Fomento Economico Mexicano S.A.B. de C.V.

Good day, ladies and gentlemen, and welcome to FEMSA's second quarter 2025 results conference call. Please note that this event is being recorded. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's prepared remarks. If you would like to ask a question, you might do so by pressing star 1 on your telephone keypad at any time. I will now turn the call over to your host for today, Juan Fonseca, Investor Relations. You may begin, sir.

Thank you. Thank you. Good morning, everyone. Welcome to FEMSA's second quarter 2025 results conference call. Today, we are joined by Juan Carlos Guillermetti, CEO of SPIN, formerly Digital of FEMSA, Martin Arias, our CFO, and Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations team. This is the first time Juan Carlos joins us for a quarterly conference call as part of our ongoing efforts to provide more market access to our leadership team. The plan for today is for Juan Carlos to open the conversation with some background on SPIN, followed by a strategic discussion on where we are today in our digital endeavor, and just as importantly, where he sees SPIN going in the future. After his remarks, Martín will provide some detail on France's quarterly results. Finally, we will open the call for questions. Juan Carlos, please go ahead.

Thank you, Juan. Good morning, everyone. It's a pleasure to be here today discussing and sharing with you some of the exciting progress that SPIN has been making and what we're trying to build. Thank you for your interest and for joining us this morning. Let me begin by providing some brief context into why and how SPIN came to be. Not to make a trip down memory lane, but because so much of what SPIN does today and will do in the future Leverages and enables also and fences digital physical assets more broadly As most of you know also began developing a platform for basic cash payments and services many years ago Selling prepaid long-distance telephone cards and evolving over time by enabling its customers to solve an ever-growing number of needs From utility bill payments to correspondent banking to e-commerce payment functionality broadening the scope of its service offering along with the needs of its customers More recently, as digital platforms in the market launched and evolved, it became increasingly clear that FEMSA had an opportunity, as well as a strategic need, to develop its own digital platform, not only to complement its physical cash-based functionalities, but to evolve OXO's broader value proposition and strengthen its role as the most convenient way to meet everyday needs. Looking into the future, Convenience retail cannot be imagined without a seamless, integrated digital experience. Spin is one of the most important aspects of how we ensure that OXO continues to deliver convenience across both physical and digital ecosystems while accessing new profit pools. Since our foundation in 2021, we have envisioned an omni-channel ecosystem centered on payments and rewards. While we always saw it as an integrated experience, we launched Spin by Auxil, our digital wallet, and Spin Premia, our rewards program, as independent, fast-to-market products focused on gaining early traction. We then saw the need to complement these assets with a B2B platform to expand our reach beyond Auxil, which led to the acquisition of NetBay. We also acquired a minority equity stake and eventually the assets of Conecta, which has served as the enabler for OxoPay, the e-commerce payment platform where consumers can pay for their e-commerce in cash or other means within the safety of the store. Leveraging Oxo's capillarity and reputation as a reliable and trusted service provider and the commitment of our growing team of spinners, we have been able to consolidate a meaningful position in the market. Since inception, we have achieved the following major milestones. SpinBioxo has created more than 14.5 million SpinBioxo accounts, of which more than 9.4 million have been active in the last 56 days. We operate across the territory with strong penetration in nearly all municipalities. Our customer base is young and dynamic, with two-thirds under the age of 45 and more than 50% of our users are women. This is specifically relevant as women have historically been underserved by financial institutions. We continue to see strong adoption, repeat usage, and most importantly, growing trust from our customers. Every month, 3.5 million users trust us to move their money through Spin by Auxil, averaging more than 21 monthly transactions per monthly user, out of which 20% are related to Auxil, either cash in cash out, or card purchases, showing it is a very useful payment method. In SPINpremia, we have over 58 million SPINpremia accounts, of which 26.6 million have had transaction activity in the last 90 days. Currently, more than 20 million OXO customers benefit from the SPINpremia rewards program each month, with an average of more than seven monthly accumulation and redemption transactions per active user. As of the second quarter, Almost 46% of OXO sales were already identified through our loyalty and rewards program. Our ecosystem is complemented by our B2B initiative, which includes NetPay and OXOpay, in which we refer to us in Neosios. It extends our platform beyond OXO stores by offering electronic