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spk04: Good day and welcome to the FEMSA's 3Q2022 results conference call. Please note this conference is being recorded and for the duration of all your lines will be in listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to ask a question. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand you over to Juan Fonseca.
spk06: Good morning, everyone, and welcome to FEMSA's third quarter 2022 results conference call. Today, we are joined by Paco Camacho, our Chief Corporate Officer, and Eugenio Raza, our COP. As always, we also have Jorge Collazo on the line, who leads COPE FEMSA's Investor Relations team. Today, Paco will begin with some general considerations on our quarterly results and strategy, and then Eugenio will provide more granular comments on the numbers. And after that, we will open the call to Q&A as always. Michael, please go ahead.
spk05: Thank you, Juan. And hello to everyone on the call. We appreciate your participation today. As you can tell from our quarterly results, positive momentum we have seen across our businesses for several quarters now is still going strong. Starting with proximity, OXXO Mexico delivered yet another strong set of numbers, with traffic accelerating its pace of growth on top of a robust ticket expansion that still reflects a resilient consumer environment and the positive performance of some of the key categories. This strong top-line performance, combined with a leaner expense structure, drove operating leverage which in turn allows OXO to deliver strong operating income growth. Beyond OXO Mexico, we continue to see dynamic growth trends, particularly in Colombia and in our Brazilian joint venture. Furthermore, as you probably saw, a few weeks ago, we have finalized the acquisition of Valora. We are already working in tandem with the team in Europe, and we will keep you posted on the plans and initiatives there in due course. For its part, OxoGas had another strong quarter on the back of increased vehicle mobility and finally reaching pre-COVID levels, as well as a strong corporate sales and wholesale activity, which together drove strong volume recovery. On the digital front, we continue to add OxoPremium and Spin by Oxo customers at an accelerated pace, reaching over 22 million and more than 4 million users, respectively. More importantly, earlier this month, Spin by Oxford received its definitive authorization to operate as a fintech in Mexico. This is a relevant milestone, as it will allow us to continue pursuing our ambition to become the permanent fintech in Mexico. As we expand its value proposition to solve more financial needs for its ever-growing user base, importantly, This would allow SPIN to operate level three accounts, significantly raising the peso amount that the user can deposit every month and making the product a better fit for small businesses. Along these lines, and as our digital ecosystem gains critical mass, we are also building the third leg of our digital strategy, the B2B component. That will accelerate the pace at which small businesses in Mexico adopt digital payments. This will, in turn, leverage and grow the use cases for SPIN and our evolving loyalty platform, thus creating a digital flywheel. For its part, our health division delivers stable results that were offset by currency depreciation, mainly in Chile, where our operations are still performing well against a demanding comparison base while facing a challenging macroeconomic environment. Within logistics and distribution, Envoy Solutions had a standout quarter with a strong top-line organic and inorganic growth in both nominal and stable margins. These figures reflect the full consolidation of our recent acquisition of Sigma Supply, enhancing our capabilities in the packaging vertical and allowing us to make more progress on efficient cross-selling initiatives. And last but not least, at Coca-Cola FEMSA, volumes grew across its territories and health drive double-digit increases at the top and bottom lines. Before I turn the call over to Eugenio, let me take a moment to comment on a couple of more strategic points. First, as you are not aware, A couple of weeks ago, we announced the retirement of John Santamaria, a CEO of Coca-Cola FEMSA, and Alfonso Garza, a CEO of FEMSA Strategic Businesses, effective December 31st. John and Alfonso have been key members of FEMSA's senior leadership team for decades, and they have been instrumental in making FEMSA the thriving enterprise it is today. We take this opportunity to again thank them and recognize their tremendous contributions to the FEMSA success story. As you know, Ian Craig will become Coke's FEMSA CEO and Constantino Spaz will become CEO of the strategic businesses unit on January 1st. We look forward to the exciting future Ian and Constantino will help us build. Finally, let me talk briefly about our strategic planning review currently underway. As Daniel mentioned during our last call, this process involves significant analysis to help us define the strategies to achieve our ambitious long-term value creation objectives, but also how best to work towards eliminating the valuation gap that exists between our share price and the true value of our business. In recent months, this topic has been top of mind for investors, prompting questions and speculation in the market about where we may be in the process, potential outcomes, etc. Therefore, and given the relevance of the subject, We want to use this call to make a clear statement. The process is ongoing. The analysis being done is broad and thorough, and we do not expect to comment further on this review or the resulting speculation on this call or in other interactions with the market until we are ready to provide a relevant update. Our target date for such an update is concerned with our four-quarter and full-year 2022 results in late February 2023. Rest assured that we have also heard the investors' community desire for greater transparency and more simplicity, loud and clear. We are taking these topics and others into account in our efforts. And with that, let me turn the call over to Eugenio.
