Hello, and welcome to FEMSA's Third Quarter 2024 Results Conference Call. My name is Melissa, and I will be your coordinator for today's event. Please note, this conference is being recorded, and for the duration of the call, your lines will be in a listen-only mode. I'll now turn the call over to Juan Fonseca, Director of Investor Relations. Please go ahead.

Good morning, everyone. Welcome to FEMSA's third quarter 2024 results conference call. Today, we are joined by José Antonio Fernández Garza-Lagüera, CEO of our Proximity and Health division; Martin Arias, our CFO; and Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations team. The plan for today is for José to open the conversation with some comments on the performance of Proximity and Health during the third quarter, and then to move on to a more strategic set of topics that follows and provides an update to some of the messages he shared with you six months ago during our first quarter call, including some preliminary views on our expectations for 2025. After José's remarks, Martin will provide more detail on the broader business and our quarterly results. Finally, we will open the call for your questions. José, please go ahead.

Thank you, Juan. Good morning, everyone. During the third quarter, Proximity and Health delivered a solid set of results. As you look at our financials, you see growth almost everywhere and margin expansion in all the right places. This is certainly positive and a testament to the strength of our business platform, the skill of our teams and the permanent effort to grow and improve quarter after quarter, year after year. But Martin will go over the results in some detail in a few minutes. I want to focus particularly on what did not go that well, particularly the dynamics of same-store sales at Proximity Americas, which came in flat for the quarter. First, let's discuss average traffic, which contracted 5.7%, reflecting a wetter and cooler third quarter, with its negative effect on some of our most important consumption occasions, thirst and gathering. The greatest contraction was in key categories such as beer, soft drinks and water. Beyond weather, in the third quarter, we faced a demanding comparison base as same-store sales grew over 15% and traffic increased a remarkable 8% in the same quarter of last year. Finally, a slowing consumer environment in Mexico also contributed to the weakness. This environment is typical for the second half of an electoral year. Offsetting the falling traffic, average ticket grew 6.1%, reflecting revenue management initiatives while having a favorable effect on gross margin. A careful review of pricing and market share data lead us to the conviction that these revenue management initiatives have been implemented without losing price competitiveness or market share in the relevant category relative to the traditional trade as well as supermarkets. It goes without saying that we will continue to monitor the data to ensure that we maintain our competitiveness. As we look ahead, our comparison base gets easier and we look forward to an improvement in the Mexican economy in general and the consumer environment in particular. Let me walk you through our longer-term plan for Proximity and Health. My team and I have taken the first year of my time as Head of the division to carefully review the portfolio and to start adjusting our long-range plan with a renewed emphasis on return on invested capital by format, line of business and country. This has led us to sharpen our focus on the investments that we are making by accelerating, decelerating or eliminating initiatives. A significant portion of my presentation to the Board in the coming weeks will be focused on an in-depth review of the entire portfolio with a specific focus on OXXO Latam. This will complement the deep dives we undertook earlier in the year in the Health and Valora businesses. We expect from this session to finalize our medium- and long-term plan. Although we must receive comments on final approval from the Board, I want to take the opportunity today to share some of the initial thoughts I have as to where we need to focus in the next few years. First and foremost, OXXO Mexico, where we believe the opportunity exists to continue to create significant value for the foreseeable future. The business has structural momentum and a very high ROIC WACC spread. The three core drivers of OXXO Mexico are sustained growth in same-store sales, sustained gross margin at the current levels and sustained high-quality store base expansion. On that note, our preliminary store expansion target for 2025 is in line with the current trend of about 1,100 net new stores in Mexico or more than 4% of the base. We will also continue to evolve OXXO's value proposition by developing and integrating additional value layers with a current focus on three projects: food service, price and store segmentation, and cash management initiatives to strengthen our service business. Beyond Mexico, we have several compelling opportunities and, as discussed six months ago, we have the benefit of being able to modulate the pace of investment given the organic nature of the growth process and according to the stage of development of each format. Let me briefly go over the various opportunities and where we are with our plan for each. In the US, we just closed our acquisition of the Delek Retail assets. These are very early days, but we're excited to finally get to work in this attractive market. So, expect more information regarding our tests around El Paso and the broader strategic path we expect to take. At Bara, we continue to optimize our discount value proposition while we meaningfully accelerate store buildup. With a preliminary target for 2025 of approximately 40% growth rate in the store base, we have also undertaken the decision to administratively and operationally segregate Bara from OXXO Mexico to ensure that it has the resources and focus it requires from what we expect to be a new stage of higher growth. This segregation may have a short-term impact on certain costs and expansion, but it will provide a solid foundation for the future. At OXXO Colombia, our matured stores are already EBIT positive even after allocating overhead to them, and we are confident that we have a winning format with food convenience, reaching approximately 15% of revenues and average sales per store matching those in Mexico. We are excited with the evolution of this market, especially as we continue to develop specific capabilities and fine tune our value proposition. Therefore, our preliminary target for 2025 is approximately 15% to 20% growth in store base while we also build out our supply chain infrastructure and improve our processes in assortment, price segmentation, services and food. For certain other Latam Proximity operations, such as OXXO, Chile and Peru, we are deemphasizing expansion and we are focused on improving their profitability drivers. This strategy will also help us reduce overhead in both markets. As a result of these initiatives, we expect to improve the results of OXXO Latam generally and reduce the level of investment required in the short term. In Europe, Valora continues to perform well, particularly retail and B2B foodservice, and we are working to improve traffic to B2C foodservice, which will depend in part on an improvement in German economic growth. We expect this improvement in the next 12 to 24 months. We are also making progress with our organic growth initiatives, particularly in German retail, but we have chosen to take a cautious approach in recognition of the complexities of that market. We're also driving continuous capability sharing with the rest of Proximity by Valora, for example, in foodservice, and from Proximity to Valora such as the use of data for price and promotion optimization and leveraging our scale to increase commercial income opportunities. At OXXO Gas, we're continuing to drive growth by increasing volume at our retail stations, as well as pursuing incremental growth with institutional clients, cautiously optimistic on our ability to obtain permits to increase our station base organically and pursuing small bolt-on acquisitions in a very disciplined manner. We have also launched a pilot truck stop concept, which combines an OXXO Gas and OXXO store with FEMSA and third-party food offerings, as well as specialized facilities for truck drivers such as showers, a rest area and mechanical services. These stops could be located in key highway areas, offering a compelling new value proposition that better addresses the needs of Mexican truck drivers. Regarding the traditional trade, after a careful analysis, we will recommend to the Board suspending our Pronto initiative, both the franchise model and wholesale distribution. We may revisit these opportunities in the future, but given the many priorities in front of us, we have concluded that renouncing certain initiatives is as essential as identifying which ones we want to accelerate. Obviously, we will continue to leverage the Proximity and cost capabilities to pursue the opportunities to provide the traditional trade with services and payment platforms through our digital division. Finally, at FEMSA Health, each of our four country operations are in different situations and require different strategies. For now, let me focus on two countries, the one that presents the most dynamic opportunities and the one that needs the most work. In Colombia, we are achieving rapid growth in retail as we deemphasize exposure to the challenging institutional segment. We expect to continue growing our leadership position by expanding rapidly with a unique value proposition for Colombia in pharma and health and beauty. We have also identified an opportunity in the wholesale distribution business where we will use our scale and logistics capabilities to serve the independent pharmacies, which still represent close to 50% of the market. In Mexico, we will continue rolling out our new flagship drugstores with an important component of health and beauty as we navigate an intense competitive environment. It is still early to determine the results of the new flagship stores, but we're optimistic that the dual-format strategy will work as well in Mexico as it has elsewhere for us. Wrapping up, hopefully, the message we leave you today is one of ample opportunities for profitable growth in the short, medium and long term of an organization that is highly focused and a management team that is determined to prioritize and allocate resources according to each project's potential to deliver the healthiest spread between ROIC and WACC in the long term. And with that, I will now turn the call over to Martin to talk about FEMSA's third quarter results. Martin, please go ahead.

