and 1,100 net new stores, which is the sweet spot for which our growth engine is currently optimized. Moving to Proximity Europe, total revenues increased by 5.8%. This positive performance was driven by growth in all business lines. Gross profit increased 8.8% in pesos, while gross margin improved by 120 basis points, reaching 43.3%. At the operating income level, Valora again delivered strong growth with 41% growth and 100 basis points margin expansion, reflecting the continued performance of the B2B operation, healthy results from the retail and food service businesses, and consistent cost management. Turning to the health division. Total revenues showed a slight contraction of 0.4% with same-store sales decreasing 1.1%. This outcome was primarily driven by a highly competitive environment in Mexico and Ecuador, which was offset by stable performance in Chile and continued strong momentum in Colombia retail. As a result, operating income fell by 14.8% in pesos, and the operating margin contracted by 70 basis points, reaching 4.1%. While these numbers show a sequential improvement from the first quarter, this challenging dynamic continues to highlight the need for strategic adjustments to overcome the challenges and change the trajectory of our business, particularly in Mexico. As we have mentioned before, we are dedicating considerable efforts to addressing the issues within the health division. In Colombia, we continue to see encouraging results from our strategic acceleration of the retail component of our business, making us the retail leader in that market and reducing our exposure to the institutional sector. This transition is steering us towards a more profitable and structurally robust operation, enhancing our overall performance and stability. Meanwhile, in Mexico, we are undertaking several significant strategic measures, including the launch of a new store format following the successful template used in our South American markets, which among other things, emphasizes the beauty and personal categories and strengthens consumer promotional activities. We will keep you posted as these initiatives progress. Turning to OXXO Gas, we posted a notable 15.9% increase in same-station sales and 16.2% in total revenues, reflecting solid performance in retail and institutional sales. During the quarter, the gross margin reached 11.6%, while the operating margin stood at 4.2%. Although the structure of profitability from our fast-growing institutional business is lower than that of retail, this was offset by operational efficiencies. Turning to Digital@FEMSA, we continue to make significant progress during the quarter. The number of active users for Spin by OXXO reached 7.9 million, marking a 37% year-on-year growth. This demonstrates consistent customer adoption and an increase in transactions per user. Our Spin Premia loyalty program also showed impressive growth, with a 44.3% year-on-year increase, reaching 22.8 million active users. Approximately 36% of OXXO Mexico sales and 40.6% of OXXO Gas sales are now linked to Spin Premia. This integration strengthens our data-gathering and utilization capabilities. We expect to gradually focus less on total users, with a shift towards a higher number of transactions per user. Finally, Coca-Cola FEMSA reported another impressive quarter, achieving double-digit growth across its income statement. This remarkable performance was driven by consistent volume growth across most of its markets, coupled with effective revenue growth management initiatives, and despite the challenges faced due to the flooding of its plant in Porto Alegre, Brazil, and the Holy Week calendar shift. A replay of KOF's quarterly call, which was held last Friday, is available on their website. Regarding CapEx deployment, our key priorities remain to enhance our operational capabilities, drive innovation, and sustain organic growth across our operations. In the second quarter, our CapEx reached MXN11.3 billion, representing 5.7% of total revenue and a 35.1% increase over that same period last year. This growth was driven by the expansion and remodeling of storage at OXXO Mexico, the continued development of OXXA Latam, increased investments in production and distribution capacity at KOF, as well as continued investment in our FEMSA-wide digital transformation initiatives. Finally, let me go over the table that we included at the back of our press release to present in detail a comparison between the first quarter 2024 consolidated income statement and the comparable first quarter 2023 results and the reclassified statement published today. The main effect of these changes are the following: total revenues grew 10.5% in the new numbers as opposed to 11.3%. Gross margin was 38.7% in the new numbers as opposed to 39.4%. Income from operations were MXN12,935 million versus MXN14,767 million, reflecting a margin of 7.3% in the new numbers versus 8.3%, relative to the reclassified 2023 figure. Income from operations grew 12.2% in the new numbers as opposed to 14.4%. Other operating expenses, other non-operating expenses were only MXN487 million instead of MXN2.4 billion. As mentioned in our press release, this does not impact the consolidated net income figures, nor does it impact the results of the businesses reported individually in either period and does not affect the 2023 audited statements. And with that, let's open the call for questions. Operator, please.

Thank you very much, sir. The first question today is coming from Benjamin Theurer, coming from Barclays. Please go ahead, sir. Your line is open.

