Welcome to FEMSA's First Quarter 2025 Results Conference Call. My name is Ellen and I'll be your coordinator for today's event. Please note, this call is being recorded and for the duration, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end. I will now hand you over to your host, Juan Fonseca to begin first. Thank you.

Thank you. Good morning, everyone. Welcome to FEMSA's first quarter 2025 results conference call. Today, we are joined by Jose Antonio Fernandez Garza-Laguera, 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 Jose to open the conversation with some comments on the performance of the business during the first quarter, particularly at Proximity Americas and then to provide a quick update of our retail portfolio. After Jose's remarks, Martin will provide more detail on our quarterly results. Finally, we will open the call for your questions. Jose, please go ahead.

Thank you, Juan. Good morning, everyone. During the first quarter, FEMSA was able to navigate a challenging environment across several markets, particularly in Mexico, taking advantage of its resilient geographically diversified business platform. Within Proximity and Health, however, Mexico is by far the biggest component and the division results will inevitably reflect whatever is happening in these core markets. Our results for the first quarter reflect a challenging set of headwinds particularly in Proximity Americas. Combining a persistently soft consumer environment in Mexico with a tough calendar setup and against a demanding comparison base. Therefore, I would like for my remarks today to provide you with three things. First, our assessment of the causes of the underwhelming numbers, particularly related to same-store traffic in OXXO Mexico. Second, an overview of some of the actions we're taking to offset or mitigate the impact in Mexico. And finally, our expectations for the remainder of the year, including what we foresee will be a better second half in Mexico that should help us deliver a solid full year result despite the slow start. After that, we will give you an update on the rest of the operations. During the first quarter, same-store sales for Proximity Americas contracted by 1.8% with average ticket growing 5.1%, slightly ahead of inflation, but average traffic contracting 6.6%, continuing a trend that has been in place for several quarters. The calendar effects are straightforward, which had one day left in February and the entire whole week shifted to the second quarter this year. Adjusting for those differences, we estimate that same-store sales would have been flat. Beyond that, there is an undeniable weakness in the consumer environment that first manifested itself around the middle of last year just after the election and consistent with previous electoral years. Moreover, the ongoing uncertainty around trade with the US has exacerbated what we already expected would be a slow start to the year due to the postponement of many investment decisions until greater clarity is achieved. Other negative traffic drivers include a particularly colder month of January impacting high traffic categories such as alcoholic and non-alcoholic beverages, cigarettes and snacks, as well as certain localized markets where consumers have reduced their movement outside the home after certain hours as a response to a heightened perception of risk. Finally, in terms of channel dynamics, we continue to see the traditional trade gradually recover some of the market share it lost to modern channels during the COVID pandemic. Historically, the traditional trade has done better in economic slowdowns as people cut down on impulse buys and seek smaller price point SKUs of this channel. As a result of the consumer environment and consistent with what we have seen in similar downturns in the past, some of the TPG suppliers are adjusting their package strategy accordingly. For example, increasing the availability of smaller price point, multi-serve and returnable presentations that are also well suited for the traditional trade. However, we do not have any clear evidence that other channels may be gaining competitiveness relative to OXXO and our reading to date is that the majority of the slowdown is attributable to factors outside of our control, such as the macro environment, weather and calendar effect and consistent with untapped figures for other channels. And this is a good segue to move on and discuss some of the actions we're taking. We have launched several commercial and cost initiatives with three clear objectives: one, to drive traffic and top line; two, to maintain our positive trajectory of gross margin expansion; and three, cost containment initiatives to ensure the leanest organization possible while not mortgaging our future by cutting transformational initiatives. Within the top line initiatives, we should highlight our push for increased affordability across categories working in tandem with our key supplier partners. These initiatives aim to expand our assortment to include more affordable brands and presentations, including in key categories like tobacco, soft drinks, beer, spirits and healthy snacks. We have launched targeted plans to reactivate the andatti coffee offering and to support the beer and soft drink categories, including returnable multi-serves. Furthermore, we continue to increase the breadth of our financial services and correspondent partnerships with banks and fintechs while also increasingly leveraging the insights from our Spin Premia loyalty program to improve the effectiveness of our promotions. And this connects with our efforts to drive profitability at the gross margin level as we keep working with our supply partners to find incremental value through the precise execution of more targeted promotions. On this front, as you saw in our results, a bright spot at Proximity Americas was once again the continued margin expansion