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spk12: Hello and welcome to the FEMSOS second quarter 2023 results conference call. My name is Laura and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call your lines will be on 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 register your 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 your host, Juan Fonseca, to begin today's conference. Thank you.
spk06: Good morning, everyone. Welcome to FEMSA's second quarter 2023 results conference call. The plan today is a little different than usual because we are joined by José Antonio Fernández, our Executive Chairman of the Board and CEO, who will open the call with some important messages. After that, Paco Camacho, Eugenio Garza, and I will carry on with the second quarter results as we usually do, followed by Q&A. José Antonio, please go ahead. Thank you, Juan, and good morning to everyone on the line. Before we begin, I would like to thank all of you who have recently reached out to us with messages to support for Daniel after the news of his stepping down as CEO of FENSA to focus on his health. We truly appreciate your kind words and well wishes, which we have relayed to Daniel. We are grateful to Daniel for his many meaningful contributions to strategic direction and high-performance standards of our company, always with a steady hand and clarity of purpose. Daniel always makes it easy for his team to rally behind him, follow his lead, and achieve excellence. And beyond strategic acumen of business success, Daniel embodies the values that define FENSA. Thank you for everything, my friends. I wanted to be here today to take a few minutes of your time, given the unique circumstances of this recent leadership transition, to convey a few important messages. First, I am now fully engaged with our senior leadership team to continue implementing our strategic priorities, including FEMSA Forward. We have already executed several important steps, and we are totally committed to the strategy to continue unlocking shareholder value. You should therefore expect full continuity, focus, and a smooth transition. That is very important for us that should have very clear. Second, my dual role as executive chairman and CEO is not permanent. At FEMSA, we believe that those roles should be separate, and we plan to go back to that when ready. We know you have questions regarding timeframes, but please bear with us while we carefully go through this important process. We will let you know when we have news to report. Finally, I want to recognize our team. I am fortunate to be surrounded by a truly remarkable group of leaders and advisors that are working hard every day to keep growing and keep delivering on the potential of our great company. The opportunities ahead of us are very significant and compelling and every business unit is executed at a high level. In fact, The strong quarterly results we announced today are a good example of what we can achieve. So with that, I will let Paco, Eugenio, and Juan to discuss the results in detail. Thank you very much for your trust and confidence. Paco, please go ahead. Thank you, Jose Antonio. Good morning, everyone. Let me begin by updating you on where we are regarding FEMSA Forward. During the second quarter, we achieved two important milestones. First, we were able to divest FEMSA's remaining investment in Heineken, retaining only a residual amount of shares to meet our obligations under our existing exchangeable bonds, and second, we signed an agreement to divest our minority stake in Jethro Restaurant Depot. These milestones have come ahead of plan and under favorable conditions, allowing us to keep our momentum as we continue to pursue the FEMSA forward structure. As you know, FEMSA Forward is fully aligned with FEMSA's customer centricity and our broader strategic priorities of driving long-term growth increasingly enabled by digital capabilities always within our core business verticals and with a disciplined approach to capital allocation. With that in mind, we can report that our second quarter results showed a continuation of the positive trends seen at the start of the year, fully consistent with those strategic priorities and making progress towards the target set by each business unit's long-range plan. Moving on to the results and beginning with proximity, it will be helpful to talk for a minute about their own long-range plan and the four priorities around which it is built. Number one, strengthening the core. Second, developing new growth avenues. Third, developing multiple successful formats. And four, growing the footprint beyond Mexico. Looking at DOCSIS second quarter results through this lens, We see they made great progress strengthening the core as same store sales growth was again stellar, surpassing 15%, split evenly between average ticket and traffic, and reflecting a structural improvement in segmentation of the store value proposition. We again saw a particularly robust performance in the first and gathering consumer occasions. further supported by favorable weather during the month of June. Continuing with the positive news of a stronger course, new store growth accelerated and was robust once again, with Mexico and Latam providing the highlight with adding 444 new stores during the quarter and almost 1,400 during the past 12 months. Once we included stores opened by Grupo NOS in Brazil, we added more than five office stores for every day of the second quarter. Moving on to the long-range priority of growing beyond Mexico, during the quarter, Grupo NOS continued to advance ahead of plan. with revenues increasing over 200% year-over-year, allowing us to increase OXOS footprint in Brazil at a dynamic pace of almost 300 net new OXOS stores during the last 12 months. Still in proximity to America, but along the priority of developing multiple successful formats, Bara proved a highlight, achieving 23% same-store sales growth. For its part, proximity Europe again saw good local currency top line growth and overall positive profitability trends, driven by a stronger pricing, growth in food traffic, as well as the higher contribution of Valora's food service outlets. Just as importantly, we continue to advance on exchanging best practices across organizations with the focus of settling of setting the right conditions for future growth and value capture. Our health operations continued the stable trends we saw at the start of the year, reflecting foreign exchange headwinds from a strong Mexican peso, but again delivering robust margin expansion at the gross and EBITDA levels, capitalizing on the benefits of having an integrated Latin American platform working as a single organization. Additionally, during the quarter, our health business continued to drive to consolidate its competitive across markets, but particularly in Mexico, where it increased its store footprint by 12%, against a challenging competitive landscape. For its part, our fuel business also had a stable performance, with a strength in the corporate wholesale business of setting softness in its retail platform. Regarding digital, the number of active users for Steam more than doubled year-over-year to reach 5.7 million, while active monthly users for our premier loyalty program also more than doubled to reach 15.8 million, while 24% of Fox of Mexico sales are now associated with the program. We continue to privilege the acquisition of higher quality users while we make progress fine-tuning the use case. Value propositions, unit economics, and monetization strategies for each of these products as well as we look to ensure long-term value creation for the ecosystem. In terms of financial implications, during the quarter we deployed close to one billion