Hi, good morning. Thank you very much for taking my question, Martín. So one thing I wanted to follow up on is just the strength of the gross margin at OXXO. I mean, that was obviously, as you've highlighted in your prepared remarks, a lot driven by the commercial initiatives, but it also feels like the financial services. So I wanted to understand if you can help us bridge the success that you're having at your digital initiatives, be it Spend by OXXO, but also Premia as it relates to that boost on the gross margin. So how sustainable is that boost and how much of that is really related and interconnected with all the success you've pointed out in the press release when it comes to the digital initiatives? Thank you very much.

Yes, just to clarify, I mean, the digital initiatives, many of them are housed in Digital@FEMSA and are not reflected in the Proximity numbers per se. What you will see in Proximity that is related to digital is the initiatives of many of those efforts benefit the store and tend to drive traffic and consumer engagement. Although I've said in the past, if tomorrow, for any reason, we decided that Digital@FEMSA should be reintegrated into OXXO, a significant portion of the initiatives that Digital FEMSA undertakes would have to continue to exist exactly as they continue to exist. For example, Premia, Spin by OXXO. So we are still not, I would say, seeing the full potential of the Digital@FEMSA monetization of data or consumer promotions through the app at the level that we expect they will occur in the future. That's an ongoing process. So the improvement in the gross margin that you're seeing today is really typical work of retailers of gaining commercial income from suppliers to promote their products and to give them prominent placements and to drive promotions. In the case of financial services, as you may know, financial services has a relatively higher gross margin. It's a service. So it doesn't really have a significant cost of goods sold associated with it. And so when that business does well, it tends to improve the overall gross margin of the business. That effort on the commercial income relating to suppliers, I would tell you, is a product of many years of capability building and focus. And as you know, the history of OXXO has been one of every year creating a series of initiatives that create new layers of value. And we're always thinking one, three, five, ten years out, what do we need to be doing today? So today, you're seeing the harvest of years of capability building, hiring of people, development of the system so that we can offer suppliers very varied and segmented opportunities for consumer promotions. So that is, we're harvesting that today. I don't know if you have anything to add.

Yes. Hi, Ben. This is Juan. I would just like to add that OXXO has increasingly become a partner in our suppliers' marketing efforts. You can observe the initial stages of this not only in the physical stores with banners on walls, decals on cooler doors, and display kiosks, but also in digital initiatives with screens in the stores and other methods for expanding commercial income into the digital space. This will also involve Digital@FEMSA in significant ways. Additionally, regarding traditional services, which, as Martín mentioned, continue to perform well along with Digital@FEMSA, we experienced double-digit growth in financial services. This growth is largely due to more customers visiting the store to pay their bills and make purchases on platforms like Temu and Shane, as well as other collaborations with Amazon. Essentially, we are enhancing the in-store experience to encourage more visits, and our team is finding great success in this area.

Okay, perfect. Thank you very much.

Thank you, sir. The next question is from Rodrigo Alcantara calling from UBS. Please go ahead. Your line is open.

Hi, thanks for taking my question. Just follow-up here on the gross margin is quite impressive. I mean, maybe you can just break down the proportion that could be attributed to the commercial income and how much could be attributed to the services, which is also very interesting what you commented, Juan. I mean, 50-50, 40-50, you could give us some more granularity on that just for us to assess the sustainability of the gross margin expansion would be very helpful? That would be my question. Thank you.

Thank you. Hey, Rodrigo, this is Juan. I could tell you, but then I'd have to kill you, right? So look, commercial income is very relevant, right? I would say, and some of you will remember my comments from a year ago or a year and a half ago, having opened the stores to both brewers, right? I mean, opening the stores to the Modelo portfolio always held potential in the sense of having the two large brewers competing for space in what is the most important channel for them. So that is beginning to actually take place. We've become important for a number of suppliers, a number of categories for OXXO also is, bar none, the most important place to deploy resources because we are not just a double-digit, but a significantly double-digit part of their channel structure in Mexico. So it works as a partnership, obviously, and it is, I mean, again, I'm not going to tell you a number, but it's very relevant. Now, I did mention a few moments ago that after some years, also for many of you who have been observers of the company for a long time, where we had seen financial services kind of plateau, we are seeing, I don't know if our resurgence is the right word, but certainly having brought minority came back, we made some changes to our relationship with BBVA. And I mentioned a few moments ago, some of these bigger e-commerce players for whom a lot of the purchases are, people will do a purchase online, but then they prefer to pay in cash at the store. Because they don't want to provide their data online or for whatever reason, they feel more comfortable paying in cash. So things that did not exist two, three years ago are happening now on the financial services side. So I would say those two are obviously the bulk of what's driving the expansion. But that's been true for a long time, right? And I would say, if I have to say which is bigger, I would say commercial income is bigger. But yes, that's I think as far as I would take it.