at the gross level. As we look at the pipeline of commercial collaboration we see in the months ahead, we are optimistic that we can continue to drive these metrics higher. There are several important negotiations underway in key categories that we expect to provide us with continued tailwinds at the gross margin level. Further down the income statement, we again faced pressure from another low double-digit increase in the minimum wage as well as a loss of operating leverage from the soft traffic trends and the incorporation of the results from the lower margin DK operation in the US. We also maintained our pace of store base expansion and capability building activities. In an effort to offset rising expenses, we have made great strides reducing the FTE or full time equivalent per store, generating real efficiencies at scale as well as a reduction in overheads. Despite these efforts, we saw a swing from an expansion of 120 basis points at the gross level to a contraction of similar magnitude at the operating level. I have asked all of our operations to drill into overhead expenses where I think opportunities to be a leaner and more effective organization. And that brings me to the general outlook for the remainder of the year. Based on our projections, we believe we will see a sequential improvement in top line dynamics beginning in the second quarter and peaking for the year during the third quarter. Such improvement is partly within our control through all the commercial and cost control initiatives I just described and partly outside of our control requiring economic activity and consumer sentiment in Mexico to gradually pick up. Therefore, at the slow start, our base case expectation for the full year remains for a high single-digit increase in revenues with stable operating margins relative to 2024. Moving on, let me give you a brief update on some of our other formats and markets that we know are top of mind for investors. In the US, we continue our testing and experimentation as we advance in the definition of our optimal value proposition for this market. As you may remember from our last call, we have already started the first conversion of some of the DK stores into OXXO. Back in February, we announced the first one and since then, we have reached 15 OXXO units, all of them in the Midland Odessa Metro area in West Texas. While consumer reaction to the rebranding has been very positive, there is a lot of work to be done as we close the value proposition gaps, including in the key prepared food categories. On that front, we have already made progress bringing the andatti coffee offering from our Mexico operations and we are testing improved food offerings in approximately 20% of the store base. The OXXO Mexico team is also sharing with the US team some of its expert capabilities such as pricing, assortment and segmentation and there is more to come. Again, very early days and we will keep you posted on our progress there. In Brazil, we continue to make progress reducing shrinkage and employee turnover, which have been two areas of operational focus in recent quarters. We continue to see the brand and value proposition grow in consumer preference and our expansion plans for this year are unchanged with approximately 100 new OXXOs in the state of Sao Paulo. At Bara, we had a good start to the year in terms of store base expansion adding roughly twice as many stores during the quarter compared to last year and on track to add approximately 235 net new stores in 2025. We recently opened a new distribution center in Queretaro and we're making progress as we set up our second region in Northern Mexico while also advancing as we develop and grow the supplier network for our key private label. In Europe, Valora's results show solid growth in Mexican pesos given the meaningful weakening of the peso against European currencies year-on-year, but on a comparable basis, the numbers are sluggish. We see positive trends in retail supported by certain categories like tobacco and from a growing commercial income platform. However, B2B service is lapping a very difficult comparison base from the successful one time pretzel project we executed last year. We continue to work to improve traffic to B2C foodservice, which is somewhat dependent on German economic growth. And on the retail front, in the coming months, we expect to rebrand a meaningful number of our DV stores in German train stations to our successful AVEK banner, which over time should help us in our organic growth efforts as the AVEK brand becomes better known in Germany. At OXXO Gas, we did well in the first quarter, but in the coming quarters, we will be facing increasing headwinds from the voluntary price commitments we have put in place for regular unleaded gasoline together with the rest of the industry in Mexico. And finally, at FEMSA Health, we saw improving operational trends across most markets except Mexico, helped by the positive impact of FX as was the case in Europe. The brightest spot continues to be our retail operation in Colombia, but results out of Chile and Ecuador were also solid. For its part, Mexico is in full operational turnaround mode, including a meaningful resizing as we rationalize the store base and continue to fine-tune the valuation of our two format strategies. Expect further news on this front as the new management team completes its work of getting up to speed and fine-tuning the new strategies. Wrapping up, we would like to leave you with a message that even though the start of the year was low in the core Proximity Americas business, based on the information we have today, our expectation remains that the numbers will improve as we go through the year positioning us well to deliver another solid set of results for the full year of 2025. And with that, I will now turn the call over to Martin to discuss FEMSA first quarter results. Martin, please go ahead.