Thank you, José. Good morning, everyone, and thank you for joining us today. Let's begin with FEMSA's consolidated third quarter results. In the third quarter, we achieved total revenue growth of 8.3%, while operating income rose 14.6% compared to the same period last year, reflecting a strong performance across business units. Net consolidated income decreased 27.5% to MXN9.2 billion, driven by: a higher interest expense of MXN4.4 billion, net of interest gains, reflecting a tough comparison base gains on derivative instruments in the third quarter of '23; a lower non-cash foreign exchange gain of MXN4.2 billion compared to last year related to FEMSA's US dollar denominated cash position positively impacted by the depreciation of the Mexican peso, which was more than offset by a foreign exchange loss due to our debt positions in all of our currencies; and finally, a higher loss in net income from discontinued operations, which includes an impairment of MXN3.9 billion from our divestment in Solistica. Turning to our operational results, José already discussed the overall performance of Proximity Americas and the same-store sales figures. So, let me take it from there. Total revenues grew by 4.8%, driven primarily by a steady growth in our store base. Gross margin, once again, expanded above trend by 300 basis points to reach 44.2%. As has been the case recently, this was driven by healthy dynamics in commercial income and a positive contribution from financial services. Operating income increased 5.9%, while the operating margin expanded 10 basis points to 9% of sales, reflecting a modest reduction in the growth in operating expenses relative to the first half of the year. This includes initiatives to mitigate the impact of higher labor costs and lower variable costs due to the slowdown in sales, partially offset by ongoing investments in capability building such as segmentation, revenue management and data analytics. On the store expansion front, in the third quarter OXXO added 367 net new stores in the quarter with 273 openings in Mexico and 94 in South America, including 39 new stores in Brazil. Year-to-date, OXXO added 1,266 net new stores during the quarter with 961 openings in Mexico and 305 in South America, including 124 new stores in Brazil. This puts us well on our way to meet our objective for the year, allowing us to reduce the pace of opening and focus on maximizing sales during the peak fourth quarter. Turning to Proximity Europe, total revenues increased by 20.4% in pesos, driven by growth in our retail and B2B foodservice business, mitigated by still challenging traffic dynamics generally, particularly in our B2C foodservice, which is more exposed to German train service disruptions and a weaker German economy. Valora's results also reflect the impact from positive currency dynamics of the weaker Mexican peso, which accounted for three-quarters of the total increase. Gross profit rose by 20.5% as well in pesos, with gross margin remaining stable year-over-year with a solid contribution from commercial income offsetting the weakness in the higher margin B2C foodservice segment. At the operating income level, Valora delivered another strong performance, with a significant increase and expansion in operating margin, reflecting solid cost containment. Moving on to the Health division, total revenues posted a 12.5% increase in pesos with same-store sales growth of 7.4%. This reflects a strong performance in Colombia's retail segment, complemented by steady results in Chile and with favorable currency dynamics, which contributed to approximately half of the overall result. Operating income increased by 7.2%, while the operating margin contracted by 20 basis points reaching 4.3%. Although these figures reflect the sequential improvement from the first and second quarters, this does not diminish the need for strategic adjustments to navigate ongoing challenges, particularly in Mexico, as José described a few minutes ago. Turning to OXXO Gas, we continue to perform strongly, posting a 7.6% increase in same-station sales and 8.2% in total revenues. During the quarter, the gross margin was stable at 12.4%, while the operating margin expanded by 40 basis points and stood at 4.9%, reflecting effective cost management and operational efficiency. Income from operations grew a strong 17% relative to the same quarter in the prior year. Turning to Digital@FEMSA, we continue to work on our strategic initiatives to drive growth and capitalize on the large customer base we have captured in our platforms. The number of active users for Spin by OXXO reached 8.2 million, marking a 28% year-on-year growth and indicating solid customer adoption trends. Our Spin premium loyalty program also showed robust growth with a 35% year-on-year increase, reaching 23.8 million active users. Approximately 38.5% of OXXO Mexico sales are now linked to Spin Premia. While year-over-year user growth has been impressive, sequentially we are seeing a moderation in the pace of growth, partly due to the scale we have achieved, but also as a result of a purposeful policy of reducing customer acquisition costs further, focusing more on driving engagement and usage from our existing base and thus generally increasing recurring revenues. By leveraging data analytics, we are gaining valuable insights into consumer preferences, allowing us to better tailor our promotional offerings. We remain focused on building an omnichannel strategy that ensures we provide a seamless experience across platforms. Finally, Coca-Cola FEMSA reported a strong set of results, with a 10.7% increase in top-line, reflecting a solid revenue management strategy, while income from operations improved significantly, expanding the margin and reflecting operational efficiencies across territories. A replay of KOF's quarterly call, which was held last Friday is available on their website. In terms of our capital allocation strategy, we remain committed to sustainable growth and shareholder value creation. Our approach involves strategically deploying capital across our business units, while prioritizing return on invested capital in each initiative. This quarter, we allocated MXN12.1 billion in CapEx, representing 6.2% of total revenues and a 26.4% increase compared to the same period last year. These investments are critical to keep growing our installed capacity and footprint, driving operational efficiency and maintaining our competitive advantage in the industries we serve. Earlier this year, we announced our plan to return to shareholders capital in excess of our ordinary dividend totaling MXN50 billion over a two to three year period. In the first year, we allocated MXN30.7 billion in a combination of approximately MXN10.3 billion in extraordinary dividends and MXN20.4 billion in share buyback. In this process, we repurchased 102.2 million shares, equivalent to approximately 3% of our total shares outstanding, leading to an increase in our earnings per share of 2.8% to MXN6.14 year-to-date. As you know, we have set a leverage objective of 2 times net debt to EBITDA, excluding Coca-Cola FEMSA, by the end of 2026. At the end of the quarter, that ratio stood at 0.68 times, basically flat to where it stood three months before. So, it is clear that we have more work to do. As we move forward, our focus remains on prioritizing investments that can deliver the best risk-adjusted returns within our three core verticals. We aim to balance our expenditures with prudent cash management, ensuring we retain the flexibility to seize growth opportunities, including potential acquisitions. Our ongoing capital allocation strategy exemplifies our dedication to driving long-term value for our shareholders.