pesos on growing this business. roughly in line with the previous quarter as well as budget as we have indicated. Finally, Coca-Cola FEMSA's volume grew across all its territories and surpassed one billion unit cases for the first time during a quarter. That, combined with cost optimization and expense efficiencies, allowed margins to expand sequentially. In addition, COF accumulated more than $1 billion of sales during the first half of the year through their omnichannel platform, Juntos Plus, which represents a significant milestone in COF's digitalization journey as it strengthens and deepens the connection with their customers. Before I turn over the call to Eugenio, I want to touch briefly on capital allocations. A topic that we are aware is very much on the minds of many of you today and a key component of our FEMSA forward strategy. As our cash levels continue to rise, we are accelerating our analysis to determine the optimal capital requirements to support the short and medium-term growth of our operations, organic and inorganic, because that will help us fine-tune the levels of capital that we could then return to shareholders. This is high priority for us. and we will keep working on it together with our board to have a more specific framework for you as soon as possible. And with that, let me turn it 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 second quarter increased 18%, while income from operations increased 8% compared to the second quarter of 2022. On an organic basis, total revenues increased 9.5%, and income from operations increased 4.5%. Net consolidated income was 8.926 billion pesos, reflecting higher income from operations, a 9.4 billion pesos non-operating income, mostly reflecting the divestment of PEMSA's minority interest stake in Jethro Restaurant Depot, and a decrease in net interest expense during the quarter. These were all partially offset by a non-cash foreign exchange loss of 6.5 billion pesos related to FEMSA's U.S. dollar denominated cash position has impacted appreciation of the Mexican peso and a net loss of discontinued operations of 3.9 billion pesos driven by the market value fluctuation of the Heineken shares underlying our outstanding exchangeable bond. Moving on to discuss our operations and beginning with Proximity Americas. We added 444 new units during the second quarter to reach 1,391 net new stores for the last 12 months. This quarter's strong expansion set us ahead of our yearly expansion target, and it underscores OXO Mexico's strong growth potential. Having said that, we will stick to an objective of 900 net new OXO stores just in Mexico for the time being, and the expansion curve for the rest of the year should be smoother than usual. OXO same-store sales were up 50.3% for the second quarter. This was driven by an increase of 7.4% in average customer ticket and a strong 7.4% growth in traffic. This underscores the solid performance we saw across OXOS categories throughout the quarter, but especially by the strong showing of the gathering and thirst locations. Gross margin was 41%, reflecting a lower contribution from financial services, which more than offset healthy commercial income dynamics. Income from operations increased 18%, while operating margin decreased 20 basis points compared to the same period of 2022 to reach 10%, reflecting an increase in labor expenses stemming from the labor reforms in Mexico. At Proximity Europe, as Paco mentioned, revenues increased 8.4% in local currency to reach almost 11 billion pesos, reflecting a recovery in traffic and ticket driven by improved customer mobility. Gross margin was 42.1%, reflecting a mixed effect driven by the positive performance of Valora's food service and B2B businesses, while operating margin was 2.9%, reflecting better operating leverage, partially offset by an increase in expenses driven by inflation pressures. Moving on to PHMSA's health operations, during the second quarter, we expanded our drugstore count by 81 net additions to reach a total of 4,267 units across our territories at the end of June, and 369 total net new stores for the last 12 months. Revenues increased slightly, while same store sales decreased an average of 3.7%. 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 almost 8%, driven by good performance at most of our operations but partially offset by a demanding comparison base in our operations in Chile and Mexico. Gross margin increased 170 basis points in the quarter, mostly reflecting positive margin dynamics across our operations, especially in Mexico. Operating margin decreased 10 basis points, reflecting an increase in labor expenses in most of our markets. At OxoGas, revenues increased 9.3%, and same-station sales grew 3.2%, reflecting a dynamic competitive landscape across our footprint. Retail volumes were again complemented by robust pickup in corporate and wholesale activity. During the quarter, gross margin was 12%, while operating margin was 3.9%, reflecting tight expense control offset by increased labor expenses. Moving on, Coca-Cola FEMSA also delivered a strong set of results in the second quarter. Total volume grew 7%, driven by growth all across its territories. Total revenues increased 7.2% and operating income grew 13.4% as operating margin expanded by 50 basis points to reach 13.9%. You can listen to the replay of the conference call held yesterday. Finally, our Envoy Solutions total revenues increased 23.1% while relative to the second quarter of 2022, reflecting some of the acquisitions we did last year together with solid execution, while operating margin contracted 120 basis points impacted by extraordinary expenses related to synergy capture across the platform. That's it from my end. With that, we can open the lineup for your questions. Operator, please.
spk12: Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Kindly take note, this is limited to only one question each. Thank you. We'll now take our first question from Thiago Bortolucchi at Goldman Sachs. Your line is open. Please go ahead.
spk03: Yes. Hi. Good morning, everyone. Thanks for the presentation and taking the questions. Just before we get started, I just want to share once again our best wishes for Danielle and also welcoming back José Antonio in our doublehead position. Good luck on the forward look. I have two questions that I'd like to explore. The first one, it has to be capital allocation, right? Obviously, we understand that you need to be cautious on the communication and on the movements, right? But putting in perspective where you are versus what you communicated on the transfer forward plan, you are already running at roughly $5 billion of excess cash position in the balance sheet, right? So unless there is any large germinate in the horizon, which I don't think is the case, growth shouldn't be a bottleneck or an overhang for a stronger capital distribution, right? And this is not to mention the organic cash flow that the business is generating. So I would just like to understand internally, right, what is the kind of debate and different deals that we're facing that is still preempting and set up on shareholders' returns is the first one. And the second one, we know there is a scope for pretty decent expansion of OXO, right, not just in Mexico, but across other regions, potentially including the U.S. When we look into Mexico and Brazil, which are both countries where you already have a pretty decent footprint and rolling up, your convenience stores overlap your bottling operations, right? How important it is for you to develop a convenience store in a country to also have somehow a footprint internally on the beverage space? This is just to imagine how the growth scope might move into new regions. Thank you very much.