spk10: Thank you, Paco, and good morning to everyone on the line. Beginning with FEMSA's consolidated quarterly numbers, total revenues during the third quarter increased 20.5%, while income from operations increased 13.8%. compared to the third quarter of 2021. On an organic basis, total revenues increased 15.4%, and income from operations increased 10.1%. Census net income decreased 17.3%, and reached 13.2 billion pesos, reflecting higher income from operations, a decrease in net interest expense, and a non-cash foreign exchange gain. This was offset by a decrease in our participation in associate results, which mainly reflects the results of our investment in Heineken, and a 1.9 billion pesos negative swing in other non-operating expenses, which reflect a demanding comparison base that included dividends received during the third quarter of last year from our investment in Jethro Restaurant Depot. Moving on to discuss our operations and beginning with proximity, we added 231 units during the third quarter to reach 902 net new 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. In Mexico, we are still a little behind pace for our target of 800 net additions, but the debt pace keeps ramping up. The pipeline is looking good for the next 12 months, and the productivity of our new stores continues to materially exceed that of previous new store cohorts. OXO's same-store sales were up 17.5% for the third quarter, driven by an increase of 11.9% in average customer tickets and a notable 4.9% growth in traffic. This reflects a pickup in the recovery pace of mobility and the gathering consumption location that has continued to perform at a very strong level. When compared to the third quarter of 2019, same-store sales increased 15.5%. Gross margin contracted 110 basis points to reach 40.2%, reflecting a phasing out of commercial income activity as some of our key suppliers defer commercial and marketing activities in anticipation of the FIFA World Cup and the December holiday season. We should also mention the effect that Oxxo Premia, our loyalty program, is beginning to have on the income statement. Given its meteoric growth, the program is already having a positive impact on the top line, but it's also affecting the gross margin line as we take a very conservative approach to accounting for point redemption. The two effects almost cancel each other out at this stage, but as the program grows and evolves, we are working on several strategies that will allow us to monetize the program further in the medium term. Income from operations increased 23.5%, while operating margin increased 30 basis points compared to the same period of 2021 to reach 9.4%, another record for a comparable quarter. driven by a structurally leaner expense structure and the resulting operating leverage. At OxoGas, revenues increased 33.6% and same-station sales grew 25.1% relative to the third quarter of 2021, as vehicle mobility continued to improve, finally recovering the pre-pandemic levels. Volumes were further rated by robust pickup in corporate and wholesale activity. During the third quarter, gross margin was 12.8%, while operating margin reached 5%, reflecting tight expense control and improved operating leverage. Moving on to FEMSA's health operations, during the third quarter, we expanded our drugstore count by 84 net additions to reach a total of 3,971 units across our territories at the end of September, and 431 total net new stores for the last 12 months. This represents an acceleration in our growth rate, driven mainly by Mexico and Colombia. and puts us in a good position to meet our target for 2022 of more than 400 new drugstores. Revenues increased 1.1%, while same-store sales decreased by an average of 3%. However, it is important to note that on a currency-neutral basis, revenues grew 13.5% and same-store sales increased 6.3%, a solid performance across our operations, even as the comparison base becomes a more demanding one, particularly in Chile. Gross margin decreased 50 basis points in the quarter, mostly reflecting a negative mixed effect that reflects the strong growth of our operations in Colombia, partially offset by improved efficiency and a more effective collaboration and execution with key supplier partners in Mexico. As a result, operating margin contracted 20 basis points, as tight expense control across our territories was not enough to fully offset the impact