And Martin, before we head out for questions, let me add just some comments on our joint venture in Brazil. In Brazil, we're expanding the store base in the state of Sao Paulo at a steady state. We continue to grow same-store sales for almost five quarters in a row on double digits. And while we continue to fine tune the value proposition and refine certain processes to reduce shrinkage and employee turnover, while this has yet to be presented to the Board, in terms of store base expansion, we will recommend to our partner an increase of approximately 20% during the next year. And with that, we can open for questions.

Thank you very much. Our first question is from Ricardo Alves with Morgan Stanley. Please go ahead.

Hi, everyone. Thank you for joining the call. My first question is about the OXXO same-store sales and the issues you encountered in the third quarter. Could you provide more insight from different perspectives? First, can we expect OXXO to return to mid-single-digit growth in the fourth quarter? Do you have any expectations for December, which is a crucial month, considering whether the challenges faced in the third quarter, like weather issues, might improve same-store sales? Second, regarding OXXO, although the same-store sales were below market expectations, the 6% increase in average ticket is a positive highlight. Could you elaborate on that? We believe that financial services are still contributing, but the initial comments were intriguing regarding the management's reaffirmation of new revenue management initiatives and revenue segmentation strategies. Can you discuss these pricing initiatives and revenue management, providing examples of effective strategies being implemented within OXXO retail media that might be misunderstood by the market at this point? Thank you.