spk10: Hi, Diego. It's Eugenio. Thanks for the question, and we'll definitely send along your thoughts to Daniel and the team. With regards to your first question on capital allocation, fortunately, we are well ahead of the divestiture program that we announced back in February. So we are in that privileged position that you mentioned of already being well below our two times net debt to EBITDA target. We are having discussions, very serious discussion at the board level as to kind of what kind of framework for a capital allocation we are going to be implementing. Having said that, you can feel comfortable that we will be looking at several alternatives. One, and for the most part, as you know, organic growth within the businesses that we decided to focus on with FEMSA Forward still continues to be strong, and we feel over the next five or six years, we could deploy $7 or $8 billion easily in terms of new store openings, further additions to our Coca-Cola bottling operations, et cetera. So there's there's plenty of room to put capital to use in low risk projects at very high returns to continue on the growth. Having said that, and to your point, most of this will be funded with just internally generated cash and we'll still have this cash left over. So a second part of the capital allocation will be reserving some amount of capital, again, within the construct of a two times net debt to EBTA capital structure at the end, but reserving some capital for strategic optionalities that might arise again, within the core businesses that we have identified and also sticking to very tight financial return guidelines so that the capital allocation into new initiatives, whether it be at proximity, whether it be at golf, whether it be in Latin America or elsewhere, that they stick to not only strategic criteria, but also very strict financial and value creation criteria. And then finally, I mean, there is a very high likelihood that after allocating this capital to strategic initiatives, there will be some capital left over. And we will consider what the best way to return that capital to shareholders will be, be it an ongoing share repurchase program, a bigger share repurchase program, and or extraordinary dividends. So those are all of the things that we are discussing at the board level. We will hope to have some more clarity for you, hopefully by the end of the year, if not very early next year. But again, we're being patient. We're focusing right now on executing on the divestment part of the FEMSA Forward Strategy and then shifting our attention to this, but you should feel comfortable that through the combination of organic, inorganic, and capital returns to shareholders, we will continue to, I mean, of course, make sure that shareholders can maximize their value in their stake in FEMSA. And at the end, when we reach this final two times net debt to EBITDA ratio, you will be exposed to a portfolio that has fantastic growth and cash flow generation characteristics to it. So that's it on capital allocation. I don't know, Paco, if you want to take the other question on the expansion of Oxxo and Beverages.
spk06: Yeah, actually, Tiago, on the second question on OXO, can you repeat it?
spk08: The line wasn't totally clear when you phrased the question the first time around. Sure, Paco, sorry.
spk03: The question is, when we imagine you penetrating other regions with convenience stores, right, with OXO, how important it is for FEMSAR, for the operations
spk06: also to partner with some sort of beverage distribution being on beer or on soft drinks uh thank you this is this is one i mean actually on on the proximity side we are we are really agnostic right uh i think obviously in mexico we have the legacy of our beer business that eventually became Heineken, and that was the reason why, obviously there was, for a number of years, we only sold the Heineken portfolio, but when we started the office in Brazil, as you will know, You obviously work with Amber as well as Heineken, but I don't think we need to be a special partnership with a beverage company in every place that we think about opening retail. I mean, obviously, in Europe, we don't have such a setup, and it should not be a prerequisite. Obviously, we know everybody in the beverage business. We are close to many of them, but it's not a prerequisite and you should not see it as either an obstacle or a facilitator necessarily. I mean, the two things really go separately.
spk08: That's great. Thanks Juan. Thanks Eugenio.
spk12: Thank you. We'll take our next question from Bob Ford at Bank of America. Your line is open. Please go ahead.
spk09: Thank you very much. Good morning, Jose Antonio, Paco, and Juan. Please know that our prayers are certainly with Daniel and his family. Paco, you mentioned the billion pesos in digital investment. Can you discuss areas of focus in terms of functionality, how you're thinking about the development roadmap, and where the consumer and small business credit resides in that sequence?
spk08: Yeah. In fact, the investment that we're doing is basic.
spk06: Thank you both for the question. As we have announced before, and we have been pretty consistent with that investment, we are at this stage, a part of that is basically going into the expenses of operating that business and growing it. So we have put significant amount of money on making sure that we have the right team, that we bring the right people. And so those are part of the operational expenses that are taking part of that investment. As we move forward, and we continue developing the three verticals in digital that we have told you guys over time, first, our fintech, our wallet, second, our loyalty program, and third, enabling the B2B business, what we are creating is really an ecosystem. So at this stage, what we are focusing on is making sure that the consumer experience of those consumers navigating through the different services and through the whole ecosystem improves with every experience and with every use of the platform. So when you look at the SPIN, for example, I mean, clearly, as you said, at this stage, we are focusing on getting a better use of the platform through the services that we have today, which is basically the wallet. And the team has become increasingly knowledgeable of the different use occasions for each of the cohorts that they have identified, both demographically, sociographically, and geographically. And that will continue to be the case. Second, optimizing the expenses. So when you look at the cost of acquiring new users. It has reduced significantly sequentially over the last quarter. But importantly, we also know that once we have established these new services, is very likely that we will need to move to additional services such as insurance, such as credit, but that is in the pipeline, but it's not something that we are rushing into without making sure that the first stage of the of the business is completed successfully, which is making sure that they have the right consumer experience. Then when it comes to the loyalty program, it's similar. We feel confident on the service we're providing today. As we said, the tender is at 24%, 25% right now. We are seeing already the improvement of also sales behind the loyalty program. So making sure that we continue improving the consumer experience, and that is important for us. The same for the partners that we have today. As you know, we have Olari, for example, so we are focusing on improving the experience for consumers behind that. And that is the focus at this stage.