of the lower gross margin. Regarding our logistics and distribution business, Revenues increased 70.3% relative to the third quarter of 2021, reflecting the steady pace of acquisitions made in 12 months by Envoy Solutions. On an organic basis, total revenues increased 14.6%, reflecting strong performance across Envoy Solutions' segments, especially in the retail and facility supply segments, coupled with good demand dynamics in our operations in Latin America. Operating margin contracted 10 basis points, reflecting higher cost of labor and transportation, in certain markets. Finally, moving on to Coca-Cola FEMSA, volumes grew 8.4% with all markets contributing to the growth. Revenues increased 18.2% and gross profit grew 16% despite supply chain disruptions and cost pressures on certain raw materials. Operating income increased 13.3% reflecting solid top line and favorable raw material hedging strategies coupled with operating expense efficiencies. Koch FEMSA delivered a strong set of results amid a very challenging cost environment. You can listen to the webcast of the quarterly call that took place last week. Before wrapping up, I would also like to anticipate to you that in the spirit of greater transparency and disclosure that Paco alluded to in his remarks, and given the steep growth trajectory of Envoy Solutions, we will begin reporting its results on a standalone basis, separate from the Latin America logistics business, starting in the first quarter of 2023. Furthermore, as mentioned during the process of acquiring Valora, we will be presenting its results separately in our releases, beginning with this fourth quarter. Finally, we are also working on additional enhancements to our disclosure that should reduce the complexity of measuring the performance of our business units and investments. We are hopeful that, despite making our financials a little bit longer to go through, they will provide a better picture of the true value being created by our teams. And with that, let us open the line up for questions. Operator, please.
spk04: Thank you. Once again, it is Star 1 for questions. We ask that you please limit yourself to one question. If you have additional follow-ups, please re-queue. And we'll take our first question from Ricardo Als with Morgan Stanley.
spk09: Hi, everyone. Thanks so much for the call. Another set of good numbers, operationally speaking, in that generation. Considering the commentary that Paco made, recent discussions with investors, how are you now thinking about shareholder return? I mean, any updates on dividends and buybacks, eventually extraordinary dividends and so forth? That's my first very quick question. The second one, When you're thinking about your geographic diversification, I know that you cannot talk about the strategic review itself, as you said in the remarks, but when you're thinking about one of your pillars of geographic diversification, what's your aspiration as of now? For example, considering that you just achieved part of that with the Valora transaction in Europe, And it seems that the growth going forward at Valora seems to be more focused locally in Germany as opposed to, you know, aggressive expansion abroad or more M&A. Just wondering if that's the right way to think about it or what can you share on your geographic expansion pillar considering SAMHSA's strategic long-term view. Appreciate the time. Thank you.
spk08: Sure. If you want, I'll start with the first one.
spk10: Again, the strategic review encompasses all of the different levers that we believe are available to us to unlock the value of the operation. So, yes, all of the tools that you mentioned are being taken into account. Having said that, at this point, we're not ready, as Paco mentioned, to comment on which ones we'll use, but we are certain that there is a lot of value that we can unlock from our operations by using those and other tools. And then, Paco, you want to go through the geographic diversification question?
spk05: Yes. Thank you, Ricardo, for your question. And again, when it comes to geographic diversification, it has to do with our intent to better manage the risk of our geographic portfolio. And I guess that the best way to answer your question is to say that we feel very comfortable with the geographies we are competing in right now. we don't expect to be expanding that number of geographies we're in for the time being.
