Earnings Call Transcript - FMX Q1 2023

Operator, Operator

Good day, and welcome to FEMSA's First Quarter 2023 Results Conference Call. Today's call is being recorded. I would now like to hand the call over to Juan Fonseca, Investor Relations. Please go ahead, sir.

Juan Fonseca, Investor Relations

Good morning, everyone, and welcome to FEMSA's first quarter 2023 results conference call. Today, we're joined by Paco Camacho, our Chief Corporate Officer and Eugenio Garza. As always, we also have Jorge Collazo on the line who leads Coke FEMSA's Investor Relations team. Today the plan is we have Paco share some higher-level strategic considerations, followed by an overview of performance trends during the quarter, and then Eugenio will provide comments on the quarter results. After the remarks, I will address some changes we have introduced to our disclosure that we hope you will find helpful, with some closing remarks by Paco, and then we will open the call to Q&A. Paco, please go ahead.

Paco Camacho, Chief Corporate Officer

Thank you, Juan, and good morning to everyone on the line. Before we get into the quarter, let me update you on FEMSA, our commitment to achieve a focused platform built on retail, Coca-Cola FEMSA, and our digital ecosystem, and the progress we have made in the couple of months since we last spoke. As you know, we already reduced our investment in the Heineken Group from approximately 14% to 8%, assuming our related exchangeable bonds are converted to food. Following the transactions, we carried out a tender offer for some of our outstanding bonds, significantly reducing our financial debt and bringing us slightly below our leverage target of 2x net debt to EBITDA ex-cost. That now stands at 1.8x. Beyond this successful development, we are progressing on the various tracks that will ultimately take us to the targeted structure in a value-conscious fashion. We will keep you updated as we move along. As you remember, a big part of FEMSA Forward is about driving growth in our core verticals, and there was a lot of that in our first quarter result. Indeed, 2023 is off to a good start, and we are excited about our momentum. This marks the eighth consecutive quarter that our proximity division has achieved double-digit top-line growth and the fifth in a row for Coca-Cola FEMSA. While inflation was a factor, we are still proud of the way our teams found a way, time and again, to deliver dynamic growth even as sources expand. What this also means is that OXXO and Coca-Cola FEMSA achieved double-digit growth this quarter, on top of the double-digit growth period of last year. Double-clicking on the OXXO results, it is particularly encouraging to see that same-store sales grew by more than 18%, accelerating sequentially in both tickets and traffic. This is in contrast to softened recent trends in Mexico. To put this in perspective, we went back and looked at 20 years of top-line sales data for OXXO, and this first quarter's growth rates are the highest for that period. Continuing with the positive news, we also have a good start to the year regarding new store growth, not only in Mexico but across markets, with a stellar performance in Brazil where our joint venture group opened almost 100 new OXXO stores during the quarter. Our health division continued the stable trend we saw at the end of last year, where the difficult comparison base in Chile along with currency headwinds in the rest of our market. However, we managed to deliver record margins for the first quarter at the gross and EBITDA levels. For its part, our fuel business continued to see positive consumer dynamics and solid growth throughout its income statement. Regarding digital, the number of active users for Spin more than tripled year-over-year to reach 4.2 million, while our Premia loyalty program more than doubled to reach 12.7 million. 20% of OXXO sales are now associated with the program. On the B2B front, we closed the acquisition of NetPay earlier this month, so we continue to move steadily forward with our plans. Just as importantly, we continue to work on the seamless integration of the three verticals into our physical networks. Moreover, we are tuning the use cases, value propositions, unit economics, and monetization strategies for each of these products as we aim to ensure sustainable value creation for the ecosystem. In fact, just last week, we launched the national transition of OXXO Premia into our coalition loyalty program with our initial partnership being with OXXO Gas, which is off to a great start. The coalition platform represents an encouraging step towards the consolidation of our digital ecosystem, and we will keep you posted on new partnerships and developments. In terms of financial implications, it is still a bit early to incorporate a full P&L for the digital business into our disclosure. But during the quarter, we deployed close to Ps. 900 million in growing this business, and we are expecting quarterly figures in that range for the next several quarters. Finally, let me talk a little bit about our logistics and distribution. As we had discussed before, the rapid growth of Envoy Solutions over this material increased its relevance as part of the FEMSA asset base, requiring in turn increased visibility in our disclosure. Therefore, we are now reporting Envoy Solutions on a standalone basis, and we are no longer breaking out the results of Latin America logistics operations from our consolidated results. As you know, we are exploring strategic alternatives for Envoy Solutions, but as long as we consolidate the results, we will continue to disclose them separately. Before I turn it over to Eugenio, I want to talk a little bit about our ongoing efforts to refresh and resize our Board of Directors. In our recent Annual General Meeting, our shareholders approved the nomination of 15 board members, a further reduction of two members from last year and six fewer than in 2018. Beyond recycling, two of our directors are new to our Board, and they bring significant experience and expertise in retail and digital. Governance is a key area of focus for FEMSA, and we will keep you posted on any new developments. Finally, I want to thank and recognize our team's unity for performing at such a high level during the first quarter. As we said during our recent conversation around FEMSA Forward, the outlook of our company has never been as compelling and promising as it is today, and our Q1 performance is a solid first step along that path. And with that, let me turn it over to Eugenio.