spk10: The other thing I would add, Bob, just so you don't get scared with this billion peso per quarter operating loss at digital, is that digital is generating revenues at the proximity division as well. So for the overall FEMSA ecosystem, the cash burn is less than what you see reflected in the loss in the others column for us. So right now, there is a transfer price that's being assigned. because of the use of the retail network, but overall the cash burn in the ecosystem is like you just see there.
spk08: Thank you.
spk12: We'll now move on to our next question from Ricardo Alves at Morgan Stanley. Your line is open. Please go ahead.
spk01: Yeah, thanks, everyone. First of all, of course, all the best to Daniel. And, José Antonio, it's nice to hear from you again. I think that your message in the beginning of the call on the SAM support plan was really important, so I appreciate that. First, very quick follow-up, Eugenio. You mentioned the buybacks, the dividend policy, or eventual extraordinary dividends. Qualitatively speaking, is there kind of a preference you guys are leaning towards here? I don't know if you've been studying these issues for a while. Is there anything that you guys learned, perhaps on the buyback front, anything that you could share in terms of what you have learned so far this year when you were discussing those topics? And then my other question is more related to OXO. Obviously very impressive same-store sale. The gross margin was also good, but we had a little bit of a higher expectation for EBITDA. So can you guys expand a little bit more on the SG&A dynamics for Oxway specifically? Labor obviously has been a factor in Mexico, but is there anything else that you care to highlight? I don't know if maybe the stepping up of the new store openings that you had from the first quarter to the second quarter. I don't know if that's relevant enough to move the needle on the scale front, but just a little bit more thoughts on the SG&A level. Thank you so much.
spk10: Sure, Ricardo. Thanks for the question. First, with regards to buybacks, as you can tell, we have been looking at all sorts of academic research about kind of what the reaction is for the market for either a large dividend or a share repurchase program. Uh, et cetera, and they can all tell you kind of what you want to hear at the end of the day. We're focused on generating value for the shareholders and using that excess capital to generate as much value. So, I think that the question there is obviously a tax element that we're looking closely at. But are, I mean, mostly comfortable at this point that taxes will be relatively agnostic with regards to either choice we make. but we're still perfecting that. And I guess the question is going to depend, number one, on what's the size of the return of capital program and then what the market dynamics and the valuation of the stock is at that moment in time and how much we can achieve on one versus the other at specific prices to ensure that we are generating as much value on a per share basis for the FEMSA shareholders who do decide to remain with us for the long term. So again, we are looking at all the academic studies and again, taking them with a grain of salt, but focusing more of the analysis on what generates the most value on a per share basis for the FEMSA shareholder. And then also on the SG&A front, there's several things going on there. I mean, on the one hand, Starting with the gross margin, you do have a little bit of a mixed effect with less services and more merchandise, and that obviously brings gross margins down. The other effect, as you know, has a lot to do with the loyalty program, where we are reserving for the points that are being earned there a little bit. That's more than being offset with increased traffic and increased ticket size, so we're happy to have a lower gross margin but more sales, so that obviously helps. And then on the SG&A side, again, labor reform, I would say, is the biggest factor. But you are right. It's not only the new store openings that you see ramping up in the second quarter, but it's all these other initiatives that we are pursuing, the PRONTOS, the opening of the VARAS, and the opening of a lot of initiatives that cost a little bit more at the beginning. We're implementing new operating models in the stores to be a little bit more efficient. on the supervisor front, we are investing in cash recycling machines to have higher cash availability for cash out in the OXO stores, et cetera. And all of those initiatives are being funded heavily during the first part of the year. Some of them cannot be capitalized. They need to be expensed. And that's why you see a little bit of the softness in the second quarter numbers. But for the most part, I would say it has to do with the labor reforms.
spk00: Yeah.
spk06: Just to add to that, it's clearly, as he said, the two main factors is the labor cost and second, the new store opening. But I think that it's also important to know that as you look at the numbers in OXO, the fact that the sales are increasing is also helping to absorb the cost. So when you look at quarter to quarter, we have a reduction in administrative expenses and percentage of revenues, for example. So the performance of OXO continues to be very, very dynamic and cost as we grow the revenue.
spk01: Very helpful, gentlemen. Just one quick, I think I misunderstood, but is the loyalty still affecting OXO? I understood that it was not.
spk08: It's been very little, Ricardo.
spk07: Okay. Thank you so much for the time. Thanks, Ricardo.
spk12: Thank you. We'll now move on to our next question from Ellen Alanis. at Santander. Your line is open. Please go ahead.
spk05: Thank you so much for taking my question, and great to be with you. Santander, please, for everyone, send our prayers for the well-being of Daniel. That's the most important thing. I want to ask a question regarding the long-term vision and long-term strategy that you have, and long-term vision that you have for the next five years for the company overall. I think that'll be a good opportunity for all. all investors to hear directly from you in terms of how do you perceive the company will be different in five years from now. And specifically, if you could touch regarding the relationship with the Coca-Cola Company and Coca-Cola FEMSA. As many of you all know, we're celebrating three decades of lifting Coca-Cola FEMSA. in 1993, and now you have the largest Coca-Cola bottle by volume. How do you foresee the relationship and the ownership that you have with Coca-Cola Frenza in the next five years? And that'll be my question.
spk08: Thank you so much. Hello. Yeah, Alan, thank you. This is Paco.