spk06: If I could add, hi Ricardo, this is Juan. Just to back up comment, and this is because of questions we've been receiving from investors in the last many weeks and months. Regarding, you know, given that Valora happened a couple years after Envoy, and Envoy, its strategy itself always involved a lot of M&As, right? We stated from the beginning when we started building Envoy that it required creating this national platform and that it would, you know, necessarily imply a fair amount of acquisitions. The strategy for Valora is very different, and that's really the point I want to make right now. Valora, you know, we are in the markets that we are in. We've talked a little bit about Germany, and, of course, there are growth opportunities that we see there. But the strategy for Valora is very different from the strategy for Envoy. And, again, I say this because there are investors that have been thinking, well, you know, maybe Substance is going to be as acquisitive in Europe as they have been with Envoy, and that's not correct. The two strategies from the get-go are very different. Thank you.
spk03: And moving on, we'll go to Louis Willard with GBM.
spk06: Hi, guys. Good morning. Thanks for taking the question. So I want to talk about SPIN. Now that it's received its authorization and we see the numbers accelerate strongly in the third quarter, you talked about this back on your remarks, Can you tell us a bit more about your priorities in terms of product development and the commercial offering for SPIN? And another question would be in the same line. Are we set to see a more active FEMSA digital division in terms of use of capital in the future after this authorization? Thank you.
spk08: Sure. If I want, I'll start.
spk10: I mean, as you know, the number of users has been growing significantly just based on the power of the acquiring platform that the OXO stores are able to give spin. And the uses right now, although obviously high value added, they're still quite limited. With the new authorization, there's two things that we're seeing. One is now we're able to have dollar accounts for physical persons in Mexico so we can get into the remittances market, I think, a lot more closely. And then also we were able to open up M3 accounts, so level three accounts in Mexico, which allow for higher deposit and higher average balances. And we can tailor that product for the B2B customer. So you'll start to see us get more aggressive into the B2B space. And in that way, close the loop between the consumer and the merchant so that we can try to develop an overall payment strategy that together with the loyalty program and other of the perks that we can offer through OXO will be a powerful combination. And we think that this powerful combination will be able to better serve both types of customers. And on the product side, again, once we get a more stable user base and with its authorization, we will start to get as well into other products such as personal loans, working capital loans for small businesses. So So definitely we'll see some more use of capital being put to use, I think, not necessarily aggressively, but with a lot of, we think, bang for the buck in terms of the returns that we're able to get from monetizing the current customer base. Paco?
spk05: And I guess that, Luis, what I will add is that as we do all that that Eugenio described, it is true that, as you can imagine, as we accelerate the acquisition of users in both SPIN and our loyalty programs, we get to know them better. So you should expect that also the value proposition will continue to be sharpened constantly so that we meet consumer needs better in what we have today. So that's something that you should also expect coming from our digital platforms.
spk06: That's very clear. Just if I make a quick follow-up. I mean, the remittances and the Level 3 accounts are, like, like plug and play, right? You don't need to do much development in terms of the app architecture. Perhaps the B2B needs a bit more time for it to be up and running. Is that correct?
spk10: Yeah, and not necessarily plug and play, but clearly those two offerings are, I think, much sooner in the pipeline than the full development of a B2B platform, yes.
spk06: All right.
spk08: Thank you, Paco Eugenio. Thanks Luis, gracias.
spk03: And next we'll go to Hector Maya with Scotiabank.
spk00: Hi, thank you for taking the questions. We saw in an interview a sense you revealed that there is a 10 million user target for Steam by 2023. We believe that considering your current user base of around 4 million, you have to achieve about about 30% more monthly new users versus what you are registering now. So in that, we would like to know what specific initiatives or investments you are planning to make to accelerate your monthly new users, possibly above the 400,000 mark. If there is a timeline for maybe merging OxyPremia to Spin to accelerate even more the number of users, or how aggressively would you be pushing Spin when one pops to cough And if you have a target on that or some numbers that you could share. Thank you.