payment solutions and services to micro, small, and medium-sized merchants, both in their physical establishments and in e-commerce. Today, with Spin Negocios, we reach almost 20,000 merchants and process almost 12 billion pesos on a monthly basis. Spin is defining how consumers and businesses connect by creating faster, simpler, and more convenient ways to meet everyday needs. This gives us a meaningful opportunity to reach the 6 out of 10 Mexicans who remain underserved by traditional financial institutions. We aim to do so not only by expanding access, but by reimagining convenience through a digital lens. Our team is excited and committed to simplify life by removing barriers and creating opportunities for all. As we look ahead, SPIN is here to bring PEMSA's physical relevance into the digital space, and we're excited by the opportunity to leverage and enhance OXO's unique value proposition to an increasingly digitized customer base. What differentiates SPIN is our unique ability to be where people truly are. physically and digitally by combining accessible technology with trusted everyday touch points like Voxel. We have learned that our customers are looking for solutions that are neither purely digital nor purely in-store. By offering digital solutions or in-store digitally enabled solutions, we can maximize the value proposition delivered to our users. Cell phone pop-ups are a great example. The user journey can be digital only, but sometimes when customers run out of data and can no longer perform the top-up transaction from their phone, making an in-store cash top-up can perfectly fit into the ecosystem proposal. Similarly, digitalized customers can transfer money to recipients who only accept cash. These interactions allow someone to make a peer-to-peer payment to a service provider via QR code, which can then be cashed out in the store. Likewise, customers can pay for their online purchases through OXOpay and complete the physical payment, again, in the store. The data generated through the ecosystem will allow us to better understand each customer's context, deliver more personalized services and products, and unlock two major opportunities for FEMSA. First, evolve convenience by enhancing OXO's value proposition through data and personalization. making everyday interactions more relevant and seamless. In the long term, this foundation will enable additional use cases such as retail media, an expanded catalog, last mile delivery, and other e-commerce features like click and collect. And second, the opportunity to build financial services on top of payments and rewards, offering both savings and credit products tailored to our target segment. Related to this topic, we remain active towards upgrading our license and establishing a partnership to significantly improve our risk-reward profile. We can assure you that we will be cautious in testing and potentially rolling out these financial services, and we'll keep you updated as developments unfold. We promise no surprises. Touching briefly on the current economics of the business, Spence Cash Burn has been gradually improving as we continue to gain scale and cement best-in-class customer acquisition cost and cost to serve. From approximately 4 billion pesos a couple years ago to a range today that is closer to 3 billion pesos per year for the core spin businesses. As an example of what we have done to reduce cash burn, we have implemented several initiatives such as renegotiating commercial terms with dealers and connecting directly to SPACE. which together have allowed us to reduce our cost to serve by 48% compared to last year. These actions are part of our broader effort to strengthen SPIN's financial sustainability. Additionally, it's important to note that we follow a conservative approach for cash flow and accounting. A clear example are premium-related expenses. While these costs are primarily reflected in SPIN's P&L, the vast majority of its current benefits of increased sales are captured at the OXO business. Similarly, a significant portion of the benefits that SPIN by AUXA generates to FEMSA are not fully reflected in the SPIN cash burn. For example, SPIN by AUXA is the second largest driver of AUXA's cash inactivity with more than 25% of total transactions. Wrapping up, we would like to leave you with the message that we're uniquely positioned to help Mexico evolve towards financial inclusion. We want Spin to earn the same level of relevance, trust, and customer love in the digital world that Auxil has earned in the physical one with the intention not of replacing but complementing the store to create an omnichannel digital approach. And beyond offering a trusted platform for day-to-day needs, we are committed to driving financial inclusion and means opening new opportunities and supporting our customers through financial education. We have been focused on bringing world-class capabilities and talent to spin, and our leadership and way of work has evolved to one of a consumer tech organization facing fast-paced change and challenges. We're building something ambitious, something that matters, not only for us, but for the next 100 years of PEMSA, and we believe we have everything it takes to get it done. And with that, let me turn it over to Martin to discuss PEMSA's second quarter results. Martin, please go ahead.