Thank you, Ricardo. Let me start by saying that the third quarter had very disappointing traffic numbers, particularly as we faced tough comparisons. In the fourth quarter, we have more favorable comparison numbers, but making a prediction about market behavior is challenging given the uncertainty and volatility in the weather this year. I do expect a stronger end-of-year same-store sales comparison, but I'm not ready to make a prediction. Our team is working diligently on effective promotions and maximizing store activity for December, which is always a crucial month. There are also plans to enhance promotions and special offers through Spin Premia, which I hope will lead to a better quarter, although I cannot predict a significant increase in sales. As you know, we are in the transition from one presidential term to another, and the changes in administration often lead to expectations of a softer economic environment. This has been true after every six-year cycle. I still anticipate a softer economic landscape, though I hope for improved weather for the remainder of this year and into next year. Regarding pricing initiatives, we have seen some price increases in major categories like tobacco and beer, which have supported our pricing efforts. We are also excited about our promotional and pricing segmentation capabilities, which have yielded positive results. These efforts, combined with growing vendor income from special promotions and well-decorated flagship stores, have been good for revenue, and we expect that trend to continue. In terms of services, we continue to see growth in financial services, which we believe will remain robust as we expand our cash services infrastructure and enter the remittance market. We are also integrating more banks into our cash-in and cash-out capabilities. Therefore, I expect financial services to continue being a tailwind for us. Does that answer your question, Ricardo?

That does answer. Super helpful. I just had a final follow-up on the digital side. When we look at the others, I think that the negative contribution on EBITDA was actually lower than expected, so meaning the number was better. I suspect that some of that could be driven by lower cash consumption at digital. I just wanted to confirm if that's the case if digital is already turning the corner. I think that would take a little bit longer. But given how much we've been talking about digital, the loyalty program, new fintech capabilities, we have been talking about credit, for example. There's a lot going on at digital that we analysts in the market, we don't have enough visibility. I just wanted to understand if there is a relevant new update that you care to share with the market or if maybe indeed it's consuming less cash. Thank you very much again.

Thank you for your question, Ricardo. Yes, in effect, on a sequential basis, the cash burn from digital has been lower. As I mentioned in my statement, there is a renewed focus on the part of digital on leveraging and taking advantage of the scale we already have and focusing a little bit less on simply customer acquisitions, particularly on some of the more expensive digital channels that have been used last year and at the beginning of this year. So generally, digital has had a better improvement in terms of its cash burn. And again, one of the challenges of measuring digital is that there are a lot of the benefits from digital that are hard to measure. For example, despite our clear conviction that the loyalty program has had a significant improvement in sales at both OXXO Gas and at OXXO, reality is very difficult to measure in a scientific precise way. Obviously, we do measure it, but it's a little bit hard to publish those numbers because of the lack of sort of accounting standard to them. And so, what you see in digital and its burn rate really is just the cost of all the initiatives that they're doing. There is some revenues that they charge OXXO and so on, but it does not reflect the increase in sales of both OXXO Gas. And if you calculate the breakeven point of what you have to believe in terms of improved sales, it's actually quite low. So, we're highly confident that digital is doing its job, it's quite productive and that it's making progress. You still don't see these numbers, any big numbers associated with the credit opportunity. We're still at the very early stages of that, and our expectation is that that be included within the total cash burn and that that be rolled out as we make progress on some of the other initiatives. I hope that answers your question.

It does, Martin. Thank you so much.

Thank you. Our next question is from Bob Ford with Bank of America. Please go ahead.

Thank you. Good morning, everyone, José, Martin, and Juan. What are your thoughts on your activation capabilities within Premia? How is Premia influencing your perspective on potential growth in commercial revenue? Martin, you mentioned a focus on expenses in the digital sector, but the press release highlighted an increased emphasis on transaction-based profitability, particularly regarding recurring revenue. How do you view the balance between fee and transaction-based revenue for the upcoming year? Also, where do you see monetization opportunities arising in the next 12 months?

I heard your first question about Premia, but I didn't catch your second one. Could you please repeat it?

Sure. I apologize for that, José. It was long. In the press release, there was a reference to greater focus at digital or on recurring revenue. And I was wondering how we should think about Spin in the balance between fee and transaction-based revenue for the coming year. And you mentioned remittances in your comments, but I was wondering how you're thinking about the monetization opportunities there within the financial services over the next 12 months?

No, that's a great question. Thank you. I would start by saying we are still in very early days of understanding the power that Spin Premia data is delivering us. We are dramatically improving our ability to understand elasticity by SKU with our analytics on a store-by-store basis. With Premia, we will be able to analyze it on a per person basis, which excites me about tailoring promotions and bringing the best of OXXO to each consumer. We have a lot of work ahead, but the early promise is very encouraging. Already this year, it represents a small fraction of our retail media efforts, primarily centered on the digital screens we are implementing in OXXO, yet nearly 10% of the revenues is coming from Spin Premia initiatives and that should increase significantly in the coming years. I am very excited about that. Regarding Spin, my colleague Juan Carlos can provide more insights and will hopefully join us in another call, but what we've been discussing about the evolution of Spin and Spin by OXXO shows that a substantial portion of its recurring revenue will come from financial services, particularly remittances, among other opportunities we see for the future. Credit is one of those key areas he is currently evaluating as a way to introduce credit within Spin by OXXO. While it’s still early to provide specific details, I know it’s part of his plans for the medium term, around 12 to 18 months.