That's helpful, Juan. Also on this front, a couple of quarters ago, months ago, you announced a partnership with Amazon, Mexico on that. Could you give us any update on this? Is this something also that is contributing to the service income line? That would be all. Thank you very much.

We have been collaborating with Amazon for some time regarding the click and collect service and managing packages discreetly. We are exploring the possibility of implementing lockers at certain locations. We partner not only with Amazon but with various e-commerce companies, like Mercado Libre, where transactions can also be processed. This area of our business is quite dynamic, and we constantly strive to offer more incentives for customers to visit our stores, which not only create additional revenue streams but also increase foot traffic. This strategy ultimately benefits us.

Great. Thank you, Juan.

Thank you very much, sir. We will now move to Ricardo Alves calling from Morgan Stanley. Please go ahead.

Hi, everyone. I had some technical issues. Can you hear me?

Yes. Yes, Ricardo.

Thank you very much. Thanks for the call. What's even more impressive to us about your gross margin expansion is that you delivered that in the context of average tickets that were in line with inflation and not above inflation, as we've seen consistently over the past few quarters. So, I wanted to talk about your average ticket as well. Appreciate already the comments you made on the gross margin expansion, but thinking about your same-store sales and the component of average ticket, what were the main drivers in your view to deliver above inflation before the second quarter? And then in turn, what were the drivers for you to perform just in line with inflation in the second quarter? I'm just trying to think of reasons that impaired that performance in the second quarter so that we can see above inflation figures as we move into the second half. I mean, I would understand the traffic being down because of the holiday shift, but maybe there's more details on the mix of products and maybe categories that were underperforming because of the holiday or maybe because of the election that maybe it's going to be away and we could go back to above inflation ticket. So that's my first question kind of related to same-store sales going forward, but focused on average ticket. My second question, we've been positively impressed over the past few months on the shareholder remuneration front, over $2.5 billion of buybacks and dividends. When you reflect, I think that maybe this is a question for Martín, when you reflect on the announcement made on February versus your current execution, which in my opinion is above expectations, what are the key learnings or with the learnings that you've had, are you willing to change in any way the announcement that you made in terms of your cash allocation down the road? You did another accelerated share repurchase. Is that the main focus going forward or perhaps another dividend early next year? And specifically for 2024, can we be getting closer to $3 billion in total return based on everything that you did and you can still be active on local buybacks in Mexico? Sorry for the long question and thanks again for the time.

On the capital allocation, I mentioned it in my comments. We can always consistently reevaluate the capital return to shareholders, which is one of the core commitments made during FEMSA forward. So that is a history that will never end. There's no final chapter on capital return. So as we gain clarity on organic and inorganic opportunities available to us, as we understand the macro environments in which we're operating and the challenges or opportunities that create, and as we see the cash generation that our businesses are generating, and in particular the return that we're getting from the organic investments that we're making, we will have to reevaluate this consistently. But our dividend now is up to over $800 million. That's the ordinary. That's a very sacred number that going forward we will protect and maintain as much as that is possible for us. As to the extraordinaries, again, of the $3 billion that we promised we would return to the markets in an extraordinary fashion, we have returned $1.8 billion. As to whether we will accelerate the remaining $1.2 billion, that is yet to be seen. And the determination of whether it will be dividends or shares will be determined by market conditions generally. So when we see opportunities to buy our shares at a compelling price, we will do so. And if not, we always have available to us the ability to repay through extraordinary dividends. And I make this judgment almost every month. We meet. We discuss what our plans are, how our results are coming, how we see the markets, how we see the opportunities in the short, medium term, and on the basis of that. So I want to tell you that whether we will or will not return the additional $1.2 billion is the decision that's made, when we will return that $1.2 billion is the decision that's going to be made based on market conditions. So I hope that's helpful and that answers your question.

Yes, no, let me take a stab, Ricardo, on the same-store sales conversation. I mean, certainly the quarter, as Martín described in the opening remarks, is a very strange quarter in terms of each month having one-offs or tough comparisons. Generally, I think the subject of tough comparisons is a bit of a constant. I think we've mentioned at the outset that for the month of June, we were lapping a 20% growth for same-store sales. And this was both in terms of the ticket that you focus on the question, but also traffic, right? So we've talked a little bit about segmentation and revenue management capabilities being developed at OXXO. Obviously, that should continue to help us drive pricing, hopefully above inflation. If I take a step back and I look at how the year is evolving, even thinking about margin for a second, in the first quarter, we saw the contraction at the operating level be bigger, and hopefully getting smaller now. Certainly, sequentially from the first quarter to second quarter, it did get smaller, and hopefully we can continue to shoot for that flat margin for the full year. But in the same-store sales front as well, we are getting into easier comps. We get into the second half we're getting into easier comps. So that should help in terms of the number that we print for the third and fourth quarter. One thing that is true, though, and that's kind of bigger than FEMSA, is that just historically, after elections, second-half after elections, sometimes there's a bit of softness out there in terms of the consumer environment. We'll see what happens this time around. But we're optimistic that the tools that we have and the capabilities that we have today that we maybe didn't have a year ago, two years ago, combined with a more normal comp base where we're not lapping 15s and 17s and 18s should make for a set of numbers for the second half that is kind of which is more normal.