Eugenio Garza, CEO

Thank you, Paco, and everyone on the line. Beginning with FEMSA's consolidated quarterly numbers, total revenues during the first quarter increased 22%, while income from operations increased 5.5% compared to the first quarter of 2022. On an organic basis, total revenues increased 12.4% and income from operations increased 3.3%. Net consolidated income was Ps.50.329 million driven by a Ps.40.6 million gain in the accounting re-measurement from historical cost to fair value of FEMSA's investment in Heineken, as well as the partial divestiture of this investment as part of the FEMSA Forward strategy announced in February. This is net of a Ps.7.6 million tax payment linked to this transaction. Both gains are now presented as discontinued operations in our income statement. In addition, net consolidated income also reflects an Ps.8.5 billion non-cash financial product that mostly reflects the repurchase of $1.7 billion of FEMSA's outstanding debt at favorable price levels also in connection with FEMSA Forward. Moving on to discuss our operations, beginning with Proximity Americas. We added 157 new units during the first quarter to reach 1105 stores for the last 12 months. This includes 120 stores from our OK market acquisition in Chile that we began consolidating during the second quarter of last year. These numbers include both Mexico and also LATAM operations comprised of Colombia, Chile, and Peru that are gradually increasing their contribution to the growth of Proximity Americas. OXXO same-store sales were up 18.3% for the first quarter, which as Paco mentioned, is the highest rate of growth we have ever seen in the last 20 years. This was driven by an increase of 11.9% in average customer ticket and a very strong 5.7% growth in traffic. This underscores the solid progress OXXO's categories made throughout the quarter, especially by the strong showing of the gathering location. Gross margin was 40.3%, continuing a recent trend where our fast-growing loyalty program and a lower contribution from our financial service was more than offset by healthy commercial income dynamics. We remain comfortable that demand elasticity driven by our loyalty program is more than offsetting the gross margin contraction. Income from operations increased 19.7% while operating margin decreased 20 basis points compared to the same period of 2022 to reach 7.3%, an increase in performance-based compensation schemes for OXXO same-store personnel and by an increase in labor expenses stemming from labor reforms in Mexico. At Proximity Europe, revenues came in slightly above Ps.10 billion reflecting a recovery in traffic and ticket driven by improved customer mobility. Gross margin was 46.3%, and operating margin was 1.4%, reflecting an increase in expenses driven by recent acquisitions and inflation. Moving on to FEMSA's health operations. During the first quarter, we expanded our drugstore account by 80 net additions to reach a total of 4,186 stores in most of our territories at the end of March, and 453 total net new stores for the last 12 months. Revenues decreased slightly while same-store sales decreased an average of 5.5%. However, as was the case last quarter, it is important to note that on a currency-neutral basis, revenues grew 14%, and same-store sales increased 5.8% driven by good performance at most of our operations, partially offset by a demanding comparison base in our operations in Chile and Mexico. Gross margin increased 160 basis points in the quarter, mostly reflecting positive margin dynamics across our operations, especially in Mexico. Operating margins decreased 30 basis points, representing an increase in labor expenses in most of our markets. At OXXO Gas, revenues maintained their recent upward trend and increased 20.6%, and same-station sales grew 17.4% as vehicle mobility increased relative to the first quarter of 2022. Retail volumes were again supported by a robust pickup in corporate and wholesale activity. During the quarter, gross margin was 12.4%, while operating margin was 4%, reflecting tight expense controls and improved operating leverage. Moving on, Coca-Cola FEMSA also delivered a strong set of results to start the year. Total volume grew 6.6% driven by growth across all its territories. Total revenues increased 12%, and operating income grew 12.9% as the operating margin expanded by 10 basis points to reach 13.5%. You can listen to the replay of their conference call that's available online. Finally, at Envoy Solutions, total revenues increased 23.7% relative to the first quarter of 2022, reflecting effective cross-selling in the company, as well as some of the acquisitions that we did last year, while operating margin contracted 140 basis points impacted by higher transportation, labor cost, and other integration operations. Now, let me turn it over to Juan who will briefly go over some of the changes we've made to the press release that we hope you will find helpful. Juan?