spk05: Yeah. Thank you, Hector, for your question. So let me provide some perspective on how the whole acquisition, user acquisition is going. Because, in fact, we feel very comfortable with the user acquisition trend for SPIN. And actually, to your point on the number of users we're aiming to have active in the midterm, really the trick is to, on one hand, as you said, continue with the strong acquisition rate, but at the same time, we also need to encourage our user or registered users to be more active in the platform. So there is a component of that that will increase the percentage of users that register and then they keep active in the platform. And that has to do with a number of things. First, how friendly the platform is. Second, the type of services you provide. And third, of course, the type of education that you put out there for consumers to truly understand the capabilities of the platform. So I think that when you look at the rate of active versus registered that we have today, we should expect that that ratio will increase in the future, and that's our aim. I don't know if any of you want to add.
spk10: Sure. The only thing I would add is that, as you know, There are network effects associated with these kinds of products, and we're starting just the tip of the iceberg with regards to the geographic pan out. So I think certain of the use cases, like peer-to-peer, whatever, have more value the more users that are on the platform. So we would expect some sort of, I mean, riding of the exponential curve in the shorter time, and that's how I think we're comfortable that we will get to that 10 million user target that Chencho was talking about.
spk05: And Hector, I think that the second part of your question was related to the relationship between SPIN and our loyalty program. And I mean, clearly, there is a relationship because at the end of the day, the way we look at this is as a digital ecosystem in which things are connected. So indeed, I mean, we should expect that moving forward, part of the B2B component of our ecosystem will have to do with how we can actually allow the small traditional stores to use SPIN and be part of our loyalty program on a business-to-business component. And then also on the other side, when you look at our loyalty program and SPIN, now when you open an SPIN account, you are also part of the loyalty program. So, I mean, there is... this synergy component, synergistic component, that as we move forward will be stronger and consumers will be actually better off because they will have more services at their disposal as part of the platform.
spk10: And just finally, the partnership with COFF, obviously on an arm's length basis, but that I think will allow hopefully to have, I mean, current COFF customers use the SPIN platform in a preferential way that will allow the synergies that Paco was talking about in terms of customer acquisition costs on the B2B space to be a very powerful combination for both parties.
spk08: Next one.
spk03: And moving on, we'll go to Alan Alanis with Santander.
spk02: Hi, good morning. Thank you so much for taking my question. I have two questions. One of them is, i guess the answer is it's going to sound like very obvious to you but i think it's good for investors to listen to it and it and it's it is if we can do a recap of what triggered the strategic review uh i know it's it makes total sense not to speak about about what their potential outcomes but it might be good to remind investors how do you define the situation or how do you define the problem and that would be the first request if i may And the second one has to do with this move towards B2B in SPIN. And I guess there's going to be a lot of questions around this in terms of not only the architecture, like it was asked before, but also in terms of the scope and the timing and then why not having just applied for a full banking license. But I guess the specific question for this call would be, uh when are you going to start attracting businesses small and mid businesses mid-sized businesses to open spin accounts can they do it right now uh what's going to be the approach and uh and what's going to be the scope and timing of moving from a platform that was understood i think but for many of us there was a platform for for uh for for for consumers basically a fintech for consumers now in terms of moving into
spk10: to a fin pick for small and mid-sized companies in mexico thank you sure if i want i'll take the first question um and then paco maybe you can address the second one um i mean as you know i mean uh daniel rodriguez's term started in january and this was his priority number one to both strategic review both bottom up as well as top down of all of the portfolio of femsa and uh and and make have a longer-term view with regards to capital allocation going forward. So that's really what triggered it. In the meantime, as the market turned a little bit south and then our portfolio started to get more complex, we started to see the disconnect between the stock price and what we believe is to be the underlying value of the businesses. And that's why I think the urgency to come to a conclusion from the market, at least, and we're hearing that loud and clear, but to be clear, the trigger of the strategic review was Daniel's desire to have a full-blown plan to present to the board and obviously to U.S. shareholders as to what his priorities from a capital allocation would be going forward. And the timing still, I mean, he said he was going to do it during this year. We're sticking to that timeframe as originally stated. I think there's It's just the market dislocation in terms of price that's putting a little bit more of a sense of urgency. But again, we're taking our time. We're comfortable that each one of the businesses has spectacular optionalities and spectacular plans to be able to create a tremendous amount of value. And then from a top-down perspective, that we have the levers available to unlock the value that's already there and also crystallize the value that we can create in the future.