And as I've said before, we'll see the new algorithm for same-store sales ends up being better than what we used to have before COVID when we talked about 5% same-store sales. It's kind of the mid-single digits that many of you have heard me say a thousand times. We'll see where we end up if we can do a little bit better than that. But then we'll also make some assumptions about inflation and about inflation. And so obviously, we got some news this morning about inflation picking up a little bit. So we'll have to deal with that. But generally speaking, I think we feel good about our ability to structurally improve on the algorithm with these new capabilities that are being developed at OXXO. And I would just add, look, in a competitive environment, and we live in a competitive environment, our policy is not just to look at inflation and say, 'I'm going to increase it above inflation.' I mean, that's an unsustainable business model. Because part of the secret that OXXO has always had is that it is price competitive to other alternative retailers, but it is extremely convenient. And so being respectful of that principle of our success, what we need to do is drive more traffic into our stores. We need to drive more opportunities for the consumers to come to our store to do more things in that store. Be they services, be they food, be they other solutions that we can bring to them. And so, we tend to focus really on revenue growth generally more than the ticket per se and that ticket relative to inflation, because that is dictated in many instances by market conditions as opposed to whatever we feel we want to do or not do. And we focus a lot more on margin. As a good retailer, it's about the gross margin and maximizing that as much as possible. So I understand your question, and I know it's a figure that people from the outside look a lot at because it's easy to understand. It's publicly available. You can compare across retailers, but the formula, the secret sauce is a little bit more complex. And to be honest, if you ask me all the ingredients, I could tell you all the ingredients, but the components of the mix actually change. And it's changing over time. It changes by season. It changes as we develop new. So our secret sauce is always getting better, and the mix of the ingredients is changing.

That's a very fair point, Martín, and Juan as well. So thanks for the call. Really helpful.

Thank you very much, Mr. Alves. We'll move to Bob Ford of Bank of America. Please go ahead, sir.

Hey, thank you. Excuse me. Good morning, Martín, Juan, and thanks for taking my question. How are same-store sales in July at OXXO Mexico? And how are you thinking about the legislative proposals to limit the work week and the funding or process changes to accommodate those? And then one, you touched on the change in the relationship with BBVA, and I had read that they positioned 45,000 FC devices in your stores. And I was curious if you could expand on the comment about the change in the relationship and maybe how these MPOS devices are playing into that? Thank you.

Maybe start with the end of your question, and we'll try to cover everything. Generally, I think the relationship with our partners on the financial services side is it's interesting over time how it changes, right? Because it's the type of customer that we service and the financial services, you know, the different banks have different positions, I guess, in terms of how much of that they want OXXO, kind of outsourced to OXXO. So it ebbs and flows, and we have really good relationships with BBVA. The number of transactions that each one of the customers can perform at OXXO per month increased recently. It does cover other aspects in terms of having the devices at the stores. But it's a very dynamic process, right? I wouldn't say love-hate, but certainly different amounts of love in terms of the role that OXXO plays for these retail banks in terms of large chunks of the population that can eventually see OXXO as kind of the place where they bank. And so that's very much a story that is evolving. But right now and I think I connect this to my earlier comment, I think we're going through a really good phase of how we're interacting with our banking partners. In terms of July, I think, I mean, we don't have, obviously, the month's not over yet, but I go back to the comment I made a few months ago that second half of election years, there's plenty of data that shows that it would not be surprising to see a bit of a deceleration. We'll have to wait to see if that materializes. But yes, I would say what we've seen is we'll be consistent with that.

Yes, I'll just emphasize what Juan said. Normally, as the new government administration takes over, there tends to be a little bit less execution on the budget and as new authorities come in and make judgments about priorities and understanding where they stand. So it would not be surprising for the second half of Mexico. Obviously, this should be a much softer landing in terms of a transition of government, given that the same political party won and the close working relationship between the soon-to-be former President and the future President. So we'll have to wait and see on that side.