Very exciting, José. Thank you so much.

Thank you. Our next question is from Antonio Hernandez with Actinver. Please go ahead.

Hi, good morning. Thanks for taking my question. My question regarding the Health division. Same-store sales outperformed our estimate. So, if you could please provide some light on the drivers, also maybe a little bit on the same-sale trend in Mexico that would be really helpful. Thanks.

Yes, Antonio. As you know, our Health division operates in four markets, each with distinct dynamics. Firstly, there have been some currency fluctuations that positively impacted this division's performance this quarter, contributing to our revenue growth. One interesting development is in Colombia, where the government health sector is facing challenges, allowing the private sector to capture a larger market share. We are leading as the best pharmacy chain in terms of same-store sales growth and store expansions across the country, achieving outstanding results. This success, combined with our wholesale distribution business in Chile, has helped us mitigate challenges in the institutional business. In Chile, we are experiencing moderate growth, maintaining our position as the largest player without losing market share, and we continue to grow same-store sales even as competition increases. We are confident that Chile will remain a strong profit source. Ecuador is performing well, although the country is dealing with energy disruptions that have impacted our sales recently. Despite this, Ecuador's performance has generally been strong. We're also converting our small SanaSana chain into a franchise to minimize our investment in Ecuador. On the other hand, Mexico continues to pose challenges due to intense competition, and we recognize the need for a stronger value proposition. I am optimistic about our new flagship stores, particularly in Mexico City and key regions in the Southeast and Pacific. Results thus far have been promising, though it's still early with around 40 stores opened and plans for several hundred more. Overall, I feel cautiously optimistic. Does that address your question, Antonio?

Yes. That's very helpful. Thanks a lot. Have a nice day.

Thank you. Our next question is from Rodrigo Alcantara with UBS. Please go ahead. Mr. Alcantara, your line is open. Please go ahead.

I think we can move on and maybe Rodrigo gets back in the queue.

Thank you. Our next question is from Ben Theurer of Barclays. Please go ahead. Mr. Theurer, your line is open. Please go ahead.

I think they might be having some issues.

Can you hear me now?

Yes. Who is this? This is Ben?

Yes. This is Ben. Yeah. Does this work? Okay. All right. Usually, they say don't use the speaker, but in this case, speaker works. No, my question is related to the plans of breaking out some of the other formats, particularly Bara in Mexico. Help us understand a little bit size of the business right now. How many stores within that 20,000-plus OXXO stores is actually already a Bara format? And what's the value proposition? What's the differentiating factor of Bara versus OXXO? And how should we think about the drivers, the consumer drivers into those stores? What's different in particular to kind of understand this as we think about how to model it going forward? Thank you.

I wish I could keep Bara a secret for a bit longer, but the truth is that Bara has been performing exceptionally well over the past two to three years. For at least the last six quarters, we've outpaced other competitors in same-store sales. Currently, Bara has 420 stores, which are not included in our Proximity Americas count or the total number of OXXOs. Bara is transitioning to a harder discount format, although it isn't fully a hard discount yet. We're very pleased with how Bara is evolving. We've been bringing in talent from the hard discount sector and adapting the concept effectively. So far, growth has primarily been in the Bajío region, with some expansion in Jalisco. About 25% of Bara's revenue comes from convenience categories, which provides an additional margin that offsets the lower gross margins typically seen in hard discount categories, especially in grocery and frozen food. It's been a pleasant surprise to see how quickly it's growing, particularly in same-store sales. We plan to accelerate Bara's store expansion cautiously. As we move beyond the Bajío region, we must establish our presence, but we've seen positive results in Jalisco. I believe the Pacific and North regions will also offer significant growth potential. A major challenge for Bara in the coming years will be managing the same point of sale system and overall OXXO infrastructure. While Bara has its own CEO, we need to separate our systems and processes, which will involve some additional costs. However, I'm very optimistic about Bara's future in the next few years.

To add to what Ben mentioned, this is Juan. The differences that led us to separate the organizations are related to the supply chain; the SKUs differ from OXXO, and the variety of products supplied by DSD suppliers for the store contrasts with those for distribution centers. Regarding the potential size of this business, we believe it could reach thousands. Although we are still in the early stages, as José mentioned, things are looking very promising.

Thank you. Our next question is from Thiago Bortoluci with Goldman Sachs. Please go ahead. Mr. Bortoluci, your line is open. Please go ahead.

We can't hear you.

Yeah, no, there seems to be some issue. I don't know if...

Can you hear me?

There you are, Thiago. Yeah.

Yes. Good morning, everyone. Thanks for taking the questions. We have two here. The first one operationally regarding traffic at OXXO, right, we understand there is some seasonality and all the election stuff, but this is the second quarter in a row that we're delivering negative traffic, right? Obviously, there is these ongoing tailwinds from all the changes and improvements you have done into the operation, but my question is, assuming your traffic base remains where it is lower, do you see any risks of having more challenges to drive operating leverage going forward on a 12-months horizon? This is the first one. And the second one on capital allocation, you just completed your second ASR. Your leverage is below 1 times EBITDA. When should we expect more news regarding capital allocation? Is there a chance you could do something prior to the Annual Shareholders Meeting, or should we expect this to be a milestone to define what you do next? Thank you very much.