spk06: I will just start answering your question, and then I'll pass it on to Jose Antonio in case he wants to add something. So on the first part of the question related to the next five years, I would like to go back to what we have discussed a couple of times, which is the long-range plan exercise that we put together recently and that we have explained to you in a number of occasions. And clearly, that continues to be our guiding light for the next five years. Each of the businesses have a very thorough, very complete five-year plan that they developed. They are working towards those plans in 2023, and they will continue to do that in the next years. Part of the results that you are seeing is precisely behind the LRPs that they have developed. So you should expect that that is not going to change. We are obviously, as in any process such as long-term planning, you know, we review the plans just to check that if anything changed in terms of context, in terms of competitive activity, et cetera. So you should expect that that might happen, but clearly we have very strong plans in place, and each of the businesses will continue to do so. At SAMHSA level, As we aggregated the plans, I mean, we clearly saw the opportunities to continue our target of doubling the size of the business every five years. So that shouldn't change either. So we feel confident about the LRP, and you should expect that we'll stick to them both at the business level and at transfer level. Part of it, as you know, is finishing and making sure that we continue deploying the FEMSA Forward strategy. You will hear news about that as they come along, but you shouldn't see any surprises on that. Here's Jose Antonio. Thank you, Alan, for your question. On behalf of what we foresee for the next five years in Coca-Cola FEMSA, I can tell you, and you know that I've been around with Coca-Cola and FEMSA since Roberto Goizueta, and we cannot be happier of the situation of our relation with Coca-Cola today. We have a complete aligned critical success factors of our executives. We have a common... perspectives of what is coming. We want to continue growing. We just won the Candler Cup from, it was assigned to Buenos Aires. Our team in Buenos Aires did a superb job, and we won it again, as many, many other times. And we are very happy. We see a very good and profitable relation for the future with Coca-Cola.
spk05: So some of the capital deployment can go also in expanding the franchise if needed. I know you've talked that maybe Coca-Cola doesn't need that money. They can use their own capital.
spk08: But if needed, you will continue to support the expansion of Coca-Cola for themselves. Yes, Alan, this is Paco.
spk06: You know, POF is always looking for inorganic opportunities. Yes. They will continue to do so, and obviously we will support them if needed, but there is no change in that. They have been always actively looking for opportunities. And I think, Alan, this is Juan, I mean, the nature of the relationship and the clarity that we now have in terms of the business and the cash flows. As you know, it's prompting the business itself to invest more. You heard the team at COS yesterday talk about their capex. They've been talking about it for months. They're investing more this year and the next couple of years than they ever have in adding capacity and just growing the business. It really is looking like we have a time ahead of us when, you know, the co-funds are going to be deploying more capital, and as Paco just said, we would be ready to step up under the right conditions for M&A. Got it.
spk05: Thank you so much.
spk07: Thank you, Alan.
spk12: Thank you. Ladies and gentlemen, kindly be reminded that this is limited to one question each. Thank you. We'll now move on to our next question from Louis Willard at GBM. Your line is open. Please go ahead.
spk02: Hi, guys. Good morning. Thanks for taking my question. Welcome back, Jose Antonio and I join my colleagues on wishing Daniel the best and his family, of course, as well. So this one is a bit philosophical. I would love to pick your brain and ask you which characteristics you think the next financial CEO should have. Especially as a relevant part of the FEMSA forward strategy would likely be already on the way If not completed and I have another one on spin very very short one
spk08: Well, thank you, Luis.
spk06: Well, the characteristics we would love to find, first of all, we would love to have Daniel back. We don't know. We hope. We're still praying, and we have hope that he will recover and will come back. Otherwise, we would look for, as you know, this job, Daniel's job is he's a CEO that coordinates CEOs. So he has to have a very good follow through. He will be able to hear from the whole team ideas and mix them. He has to complement and push and motivate the CEOs of the different divisions. We are in a very different path that we have in the last 20 years. I mean, today we have a very nice problem of having a lot of cash. We have another very nice problem of lots of opportunities geographically to develop, Latin America, U.S., and even Europe organically with stores. So this has to be a matter of priorities, a matter of studying very well the projects and deciding which one goes first. There is not a special order of the priorities because we don't know what we could find as opportunity anywhere in the world, but we will follow up the growth of all the divisions as we speak. You know the potential of digital is great. We need to know more about this. This is obviously a new venture for us, completely different than operating beer or soft drinks or retail. But the CEO should be very open to new ideas, very cautious on how to invest and which projects to pursue. But I hope Daniel, I insist Daniel comes back. That's my expectation.
spk02: Absolutely. We'll hope that to happen. Thank you and thanks for the answer. Another one, just very quick. I think I may have asked this in the past, but is there any relationship that you might have detected between the ongoing lower share of financial services at OXO, if not the first quarter it happens, and the strong advancement of SPIN users? I'm thinking that if there's a relevant share of financial services that are now being made or transacted through the app at a lower profitability. Thank you.
spk06: This is Juan. I think in the long run, you should expect to see a migration of some of the physical users moving to digital. But I think what we're seeing today still is much more related to kind of the vagaries and the ups and downs of the relationship with the correspondent banks. I mean, as you know, we've had a couple of banks that reduced their exposure to OCO. They're coming back, and we obviously need to be very careful about the fees, you know, with inflation, how do you manage your fee structure? So I don't think that the changes that we're seeing right now is necessarily driven by the secular trend of physical becoming digital. I do think it's still much more related to whether one of our big banking partners left or is coming back or, you know, what's happening to the fee structure. So, you know, I think it will happen, but I don't think we're seeing that yet.
spk08: Understood Juan, very clear. Thank you.
spk12: Thank you. We'll take our next question from at JPMorgan. Your line is open. Please go ahead.