Juan Fonseca, Investor Relations

Thank you, Eugenio. The change you will see on our press release is the net debt to EBITDA ex-Coca-Cola FEMSA table on Page 3 where we calculate and show the leverage ratio as we established when we discussed FEMSA Forward a couple of months ago. There was some confusion in trying to replicate it. So here we give you the numbers, and there's a table in the back on Page 16 that goes into the adjustments in more detail. Next, the Proximity Americas section is presented in two parts. First, we present information for OXXO that includes Mexico as well as the three countries of LATAM, which are Colombia, Chile, and Peru. All the information on Page 4 refers to these operations and is presented in Mexican pesos. Then on Page 5, we show a paragraph on Bara and another on the Grupo Nós joint venture in Brazil. In time, the plan is to provide income statement tables and more information for these businesses as they continue to grow, and eventually we should follow a similar path for other developing formats like Toronto, OXXO SMART, and our cost of drive-throughs. The next important change comes on Page 9, where we are introducing a table that shows growth rates for revenues, units, and same-store sales for our retail operation, marking out the countries for OXXO and for health in currency-neutral terms to better reflect their on-the-ground performance. We believe this table will come in very handy as these operations accelerate their pace of growth and begin to move the needle. Finally, you will see that we are now presenting Envoy Solutions on its own as Eugenio just mentioned, no longer as part of logistics and distribution. Envoy has, in the past couple of years, achieved material growth, and it merits some disclosure for as long as we continue to consolidate its results. And those are the main changes you will find today. We will continue to listen to you in a permanent effort to improve our disclosure moving forward. And with that, let me turn it back to Paco for some closing remarks. Paco?

Paco Camacho, Chief Corporate Officer

Thank you, Juan. Just a few words about the road ahead. As we said, 2023 is off to a strong start. We are aware that the rest of the year will continue to be challenging. We'll be cycling against the strong results last year. Inflation will remain high, and there will always be macro and regulatory uncertainty happening somewhere in our jobs. In this context, we will remain laser-focused on creating value by meeting customers' and consumer needs and executing with excellence. We are prepared to quickly adjust to the challenging environment and deliver results. We are convinced that we have a structurally strong business platform, a rich opportunity set, and most importantly, we have the best team to execute our strategy and consistently win across our markets. And with that, let us open the line for questions. Operator, please.

Operator, Operator

Thank you. And with that, our first question today comes from Ben Theurer of Barclays.

Ben Theurer, Analyst

Yes. Thank you very much, and good morning. Congrats on the strong results. So the one question I had is if you could help us understand a little bit better some of the growth dynamics you are seeing in the health division. And thank you by the way for the table on Page 9, but looking into that, it seems like there was a particular softness in Mexico, and I'd like to understand what's been driving that in comparison to the other markets, and how you think about the growth potential in these different markets going forward, as obviously health is one part of the core of the new FEMSA. Thank you very much.

Eugenio Garza, CEO

Sure. If you want, I'll start. The softness in Mexico comes from the same-store sales basis. We're referring to the negative 7.1% that is typically very tough. That is just a very tough comp coming from the last leg of COVID-induced increase in sales at the same-store level. Having said that, going forward, we do expect strong unit growth in Mexico as well as a little bit of improvement in the overall top-line on a same-store sales basis. But more importantly, what is driving value in Mexico has been, I mean, a few hundred basis points increase in gross margin as we have been able to partner with suppliers and get increased margin on some of the products that we're offering. But the softness is more related to a very strong comparison base in Mexico. In the other market, Chile, as you know, we do have a strong market share there. And we're also coming off very strong results stemming from consumer pickup in demand, given all the liquidity that was released to the consumer during the COVID era in Chile. So on Chile, we're also working off a strong comparison base. Not as strong as in Mexico, but we do expect there, with commercial efforts and also with the multi-format strategy, Cruz Verde, Macau, and others, that we will be able to offer consumers a good value proposition and continue to grow. Colombia and Ecuador each are different countries. In Colombia, a lot of the growth is driven, as you know, primarily by serving customers that are affiliated to EPC, but we are also growing in the retail channel significantly, which would also drive our growth. And again, Ecuador, although there's still a very good value proposition, I mean, political and economic factors have been I think the most important driver of top-line growth there. I don't know, Paco?