I will address the first question and then hand it over to Martin for the second. Traffic is a significant concern for me. I dislike using excuses from my team, but we have been experiencing a lot of rain here. I don’t have the official numbers and prefer not to rely on them, but it's been one of the rainiest years in a long time, particularly in the north of Mexico, and this has had a substantial impact on us. I don't believe this is a structural issue. Most of our decline is in cold beverages, accounting for nearly half of it. However, we need to focus on ensuring our stores are adequately staffed and that shifts are filled. The team has done an excellent job ensuring every OXXO in the region is properly serviced. We will be addressing challenges within our supply chain and operations to ensure that the issues are related to consumer demand rather than our performance. I don't see any structural problems. I expect some medium-term challenges as next year will still be influenced by the elections, and the aftermath of elections typically softens demand. Nevertheless, I am confident that some of the value strategies we are implementing will lead us back to traffic growth.

Yeah, I would add one thing, Thiago. Hi, this is Juan. Sometimes it's hard to look at traffic, especially when you look at the long-term series and look at it in isolation from the number of stores that we've been adding every year, right? So, you're adding close to 5% new store base every year and that has to play a role in the equation, because at the end of the day, consumers are satisfying their needs. If you would have gone five times to a store in a week, now maybe you go the same five times or maybe you go six times, except you split it between the two stores, the old one and the new one. So, we're going to start looking into ways to try to come up with an aggregate measure as well, because the part of your question that talks about operating leverage, I mean, at the end of the day, we are getting a lot bigger every day from a transactional standpoint, the absolute traffic number gets bigger every day regardless of what happens at the average store level. So anyway, we'll keep talking about this going forward with you guys, and we'd love to pick your brains, but you can't just not bring into the equation the fact that the speed at which we add stores because it plays a role.

Regarding your second question on capital allocation, we have committed to distributing MXN50 billion as an extraordinary capital return to shareholders, and we've completed about 60% of that, or MXN30 billion. We intend to be disciplined in our approach, which means we do not plan to initiate another ASR at this time. We believe in pacing this out over time and not rushing ahead. With the forthcoming US election, if it brings volatility, we will retain the option to adjust our plans. However, we currently do not foresee any significant developments related to the elections, aside from general curiosity about the results. I expect that by the end of the first quarter next year, we will start to consider our strategy for the Shareholders Meeting regarding any further extraordinary dividends. As we have stated before, we are neutral about returning capital through extraordinary dividends or share buybacks; it primarily depends on available opportunities. These decisions are complex and require consideration of various factors, so I do not anticipate any announcements before then.

That's clear. Thank you very much everyone.

Thanks, Thiago.

Thank you. Our next question comes from Alvaro Garcia with BTG Pactual. Please go ahead.

Hi. Can you hear me?

Yes.

Yes. Hello.

Great. I have two questions. First, regarding your intention to deemphasize certain OXXO Latam markets, could you specify which ones? I missed the details. Second, looking at your payments business in light of Coface's fintech report and your successful banking correspondence business, what kind of pushback, if any, have you encountered from banks that pay for access to your platform? Considering the growth of Spin and your goals in that area, how do you see these agreements changing over time? Thank you.

Thank you for your question, Alvaro. Regarding the Latam market, we are very enthusiastic about the region overall, but we are particularly optimistic about accelerated growth and profitability in Colombia. We want to highlight Colombia and Brazil. In Brazil, the progress of our stores and the double-digit same-store sales growth throughout the year keeps me optimistic about implementing a solid plan. Naturally, this needs to be aligned with our partner, but we aim to enhance our value proposition in Brazil, address operational issues such as properly stocking stores, reducing staff turnover, and minimizing shrinkage. We plan to do this by not expanding beyond Sao Paulo and focusing on adding around 100 to 125 stores, pending approval from our partner. Brazil and Colombia are our main focal points. By contrast, Chile and Peru are lagging behind in terms of profitability, and Chile is facing significant economic challenges, prompting us to slow down growth in those areas. Consequently, we may need to make some adjustments to our overhead to lessen cash burn and better concentrate on markets poised for success, namely Colombia and Brazil. Regarding fintech developments, I have no updates on the Coface situation. We continuously monitor recommendations from authorities and provide excellent service throughout the country. Many banks that have previously left us are returning, and we're eager to serve all banks and communities. We encourage competition in financial services and welcome the presence of other convenience store players in Oaxaca and Chiapas, along with more corresponsalía participants across the country. I have no concerns about this and hope to see further expansion.

Yeah. And I would just add that I mean people regularly underestimate the cost and complexity of what it involves for OXXO, administering, transporting, counting, depositing the money, the complexity it adds to lines in the store and so on. So, I would generally say and emphasizing what José said, we're providing an amazing service to the community, we're very proud of it. And just check the return on equity of the financial institutions to see they're doing just fine.

Totally agree, by the way. And just had to ask and super helpful, and thank you for those answers.

Thank you. Our next question is from Rodrigo Alcantara with UBS. Please go ahead.

Hi. Good morning, guys. Can you hear me now?

Yes.

Yes. Hello, Rodrigo.