Thank you, Jose. Good morning, everyone, and thank you for joining us today. As you have seen in our press release, we've added a column to the various income statements representing comparable figures to help you isolate the effects of currency fluctuations as well as acquisitions. We are using the same definitions and following the same methodology used for many years like Coca-Cola FEMSA in their own disclosure, which will surely be familiar to many of you. Hopefully, you will find this information useful. Let me begin with census consolidated financial and operational results for the first quarter of 2025. Total revenues increased 11.1%, while operating income grew 4.9% year-over-year reflecting mixed results from our business units as several of them faced a challenged macroeconomic backdrop and softer consumer demand in our key Mexican market as well as unfavorable calendar effects throughout our businesses. On a comparable basis, total revenues and operating income grew by 5.6% and 1.7%, respectively, evidencing the currency tailwinds, which helped us this quarter. Net consolidated income increased 54.3% to MXN8.9 billion mainly driven by: 1, a MXN630 million increase in income from operations; 2, a MXN3 billion increase in the other financial income related to net foreign exchange gains and gains in our financial instruments mainly as a result of an increase in the price of our remaining Heineken shares; and 3, a MXN2.4 billion increase in net income from discontinued operations driven by a gain from the sale of PTM. All of this despite higher interest expense and income taxes as we have explained in our earnings release. Moving to the operations, I will try to be brief, so as not to repeat most of what Jose already touched on. Proximity Americas delivered a 6.8% or 1.4% on a comparable basis increase in total revenues and 11.8% decline or 11% on a comparable basis in income from operations. The decline in operating income reflects soft top line growth accompanied with solid gross margin expansion, however, offset by higher operating expenses resulting from increased labor costs, continued investment in transformational initiatives and reduced operating leverage. As Jose mentioned, we are implementing a series of top line growth and cost containment initiatives, which we expect to bear fruit in the second half of the year ideally among with the reactivation of the Mexican economy. On the expansion front, OXXO Mexico opened 361 net new stores during the first quarter, a good start to the year, while net additions reached 31 in Colombia and 21 in Brazil through our Grupo Nos joint venture. Now turning to Proximity Europe. Revenues increased 18% in plaintiff terms or 1% on a comparable basis. Gross profits rose 14.8% in pesos, but declined 1.9% on a currency neutral basis resulting in a margin contraction of 110 basis points primarily due to softer performance in the higher margin B2B foodservice segment and flat results in the other businesses. At the operating level, Valora reported a 14.6% decrease in income from operations or 27.7% on a comparable basis, reflecting a 90 basis point margin contraction, reflecting the impact of the weaker higher-margin B2B performance against a very demanding comparison basis. The Health division delivered revenue growth of 21% in pesos or 7% on a comparable basis. Colombia had a stellar performance, while Ecuador and Chile had solid results driving division's momentum for the quarter. In contrast, Mexico remained challenging, but we have begun the process of closing underperforming stores, which we expect to total in excess of 400 by the end of the year. Operating income rose 27.4% or 11.7% on a comparable basis with the margin expanding by 20 basis points to 3.5%, particularly reflecting the solid growth in the retail segment in Colombia and solid performance from Chile and Ecuador. Shifting to Spin, we are executing against our vision to build an omnichannel ecosystem anchored in customer engagement, loyalty, data-driven innovation and financial services. Spin by OXXO continues to gain traction with our active user base showing double-digit growth year-over-year to 8.9 million active users. We are also seeing increased modernization through a higher number of transactions. The Spin Premia loyalty program is expanding its relevance, now linked to 42.5% of OXXO Mexico sales and becoming an important lever for engagement reaching 25.2 million active users, an increase of 16.1% compared to last year. As we continue to grow, our focus is shifting towards improving unit economics, using advanced analytics to refine our offering and drive incremental value across the system. Lastly, Coca-Cola FEMSA delivered another solid quarter underscoring the strength of its diversified portfolio, geographic footprint and disciplined operating model. Despite soft volume trends in Mexico, this was largely offset by growth in Brazil and certain other markets. Top line grew by 10% or 5.9% on a comparable basis supported by revenue growth management initiatives, while income from operations grew at a slightly slower pace of 7.4% or 3.2% on a comparable basis reflecting mostly higher distribution expenses. The team remains focused on protecting profitability through ongoing efficiency initiatives and by leveraging its proven execution capabilities. As always, we invite you to refer to Coca-Cola FEMSA's earnings call webcast for further details. Before closing, let me briefly update you on our capital allocation strategy. As we announced last February, we remain fully committed to balancing disciplined reinvestment in our core businesses while maximizing returns to shareholders as we advance towards our target leverage. During the first quarter, we deployed MXN8.8 billion in capex, representing approximately 4.5% of total revenues with a continued focus on expanding our retail footprint and strengthening our supply chain infrastructure. Regarding the return of capital to shareholders, in the first quarter, we repurchased approximately MXN1.3 billion pesos of FEMSA BD units in the local market. We also paid in January the last installment of last year's declared ordinary and extraordinary dividends for a total amount of MXN6.1 billion or nearly $300 million. Additionally, last Friday, we distributed the first quarterly installment for both the ordinary and extraordinary dividends for 2025 for a total amount of nearly MXN12 billion or approximately $610 million at current exchange rates as approved by our recent annual shareholders' meeting. The total amount allocated for shareholder returns from March 2024 to March 2025 including both extraordinary and external distribution amounts is MXN44.8 billion or around $2.5 billion. For the period from March 2025 to March 2026, we have committed to returning MXN66 billion or nearly $3.2 billion at current exchange rates. Looking ahead, we remain optimistic about the opportunities ahead. And while we acknowledge that this year presents somewhat of an uphill battle, the first quarter usually is our least important quarter. As the macroeconomic and competitive environment continues to evolve, we are confident in our strategy, our team and the resilience of our diversified portfolio and trust our results will revert back to the long-term growth trajectory as they have always done. As we move forward, our focus will remain on disciplined execution to deliver solid results for the rest of the year and beyond. And with that, we will now open the call for questions. Operator, please go ahead.