Thank you, Juan Carlos. Good morning, everyone. Let me begin by discussing our consolidated results for the second quarter of 2025. During the quarter, we delivered total revenue growth of 6.3%, despite a challenging environment in Mexico, impacting both proximity and , which was offset by solid top-line trends outside Mexico, currency tailwinds, and the consolidation of the OXO-USA operation. Operating income increased by only 0.2% year over year, as the more challenging consumer environment in Mexico did not allow us to absorb the inflationary effects on our costs and expenses as effectively. In addition, our operations were geared to a stronger consumer environment than the one that materialized, plus our costs and expenses ran a bit ahead of actual volume and traffic. While this impacted profitability, we remain confident in our ability to navigate short-term headwinds by maintaining strong operational discipline and leveraging the solid fundamentals of our business. Net consolidated income decreased by 64.3% to 5.6 billion pesos, driven mainly by one, a non-cash foreign exchange loss of 4.1 billion pesos compared to a gain of 6.1 billion pesos last year, a swing of more than 10 billion pesos, related to FEMSA's U.S. dollar denominated cash position, which was negatively impacted by the sequential appreciation of the Mexican peso in the period. And number two, a lower interest income of 2.1 billion pesos compared to 4.1 billion pesos the previous year, reflecting lower interest rates. Turning to our operating results and beginning with the Proximity Americas division. Overall, the division delivered mixed results this quarter, improving sequentially at the top line level, but still reflecting a challenging consumer environment in Mexico that was partially mitigated by a robust performance in our other markets in La Panne. Bank store sales declined modestly by 0.4% once again reflecting a combination of a solid average ticket going 6.6%, offset by lucre traffic, which contracted 6.6% as well. It is worth noting that while same-store sales remained lackluster in Mexico, they grew nicely in Auxilatan, increasing in the high teens even after accounting for foreign currency tailwinds. While these operations are small in relative terms, these are promising results. While we are encouraged by the team's ability to drive average ticket above inflation, leveraging our targeted promotional activities and the positive seasonal effect of larger baskets around Holy Week, the sustained weakness in traffic in Mexico is a clear focal point for our commercial initiatives as we start the second half of the year. As has been the case for several quarters now, the decline in average traffic was mainly attributable to a persistently weak consumer environment in Mexico, combined with atypically adverse weather conditions across the country. This hit some core convenience categories, such as soft drinks, beer, and tobacco, particularly hard. On this point, our data suggests these convenience categories may have lost competitiveness relative to others across channels during the quarter. We believe this effect is not driven by SKU-level pricing. but rather by the mix of presentations, such as multi-serve returnable beverages, smaller snack presentations, and low-cost cigarette alternatives, which are currently available in other channels, such as the traditional trade, but not at OXO. Total revenues for Proximity America grew 6.9%, or 2% on an organic and currency-neutral basis. mainly driven by the continued expansion of our network by 1,500 stores year on year, a strong performance in our last-hand markets, the consolidation of OXO USA, as well as a favorable exchange rate. Gross margins remain stable at 44.1% and expanded by 120 basis points if we exclude the options outside Mexico. Operating income decreased by 2.8%, while operating margins decreased by 90 basis points to 9%. Operating expenses grew faster than revenues. However, it is worth noting that selling expenses, the biggest component of our OPEX, grew in line with our expansion of 6.3%, thus reflecting our continued efforts to offset labor cost increases with greater FTE efficiency in the stores through the use of data analytics and new, more flexible shift policies. On the expansion front, Proximity Americas added 334 net new stores in the quarter, in line with our plan. In the US, we continue to make progress in the conversion of DK stores into OXOs, focusing currently on the Midland Odessa and Lubbock metro areas in West Texas. where we have converted 40 stores as of the end of the second quarter. Later in the year, we will begin the process in El Paso, applying the learnings from the earlier conversions. These involve not just rebranding, but also the addition of several hundred SKUs, including our adaptive coffee value proposition, and early results in terms of incremental sales are promising. We will continue to test food concepts and to tweak the overall value proposition, and we will keep you updated on developments. At Bada, during the quarter, we continued our accelerated store expansion, opening 23 new stores, and we remain on track to achieve a 30% to 40% growth rate in 2025. We continue optimizing our discount value proposition while scaling our private label strategy. Bada same-store sales grew 8.9%, but they grew in the low teens if we exclude the convenience categories, reflecting the current consumer trends and consistent with the dynamic seen at OPSA. In Europe, Ballora delivered solid results as total revenues increased by 31.4% in pesos, or 5.9% on a currency-neutral basis, driven by a strong performance in our retail business in Switzerland partially offset by lower sales in our B2B and B2C food service. We continue to focus on converting stores into the successful AVEC