Paco Camacho, Chief Corporate Officer

Yes. Just to add on the Mexico side, Ben, we need to remember that in Q1 2022, we had the Omicron variant, so there were strong sales related to that. Number one. And number two, year-to-date, the market share in Mexico has increased slightly, so that assures us that structurally we have a very solid business.

Operator, Operator

Our next question comes from Thiago Bortoluci of Goldman Sachs.

Thiago Bortoluci, Analyst

Yes. Hi, good morning, everyone. Thanks for taking the questions and congrats on the very solid print. I have two things here that I'd like to explore further related to the FEMSA Forward priorities, right? I know you have to be very cautious on the forward statement and any guidance that might provide, but from what we understand, obviously, there are two priorities in the plan. One is growth, and the other is capital allocation, right? You mentioned in the press release, and it's clear that leverage is trending pretty well, which allows you to execute those priorities. So I'd just like to understand from a growth perspective, right? What are the kind of opportunities that you're envisioning for the short and medium-term, how urgent and how large they are, and how much capital these initiatives could require going forward? This is the first one. And the second one is more on the operating side, right? You posted very solid and impressive FEMSA sales in Mexico, and obviously, this decoupled a little bit from your peers. I'd like to understand a little bit more from you. How have you seen the FEMSA sales trend building out throughout the quarter? Especially early reads from April or whenever you saw in March, and how correlated do you think OXXO performance could be true and in fact going forward? Those are the questions. Thank you very much, and once again, congrats on the results.

Eugenio Garza, CEO

First, let’s discuss growth and our expectations for it. As mentioned last year, each of our business units has set long-term plans aimed at doubling their EBIT over the next five years, and all units are working on organic strategies to reach that target. OXXO, particularly through the multi-format category, stands out in this regard. We anticipate a significant increase in revenue beyond the natural growth from new OXXO stores, particularly by introducing additional formats and use cases. In Latin America, Brazil presents substantial growth opportunities across various formats. Regarding the basic OXXO store, we plan to enhance our value proposition through cash management products, digital integration, and importantly, a loyalty program, which we believe will lead to healthy same-store sales growth in traditional OXXO locations. Concerning capital allocation, most of these growth plans will be self-funded by operations, minimizing the need for significant cash support from FEMSA's parent company to achieve their objectives. Similarly, the health division has substantial organic growth potential in Mexico. While we have strong footholds in certain geographic areas, there are still others where we can expand organically. Additionally, we anticipate that there will be inorganic opportunities in Mexico that may require more capital allocation. Paco, would you like to address any other topics?

Paco Camacho, Chief Corporate Officer

No, just basically to reinforce the point that as we enter into 2023, the results we are announcing today already reflect the fact that all the businesses are walking the path on the long-range plan as it was presented to us at FEMSA and as cities included in as part of FEMSA Forward. So the results start to reflect already the plans that were deployed as part of FEMSA Forward in each of the businesses, importantly on the organic side as Eugenio said.

Eugenio Garza, CEO

The other thing to add on your question regarding relative performance vis-à-vis Walmart and other peers is that we did see a significant outperformance this quarter. And if you look at category by category, use case by use case, it was mostly the gathering patient that is bringing us more traffic in the store. So I think what we are seeing, if you go back to when the pandemic started, convenience formats started to lose a little bit of share while grocery formats started to gain some of that share. I think you're seeing some of that come back slowly but surely. But more importantly, we are experiencing that growth in traffic and changing consumer habits with a much more well-known basket of products that are accessible at OXXO, also including liquor, financial solutions, and others that are making this traffic come in and not lose the high average ticket that we grew through in the pandemic. So I think the combination of a higher ticket and recovering traffic is why you're seeing a very strong performance at OXXO in the first quarter.

Paco Camacho, Chief Corporate Officer

I believe your second question is connected to your first because OXXO's long-term plan includes opportunities for organic growth, which relies on enhancing their segmentation strategy and the ability to quickly adapt their product offerings to meet consumer needs. They have been working on this for a while, and their capabilities significantly improved during COVID. They have continued to advance in this area, which is a key part of their plan for the next few years to refine their ability to meet consumer demands. The results demonstrate this progress, and that gives us confidence in continuing to see positive outcomes moving forward.

Juan Fonseca, Investor Relations

Yes, I'd like to add that during COVID, the market had concerns about OXXO's relevance and its future role in consumers' lives. The slowdown in openings and the closure of several stores raised additional concerns. However, this quarter shows that OXXO remains a vital part of consumers' routines as they return to normal activities, such as attending fairs and concerts. The stores are performing very well, and they have adjusted their value proposition accordingly. While we're not back to opening 1,000 stores per year, we are making progress in that direction. This quarter highlights OXXO's significant relevance and its various roles, which are reflected in our strong performance numbers. In terms of relative performance, we aren't included with some major industry players, making those comparisons less meaningful, but we hope to continue to outperform the market.