We will take our first question from Tiago Bortoluci, Goldman Sachs. Your line is open. Please go ahead.

Yes. Hi, good morning, everyone. Jose, Martin, Juan, thank you very much for the call and the opportunity to talk to you guys. Always a pleasure. I would like to explore a little bit more the momentum for Proximity Americas particularly Mexico, right? Jose, the initial remarks that you shared were super helpful, but double-clicking into those. I think the first point I would love to hear from you is what's your feeling regarding traffic share, right? You alluded to ANTAD, but obviously, we can imply necessarily how much traffic has moved there. But I think it's fair to assume OXXO has apparently lost some traffic share in the quarter, right? So just to understand if this is your reading and if you have a clear view on to who you are losing this and what are the efforts to address. This is number one. And the number two, you mentioned this being the fourth quarter in a row that you are declining traffic, right? Does this trend change at all your appetite for further growth or the projections for the returns on of these new stores that you're opening in the region? And then finally, at the third point within this Proximity debate, mix has been an important source of compensation at the gross margin, right? Could you please give us the ballpark of how your mix has evolved over the last few years? More curious to see how much financial services and commercial income penetration you have there and potentially to where you believe this could get over the next two years? Those are the questions. Thank you very much.

Thank you, Tiago, for your question. It's very relevant, and there's a lot to discuss. Regarding the traffic issue, we believe the primary factors affecting it are calendar impacts, especially the loss of the holy week and its shift to the second quarter, the unusually cold weather in Northern Mexico during January, and the overall economic situation. In January, we noticed we were performing well with hot beverages while cold beverages were underperforming, which highlights the effect of colder weather. We have been closely tracking our market share, particularly in what's known as the modern trade or convenience modern trade channels like OXXO. We’ve experienced a slight decline in market share, but it’s just in the low single digits. Conversely, we see some gains in the traditional trade sector. Specifically, about 80% of our market share loss is concentrated in the Pacific and Northeast regions of Mexico. These are areas where hard discount channels are not very prominent. The traditional trade has gained more significantly, while the modern non-convenience trade has seen a bigger decline. In terms of categories losing market share, tobacco is a major concern for me. The traditional trade is successfully selling tobacco products on a per cigarette basis and even lower-priced items that we cannot sell in OXXO. We are currently collaborating with suppliers to introduce value brands in tobacco. Early results from our launch of a new brand with a major tobacco partner have shown increased traffic, largely without detracting from our higher-end brands. While I remain committed to enhancing traffic, especially in value and affordability offerings, there is substantial potential for us to improve our beer value brand categories and return to offering affordable options. We are working closely with beer suppliers to drive growth in that area. Regarding store expansion, we are seeing significant opportunities and are not planning to slow our expansion efforts. Our focus is on ensuring the quality of the new stores we open, rather than just the number. Though some cannibalization will occur, the returns on investment remain profitable, and we still see ample room for growth. Therefore, we are being diligent about ensuring that new store openings maintain high standards. Lastly, our financial services category is also growing, with mid-single-digit growth. Initiatives around fintech and alternative payment methods are performing well, especially with OXXO Pay being utilized for payments, both in stores and as an automated payment machine for cash withdrawals. This segment has significant growth potential as we expand our network of partners. Additionally, our retail media initiatives and promotional income are just beginning to take off, presenting further opportunities for margin growth. We are optimistic about these developments as we engage with our key suppliers.

I would like to add to what Jose just mentioned. The way you framed the question about the mix is interesting. Financial services and commercial income continue to be significant drivers for us, and I am surprised that we keep discussing these two aspects quarter after quarter and year after year. Looking at the gross margin, which was in the mid-40s, we almost reached 50% in the fourth quarter of last year. This has been a result of incrementally adding SKUs and enhancing the mix of merchandise. However, it's clear that financial services and commercial income have been crucial for our margin performance. This is great to see because, as Jose mentioned earlier, we believe there is still significant potential for growth in commercial income.

This is super helpful. Thank you very much, both. Appreciate it.

Thank you, Tiago.

Yeah, good morning and thank you very much for taking my question. I would like to follow up a little bit just on what is within your control, right, within OXXO and you've talked a couple of initiatives. So I wanted to get a little bit more detail and granularity as to the initiatives that you're looking at, be it in-store or be it on the app to achieve certain cost savings to really kind of like get maybe a little bit of a leaner structure in place within OXXO in Mexico to help drive that gross margin expansion also further down the line, because it feels like a lot of it is lost and even more than is actually lost than what is gained on the gross margin level. So maybe help us understand with a couple of ideas, initiatives, what you're looking for in order to drive that gross margin expansion throughout the income statement down to the EBITDA? Thank you.

Just a moment, please. Yes, Ben, thank you. To start with the gross margin initiatives, we are implementing several strategies in financial services that will enhance our gross margin. We are awaiting authorization to re-engage with Banorte, and we already have Banco Azteca on board, which will help us attract new banking customers. These initiatives are aimed at improving our gross margins. We identify opportunities for market segmentation and value proposition adjustments to enhance margins in specific categories by optimizing space and variety. Additionally, we are significantly expanding our retail media platform. Currently, we have over 3,000 digital screens in our store networks and we plan to more than double that number over the year, which will lead to substantial incremental revenue. We're also very enthusiastic about our expansion of controlled environment stores, known as OXXO Nichos. These stores are highly profitable and reach maturity quickly, requiring a lower initial investment compared to regular OXXO stores. We're planning for OXXO Nichos to make up about a quarter of our new store openings, totaling over 300 stores, which will boost profitability. Regarding overhead and opportunities, while I can't give a specific estimate, we are investing significantly in transformational initiatives that are currently showing substantial revenue generation, so we won't be cutting those. Investments in food service, retail media, and high cash projects necessitate dedicated teams, and we're committed to that. However, we are looking for savings in other areas of overhead, such as by centralizing certain administrative processes that are currently decentralized across regions. With the development of local teams, especially in OXXO International, we can streamline overhead at central offices. Those represent the most significant opportunities for us. I believe the potential savings could be considerable, but I can't provide an exact figure on how much we expect to save.

Let me also comment on some numbers. We just drill down to OXXO Mexico and you the growth of selling expenses, you can explain all the growth that we had this quarter by inflation and expansion. And despite there being an increase in the minimum wage of 12%, if I'm not mistaken, the reality is through the initiatives that were implemented with regards to staffing, a much more dynamic staffing per store and taking into account peak periods, we were able to offset and keep the growth of the selling expenses at lower than you would have otherwise expected and very close to the sum of inflation and expansion.

I think that's a relevant point, Ben. Even though this aspect is very sensitive to revenue and operating leverage is crucial for profitability, we have decided to continue opening stores at a consistent pace of 1,100 to 1,200 per year, despite a slight slowdown in revenue. We have also accelerated the openings compared to last year, which were nearly the same number. This year, many of the openings will occur in the first half. This will influence the calculations that Martin discussed regarding inflation and the approximately 5% increase in the store base this year, which is a significant factor in the rise in expenses.

Okay. Thank you.

Hey, thank you so much. How should we think about the monetization of Spin and Spin Premia? I mean, you alluded generally to some opportunities with Premia in data. But more specifically, when you look at the financial services opportunity, how are you mapping that out right now for the intermediate term?