spk06: That's very good.
spk05: Thank you. And Alan, thank you for your question because actually it's an important point regarding the second part of your question, which is the B2B component of the digital platform. And I would like just to go back a bit when we started working on our digital business. Because at the time we said, all right, we are going to focus on three main verticals. We said there is fintech with the spin wallet. There is the loyalty program, and then we said there is the B2B component, which is primarily also enabling the traditional trade. That was the focus we had, and that continued to be the case. So, of course, we started, because we had already a platform for both in Oxopremia and Spin by Oxo, working on the first two verticals of this strategy, And the results of that, they are going extremely well. But certainly, as we have reached this level of performance in these first two verticals, we start thinking that in order to close the loop and to have a complete flywheel, we, of course, need to deliver on the B2B component. Because at the end of the day, part of the mission that we have is to enable both consumers and small trade on the financial side giving them access to services and to, I would say, financial elements on their daily life that today they cannot do. And as we have been doing that with SPIN, we have identified, obviously we suspected that, but there are a number of cohorts that interact with our products in a different manner. There is, of course, the regular consumer, the one that goes and they need to shop and they need to put money in their cart and they need to use the wallet the way, you know, the very basic way it was designed to function. But there are other cohorts of, for example, people that have small businesses that use the wallet in a different way to, you know, pay their suppliers or receive payments from their customers. And obviously, when we... started the spin wallet, we knew that that was going to happen, but now we have significantly more data in terms of how those cohorts are behaving and what type of services they need moving forward. And receiving the full fintech license will allow us to increase the type of services that we can give them, including things as simple as the amount of money they can actually put in the cart. So that's on the wallet side. Now, if you move that part of the services that these cohorts need towards the B2B, and we talk about the small traditional trade, I mean, these type of businesses also need these type of services. But if you will, they will need it in a little bit more sophisticated way because obviously they have inventories to manage, they have larger suppliers to deal with, they have more customers to serve. So evidently, there are some parts of the first two verticals as I said, the wallet, but also the loyalty program that will serve them well for these additional needs that they have. But clearly, we will need to develop others that are more specifically targeted for these type of businesses. So again, this is an evolution. We are moving fast, but at the same time, it's very important that we understand fully what each of the cohorts need and that we construct something that is going to be, I would say, comprehensive and that leverages on each of the strengths of the verticals that we are developing. So that's what I would say regarding the second part of your question.
spk10: To be clear, Alan, we are at this point not considering a banking license. We are dipping our toe in the water with the fintech license. We think We can learn a lot about the use cases and whether or not it's going to be worthwhile for us. If this scales, clearly that's going to be one alternative we will need to look at. But for now, we are just testing this out. And let me just emphasize what Paco just told you. I think this is a unique case in the development of digital financial systems across the world where you have the power of a distribution network to B2B customers like Coca-Cola FEMSA And on the other hand, the ubiquitousness of OXO and its relationship to the consumer that can allow for a very strong combination to really create this full-fledged payments ecosystem coupled with a loyalty program and coupled with the multi-category opportunities to increase wallet share in the B2B space through Mutenta and otherwise with a partnership with OXO that I think will allow this to become a tremendous ecosystem that really we have not seen in other places in the world. Yeah.
spk02: No, it makes a lot of sense. The potential is huge. And last question, would you use the brand, I mean, OxoSpin also for the B2B, or will there be a different brand for this B2B platform?