Operator, Operator

Our next question comes from Ricardo Alves of Morgan Stanley.

Ricardo Alves, Analyst

Hello everybody, thanks for the call. My first question has been partially answered regarding the impressive OXXO same-store sales. I wanted to elaborate a bit; the average ticket appears to be the main driver behind the sequential 12% increase. Could you expand on that? We recognize that unit revenue has been improving since the pandemic began. In the first quarter, we observed a significant jump in average tickets. Are there any specific categories you'd like to highlight? The growth in average ticket is quite surprising in a positive way. More importantly, how did April look, considering Holy Week? Any additional insights for the future regarding OXXO same-store sales would be helpful. For my second question, I'd like an update on FEMSA Forward. We appreciate the transparency in your disclosures; it's very helpful. Could you provide more qualitative insights regarding Envoy, including any negotiations or interest from third parties, and potential structures you envision? Any updates on Envoy would be beneficial. Additionally, we've been receiving numerous questions about Heineken. We understand the lockup period is nearing its end, so we’d like to hear your latest thoughts on that and whether the commitment remains, as well as updates on Envoy and Heineken. Thank you.

Juan Fonseca, Investor Relations

Paco will handle the second and Eugenio go back to you also.

Eugenio Garza, CEO

Sure. Just FEMSA Forward, we continue to work on all fronts. As you mentioned, Heineken and Envoy and a couple of the other good progress. The market has been conducive for us to continue on our path going forward. And again, we will update you when we can. But at this point, we feel comfortable that we are on track, if not ahead of track to meet the original expectations outlined in the FEMSA Forward announcement in February.

Paco Camacho, Chief Corporate Officer

And as for the OXXO question, just to provide a little bit more color, the ticket increase is something that we have seen consistently over the last quarter. I mean, this is not something that's happened suddenly. This has to do with the way, as I said before, we are tackling the opportunities that are out there in terms of what consumers need and want, and how they need to adjust the portfolio. It is true that following the pandemic, there are some changes in consumer habits. Some of them started to buy different things in different places. I think that also has been quick to adapt to the categories that have, I mean just been the main categories in the store, such as snacking, beverages, and so on. They have been changing, and they have been buying more multi-packs, etc. So that's there. In the beverage part, there is also beer. I mean, beer has been performing quite strongly as we have finalized incorporating the ABI portfolio into most of our stores. So that is also affecting the ticket size. And then last but not least, I would say that the team has also done a very good job adapting the offering for the pantry in households. So that offering has just improved its importance in the store. All those adjustments are what maintain the ticket going up. As I said, I think what is important to keep in mind, this is not a standalone one-quarter effect. It's something that has continued throughout the pandemic and now is kept that way. We're hopeful that we will continue to see that performance in the quarters to come.

Juan Fonseca, Investor Relations

Yes. Now let me just add a little bit to what Paco just said, just to focus on beer. And the reason for that is obvious: the four-year process of incorporating the ABI portfolio into the stores. That was a big deal and unfortunately, it was kind of overshadowed by COVID, right? I mean, we started literally a few months before COVID arrived. I don't think we fully saw the impact yet, but certainly, you begin to see behaviors in the beer category that are very, very encouraging as you now have both brewers basically duking it out in what is their most important battleground. I think also, as you know, for a long, long time, we had been the most important channel for our brand, for Heineken. I think we're on our way to becoming a very important channel for the ABI brands as well. And so obviously in terms of the actual number of cases that you sell, the implications that this might have at the commercial income level, I mean, it's just beginning to look like I always hoped it would look once we had both portfolios in the store. Just to kind of highlight that, beer is the most important category for OXXO and continues to be probably always will be. The other word I wanted to put a little bit of a dampener out there in the sense that I don't think what we saw in the first quarter is necessarily the new normal, right? I mean, don't expect to see 18% same-store sales throughout the rest of the year. I think there is no calendar change. I mean, Holy Week happened in April in both years 2023 and 2022, so there's no distortion there. But as healthy as things look, again, don't put 18% in your model because I don't think we're going to get there, but it's still looking like a very, very strong year.

Operator, Operator

Our next question comes from Bob Ford of Bank of America.

Bob Ford, Analyst

Thank you. Good morning, Juan, Paco, Eugenio, and thanks for taking my question. We back out a Ps.1.1 billion loss in the other division, and I was wondering if the level of investment in digital initiatives had any non-recurring expenses associated with the strategic review there and what your expectations are for the segment going forward. Thank you.