Yeah, awesome. Hey, thanks. Hi, José. Thanks. Hi, Martin, Juan. So, my question would be here for José, if you can perhaps comment on the price and income elasticity of OXXO, please? And how comfortable you are with current OXXO's price competitiveness relative to the mom and pops and the self-service formats in Mexico? That would be my first question on price competitiveness. And second one very quickly also if you can comment more on what you mentioned in the press release about commercial capabilities driving higher OpEx at OXXO. If you can comment more about that, it would be also very helpful. Thank you very much.

Yes, these are great questions. Regarding pricing, we take pride in our pricing strategy and utilize our AI model to optimize it. We aren't simply raising prices; instead, we are implementing a mixed approach. We're lowering prices in some categories with high elasticity while adjusting prices up or down in others. We’ll continue to keep a close eye on this. We're also monitoring market shares in other channels, aiming to remain a strong player in serving Mexican consumers. We have seen healthy growth in our share within the traditional trade, which is rebounding after COVID. Pre-COVID, traditional trade had a larger share, lost some during the pandemic, and is now gradually recovering, which we view positively. We want the traditional trade to thrive in Mexico and are not concerned about losing share based on our assessments. We've observed the traditional trade becoming more competitive against larger supermarkets, but I'm not worried. I monitor it closely, and if needed, we’ll adjust our pricing strategies accordingly. Currently, we identify opportunities to both raise and lower prices. Additionally, we're working on segmentation and analytics projects to enhance our approach. This includes optimizing store layouts and product variety, such as adding more high-end and low-end SKUs. We’re studying factors like placing benches in stores to enhance customer experience and promote food sales. People in our stores really appreciate promotions and are actively seeking them. With insights from Spin Premia, we're able to tailor our promotions more effectively. This is a complex area that requires investments in our team and capabilities, but it’s an important focus for us. We believe it’s worth the investment and are working on initiatives to manage overhead costs effectively.

Awesome. Thanks for the answers, José.

Thank you. Our next question comes from Carlos Laboy with HSBC. Please go ahead.

Yes. Good morning, everyone. José, maybe you can take a step back and give us some historic context on the strategy for bringing traffic into the OXXO stores over time, how has this evolved? And how much of a reacceleration that you see looking forward over the medium term can be digitally enabled? If you can help us with some granular examples, it would help. Thank you.

Thank you, Carlos. I won't dive too deep into history, but I'm sure you're familiar with OXXO's journey. OXXO initially focused on beverages, which was a key driver for years, but we gradually added more value streams in grocery and tobacco. It's always been effective at expanding and adjusting its offerings. For instance, we used to sell a lot of phone cards, but we've since shifted to different services, including financial services that began with municipal payments and fines, which have developed into a significant business that's evolving rapidly. While I'm not worried about financial services transitioning to digital, we see an interesting shift towards new services. Although customers may be purchasing less airtime, many are using OXXO for online shopping payments across various e-commerce platforms, from Amazon to Temu and SHEIN. Customers who prefer cash, even if they have banking options, continue to use our services. We are exploring ways to integrate further into the fulfillment sector. The OXXO team is actively researching this, and we envision becoming a more omnichannel presence, assisting with both the initial and final delivery of products. We're already collaborating successfully with Amazon and initiating partnerships with MercadoLibre. I’m particularly excited about potential engagements with Facebook Marketplace for pickup and logistics, although it's early days for that. Additionally, we recognize we need to significantly enhance our food offerings. While we've made progress in Mexico, we know there's still room for improvement. Looking at our operations in Colombia, Brazil, and Chile, we've seen great success, especially with food sales, where in Colombia, food contributes nearly 15% of our business. We dominate in certain urban markets, particularly in breakfast and lunch for office workers, and we plan to increase our market share there. Mexico offers unique food dynamics, heavily influenced by street food, which presents fierce competition. However, I see opportunities to offer portable food options that are easy to carry, such as burritos instead of tacos. We're testing new food types at OXXO, with positive outcomes and reduced waste, aiming to capture markets in breakfast, snacks, and evening meals. Lastly, we're making strides in establishing cash infrastructure to enable significant cash-out services. While we’ve excelled in cash-in transactions, we're expanding cash-out capabilities in regions like Oaxaca and Guanajuato, where we've implemented this infrastructure. We’re also piloting remittance services, and although it's still early, the signs are promising. In El Paso, we see opportunities to enhance our role in connecting both sides of the border for transfers and cash out at OXXO, which could drive growth by simplifying the remittance process.

I would just add that we are rolling out cash recycling machines that allow us to significantly increase the amount of cash that can be disbursed at the store without raising the risk profile. This capability enhances our participation in remittances where the average amount sent is between $400 and $500, which is much higher than what we typically handle in a traditional store. The performance of these cash machines has been promising in the locations where we have implemented them. Additionally, I want to reflect on how OXXO has consistently excelled in identifying and addressing consumer needs. While many of these needs previously required physical cash exchanges or goods exchanges, some are now transitioning to the digital space. However, the extensive reach of our store network and the trust associated with our brand are crucial to this transformation. This has allowed us to be part of customers' daily lives. As José mentioned, we see new e-tailers like Temu and SHEIN, which were not present in Mexico a couple of years ago, now gaining significant traction, and we have found ways to facilitate consumers purchasing from them smoothly while managing risk effectively. Ultimately, our strategy spans a variety of products and services — from beverages to snacks to e-commerce — all aimed at making people's lives easier every day.