spk05: Yeah, well, that's a good question that the teams are working on as we speak, and All I can tell you is that we'll have some news on that respect. The teams will have news on that respect very soon. Thank you so much.
spk02: I appreciate it. Congratulations on the results. Thank you. Thank you.
spk04: And moving on, we'll go to Alvaro Garcia with BTG Pactual.
spk01: Hi, good morning, Eugenio Paco. My question is on PREMIA. which is obviously growing very fast. And I was just wondering if you could sort of walk through, you mentioned in the release, some impact to gross margin on the back of it, but just that tradeoff between top line and profitability, and from a strategic standpoint, how you're thinking about that going forward. So maybe two-part question first, sort of what's going on this specific quarter, how is that really impacting gross margin? And two, how are you thinking about sort of increasing the size of your network long-term versus profitability? Thank you very much.
spk10: Sure, if you want, I'll take a crack at it, Alvaro. But, I mean, clearly right now we are reserving 100% of the loyalty points that are being earned. We are putting in straight cost of goods sold. So that is affecting the gross margin in the short term. At the end, there will be some breakage. Sorry, I'm sorry. I'm getting a little bit of an echo. Can you hear me? Yes. Perfect. So there will be some breakage on those points, and we will fine-tune kind of what we're charging in the income statement going forward. Having said that, the elasticity of the program, and again, 10 million users and about a 19% to 20% tender at this point. As this grows, I think the elasticity of the traffic coming to the stores from loyalty customers and the average ticket that we're getting from them, right now it works out to be a wash. between the heat on the income statement from the rewards for loyalty and the excess traffic and excess ticket that we're getting. As this scales, we do expect loyalty to become, I mean, a contributor of value to the company. Whether we decide to use that value to reinvest in further store visits or whether to reinvest in other other products, be it digital or not digital, is something that we will test out in different user groups and different platforms. geographies as we go forward, but the loyalty program in and of itself is intended to be a value generation mechanism for us, not just a program to get more traffic in the stores.
spk05: There is some feedback, we apologize for that, but the one thing that I will add to what Eugenio said is that moving forward as part of the loyalty program, that is really a coalition program that we are building is that we add more partners into that program, as we add more possibilities for consumers to participate in the program, you can imagine that the amount of data and the amount of knowledge that we will generate will open a lot of possibilities in terms of additional monetization of that program. Obviously, that is a work in progress. That is part of the evolution of of the loyalty ecosystem, but the momentum that it's having, as you said, gives us the confidence that moving forward, we will open a number of possibilities for both the services that we will provide for the consumers and also the possibilities of monetization that we will have.
spk08: Great, many thanks. Thank you, Álvaro.
spk03: And next we'll go to Antonio Hernandez with Barclays.
spk06: Hi, good morning. Thanks for taking my question. My question is regarding Valora. Now that you have exposure to Europe and even the current macro adverse macro environment in the region, what are your expectations there for the short to medium term? We've been talking about the different strategies to improve profitability, to improve traffic, the different programs and so on. Everything that you've mentioned, do you think that there's maybe a possibility of having some of these capabilities in Europe as well? Maybe in the medium to long term? Thanks.
spk05: Yes. Let me give a crack at it and then obviously I'm in both Kike and Eugenio can complement. But clearly, as you can see, the management team of Valora has been on top of the development in Europe and the circumstances in terms of inflation, in terms of energy costs, etc. That is, I guess, what is behind your question. The management is taking the necessary measures to to protect the business against these headwinds. At the same time, I think that it's important to remember that a big component of the Valora business is the food billions. And that particular business, that particular segment is very resilient when it comes to economic downturns. So we are confident that the very senior management that we have in in Valora, in place, and that, as you remember, they stayed from the pre-FEMS acquisition, has the right plans and the right organization to defend our business against this situation. Having said that, as we get more involved in the business, we are obviously you know, providing as much support as we can, given the knowledge we have in the emerging markets regarding inflation, regarding volatile environments. So this is a good transition to the second part of your question. I mean, clearly there is a lot of knowledge that we have developed on how to handle businesses in not so comfortable situations. And obviously that component is going to be there as we work together with the European team. But second, also, as you said, has developed a strong set of capabilities and know-how in terms of operating stores in a very efficient manner. And you should expect that part of that knowledge and part of that know-how is going to be quickly transferred to Valora so that they can capitalize on this learning that we have developed over the years.