Eugenio Garza, CEO

Yes. On the digital division as you know, it's in the others category. We are roughly running a loss during the quarter of about Ps.900 million. Part of that, if you just look at the overall ecosystem, is compensated by revenues that are being generated at the proximity division related to the use of Spins that are obviously reflected. So on a consolidated basis; it's less than Ps.900 million. Having said that, it continues to be a relevant amount. A lot of that is development of the product, staffing up in terms of people, outside consultants, and whatnot. We're not capitalizing any relevant amount of that. So we continue to invest, number one, in obviously getting the user base to a level that we need to, but more importantly, making sure that the use cases, the functionality, and the eventual modification strategy for these customers be it through the financial side or the loyalty side are tenable. For this year, I would expect cash burns at or about those levels. And hopefully, as revenues come up in the proximity division in other divisions via the loyalty program, that cash burn over the course of the next 18 months to 24 months will start to turn. But at this point, we are committed to basically putting a product out there that consumers will enjoy interacting with. And that will generate what we believe is long-term value for our overall ecosystem.

Bob Ford, Analyst

And Eugenio, how should we be thinking about the functionality roadmap?

Eugenio Garza, CEO

The functionality roadmap? Right now, as you know, the spin product is migrating from, I mean, the three products basically of digital, which are B2C, and then the loyalty program. They're slowly migrating to this new platform called Spin Plus. The idea is to have a single app that will be able to manage all of the different accounts there. So from a functionality perspective, first and foremost, it's just consolidating all of the product offerings into a single app, and then slowly but surely adding on what we believe are going to be very useful use cases. Right now we have obviously bill payments, money transfers, peer-to-peer, etc. But more importantly, we will at some point begin to offer remittances from the U.S., start to offer some kind of credit products with a very heavy weighting on credit risk measurement and whatnot. And then eventually through the loyalty program, being able to offer our CPG customers the digital advertising space, promotions, etc., and grow from there on the consumer side. And then on the business side, now with the NetPay acquisition, the idea is to be able to kind of close the vice grip on the overall consumer experience by affiliating Mom-and-Pops, by affiliating other customers that Coke is serving and putting them into the digital ecosystem by offering them the same product so that they can start to charge consumers with either a debit or a credit card or a Spin card with a QR code, being able to offer the multi-category and omni-channel offering to the Mom-and-Pop and have them earn loyalty points as they run their own business as well, and make that part of the overall value proposition. And again, try to establish this closed-loop system where hopefully consumers who have the Spin product will be using Spin not only at OXXO to earn and redeem points but also at any Changarro or any other restaurant or other places in Mexico. So that is the eventual dream to close the B2B and the B2C side.

Paco Camacho, Chief Corporate Officer

And I guess just to add just a couple of things: as the team walks towards that path of all these value-added services, their focus right now is to make sure that they increase the number of active users monthly. So it is crucial that consumers that users come back and continue to use the app. And second, to improve the NPS. On both sides, we have good news. I mean, the multi-active users continue to grow, and the NPS continues to improve. So that's the path today.

Operator, Operator

Our next question comes from Luis Willard of GBM.

Luis Willard, Analyst

Hi everyone, good morning, and thanks for taking my question. I wanted to talk about the dynamics in financial services and the payment at OXXO. Can you help me understand? You've seen traffic up year-over-year significantly at OXXO, but you mentioned pressure using connection services is contributing less to a top-line. And I would assume gross profit. So can we understand a bit more on the dynamics on this front? What's the rationale behind that? And anything that you can comment on that, that would be helpful. Thank you.

Eugenio Garza, CEO

Sure, Luis. With regard to financial services, remember they're made up of obviously people paying. But the biggest part comes from our correspondent banks doing transactions to the OXXO network. And over time, as you know, we've added different banks in Mexico, but then also some banks have dropped. So the volatility, if you want, in the traffic related to financial services has more to do with banks that are either coming on or offline any given quarter. And then certain banks just because of their own value proposition are sometimes limiting the number of transactions that customers can do at OXXO in any given month. So it has a lot more to do with that. I would say we had slow traffic during the middle and latter half of 2022. That traffic is coming back. But again, coming off a low base in the first quarter of 2023. And the other thing to note, just from a peso perspective, is that the commissions that we are charging have remained pretty much flat in peso terms. So when you see these numbers that are reported in real terms, we've lost some real peso revenue growth in those categories related to pricing more than traffic and volume. But that's kind of the nature of the business. Having said that, I think the word in terms of the financial institutions that are participating with us more and more, we are seeing some of them that have left, come back at a more aggressive pace. And the number of transactions that have been limited to some in the past have been opening up. So I think in the first quarter, we're starting to see the tip of the iceberg in terms of that traffic coming back.