spk11: Hi, guys. Thanks for the space for questions here and obviously echoing the good wishes there for Daniel. So the question that we had was more if we could explore a bit on the other retail formats in Mexico, particularly around VARA. Maybe if you can comment a little bit on what the outlook is for the rollout, any short-term targets that you can share there, and obviously any colors there around how profitability is evolving, CapEx requirements, all of that, that would be highly appreciated. Thank you so much.
spk08: Yes, Alicia, thank you. Thank you for the question.
spk06: Indeed, I mean, VARA is one of the formats that the OXA team is exploring as part of their multi-format strategy. And VARA, frankly, has been doing a terrific performance during the quarter. So when we look at the results, If I'm not mistaken, the results were 22% ahead of a year ago, strongly in the digits. The traffic increased by 12%, and we continue to see same store sales at plus 12%. Private label, which is a strong part of the value equation, it is also performing significantly well. And they continue to improve all the operational aspects of the stores, reducing the inventory, reducing the operational cost, reapplying the success that also has had on the segmentation. And importantly, they also continue improving the number of the opening of stores. So, right now about 200 barrett stores, 300 barrett stores, particularly in the center part of Mexico. And our idea is that we'll continue with that expansion strongly in the years to come. Once again, making sure that we first continue in the geographic areas that we are, and we slowly expand to others. and continue fine-tuning the value proposition. But we are very confident at this stage that we have cracked that value proposition, and it's a matter of making sure that we gradually expand it in other parts of the geography in Mexico, specifically Mexico.
spk10: If I may compliment, with regards to the unit-level economics, I think with the gross margin structure that has been achieved through the different categories, value prop and private-level penetration, We have been able to, I mean, reach unit level economics that from a marginal perspective in terms of the store investment and the operating model that can give us, I mean, returns on investments well into the double digits. And again, at the forward level, they're reaching, the mature stores are reaching and in the contribution that we originally set out for the rebranded, not the rebranded, but the reformulated value prop three or four years ago. So we're very comfortable that as the scale grows, distribution centers fill up, et cetera, that we will be achieving, I mean, much better EBIT margins than what we're seeing right now. And that the marginal dollars that are being invested here are earning, I mean, spectacular returns. So we're comfortable, again, that the unit level economics on VARA are working out either as or better than expected.
spk11: All right. Thanks for that. Super, super helpful. And if I may just to follow up on that on the point there on private label, do you have any sense or any level that you can share with us around how much private label actually represents there within the format? Thank you.
spk06: Yes. When we look at the total sales, private label is at around 21%. of the safety in the store, but then obviously it changes depending on the categories. So it goes very high when you look at a fresh product, for example. It is around 27%. What general merchandise is also higher at 27%. So it changes, but it's an important part of the value proposition.
spk08: Okay, perfect. Thanks for that and congrats on the results, guys.
spk12: Thank you. We'll take our next question from Rodrigo at UBS. And before that, kindly be reminded that this is limited to one question each person. Thank you. Rodrigo, your line is open. Please go ahead.
spk04: Sure. Thank you. Good afternoon. Good morning, guys. Paco, Antonio, Juan, Eugenio. Well, we'll limit the questions here to one. I would like to explore Your thoughts on OXO Brazil. Looks like you finally cracked the formula there, delivering very impressive results in terms of sensor sales. Two questions here. I would like to hear your thoughts. The first one is, do you envisage a near term or even next year in a scenario where perhaps you could be in a stage in Mexico at some point, like opening one store per day? would you see that happening in brazil for instance and the second one if you can i mean appears to me most of the stores being or even all of the stores should be in oxford looks like in dj venture pretty much you know what everything we heard is coming from you guys just just if you can remind us or share with us i mean what what's essentially the the contribution shift from from from from your counterparts and from raising in the jd uh that would be uh
spk06: great to hear it and congrats on the overall results thank you very much hey let me take the first part and then I'll get back up a compliment I think on the on the one store per day I mean I don't want to put our colleagues in the in the hot seat but that's actually what they did during the first quarter right I mean if we remember that in Brazil they use a different fiscal year they have their Their end of the year is at the end of March because of the harvest, the safari year. So our first quarter was their fourth quarter. And they actually opened like 90 stores during that quarter. So it is doable. Now, is that a run rate for the full year? No. But is that possible? Yes. I think in the short to medium term, that's the kind of growth that we are looking for. I'll let Paco talk about the partnership, which is really going very, very well. Yes. Thank you, Rodrigo, for the question. Look, first and foremost, we are extremely happy with the relationship we have in Brazil. We are extremely happy with the way the joint venture is working. We are extremely happy with the I would call it learning that we have and that we share between the two entities. When you look at Brazil today, we have a very strong base of office stores right now, but we also have a very strong base of the selected stores. Our partners have over 1,600 stores in Brazil, and they opened 35 units in the last quarter. So at the end of the day, we have an ecosystem of stores. Stores in in Brazil between the select and the also that are very powerful wrong as you know, they are experts on the field side and It's something that we plan to Even learn more as we move forward with our expansion plans in other places so I mean clearly the the joint venture we have there is going ahead of expectation and We have a strong relationship with our partners that we plan to continue building in the future
spk10: If I may add to Juan's earlier point. Sure. I just want to add to Juan's earlier point. You have to remember the 90 stores we opened in their last quarter were just in Sao Paulo and Campinas because we just have one, I mean, D.C. in place. eventually will be in Rio, will be in other places. So again, I'm trying to be a little bit more aggressive than what Juan is, and I'm sure I won't put our Brazilian colleagues on the spot here. Once we have three or four different areas where we're saturating the market simultaneously, we should be able to reach that growth. And again, also just to compliment on Paco's point, you have to remember that the first three years of the joint venture were run by someone who came from Raisins. So I mean, the local know-how, the local expertise has been invaluable in terms of rolling out the value proposition in Mexico, and we will continue to rely on them for learnings that are being put to use in the region.