Sure. The Spin team views financial services as a broad concept that increasingly involves enabling customers to conduct transactions through our app. This capability generates data that provides insights into spending habits. To enhance the app's effectiveness as a payment method, we want to extend this feature beyond the store. We're already testing terminals in key cities to help local mom-and-pop stores accept payments. For example, some stores allow customers to pay their electricity bills and other utilities using a QR code. If we can establish a preferred payment system in Mexico, there are vast opportunities for additional businesses around that payment platform. One unique aspect of our payment platform is the loyalty feature tied to Premia points. Store owners have mentioned that these points help them compete with larger chains like OXXO by enabling similar loyalty offerings. They see Spin as an advantage in staying competitive. Building this payment ecosystem with a focus on loyalty drives more data, more information, and increased engagement with our app. If users leverage the app multiple times a day for various payments and money transfers, including receiving remittances and cash transactions at stores, it sets the stage for introducing financial products like deposits and loans. We anticipate upgrading our fintech license to a full banking license in due time, which will provide us with greater flexibility. We are at the early stages of this process and will keep everyone informed as it develops. There’s no immediate concern about rapidly expanding our balance sheet through aggressive lending; any growth will be measured and cautious to avoid pitfalls seen in other retailers. Ultimately, our focus is on creating an integrated ecosystem that combines OXXO's offerings with a comprehensive range of payment services. This ecosystem will unlock various options as users engage more with the application. I hope that clarifies things.

I do. It makes sense. And then just as a follow up, separate question or a separate topic and that is ESA. The same-store sales in Mexico were particularly weak. I was wondering if you could just expand on what you're doing across price, assortment and service? And what's different at this time in terms of how you're changing the way you go to market I think? Jose said something about going with two formats which sounds a little bit more structural, but whatever you could say would be helpful.

The numbers are obviously weak, particularly in terms of traffic. We had a healthy ticket, but that largely relates to mix rather than any price increases. A significant portion of the weak traffic can be attributed to weather conditions and calendar effects, but even after accounting for those factors, the traffic numbers are still not where we want them to be, and we're not happy about it. We believe there is a change in the economic conditions in Mexico, and there is a desire to return to certain value opportunities in our core categories. We should focus on providing value opportunities, affordability, and returnable packaging in categories like beer and soft drinks. We are already noticing an increase in traffic, especially in tobacco, by adding a few value brands, though we aren’t seeing a shift from premium to value smokers, just an increase in traffic. I'm confident that our strategy focusing on value and affordability in our core categories, as well as in some grocery areas, will help boost our traffic. We are also planning to support our gross margin through promotional income and some financial services. Therefore, I am optimistic that we can turn this around. However, there are several things within our control that we need to actively work on to improve traffic numbers.

I would add that we've seen in the past that during a slowdown, consumers tend to shift from making less frequent, larger purchases to going to nearby stores more often. There have been several instances where OXXO has benefitted from this change in consumer habits, as people opt for smaller packages. These might not be the most economical per unit, but they help manage cash flow better. Additionally, we know from our close relationship with Coke FEMSA that consumer packaged goods companies are introducing more returnable and larger product presentations. The SKUs that work well for small shops also suit us. The changes in product mix don’t happen by themselves; we actively work to adjust. For instance, we saw a decline in demand for returnables before, but as consumer interest returns, we make sure to meet that demand. This pattern isn’t new; we have been in similar situations before, and OXXO has been resilient and defensive. We’re also seeing suppliers create special sizes, like small 200 ml bottles, specifically for OXXO, which is a result of our partnerships and can sometimes be neutral but not beneficial.

Thank you. The question was about ITA and I should have said Health Mexico and I think you misunderstood me, but it was about ITA or FEMSA Health Mexico where the same-store sales number was down 11.5%.

Sorry, we didn't get. Now we gave you another five minutes of comments from same store sales, which I'm sure everybody appreciates.

Our Health Mexico operation is currently undergoing a significant turnaround. Previously, our business model was designed around a cost structure that could be sustained when labor costs were stable. As these costs began to rise dramatically, the initial increases in minimum wage did not impact us because we were already paying above that level even for entry-level positions. However, after more than five years of continuous 20% minimum wage hikes, we started to feel the effects. Our health business in Mexico lacked the scale to compete aggressively against value-focused competitors, and as our cost structure became a burden, we are now transforming our business model to adopt a more mainstream and premium store format, which is yielding positive results. Many of our older stores are no longer profitable, prompting a comprehensive restructuring. The positive aspect is that we have successfully implemented similar transformations in Chile, Ecuador, and Colombia, where we have a robust business model featuring premium stores. In Ecuador, for example, our Fiveca layout exemplifies a strong premium format, alongside Sana Sana, our value store format, both experiencing significant growth. We are seeing similar success in Chile and Colombia, where regulatory changes are opening new growth opportunities in Health. In Mexico, we are rethinking and redefining our entire business model with a focus on an omnichannel strategy that leverages the OXXO platform to deliver over-the-counter and prescription medications through our store network. Over the coming months and even years, you will see a series of initiatives aimed at revitalizing this business model.

Yeah. And I think I would remind everyone, I mean, how that operation really came to be in terms of the three very regional acquisitions where we bought three small good brand locally operations and the effort to turn that into a national platform has been an uphill battle. And so it's always been a function of scale I think. And as Jose was saying, the two banner strategy that has served us well elsewhere is something that obviously we're testing now in Mexico. But really thinking a little bit outside the box in terms of how to compete in an industry where there are two or three big incumbents that we haven't quite been able to catch up to.