And then just lastly, how are you thinking about some of the proposals to reduce the workweek? I mean, how abrupt do you think they can be and how do you think you can fund those?

Look, literally, we're just reading publicly available information. It's our understanding that the workweek will not be treated in this short legislative session that will happen in September. I understand that's off the table. But again, I'm reading what everybody else is reading. We do expect in the medium term that the reduction of the workweek in Mexico, the government has been very clear that it's an agenda and as always, we will respect the law and implement the requirements of the law. Generally, we're sort of agnostic to these things as long as it's applied equally across the competitive environment. Because then everybody has to react with the appropriate hours and many of their outlets and dealing with the cost impact of those issues. And until now, all of these issues have been implemented in that fashion. It hasn't been particularly targeted towards a particular industry or a particular type of retail. So as long as it's applied equally and across the board, we will react and we believe that at the end of the day, we're in a position to continue to compete as well as we've competed against everyone else. As to the minimum wage, again, during the campaign, reading exactly the same thing everybody else is reading. The future president announced that it is her intention to continue to increase the minimum wage, albeit at a slower rate than it was in the last five or six years. So we continue to expect that to happen. Reacting to that, we are being proactive in every quarterly business review that we do. The OXXO team is doing an amazing job of finding areas of opportunity for efficiencies through technology, through dynamic scheduling, through shifting responsibilities between store leaders and store area supervisors, the use of part-time work. The other day, they were showing us a mapping that they're doing. They did it across two, three hundred types of stores with different segmentation to figure out where the peaks were versus the labor capacity in a store at any given moment. And despite what you would imagine, they saw an enormous number of opportunities where, hey, do we really need everybody to start their shift at exactly the same time? Or can we have some people starting to shift at 8 o'clock in the morning and finishing at four or five and have other people start at 10 but finish at six? And they're playing around with all these mixes. Again, that segmentation that we always talk about from the perspective of value proposition is that segmentation that's also happening at an operational level. And again, we believe will give us flexibility and opportunity. And as I said in the past, the increase in the minimum wage for us. As long as it's applied equally, we see it as a positive. It's going to help consumers. It's going to be good for consumers. And consumers who are making more money will be spending more money at OXXO's and will be buying more soft drinks and will be going to more of our pharmacies and taking more trips and using more of our gasoline. So we are in the segments of the economy that generally benefit from the policies that the current government is implementing.

That makes sense. Thank you so much.

Thanks, Rob.

Thank you, Mr. Ford. We'll now move to Tiago Bortoluci from Goldman Sachs. Please go ahead.

Yes. Good morning, everyone. Thanks for taking the questions. My first one is a follow-up on OXXO traffic, right? When we try to isolate here for a calendar, on average, you grew traffic by 0.8% in the first half of the year. This is a deceleration from last year, clearly. And it still puts you way below where you used to be pre-pandemic, right, if this is a reasonable base. I know Juan mentioned in one of the answers how important it is traffic to sustain the business model and profitability going forward. But given this relatively low run rate that you are printing, how realistic is it to expect an acceleration in traffic in the back end and in 2025? And what are the drivers for this? This is the first one. And the second one is still on OXXO, but now on profitability. You posted more than 300 basis points expansion in gross margin, but essentially flat operating margin, right? I know in the press release you mentioned labor in Latin America as directionally the headwinds. But if you could help us quantifying those, which one is the most important. If it's labor, this pressure should ease next year. If it's Latin, it could be more structural. So just to help us frame the evolution of SG&A in OXXO? Thank you very much.

Just one second, please. Juan will take the part on the traffic, and then I'll take the one on the operating margin.

Yes, let me start. Tiago, regarding traffic, if we look back a few years to the pre-COVID situation, it's quite relevant. We've had this discussion with many of you before COVID. We used to mention that within the 5% same-store sales, which was my usual reference, we assumed that with the Banco de Mexico's inflation rate between three and four, it would break down to about 4% from ticket and 1% from traffic. That 1% from traffic was what we aimed for back then, and I would say it still remains our aspiration now. Traffic is harder to achieve compared to ticket sales. Additionally, we're adding between 4% and 5% new stores each year, which impacts individual store traffic. Personally, I would agree to a commitment if we could reach that incremental 1% in traffic. As Martín mentioned earlier, meeting customer needs and offering more products and services in-store is challenging. We've managed well and plan to continue doing so. Generally, I'd refer to aiming for about 20% of the same-store sales coming from traffic to be considered doing a great job. However, what we've experienced in the last couple of years is not replicable. Previously, we had 15% sales growth, with 8% from ticket and 7% from traffic, which was partly due to the post-COVID recovery, as people returned to certain activities and workplaces. Currently, I expect traffic to normalize to about 1% within the same-store sales calculation, and I believe we would be satisfied with that.