spk04: I understood that. That was very clear. I totally agree. It certainly exceeded expectations. You're already breaking the point there, right? We're still in negative operating income. Maybe you can share with us. That would be helpful. Thank you very much.
spk10: Sure. At this point, given that they are also a public company, we'd rather not give out the numbers. Having said that, from a free cash flow perspective, given how much we're expanding at this point, we're still free cash flow negative, but in a good way. What I can say is that the economics of the business are better than what we expected when we originally started three years ago. in all income statement lines.
spk12: Thank you. We'll move on to our next question from Ben Thurow at Barclays. Your line is open. Please go ahead.
spk15: Perfect. Thank you very much, and good morning as well, Congress, from my side. Just wanted to dig into recent dynamics at Oxo. Clearly, we saw very strong second quarter just continued, a very healthy combination between ticket and traffic. I was wondering if you could explore a little bit of how much of maybe that traffic was driven, just weather-related, people more going into stores just because of the heat, buying certain beverages and so on, and what the trends are into the third quarter and how you're feeling about the traffic more recently. Thank you.
spk08: Hey, Ben, this is Juan.
spk06: I mean, we were talking a little bit about this even last quarter. We were talking about the gathering location, the thirst location. I remember making a comment in the call three months ago about beer being very relevant now that we have, I mean, we've opened fully the territory, all of Mexico to both big families of brands I'm beginning to move the needle, even though the opening to the API portfolio happened during, you know, several years ago or began happening before years ago, we already were, you know, under COVID and people weren't really living their lives normally. But now we are, right? And so people are getting together a lot more, consuming a lot more. And so we again see those trends where the you know, the beer category and the soft drinks category and the snacks category and the liquor category are all performing very, very well. Now, I think if we looked at it intra quarter, certainly the month of June was the strongest. And, you know, you point to the right reason. I mean, the heat, the weather that we've had for June and the better part of July obviously has been an additional tailwind to the consumption of beverages. So, you know, it looks like July kind of took off where June ended, so we need to see good trends. But again, I think the broader reason is people fully going back to living their lives. I mentioned the other time, you know, concerts and fairs like the one in Aguascalientes, really all over Mexico. Just people gathering and consuming normally where we have not for several years. That would be my comment. Yeah, no, and then the only thing that I would add to that is that when we look at traffic, It has been improving, as you know, sequentially for a few quarters now. The strong performance that we're seeing, the additional good news is that it is coming behind the general merchandise. I mean, basically every single segment of the store is growing and adding traffic. And that is being reflected also on the market share. I mean, also continues to gain market share. And that has to do with the basic and the core value proposition of the store. So that is the good news. Yeah, all the segmentation work that is being done is paying its dividends. And I guess that the consistency of it is what is helping the traffic. And that's why we believe that in the quarters to come, hopefully we'll continue to see the same.
spk08: Okay, thank you very much.
spk12: Thank you. We'll move on to our next question from Alvaro Garcia at BTG. Please go ahead.
spk16: Hi, good morning. Just one quick one on SPIN. I was wondering if you're seeing higher transactions per user. In the release you mentioned increased transactions per month. But I was just wondering if in certain cohorts you're seeing just higher balances and just higher movement on a per user basis.
spk08: Thank you. Yep. Hi, Alberto.
spk10: Thanks for the question. On SPIN, yes, we are seeing different cohorts, especially the newer ones, being more prolific in terms of their transaction volumes. as they find different use cases for the product. Again, cash in, cash out continues to be the main one, but what's really picking up now is peer-to-peer, which is what we want to because it creates the network effect and it creates stickiness to the product. So I would say that for the most part, we are seeing an increase in transactions per user the way we would want to see them. And as people see the functionality of peer-to-peer and also the payments that we were seeing being done on an analog basis, the services, etc., that is also being i mean you top up once in the month and then you use it to pay for three or four services online instead of having to come back to the cashier uh and paid for three or four services over the course of the month so i think it's moving in the right direction as as we expected it uh there is uh i mean some uh i mean shift uh as in one of the other questions with regards to what that's doing i think overall to the uh financial services line uh but having said that it's it's it's i think from an economic perspective it's not It's not extremely diluted, but more importantly, we are having more engagement in the platform, which is at the end of the day what we want.
spk07: Great. Thank you very much. Gracias, Sergio.
spk08: Thank you.
spk12: We'll now move on to our next question from Sergio at Citigroup.
spk08: Please go ahead.
spk14: Yes, hi, it's Sergio Matsumoto from Citi. Thank you for taking my question. And also my thoughts and prayers are with Daniel and his family. My question is on Premier, the loyalty program. When you look at the strength of that program to drive traffic into the stores, How does that compare against those that were non-digital or analog, as you just mentioned a few minutes earlier, such as the services and the payments and the mobile phone minutes top up? That's my first question, and related to that is, does the ubiquity of OXO stores play a role under, you know, how does the ubiquity play a role in the acquisition and retention in these digital platforms? Thanks.