banner, which has proven to offer a compelling value proposition tailored to the evolving needs of consumers in the region. Originally launched in Switzerland, our AVEC format travels well across borders and presents an attractive opportunity for organic growth. Gross profits grew 25.6% in pesos, or 1.2% currency neutral, representing a dilution of 190 basis points compared to last year, due to the slowdown in our higher margin B2C business, as well as the impact of changes to the operating model with our retail operations. Alona reported a 54.4% increase in operating income, 24% on a currency neutral basis, accompanied by a 70 basis point improvement in operating margin. This result reflects continued progress in cost discipline and operational efficiency across the business. Now let me walk you through the performance of our health division. Total revenues increased 15.6% in pesos, with the same store sales growing 13.1%. mostly explained by strong top-line performance in Colombia and Ecuador, supported by favorable FX dynamics. On a currency neutral basis, total revenue grew 6.7%. The growth in revenues occurred despite the continued challenging environment in Mexico, which saw same-store sales decline and the closure of 432 underperforming stores versus the same quarter in 2024. Operating income rose 5.7%, but declined 5.2% on a currency-neutral basis, resulting in an operating margin dilution of 30 basis points to 3.8%. This performance of operating income reflects one-time restructuring charges in Mexico and in Chile. The new management team has been in place for over 100 days and is well advanced in its diagnostic process. and they are taking some decisive actions to improve profitability. In addition to the closure of 432 underperforming stores in Mexico in the last 12 months, the team has executed a significant overhead reduction, which is reflected in the operating expenses. For its part, Columbia Retail continues to show solid momentum driven by robust same-store sales growth, new store openings, and improved mix towards retail versus institutional. while Ecuador delivered a strong set of results as it focused on expense control and revitalizing existing formats. Finally, Chile's sales remained positive, but profits were flat due to overhead restructuring charges, which put pressure on margins. At Oxel Gas, same station sales increased by 4.9%, and total revenues grew by 0.6%, reflecting growth in retail volume offset by a decline in the wholesale business. Growth margin stood at 12.6% and operating margin at 4.7% as we continue to look for further efficiencies in the savings to support profitability in areas like labor and other selling expenses. Now moving to Cover la Frensa. During the quarter, revenues increased 5% in the face of adverse weather conditions and a tougher demand environment. particularly in Mexico and Central America, where volumes declined by nearly 10%, while lower operating leverage put pressure on profitability. Despite these temporary headwinds, Coca-Cola FEMSA remains well-positioned to execute its strategy, leveraging recent investments to increase production and distribution capacity, along with a diverse grant portfolio to meet evolving consumer demands. For a detailed analysis of their results, you can access the webcast of their earnings call held last Wednesday. Before we close, let me give you a brief recap on capital allocation and our outlook for the second half of the year. As part of the FEMSA Forward Plan, we successfully completed the divestiture of the bulk of our remaining logistics business on July 1st. In terms of capital deployment, our top priority remains in investing and growing our core operations, which includes an ongoing multi-year investment plan across all business units to support long-term growth. Regarding shareholder remuneration, we remain on track with our commitment to deploy 66 billion pesos, approximately $3.2 billion, between March 2025 and March 2026 through a combination of ordinary and extraordinary dividends as well as share repurchases. As of the end of July 2025, we have executed approximately $374 million in share buybacks, including repurchases in the local market and a $250 million accelerated share repurchase program, or ASR, which concluded last week. Additionally, we have paid out of the four installments of ordinary, we have paid out out of the four installments of ordinary and extraordinary dividends for the year, totaling nearly $1.2 billion. As of the second quarter, we reached a leverage ratio of 0.93 times, excluding Córdova La FEMSA, and have deployed $1.6 billion in extraordinary returns, representing half of the $3.2 billion commitment announced earlier this year. As we look ahead, we remain confident in the strength and resilience of our diversified portfolio, and we are maintaining our expectations for stable full-year operating margins at Proximity Americas. Last Wednesday, Coca-Cola Pensa shared a similar message, maintaining their long-term perspectives on change, so we are directionally in sync. As we look at the next couple of quarters, we remain cautiously optimistic for the second half of the year, acknowledging potential volatility amid the soft macroeconomic environment. Beyond that, we believe our continued focus on operational disciplines, strategic investments, and rigorous capital allocation position us well to navigate the involving consumer environment and deliver sustainable growth ahead. Finally, regarding our management succession, and as Jose Antonio mentioned during the February call, FEMS's Board of Directors appointed a special committee for this purpose. The committee is currently working on this process and we expect to have more news for you later in the year. And with that, we are ready to open the call for questions.