As to the issue of expenses, yes, they were 20-plus percent this quarter. Part of what you're seeing is the acceleration of growth in Latam-OXXO, where there has been an investment in people and capabilities relating to the more accelerated expansion that we're trying to achieve in some of these countries which are not in Mexico. Without a doubt, labor is an issue. But so the number, the total number for Mexico is actually below that by I would say 25%. So Mexico itself was more in the sort of 15% range. And then what you're seeing is the OXXO Latam and that investment taking up and causing the entire number to go up to 20%. And so I would say labor is a driver. And I would say capability building and building up the teams for more aggressive expansion for implementing some of the initiatives that we're developing in Mexico, transporting them to the countries in OXXO Latam. That's what I would have to say on cost and expenses.

And I would just connect, I mean, that last comment on OXXO Latam. I mean, the reason this is beginning to move the needle a little bit here is that in some of these places in particular, I would say in Colombia, we have gotten to the place where the value proposition is, we believe, the right one. And so the pace of growth is increasing. And so the platform, the team that you need in place to kind of take that operation to the next stage in terms of just sheer scale, we are at that inflection point. And so that's, I think, where Martín is coming from in terms of those expenses increasing in what is otherwise a very small part of the division, right, that you think about South America versus Mexico.

Thanks both. If I may, just a quick follow up. When you frame your ambition, right, for Latin America, which is huge, would you say you would need to invest more OpEx to get there or you are already ballpark where you want to be?

There will definitely be an investment. The more successful you are, the more stores you have. When you reach a certain level, you gain some operating leverage. In retail, the number of people in the stores depends on how many stores you have. Once you find the right mix of staff for a store, it tends to become a bit variable. Your distribution costs are somewhat of a step function because you build a distribution center, create some excess capacity, and fill it up, but eventually, you reach peak efficiency with that distribution center as you open more stores. If you are increasing your top line, this makes sense. The initial phase can be the toughest because you need to invest before seeing profitability from the new stores. To build the capability to open hundreds of stores in a country takes about six months to a year, involving negotiations for rent, choosing the right locations, obtaining necessary permits, and working with suppliers. The most challenging part is at the beginning; after that, operating expenses as a percentage of total costs tend to decline, and everything begins to grow in line with each other. It's hard to predict, but we have the capacity to adjust certain costs if we are not achieving the expected level of success.

That's great. Thank you very much, both.

Thank you very much, sir. We'll now move to Alvaro Garcia of BTG Pactual. Please go ahead.

Hi, Martín Juan. Thanks for taking the questions. My question is on other expenses. So, on page 16 of your release where you walk through sort of your net debt, the other expenses were $405 million versus $261 million last quarter, so a big sequential uptick there. It implies sort of a $100 million run rate. I was wondering if that's related maybe to some intercompany stuff or maybe is there a potential change in your guidance for expenses at digital and corporate going forward? Thank you.

Could you repeat those numbers just to make sure we can find the right place and make sure that we're in the right spot.

Sure. It's page 16 of the release. It's where you walk through your net debt and adjusted EBITDA ex-cost, and there's another when you walk through your EBITDA of $405 million. That's the other I'm sort of referring to. I suppose I could also refer to the difference between your consolidated EBITDA and your EBITDA of all your reported subsegments, which also seems to be inching closer to $100 million a quarter. So just wanted to really just clarify that guidance for the cash burn at digital and corporate going forward?

Okay. Yes. Again, I'll respond quickly. I'll let two members jump in here. This other, if you look at the footnote, it includes FEMSA's other businesses, so it includes Bara and Digital@FEMSA corporate expenses. I would tell you the bulk of that is Digital@FEMSA at FEMSA corporate expenses. FEMSA corporate expenses, as we've mentioned in the past, is we have an expectation, again, of non-reimbursable expenses and by non-reimbursable expenses, expenses where the business is, we're not providing a service to the business that if it weren't here would by definition need to be in the operations. For example, we have a centralized mergers and acquisitions team. We have a centralized treasury that provides services to the operations. We provide our security arm that provides security to executives and to many of our facilities is here, all that gets reimbursed to us. And again, if we didn't have the security here, each one of the operations would have to have the security. So there's a sort of $100 million of corporate expenses that I've mentioned in the past and there is the burn rate for Digital around $200 million to $250 million. That $200 million to $250 million does not include the benefits that it brings to OXXO. It does include some things that OXXO makes for, for example, the loyalty program points because it's an arms-length transaction between the loyalty program and OXXO and the loyalty program and the gap, but the burn rates are out to us. Right there, you probably have $300 to $350 million of the total $405 million number that you see there.