spk06: Yeah, thank you, Sergio. This is Paco. I will take the second part of your question, start on the first, and then Eugenio can complement me. But, I mean, clearly the OXO, stores play a very, very important role in both spend and the loyalty program. I mean, having the physical store and the approach that the team is taking is a digital approach, which means the service providing on the fintech side and on the loyalty program side are leveraging strongly on the store, both on the acquisition side, but importantly also in terms of the consumer experience and the type of um offers and programs that we put together so there is at this stage the intention is to continue leveraging uh on the physical presence of the store uh and the teams were very close together because i'm clearly the store when we talk about the store it basically means the the people that work in the store They are the ones that many times have to convey the messages in terms of whether the consumers are going to use the Logitech program or not, if there's a special offer that they should be taking a look at. You need to know that they are, for example, this is just an example, but there are dedicated coupons that people can use, but they only have them available in the application, in the app. So many times, at least at this stage, the cashier is the one that is going to suggest the user to go and look into the applications to see if there are any coupons. So that link between the store and digital is strong today, and we expect it to get even stronger in the future. And that takes us to the first part of your question. which is that also premia at this stage is a big part of the transactions are still on the physical side. So people go there and they have their phone number and they access their account through the phone number to the cashier. more and more we're seeing that uh users have the application and and they do the transaction through the application uh but at the end of the day we believe that it's going to be a combination of both uh moving forward yeah if i might add just in the ubiquity point um according to banco de mexico in all of mexico there are 62 000 atms
spk10: and only 28,000 or 29,000 of those 62 are actually outside of a bank branch. If you think about OXO, in OXO we have 21,000 ATMs. So technically we've got, I don't know, 40%, of the outside of bank APMs in Mexico. And if you go to the more rural areas of Mexico, it could probably be the only ATM in town. So clearly that is a significant portion of the value proposition, especially in a cash rich economy and an informal based economy like Mexico is. So clearly that is, I think, the main driver of the value proposition. Our job obviously is to take that that advantage and turn it into a unique user experience that flows across not only spin, of course, with payments and peer-to-peer, et cetera, but also with the loyalty program to drive that symbiotic relationship between the digital and the physical store. And right now on loyalty, again, it's still early days, but I mean, you saw in the press release, we're at 24% tender. So 24% of all the sales of OXO are being done through the loyalty program. And these, again, we're still running some numbers, but these customers are running tickets and traffic and purchases that are significantly higher than they otherwise would have been to a comparable cohort without the loyalty program. I think this symbiotic relationship, again, between the physical store, the digital wallet, and the loyalty program is causing exactly the kind of network effect that we want it to have.
spk08: Thanks, guys.
spk12: Thank you. And we'll take our last question from Hector Naya at Scotiabank. Your line is open. Please go ahead.
spk13: Hi, thank you for your time. Apologies if I get disconnected. I'm having some issues with my line. I just wanted to say first that our thoughts and we are wishing you all the best. Also, the question I have is related to Temple Forward. In the announcement, it was mentioned the potential that Temple has with the traditional channel. So I would like to know how you are to become the supplier of the traditional channel. If you have some clarity in the economics or how you would organize your and the red trucks with the Coca-Cola company. In the end, I mean, do you believe that we could eventually start to think of PEMSA as a relevant supplier or even as a one-stop shop of the traditional channel in Mexico?
spk08: Thank you. Hector, hi, this is Paco. Thank you for your question.
spk06: The line was breaking up, so I will try to answer the best I can. But basically, we continue to believe that there is a lot of opportunity of enabling the traditional channel and solving the key pain points that for many, many years they have had. I mean, first of all, I mean, clearly the pricing is a concern for them. And that is almost the price of entry. Making sure that they have the right price is something that is a very important part of the value proposition. On that side, you can imagine that clearly we believe that we are well equipped to solve that one or to at least address it simply because we have a very strong commercial relationship on the offshore side. But there are a number of other pain points that this segment has suffered over the years. One is the availability of products and the delivery, because today what they have to do is most of the time they have to go and look for the product themselves, open store late because they have to go to the wholesalers or the central de bastos or other places. to supply their products. And that means that they lose sales as they go and they come back, they have to pay for transportation, et cetera. So having an ecosystem in which you can actually receive the product, place the order the day before, two days before, once you have closed your operation for the day, and then receiving it in full at the right price is basically going to solve a very big pain point. And the second one, which is not minor, is that every time they go and buy, they have to buy full cases. And that is an issue. I mean, that is an issue because many times they only need to buy a few units. And given that they don't have access to credit, they don't have access to any source of financing, they have to work with their own working cap to pay for these things. And if they buy a full case of something that is going to take two months to repay, you can imagine they have money trapped that they cannot use for other things. In reality, our ecosystem can actually offer them to buy by the unit, simply because also has been doing that by supplying their stores by the unit. So that's not a minor thing. It's a difficult thing to do because you have to make money as you do it. And also it's an expert doing that. So clearly we are planning to continue exploring all the alternatives we have to provide a platform that will solve all these issues for our traditional channel. The traditional channel continues to be an important segment for the retail in Mexico. And we expect it to continue to be as such. So clearly us playing a role in helping them is going to be important. I think I would just add, this is Juan, and I know this is a question that has come up on the call center side as well. Just remind everybody that it's still early days in terms of how we build this thing and how roles and responsibilities and capabilities and interactions, a lot is still to be defined. So it's looking very promising, but it's still early days.
spk08: Thank you.
spk12: Thank you. There are no further questions in queue. I will now hand it back to Juan for closing remarks. Thank you.
spk06: Thank you, everyone. Thank you, obviously, for all your kind words, again, regarding Daniel. We will definitely relay them to him. He might very well be listening to the call, so maybe he already heard you. You know, we're always available, as always, myself and the team. Antonio, if you want to also, you're going to sign off. But, you know, have a great end of the week and weekend, guys, and we'll be in touch. No, thank you Juan. Thank you for your time. Thanks for the interest on the company. I will try to be at least on a couple of these kind of conference calls per year, not on all of them. Unless there is an important news that we have to announce, I will gladly come. And also, you should know that through Juan, you can contact us all the time. We will stay in touch. Thank you very much and see you soon.
spk00: Thank you.
spk12: Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Continue to stay safe. You may now disconnect.
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