Luis Willard, Analyst

Does the lower peso value for the company relate to the fact that transactions, particularly money transfers and deposits, are being conducted through Spin?

Eugenio Garza, CEO

Not really, I think only cash. Sorry.

Operator, Operator

Our next question comes from Alan Alanis of Santander. Please go ahead.

Alan Alanis, Analyst

Thank you. Hi, Paco, Eugenio, Juan, congratulations on the results, and I appreciate your taking my question. I'm curious about the potential for returning cash to shareholders. Specifically, what conditions would need to be met for you to initiate a significant share buyback program or issue an extraordinary dividend? I understand that you paid $650 million in ordinary dividends and have around $4 billion in gross cash. It seems you could pay another $650 million and still maintain a net debt to EBITDA ratio of under 2x. What is your thinking regarding returning cash to shareholders in terms of catalysts and timing moving forward? Thank you.

Eugenio Garza, CEO

Sure, Alan. I appreciate the question. And clearly, that's top of mind for us right now, no question about it. Having said that, I think the priority right now is to get the structure and the portfolio structure in place. So we're more focused right now on executing those transactions. See where we end up in terms of leverage. I mean, we're already there; we're already at 1.8, and these transactions are not going to do anything but improve that ratio. But we first want to have I think a little bit more clarity. And then I mean, we will be considering any and all options to maximize value for shareholders, including modifying the current dividend policy, considering extraordinary dividends, doing share repurchases in comparison and contrasting that with any inorganic inactivity to the extent that we believe we can create equal or more value for the shareholders than any of the other options. But I think the focus, at least for the next quarter or two, is going to be just on getting the FEMSA Forward transactions with greater visibility so that we can make that decision of capital allocation with a lot more certainty.

Paco Camacho, Chief Corporate Officer

And as we said, this is a process; I mean, implementing FEMSA Forward is a process that will take several months; it's not something that will happen overnight.

Operator, Operator

And our next question comes from Rodrigo Alcantara of UBS.

Rodrigo Alcantara, Analyst

Hi, thanks for taking my questions, Paco, Eugenio, Juan. Just curious here, you have that form of record years. I understand you disclose it or mention it very clearly in the press release, it's a very promising format with very unit economics. Should we expect you guys to accelerate store openings here at Bara and more exploring new spaces? I think we are just in five or six spaces in Bara. And if organic growth accelerates, would Bara be an option for you guys? That would be my question. And also on the Australian store openings, any updates regarding Valora if you have opportunity, any plans regarding organic expansion there, particularly in Germany, that would be also very helpful. Thank you very much.

Eugenio Garza, CEO

Let me provide some insights on your first question. Indeed, the multi-format strategy for OXXO includes Bara as one of the different formats we plan to accelerate. Bara is performing very well, and we've refined its value proposition over recent years, so we are confident it will continue to grow. We have ambitious plans for openings in 2023, although right now, the team is focusing primarily on organic growth opportunities for Bara. As for Valora, you are correct. Our main priority for organic growth is Germany. Currently, when we consider Valora, we have about 1,200 stores in Switzerland serving 8 million people, whereas in Germany, we have the same number of stores for a population of 80 million. Hence, the potential for organic growth in Germany is significant, and we are focusing our efforts there now. We see opportunities in 2023 and beyond.

Paco Camacho, Chief Corporate Officer

Yes. In the first quarter, you could see seven net new store openings for Valora, which is on the low side, given where we expect to go going forward. Having said that, as you know, we're still digesting the acquisition, integrating it into our systems, getting everything aligned, and we are juggling a very complicated inflation environment, especially in Germany. So once we get that under control and integrated, you should see a more aggressive extension in the store base going forward.

Operator, Operator

Our next question comes from Sergio Matsumoto of Citi.

Sergio Matsumoto, Analyst

Yes. Good morning, Paco, Eugenio, and Juan. Thanks for taking my question. I want to go back to your comment about habits have changed and just ask the question from a different angle. In the past, before the pandemic, there was this value proposition from OXXO where there would be services rendered at the stores or the convenience of going there would drive traffic into the stores. And some of that would result in cross-selling within the store where they pick up something else to buy. I'm wondering, under the new FEMSA Forward strategy if the Spin and the Premia is now fully offsetting that value proposition, or has it taken over? And if not, when do you expect that to take over?