Yes, I would add in terms of some of the things that are being divested that were part of the other, if you think about Solistica, and you think about Imbera, I mean those are EBITDA-positive companies that are being sold. And so, in the comparison, we're losing some of the entities that contributed positive numbers to that other. So that's also, I think, impacting the number.

Great. Thanks, Martín and Juan. Appreciate it.

Thank you very much, sir. We'll now move to Carlos Laboy of HSBC. Please go ahead.

Yes, thank you. Juan, on Ben's question earlier, you may want to give some context on how OXXO's margins have expanded since you arrived at the firm, right? Because the scale-up that this business has to go through is important context. My question was a different one. Carlsberg just paid 14 times EBITDA for a weak Pepsi bottler with an unclear strategic purpose. So, you know, with one of the best Coke bottlers in the world sitting right there at half the valuation next to you, why isn't it cheap enough for you to buy out the float and deal with the governance problems that relationship with Coca-Cola FEMSA raises?

Hey, Carlos. Regarding your comment about the margin changes since I joined, I would like to take some credit for that. I have really great colleagues. I'll let Martín discuss the strategic aspects of the cost conversation. To set it up, you've seen the numbers that Coca-Cola FEMSA delivered. The current alignment between the bottlers and their partners in Atlanta is very strong, and everything is functioning exceptionally well. This brings us back to discussions about market dynamics and potential consolidation. I'm sure these are questions you’ve been posing to Ian and his team, but it’s a positive time for Coca-Cola. Now, I'll pass it to Martín to share his thoughts on why our current structure is beneficial and what we’re considering.

You seem to be suggesting a transition of Coca-Cola FEMSA to private ownership. As with any matter related to FEMSA, everything is open for discussion and consideration. I can't dismiss this as a possibility. Discussions around this have occurred in the past. Historically, we have generally favored keeping Coca-Cola FEMSA publicly traded for several reasons. Firstly, it provides a currency for enabling bottlers to participate in equity through our various transactions, even though these bottlers haven't always shown interest in other areas of our business. Secondly, Coca-Cola FEMSA has traditionally maintained a stronger balance sheet than FEMSA, with a better rating and lower funding costs, attributed to its relationship with Coca-Cola and the distinct characteristics of a bottling business compared to retail. Lastly, we believe that being publicly traded has enhanced Coca-Cola FEMSA's governance, as it mandates oversight through a public board, which is generally seen as beneficial. Transitioning Coca-Cola FEMSA to private ownership is not purely a financial decision; there are numerous factors to consider. With regards to valuation, sometimes a higher EBITDA multiple is paid for underperforming businesses not necessarily due to their quality, but because there is potential for significant profitability improvement. I firmly believe that Coca-Cola FEMSA deserves a better valuation based on its returns on invested capital, cash flow generation, and growth potential, and I’m certain we would both agree on this considering your appreciation for Coca-Cola FEMSA. The reality is the opportunities for dramatically improving the performance simply because we bought out Coca-Cola and the public, or just bought out the public, probably is more limited than the example that you're highlighting. But I will tell you, we discuss it certainly in the panoply of investment ideas that we consider. And maybe it's not even taking product, buying more, you know, buying some, leveraging the balance sheet, which is a form of buying back shares or buying back, equity, buying a portion of what Coca-Cola, I think, part of what Coca-Cola owns, doing share buybacks entirely, or all things that are constantly and repeatedly discussed.

Martín, how do you value the data from Coca-Cola FEMSA and the relationship information from Coca-Cola FEMSA that FEMSA needs or could need in the future? What is that worth?

Oh, if I had the answer to that, I'd be a venture capitalist, and I'd be raising billions on dreams. I can't assign a value to it, and I think we won't know for years what that eventually will be valuable to the entire ecosystem. But that was a tough one to assign a specific number to. I do think we have a conviction that through all of our businesses, Coca-Cola FEMSA and FEMSA in all its iterations. Our pharmacy business is one of the businesses that has the best data. The problem is it's a significantly smaller business, but I believe it has 6 million people in its loyalty program. But even here in Mexico, just in Mexico, I think they may have 6 million members in their loyalty program. And that's an incredible source of information on consumption patterns and needs of the consumer. Digital@FEMSA, that is the mission of Digital@FEMSA because it's a long-term bet. It's going to require a lot of work by the way, just standardizing the data so that when a consumer buys an OXXO Gas, we understand that it's the same consumer that's buying an OXXO Mexico that we understood that it's the same consumer that's buying at Fomento@ESA that we know that they're a mom and pop in Coca-Cola FEMSA. I mean, that is a significantly larger undertaking that I think people understand in integration of systems and standards and then using that information for, amongst other things, consumer promotions and selling the opportunity to make promotions to those consumers or to extend credit because you have a very clear understanding of spending patterns, of developing loyalty programs that drive traffic or consumption or give benefits to a mom and pop. I know that it sounds easy to say it, but when you understand the intricacies of that, what that involves, you understand that it's a huge task ahead of us. And as many huge tasks that FEMSA takes, you know, sometimes they take years to develop and to come to fruition.