Thank you. Ladies and gentlemen, we will start now the Q&A session. So if you would like to ask a question, please press star 1 now on your telephone keypad. And to redraw your question, please press star 2. The first question comes from the line of Ben Thorough calling from Barclays. Please go ahead.

Yeah, good morning and thank you very much for taking my question. I wanted to take the opportunity to dig a little bit more into some of the comments you made in the opening and talking a little bit about SPIN and the opportunities here and particularly how you think to bring this back into proximity Americas and to hopefully trying to see some sort of a recovery. As you've seen the business evolving over the last couple of years from the early stages to now, and obviously you're showing progress here on still acquiring new customers with them actually using as well the platform. What would you say are the missing pieces in order to really make the most out of spin and spin premia as it relates to really boosting again, maybe some of that traffic or some of that recovery of the proximity stores, particularly in Mexico? That would be my question.

Thank you for the question. I'd like to first highlight that in terms of where we see the future from an Oxo perspective. We're already well underway in leveraging the data that comes from our PREMIA rewards program to accelerate our retail media efforts. And the early results are quite promising as we have more data on our customers and we continue to penetrate further our base. Our expectation is that how we can personalize and customize our offers is going to continue to improve, allowing us to drive higher commercial income. On the spin side of things, we're very early in our monetization journey as we're currently only starting to explore financial services, including savings and credit products. We launched our first personal loans earlier in the year. and are very excited about the prospects of how this can evolve in the future, but recognize that we're going to be doing so in a very careful manner and taking time to progress our financial services value proposition. Lastly, I would highlight that we have interest in moving all of our spin products beyond OXO, beyond proximity and health, to have a much wider value proposition, and we're also quite early in that journey that will start primarily focused on payments and rewards and evolve into financial services as well.

I think I would also add, Ben, this is Juan. I mean, if you just look at the tender, you know, this figure that we've been reporting of what percentage of OXO sales are going through the program, through the PREMIA program, And that's a number that goes up by one or two percentage points per month, right? I mean, we were discussing among ourselves, we gave you a figure today of, I think, 45.8, almost 46. But the reality is that June was already at 47, right? And so I'm sure three months from now, we're going to be talking somewhere in the 50s. I think we're still very much in the early stages of people embracing this and to having it impact their their habits, right, in terms of going to OXO more frequently and choosing OXO versus other alternatives because it gives you those rewards and then how this feeds through the engagement on whether you're using your physical card or your app and then kind of the broader purpose of SPIN as an ecosystem. But I still think, I mean, the growth rates, this thing has only been around for a couple of years, right, a little bit more than a couple of years. The slope of that curve is really remarkable. So I do think there's a lot more to come in terms of just people, again, internalizing that if you do this transaction at OXXO versus elsewhere, it gives you these benefits that you didn't have not that long ago.

Can I just quickly follow up on that? With that tender going up, are you seeing better traffic data with the ones that are signed up for SPIN slash SPIN PREMIA than traffic data with the customers that aren't signed up? So is there something that potentially can help you recovering the traffic as we move into the coming quarters and then into 2026?

In fact, we do because that 47% of sales is tends to favor heavy users. In other words, the percentage of users that represent that 47% is a lower percentage. And so what that indicates to you is it drives loyalty and engagement with people. So people are obviously choosing to go more to the store more frequently to buy more things driven by points. And the value proposition of that program still going to experience significant improvement in terms of customization, in terms of the types of promotions you offer. As we refine the data, we improve the data, we learn more how to use the data without obviously overwhelming the consumer.

I think there's also kind of a double click you can do on the tender number because the number we give you is a percentage of sales, but we're increasingly tracking and incentivizing the number of transactions, which would connect with traffic more directly. And then of course, there's a second click, or a third click in this case, that has to do with services transactions, right? Because those give you a lot of information that it's very different what you can glean from a transaction of somebody buying a Coke, as opposed to somebody paying their bills. And so there's still a lot of room to keep improving that data acquisition and processing and then implementation within the SPIN ecosystem.

Perfect, thank you very much. I'll pass it on.

The next question comes from the line of Alvaro Garcia calling from BTG. Please go ahead.