Eugenio Garza, CEO

Yes. Thank you. Thank you for the question. And well, look, on the one hand, we believe that OXXO continues to have a very strong value proposition on the physical side of the store. The difference in consumer habits we saw from before the pandemic to the pandemic, I mean, just let's talk about, to illustrate the point, which is that less people go to the office because more people do virtual work. I mean, that is there; it's undeniable that that is affecting everything that consumers do, but related to us. So there are a few changes that have happened or been taken about into the value proposition of the store. First, we are more careful to see where we open the stores. That's something that you have seen, and we have been more strict in our store opening. Juan has said several times, the new stores perform better today than before, simply because we are being more strict in terms of where we open the stores. Second, to illustrate one point: in the past, consumers, as you said, would stop before going to the office, buy something to drink, and then go to the office. Right now, as they probably stay at home for a couple of days during the week, they may be shopping less frequently in the store, but they probably buy more. So now the store is selling for multi-packing for beverages so that consumers can actually shop for whatever they are going to buy for the whole week. So these types of changes and fine-tunings are what are allowing us to maintain a very relevant value proposition for consumers in the physical store. Now, having said that, Spin and Premia, the way consumers are using those products is allowing us to increase traffic in the store. Why? Because consumers will receive an electronic offer, receive a coupon, and be invited to go to the store and then add an additional purchase on top of whatever they are going there to buy. So actually, we see that not as a switch in detriment to the physical store, but actually the way we are seeing it is that this is a physical way of consumer shopping, in which they will on one hand have the digital platform and the physical store. And frankly, there will be a lot of synergies on that. That's why we're seeing already in fact, the increasing traffic because of Spin and because of the various components of Premia.

Operator, Operator

Our next question comes from Carlos Laboy of HSBC.

Carlos Laboy, Analyst

Yes. Good morning, everyone. I know you've spoken about this before, but if you could give us some updated thinking on it, it would be helpful. Do you feel that you need to make an acquisition to build out your C-store footprint in the U.S.? And if you were to do it organically, what's the biggest challenge to that?

Eugenio Garza, CEO

Sure. The short answer is that we do not need an acquisition. Given the skill set required and the competitive nature of convenience formats in the U.S. compared to gas, having knowledgeable operators who understand the oil and gasoline market would be beneficial. However, we believe we can implement the value proposition we have at OXXO in some markets where local operators are already familiar with the concept. We can start this process organically and at a slow pace. There is considerable activity in this area, including a major transaction announced last week. We are exploring various options, but ultimately, we will ensure that we allocate capital in a way that maximizes absolute returns rather than relative ones, considering other opportunities such as share buybacks and dividends. In summary, we will be assessing both inorganic and organic growth, but we do not need to acquire to achieve growth in the U.S.

Operator, Operator

The next question comes from Jorge of BTG.

Unidentified Analyst, Analyst

Good morning, Paco, Eugenio, Juan, thank you for taking my questions. Going back to Envoy Solutions, with the prior question, I was wondering whether the margin pressure in organic additions is related to other organic drivers. Also, if you could shed some light on M&A, would be much appreciated. Thank you very much.

Eugenio Garza, CEO

Okay. Could you just repeat? You asked about margin pressures, correct?

Unidentified Analyst, Analyst

Yes. Sure. I was wondering if you could provide any comments on whether this has to do with inorganic additions for margin or it is related to all organic drivers.

Paco Camacho, Chief Corporate Officer

It's a combination.

Eugenio Garza, CEO

Yes, it's a little bit of a combination of both. First and foremost, the first quarter is usually lower in the specialized distribution space because of lower sales volume. The SG&A expense that we put in starting in the second half of last year and into the first quarter involved bringing in very solid integration teams that have been working on putting in all of these acquisitions into the same ERP system. A bunch of the pricing initiatives about budget logistics initiatives we were putting on, I mean, a bunch of that SG&A came in during the quarter, which is usually the lowest in sales, so that's where you see margin contraction. Having said that, on the gross margin side, I think it continues to be on track with what we were expecting. There are some pressures on the food service disposable category, but they're more than offset by the strong performance of the Jan-San category. And to your point, especially the acquisitions that happened during the second half of 2022, those are still going through the synergy process and making sure that we integrate the back office, etc., and still have not borne the fruit that we expect them to on a runway basis. So yes, it was an awkward quarter from an operating income perspective, but it's explained mostly by those two reasons.

Operator, Operator

And that is all the time we have for questions today. And that concludes FEMSA's first quarter 2023 results conference call. We thank you all for your participation. You may now disconnect.