Thank you very much. We'll now move to Hector Maya calling from Scotiabank. Please go ahead.

Hi, thank you very much for taking my question. So could you please update us on how you have been thinking about transactions in the U.S.? I mean, if your conviction regarding inorganic growth and convenience stores has changed or the timing to eventually pull the trigger has evolved considering the local and U.S. political environment this year? And also on how you're thinking so far in terms of store sizes or exposure to gas stations? Because from what we see in the U.S. market, stores are much larger in size, like 250 square meters at a minimum, over 80% of stores sell fuel. So I was wondering how you were thinking that FEMSA could tackle these peculiarities in the U.S. market?

We've spoken about this in various forms. We continue to believe that there's an opportunity for FEMSA to contribute value and to create value with its capabilities by entering the convenience store sector. In the U.S., we've had that conviction for many years, but obviously, we had a structural issue relating to the Heineken shares that made it impossible. I would tell you, the issue of political environments in Latin America generally are not the driver. We didn't diversify. We didn't think we could create value.

I think you were talking about the U.S. political environment, but I have nothing to do with that.

To be honest, compared to what we deal with on a daily basis and interact, I know that what's happening in the U.S. creates an enormous amount of passion and opinions about issues. We all probably listen to the U.S. news more than we should. People will continue to go to convenience stores. We'll continue to have to have gasoline. We'll continue to eat snacks on their way to and from work. FEMSA has thrived in many different types of environments. We're highly confident that nothing that's going to happen in the U.S. is going to be so surprising to us relative to other experiences in other countries. You highlighted some important differences between what is the business in the U.S. and what is the business in Mexico. And we are well aware of them and we debate them frequently. But one, I would just note on the gasoline, we own gas stations in Mexico. And it's a very different business, but it's not like we're new to the gasoline business. Number two, they are bigger stores and they require more investment. So it requires much more careful thought as to how you expand and the speed with which you expand and the level of certainty that you need to have with regards to the value proposition that you have. Very different to open up a hundred stores where the investment is 3,000 to 4,000 versus a store where the investment can be $4 million or $5 million. So it's a point well taken and one that we are certainly aware of. As we've said, we are looking for opportunities in what we call the southern belt that sort of starts through Texas and then goes through the south to the east, excluding Florida and excluding the southwest such as California. There's where we believe particularly in Texas and border states that we can add value, particularly complementing whatever we acquire with trying to develop a proposition with the Hispanic market. Again, we are not looking to open up a Hispanic value proposition in the United States as the sole and primary convenience store consumer proposal, but it will certainly be part of it and we think we could sort of add value to that. We are intrigued by the possibility of trying out what has been extremely successful to us in the United States, which is a standalone convenience store value proposition, but we understand that that is something new and gasoline will be part of the mix. So whatever opportunities we're looking at, almost all of them include a gasoline proposition. Again, in terms of size of opportunities, we've spoken about sizes which would be considered small relative to the size of all of FEMSA. I don't have in our radar right now opportunities that exceed the billion, billion and a half numbers. We would like to start out with something smaller, get our feet on the ground, test out opportunities and possibilities before we would undertake a very large transaction. And we've been until now very disciplined in how we've gone about that and our board and our strategy committee have been very clear about that, and we've listened and we always pay attention to our board and our strategy committee. I hope that's helpful.

I would just connect as a way to close the comment to what also said on the call three months ago in terms of the thoughtfulness and the prudence and as compelling as the industry is and the overall size of the U.S. market. There's a lot of reasons why it's attractive. But in terms of just giving the market the comfort that we will be very, very deliberate and thoughtful in terms of how we go after it.

Thank you very much, very clear. Thank you.

Thank you, sir. We do not appear to have any further questions at this time. I'll turn the call back over to Mr. Juan Fonseca for any additional or closing remarks. Thank you.

I mean, just thank you for your interest, for joining us today. As always, the team and I, Pamela, Alex, and myself are always around to try to help. And we'll speak soon. Thank you.

Thank you very much. That will conclude today's conference. Thank you very much for your attendance. You may now disconnect. Have a good day and goodbye.