spk06: Okay, and regarding your organic growth expectations in Europe, have they changed maybe because of the situation or what do you expect in terms of organic growth maybe for the next couple of quarters, next year?
spk05: Yeah, as I highlighted at the beginning of the call, the final Part of the acquisition of Valora just happened a few weeks ago. So now that we are in control of the company, we're working with the team to develop the right budget for the year and for the quarter to come. So it's a work in progress as in the rest of our businesses.
spk08: Okay, perfect. Thanks a lot. Have a great day. Thank you. Gracias, Antonio.
spk03: And moving on, we'll go to Rodrigo. Alcantara with UBS.
spk08: Hi, good morning.
spk07: My question regarding Valora, we agree there is a different strategy to the chance of more organic growth than M&A. So my question here is on I mean, how should we think about the funding of that organic growth? I mean, do you think that you can fund that with, you know, the operating cash flow of Valor itself, or can we expect some minor disposals of the Heineken stake, if you can comment about that? And the second one, very quickly, regarding the Envoy solution, should we expect, let's say, mid-2023, or in 2023, is it a stage where we'll do a start the integration of all the assets that you have acquired in the U.S., meaning perhaps some synergies at the GNA level. Those would be my two questions. Thank you.
spk10: Thank you, Rodrigo, for the questions. If you want, I'll start with the funding of Valora. I mean, Valora in and of itself is generating good cash flow, and it could fund, to a certain extent, its own expansion. And again, it will be organic in certain cases. It will be new stores, and in certain cases it will be affiliating existing independent stores in Germany and otherwise, which is highly fragmented. And we expect those to be highly ROIC accretive from the beginning. So if there is a need for funding, we will clearly find a way to fund it from other of the FEMSA operations, but we do not expect this to be a major strain on the FEMSA funding structure altogether. And with regards to your question on Envoy Solutions, we are already working on that. We've hired, I mean, two senior people to the Envoy management team, basically working 100% in terms of integrating the companies. I mean, they're integrating them, I mean, coming from a flurry of 26 acquisitions over the past couple of years, so they're working on the earlier ones and slowly integrating them into a common operating style, a common operating procedure, single single supplier platform, et cetera. And most of the synergies that we are finding, and we're already finding, more than from an SG&A perspective, are coming just from a purchasing perspective. So equalizing the product catalog, getting discounts from suppliers for scale purchases, being able to serve national accounts from a single point of contact, et cetera. So those are where the synergies are coming from. And it is turning, I think, most of the acquisitions that we've been making at maybe low double-digit EBDA multiples, with the synergies, they're turning out to be high single-digit EBDA acquisition multiples with very high cash flow conversions. So we're finding those to be, I mean, quite accretive in the short term, and hopefully you'll be able to see that for yourself once we start disclosing those numbers on a standalone basis first quarter of next year.
spk07: That was very clear. Thank you very much. Just on the Valora, you said funds from operations, right? For the organic growth.
spk10: Yeah, either from Valora itself or slightly with some use of funding from FEMSA, but nothing that will strain our balance sheet by any means. Sure, thanks. Thank you.
spk04: And that does conclude our question and answer session. I'd like to turn it back to Mr. Fonseca for any additional or closing comments.
spk06: Thank you for your time today, for your attention. We're always available for follow-ups, my team and myself. And have a great week.
spk04: Thank you. And that does conclude today's call. We'd like to thank everyone for their participation. You may now disconnect.
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