Thank you so much.

Hello, everyone. Thank you for joining the call. I hope you can hear me well. I appreciate the opportunity. I have a few follow-up questions regarding OXXO in Mexico, as well as inquiries related to the US and Brazil. In Mexico, the insights on competition from the earlier question were quite useful, so thank you for that. However, I would like to delve deeper into the concept of cannibalization, essentially competition within your own business. The growth rate of your stores has been impressive, and we have noted this for some time. I would like to understand why this significant expansion has not adversely affected your same-store sales. It would be helpful if you could share some metrics you use to evaluate each new OXXO location, including the betting ratios we've discussed previously, or any criteria that guide your decision on the best sites for new stores. Hearing your perspective on why you believe there has been minimal cannibalization would be valuable for gauging the growth potential of new store openings in Mexico. In the US, I would like a brief update regarding your expansion strategies, particularly on the inorganic side. I understand there are limits to what you can disclose, but I am interested in your qualitative thoughts on how important inorganic growth will be for your expansion in the US. Additionally, I’m keen to learn about any updates concerning your organic growth, especially regarding prepared foods. What are your targets for prepared foods as a percentage of your total offerings compared to what you have achieved in regions like Mexico? How could an increase in prepared foods positively impact your margins? This aspect of your ramp-up in the US is intriguing, especially outside of the conversion to OXXO stores that you have already mentioned. Lastly, on the Brazil front, I appreciate your comments about the slower pace of store openings, which I understand. However, the strong performance in top-line growth has been pleasantly surprising. If you manage to resolve the issues with shrinkage and employee turnover sooner than expected, how feasible would it be for FEMSA to accelerate the current growth trajectory? Are there any current constraints with your partner in Brazil that would hinder this possibility, or is that not a concern? I’m just trying to assess the likelihood of accelerating growth in Brazil if these operational challenges are addressed. Thank you once more.

Thank you for the great questions. I'll address your last question first to be concise, then we will focus more on the cannibalization issue. We are very pleased with the developments in Brazil over the past few months, particularly regarding cost management, turnover, and shrinkage, as well as our sales growth. The momentum we've experienced is encouraging, and if the year continues in this manner, we believe it will present a substantial opportunity for us in Brazil. We are aiming for an expansion rate of about 20% to 25% of our store base, which aligns with OXXO's highest growth rates. These are the figures you can anticipate going forward, as we expect Brazil to maintain this growth trajectory for the foreseeable future. You will see our numbers increase from 100 to 120 to 140 stores, eventually reaching growth levels similar to Mexico within about a decade. We are committed to our ventures in Brazil and will continue to invest significantly in this market. With our joint venture partner, we have a strong relationship, but should there be any financial issues causing them not to proceed, we will work towards a resolution. Regarding the US, it's premature to discuss the food sector comprehensively as we are testing various formats. We have recently launched the andatti coffee brand and are seeing excellent initial results. We're also experimenting with Dona Tota and have a promising partnership with a pizza chain that we are eager to expand. This represents an opportunity for us to explore a sector we haven't fully developed in Mexico, which is significant. We are also trying out several other options in fried foods, but it’s too early to provide solid projections. We aim for food service to contribute up to 10% of our in-store sales, but we need more time to evaluate how this will develop.

If you allow me, I think in the US question, there was also an issue about organic versus inorganic growth. The reality is we have high expectations and high hopes for foodservice in Mexico. When you look at places like the US, where food is 20% to 25% in the leading players of sales, when you look at places like Japan, which over 50% of fresh food, there is definitely an enormous amount of room to grow for FEMSA. Now Mexico is a different place. It's in a good and a bad way. And the bad way is it has significantly broader informal food offering throughout Mexico. So the taco stand at every corner, the food cards and so on, all those are potential competitors. On the good side, Mexicans have many meal occasions. They have a breakfast, they have the famous mid-morning snack, they have lunch, then they have another mid-afternoon snack and then they have dinner. And each one of those eating occasions has a variety of breads, cookies, tortas, it really is a very wide variety of things. And so there are we believe there's plenty of opportunity here. We definitely have to do better. We don't have a specific target. There is an ongoing debate about in how many of the stores that we have or ultimately we have a food offering. And there's a general consensus, it's not going to be in all 24,000 stores. In the home occasion or the home segment of stores that are really meant to cover daily repositioning needs, probably you won't have food, but definitely you're going to have it in the downtown high traffic, office-related or school-related or near hospital-related type stores. So that is still a work in progress and we don't have any clear targets to share with you at the current times.

I would just add, Ricardo, the analytical data that we've been exploring on cannibalization tells us that it's no more than 20 to 30 basis points of same-store sales that it affects. So I mean, we want it to be as near as zero as possible. But within that range, we are okay with continue to expand given our high ROICs or marginal high ROICs in our stores.

That was 20 to 30 bps, right? Sorry.

Yeah. bps.

Got it. Thank you. Thank you so much, everybody. Thanks for answering all the questions and the questions within the questions. Appreciate that.

Now you guys are doing two questions in one. We're being very generous here, but now keep it.

Apologies. Apologies Juan.

No worries. Tiago started at the very beginning setting the tone. So that's okay.

Hi, gentlemen, thanks for...

Hi, Alvaro.

I was wondering if you could give us more color on OXXO Nicos on what it is exactly and why you think it might have higher ROICs? And then to a follow up on the pilot in Puebla between Spain and Juntos or Spin and cough. So what are some of the early learnings and what are the early challenges you're seeing in sort of really firing up that flywheel? Thank you.