Hi, thanks for the space for questions. My question is for Juan Carlos, given he's on the line, much as I'd love to ask about OXO. On culture, sort of other FEMSA subsidiaries very much focused on profitability. You've had the benefit of sort of being isolated from that mentality for some time now at FEMSA Digital. How do you feel about FEMSA Digital fitting within OXO to really leverage that physical footprint? And this is obviously in the context of potentially leaning into It's the second question within digital, which is how you feel about not burning cash necessarily, but being a lot more aggressive when it comes to leaning into specific revenue streams like net pay, like credit, like merchant acquiring, et cetera. Thank you.

Thanks for the question.

Generally, we're excited. I think the environment inside of FEMSA is one where we have the independence and the autonomy to drive a differentiated culture within Spin than the rest of FEMSA. It's a culture that is much more consumer tech focused where we have a strong emphasis in agility and rapid iteration testing based on customer needs and demand. And hence, we've been able to develop our own culture within Spin. Now, I recognize that our right to play starts from the assets that we have within Tempstar, more specifically with the capillarity that we have with OXO and the significant footprint and customer presence across the OXO platforms, which requires tremendous amount of collaboration between our teams that although it is a challenge given the differences around culture, the reality is that we have strong alignment both at the board as well as at the management level, that we need to evolve our thinking towards digital, and hence this is a strategic imperative for the company, and there's tremendous amount of focus from the OXO team in working together with SPIN as we evolve our value prop. On your question related to cash burn and our ability to be more aggressive on the growth side, and not necessarily as focused on profitability, you're absolutely right. Within Spin, we recognize that for us to be a relevant digital platform, we have to have the scale, the massive penetration within Mexico, and the frequency of use. And that requires us investing in the business to be able to drive that stickiness that ultimately will enable us to drive two big opportunities, as we mentioned earlier in our remarks. The first one being evolving OXO's convenience value proposition into digital with a much more physical value prop that leverages both their existing physical footprint but our spin digital ecosystem. And then two, driving financial services both for savings and credit where we see a significant monetization opportunity and we're very early in that journey of deploying credit.

I would compliment on just two small points. One is the issue of alignment between the two organizations. We hope to, by the end of this year so that it applies next year, we come up with a system of joint P&Ls and joint KPIs where key executives that need to cooperate in OXO and in SPIN will be receiving their bonuses, a significant portion of their bonuses tied to the same exact objective. So we hope that will align interests and will align efforts a lot more. And number two, and out of fairness to spin, we are quite conservative in how we measure the cash burn of spin. As Juan Carlos mentioned, if you think about premia, the percentage increase in sales that you would have to believe to make premia, just premia, a break-even business is very low, very, very low single digits. In other words, if you just take the incremental sales multiplied times the gross margin, thinking that having 47% of your sales tied to premia has to be driving incremental sales, then Premia, there is no doubt that Premia today is profitable. The problem is we wanted to avoid measurements such as that because they can then justify any number of things with regards to just spending more and more and more. And so we purposely, for purposes of the P&L and cash per spin, we said, no, no, no, I just want to know the cost that you're spending and the points that you sell to OXO. Incremental sales doesn't get included into your P&L, but we well know that this is driving a significant amount of incremental sales.

Thank you. Thanks, Adam.

The next question comes from the line of Thiago Portolucci calling from Goldman Sachs. Please go ahead.

Yes, hi. Good morning, everyone. Thank you very much for taking our questions. I would like to explore more the semester sales dynamics at OXO Mexico right now. It's been roughly the fourth quarter in a row that we are discussing traffic and what is happening there, what are the pressures, and when will it reflect. Obviously, there are a lot of moving parts, weather, macro that comes from the elections. But one thing that caught our attention this quarter was in the beginning of the presentation in Martin's prepared remarks, He said, you know, some loss of competitiveness versus other channels and other points of sales, number one. And on the opening remarks on the press release, I see a focus from management to work on assortment.

It's not like we've been increasing the prices on an SKU-like to SKU-like basis. But again, I think the best example is, for example, beer. if before you were buying one-way glass presentations or you were buying cans and now because you have a little bit less money in your pocket because of the economy and when you have some friends over, you're going to buy the one liter returnable beer package and share it with a group of friends. If Oxford doesn't have that packaging presentation, then in effect it's at a competitive disadvantage. But that second part we believe is generally addressable. and we're working on that both in beverages as well as snacking with smaller presentations as well as lower-priced tobacco products. But, you know, an example is we're seeing it with VADA as well. If you sparse up VADA and you strip out convenience categories and you just leave the categories that go head-to-head with other similar discount channels, you can clearly see that we're doing fine on the non-convenience categories, but in the convenience categories, the consumer is simply being more conservative and more cautious. In addition to the weather issues, anybody who's in Mexico City knows that the last quarter was particularly cold for the time of the year, and in other parts of Mexico, more rain. But we have to react to that, and there's a laundry list of very, very, very long initiatives that's been triggered by the OXO team around beer, soft drinks, packaging formats, our coffee value proposition, more promotional activity with our supplier partners that we hope that during the second half of the year will help improve this issue with the traffic.