Yes. Thank you. And just a comment, Juan, Martin, José, the step up in the quality and the insight of these calls is really phenomenal. Thank you for helping us with all the insights you're giving us.

Thank you, Carlos. We enjoyed them. Really thank you for your question.

Thank you, Carlos.

Thank you, Carlos.

Thank you. Our next question is from Hector Maya with Scotiabank. Please go ahead.

Hi, thank you very much for taking my questions. First, if you could please go deeper on details regarding the line of non-cash charges at OXXO that helped to drive the EBITDA margin? Just to confirm, what was the main change in the digital platform that resulted in the lower cash burn there and how sustainable this could be going forward? And also, if you could give us more details on the decision to suspend the Pronto initiative? It would be interesting to know what plans remain in place to empower the traditional channels with the digital platform, particularly to understand if the company is still thinking about being a supplier of the channel or if this is over and FEMSA will just focus on B2B payments. Thank you.

Thank you, Hector. Give me just one minute.

Hi. On the non-cash charges, because of an automation process that we did with regards to the reporting from the different operations, we found that there were certain non-cash charges that were being treated as cash expenses in the past. And so, we tightened a little bit more of the definitions and the classifications and so on. And so, what you're seeing really is just a more detailed and a better way of classifying cash versus non-cash charges. And this happened not only in Proximity and Health, there was a little bit of that also in Coca-Cola FEMSA.

On Pronto, I can share that we have several initiatives aimed at supporting traditional trade. The two most promising are the efforts by Coca-Cola FEMSA, which is utilizing their Coca-Cola truck to supply additional categories. This initiative is progressing well, especially when combined with their Juntos+ program, which utilizes the loyalty infrastructure provided by Digital FEMSA. This will continue to develop. Additionally, Digital FEMSA is testing interesting projects, still in pilot phase, that involve their payment infrastructure, particularly the Spin Premia initiative, aimed at traditional trade settings like fondas, small restaurants, and flower shops. This trial is currently taking place in Puebla and is showing good progress. We performed well in this area, but we realized that the path to profitability was too challenging, leading us to refocus our efforts. The primary goal of the Pronto initiative was to establish routes delivering select OXXO products to traditional trade. However, the high cost to serve in that business compared to established wholesalers with different infrastructures made it difficult for us. I believe there is potential for an interesting service here, but I think it would need to operate on a cash-and-carry basis leveraging our distribution centers to create something new. For now, we are encouraged by the progress of Bara, so we prefer to concentrate our resources on areas where we see significant market opportunities such as Bara and Caffenio. As a result, we have decided to pause the Pronto initiative and are discontinuing that business to significantly reduce cash burn in Proximity. This will allow us to potentially return in the future with a more cost-effective business model.

You raised a question about the cash burn of digital and the factors contributing to the improvements. To be more specific than my previous statement: first, the digital ecosystem is now directly connected to SPEI, the Mexican payment system, which has significantly reduced our reliance on third-party fee structures. Second, we are negotiating better terms with credit card companies regarding their fees. Third, we are utilizing less expensive customer acquisition channels. Based on guidance from Juan Carlos, our analysis indicated that some pricier channels were not yielding a favorable return in terms of churn and customer quality, prompting a decision to reduce our focus on those. These three actions have effectively contributed to lowering our cash burn.

Perfect. Very, very clear. Thank you very much.

Thank you. Our next question is from Ulises Argote with Santander. Please go ahead.

Hi, guys. Thanks for the space for your question. I just want to hear from my side to José Antonio. So, on your remarks, you mentioned there the kind of organic growth reignition for Valora. I was wondering if you could give us a little bit more detail on what kind of potential are you seeing for openings and maybe on what formats or regions. You mentioned something there around Germany, but maybe if you could be a bit more specific on what the plans entail for this part of the business? Thank you.

Thank you, Ulises. That's a great question. We're quite pleased with the progress of Valora, and I believe it's beyond a post-COVID recovery now. The team has achieved strong results across all three business segments, particularly in the B2B and convenience sectors. Our long-term strategy for Valora includes expansion into Germany, where we see potential for convenience stores in locations outside of high-traffic areas like airports and train stations. We have identified two main strategies for this. First, we aim to partner with fuel providers who either lack a convenience platform or have a limited offering, which is a significant opportunity as many fuel providers need to enhance their convenience value. We are in discussions with various fuel providers, ranging from large to small, about setting up convenience stores at their stations, and we hope to share relevant updates soon. The second strategy focuses on high street locations, where we are taking time to carefully assess our positioning due to the weakening consumer market in Germany. Nevertheless, we still anticipate substantial growth in that sector. We are opening stores in economically stable areas, particularly in southern Germany, but the pace of openings has been slower than we initially expected. Our goal is to eventually open 50 to 100 stores annually and gain positive momentum. It’s still early, and we are particularly excited about the potential with fuel stations, which have demonstrated demand, and we have expertise in managing them.

That's very clear. Perfect. Thank you very much.

Thank you very much. I would like to turn the call back over to Mr. Fonseca for any closing remarks.

Thank you. My team and I are available for follow-ups, and you know how to reach us. Thanks for being part of the call, and have a wonderful week.

Thank you very much. That concludes today's conference. You may now disconnect.