Sure. Regarding OXXO Nico, let me provide more details. Typically, we receive requests from large factories, for example, one in Monterrey might call us saying they have 2,000 workers and their cafeteria is inadequate. They want financial services, so they ask us to set up an OXXO. I previously established one at the Kia factory, which has already developed into over two stores for that Korean car manufacturer. The process usually begins with their request, leading to favorable rental agreements, sometimes even covering our electricity costs. This setup minimizes initial investment and the economics are quite favorable. The stores mature rapidly because they're in controlled environments where people are familiar with the concept and appreciate the convenience. While there are some limitations on product offerings, which may reduce overall sales—like alcohol restrictions or specific items not allowed—the lower investment costs mean they still add significant value. This results in increased sales of snacks and other products for workers who might not have access otherwise. The OXXO Nico model has performed exceptionally well for us, benefiting from strong network effects as people seek these locations for access to financial services and remittances. Our market share with the OXXO Nico model is notably higher than our traditional locations. There are various types, including those in universities and buildings, as well as OXXO Smart stores, but this sums up the general idea.

In response to your second question about the earnings on Spin, several important points come to mind. First, the connection between mom-and-pop businesses and the Coca-Cola FEMSA sales team is highly beneficial. This relationship is valuable for gaining access to these businesses, even if they don’t directly participate in the sales process. Second, the Premia points system appears to set us apart from other payment platforms that lack similar offerings. We’ve observed that retailers sometimes use multiple terminals, such as Mercado Libre, Santander, and another, allowing them to choose based on which offers the best value. It's crucial to provide a competitive value proposition across all platforms. Another insight we've gained is that mom-and-pop stores prioritize cash flow management, making them savvy financial operators. For instance, they need immediate balance crediting rather than daily or twice-daily processing. If we can't meet this need, we risk losing competitiveness. Many smaller fintechs that relied on holding funds for a few days may struggle in this regard. There are also challenges to address in how these businesses utilize cash flow for acquiring points and paying bills, as this remains a bottleneck that hasn't been resolved yet. Lastly, training the mom-and-pop owners is essential. I've noticed significant differences in performance based on whether the owner understands the value of these systems and how they communicate this value to customers. I met one remarkable store owner who skillfully balanced the points she receives with those she distributes, ensuring she doesn't have to purchase extra points while still generating revenue. These are the key lessons we’ve learned through our experiment, which we intentionally kept small and focused in one city to gather insights before expanding to larger markets.

Awesome. Thanks for the color.

Thank you, Alvaro.

Thank you very much, Jose Antonio, Martin, Juan, for taking my questions. Just if you could please expand on the initiatives for more affordable brands at OXXO just to understand the potential extent of the push for value brands and affordability and to know if this could eventually translate into a longer-term strategy, maybe also focusing more on private label or if this is more strategic in short term and more focused on decisive product presentations due to the current macro economy.

Great, Hector. I would say that private label is definitely part of our strategy, particularly in groceries with products like our cooking oil and snacks. However, the main contributors are the collaborations we're developing with our key suppliers. For instance, we've successfully launched a value brand in partnership with a tobacco supplier this month. We're not noticing a significant shift from premium brands to local or value brands, but we are working to push that transition, as it can drive increased traffic and gross margin, even if the margins are smaller. For our beer and soft drinks, we're implementing two strategies, one of which involves returning to returnable packaging. While this is complicated for our convenience stores and can create logistical challenges, we have expertise in managing it and are reestablishing these partnerships. Additionally, we are promoting our coffee brand, Andatti, offering small snacks with coffee purchases, which has shown promising results, and we're expanding those promotions further. As Juan pointed out, we are reintroducing mini spirit bottles that we first launched in 2018, along with new flavors and varieties. We're also introducing cookie assortments and snacks at a value price point, which will contribute positively. There’s a clear opportunity to grow our grocery segment, especially as we attract value-conscious consumers seeking smaller packages and making more frequent store visits. We want to emphasize that we have previously executed successful promotions that we plan to highlight again, and all these initiatives are currently being rolled out and should yield results.

Got it. Thank you. And also quickly with what you are seeing in the US and your view on adapting the value proposition, how much time do you think it could take you to say, okay, we got it right now? We are ready to push for much stronger organic growth with the right assortment of prepared food. So could we consider that this could happen maybe in the next two years or should it be more like five years from now? I'm just feeling on how you are thinking about.

I'm not ready to provide an update just yet, but I believe that within the next two years, we should have a strong value proposition based on the momentum we are seeing in West Texas with OXXO, especially since we receive a lot of consumer feedback about their needs. It's essential for us to be not only better than our competitors but also unique, which can be challenging to achieve. There are strong players in the market, and it's relatively easy to visit stores, observe what works, and replicate that. To truly succeed, we need to offer something that only OXXO can provide, which will help us attract customers away from larger players and regional competitors.

Okay. Thank you very much. Thank you.

Thank you very much. Hi, Jose, Martin, Juan. Thanks for the added insights as always, that's very appreciated. I just wanted to see if you could provide some more color into the rebranding there of DK, OXXO in the US, I know it's super, super early and Jose, you've made some comments already on this. But any readings or maybe any expectations into sales and profitability lift on the rebranding and the fine-tuning of offerings you're doing there on the value proposition? And also is there any timeline you guys are targeting and maybe should we expect to see a 100% rebranding of the stores or what's the strategy there? Thank you so much.

It's too early to provide a definitive answer. We have been pleasantly surprised by the upward trend in sales and traffic, which has been notably significant, reaching double-digit growth in our first store. We recently rebranded 14 additional locations and are observing similar growth patterns. There may be an initial phase of enthusiasm, and we expect that to eventually stabilize. While it's premature to make solid predictions, we anticipate converting up to 99% of the stores, though a few may face closure. We are also planning to open additional stores this year as part of our experimentation process. Currently, we have a low number of openings and will closely monitor how they perform while trying out various concepts. For instance, we are testing one store that combines grocery with elements of a dollar store and convenience store, along with another focused primarily on coffee. These experiments are crucial for us to understand what works well for broader implementation. So far, we are very pleased with the OXXO brand's performance in West Texas, which has exceeded our expectations and generated considerable excitement in the region.

Perfect. That's great to hear. Thank you very much.

Hello, everyone. Thank you for taking my question. I would like to learn more about Bara, especially with the opening of the new distribution center. Should we anticipate an increase in the pace of openings in the coming years, either this year or next? What is the long-term store size you envision for this format? Additionally, how did the format perform during this quarter, particularly regarding the changes in OXXO? Did the Bara format capture any of that? What are your thoughts on the downtrend we're observing in Mexico? Thank you.

Bara continues to perform exceptionally well. While we experienced a slowdown compared to last year's fourth quarter, where same-store sales were growing at a high-teens percentage, we've observed single-digit growth this time. Nevertheless, Bara is thriving, and our new stores are actually outperforming expectations, presenting significant future opportunities. We aim to accelerate our expansion, but the current pace is being influenced by our efforts to separate from OXXO. We are still operating under the same LLC and systems as OXXO, and adjusting these takes time. We will need to invest in sizable teams to establish the new Bara, which will enable us to significantly increase our expansion rate from the 230 stores we plan to open this year to over double that in the next few years. We believe there is potential for thousands of Baras in Mexico. While I can't provide a specific number, it’s clear that thousands of Baras can thrive, especially as the discount store segment gains traction and more people recognize the value they offer. Our experience with OXXO has provided us with insights into regions where Bara is likely to succeed, and we're learning how this format can deliver substantial value to local neighborhoods. We're excited about our progress, and our stores keep improving in performance. The potential is endless.

I would add that we've discussed private label and noted that the mix of private label at Bara is still lower than we would like, currently in the 20s approaching 30s, while some competitors are doing better. We're having productive discussions with potential partners in the private label space, including large corporations from various parts of the world who recognize the opportunity with Bara and express their willingness to collaborate on long-term plans. Scale is an important factor, and as we grow, the overarching FEMSA and OXXO brands provide potential partners with the confidence that we will follow through on our commitments. Overall, things are progressing positively.

Thank you very much. Appreciate it.

Hi, thanks for taking my question, one, Martin. Just one I promise. Just in a context of another store having seven employees per store, right, three it's a bit strong, it's a difficult for me to understand how much more lean could the staff, the stores, the labor structure of a store could get. So just curious if you can elaborate a bit more here on precisely on these initiatives of having a more efficient staff per store. And just for the sake of modeling, if you can comment on when you started to deploy these initiatives kind of like the ramp up of the initiatives just for us to kind of have an idea of when we could see the implications on margins already reflected. That would be my question. Thank you very much.

We have been focusing on the number of stores and the number of employees per store, and we are currently below the 7% threshold, having achieved 6.7% last year with a target of 6.5% for this year. Given our scale, reducing from 6.7% to 6.5% is a significant challenge that must be managed without compromising our value proposition. In some stores, we have as many as 10 or 12 employees, especially in high-traffic areas, while others operate with as few as five. We are refining our analysis more precisely than before. Previously, we primarily looked at the number of transactions, but now we take into account various factors, like the demand for coffee, which needs more staff for cleaning, or financial services that may require additional personnel with banking experience, particularly in regions like Oaxaca and Chiapas where quick bill counting is essential. We are focused on hiring individuals with specialized skills relevant to the store's needs. Our initiative called Trejo leverages machine learning and analytics to determine the optimal staffing levels for each store. Our goal is to minimize staff numbers without impacting our value proposition. Achieving staffing levels of 6.3% or even 6.2% seems attainable, but it will take time. The retail landscape is evolving, and while some automation tools are still years away from being useful in our market, there are others that we can implement. We are actively exploring how machine learning and large language models can enhance efficiency, not just in-store operations but also in supervisory roles, allowing for more stores to be managed per supervisor. We believe this presents a scaling opportunity as we strive to be more efficient, but we will also continue to open new stores and support our high-performing employees and supervisors. There remains substantial potential for growth and wealth creation.

And I think another thing, Rodrigo, maybe we've talked about this in the past a little bit, but it involves, as you might imagine, certainly the number of people, but also things like what time do they start their shift. So going from the kind of the basic three shifts, each shift comes in at the same time to a much more dynamic well one person can come in at X hour and then the other person comes in three, four hours later because that's what the numbers tell us, they're not needed at the same time. So again something that sounds relatively straightforward, but you need the data to tell you how to do it. And obviously, we're assuming there are going to be more minimum wage increases in the coming years. So this is something that not only addresses what's already happening, but we need to be ready for the coming years where this probably will continue.

That was super helpful, Jose, Juan. Thanks for the color on that.

We have no further questions in the queue. So I will hand you back to your host for closing remarks.

Thanks, everyone, for joining. Obviously, you know where to find us. If you have follow-ups, you can get in touch with my team and myself any time you need. Otherwise, just have a great week. Thank you.

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