That makes sense. Thank you very much, Martin. If I may follow up, now it's more on health and also Grupo NOS in Brazil. I know in health you've been very vocal on rationalizing the portfolio and you've been closing stores over the last few quarters. And this quarter we also saw some net closures in Brazil, right? Where would you say FEMSA is in terms of optimizing the portfolio and how should we think about net unit growth across these two divisions going forward? Thank you very much.

Let me take a first crack at this and then our team can complement. I think the two are in very, very, very different situations, right? And on the one hand, in health, you're talking about Mexico specifically, which is going through a pretty major surgery. And there's different things that are being analyzed by the team in terms of how to move forward. Clearly the national strategy and entering into some parts of the country where the brand was not well known and trying to compete head to head with some of the incumbents has not turned out to be the right strategy. And so the 400 plus closures in Mexico and restructurings, that we're going to talk a lot more going forward about how... And there are some really cool ideas, I think, internally that we're thinking about how we could disrupt this industry or do things differently. But that's one thing. Brazil, you know, we closed a few stores of the earlier cohorts. We continue to kind of learn about what works and what doesn't in Brazil. You know, The growth in Brazil should be at about 20% for the foreseeable future. We are super bullish about Brazil, and so I just want to be clear that the fact that we closed a lot of stores in Mexico Health, a few stores in Grupo Nos have nothing to do with each other in terms of the causality of what's going on there.

You know what? And I'd like to go back to your first question. I specifically asked the Oxo team before this call to run an analysis for stores that were near hard discount channels and to give me a sensitivity whether there was a decline in sales, same-store sales in those stores. And the difference is really very small, very, very small. I would characterize it as 1%. When you look at the categories, I also ask them to help me map all the categories of a hard discount, which is the subject of a lot of comments that we get. If you ask somebody to map out the categories that are in a hard discount store versus in an OXO, the overlap is probably in the 20% range. In other words, the consumer occasion of going to buy coffee, going to pay financial services, of buying Coca-Cola product or buying Heineken or Moella product as you walk down the street, of buying a quick snack because you're hungry or accessing to buy some bread for a quick snack. Those occasions are significantly different than the one that's being offered in the hard discount models. We think it competes head-to-head in BARA without a doubt. But with regards to OXO, we do believe that the format will continue to exist, coexist with relatively contained overlap. I wanted to address that because that's the subject of a lot of questions, particularly one gets and commentary that we see in the analysis that's published.

That's helpful. Martin, Juan, thank you very much, guys.

Thank you.

The next question comes from the line of Rodrigo Alcantara, calling from UBS. Please go ahead.

Hi, thanks.

Good morning, and thanks for checking my question, Martin, Juan. I want to take the discussion on Proximity Americas, yes, but on the OPEC side, right? On one hand, you know, selling expenses was really, really impressive, the achievements that we saw, right, on you guys decelerating the pace of OPEX growth. I mean, you mentioned there about initiatives to have a more efficient labor usage, right? So my question on the OPEX side related to labor is, is it fair to assume this runway that we saw this quarter to project this going forward, which again was quite impressive, the efficiencies that you achieved on the labor front. And how would you say in relation to the 40-hour working week, how compliant would you say you are currently right now to comply with that new regulation as a result of these changes that you have implemented. And my question on the other question for the OPEC side would be on the GNA, the administrative expenses. where we continue to see, you know, this line growing considerably. You give some explanation in the press release, right, but just curious on, I mean, really what's driving here? I mean, are you hiring more people, or what is driving the GNA, and when can we expect some sort of leverage or restabilization in this line? That would be my question. Thank you very much.

Sure. Couple of quick things. Let me start with your compliance question. Look, we're always trying to get a little bit ahead of the curve, because as you know, OXO is a very big ship, and so it's not a ship that moves on a dime, and it's not moved from one quarter to another, and changes require changes in the operations, systems, culture, and so on. So today we are not compliant with the 40 hours because it's not the law. But we have been running experiments in certain plazas, certain areas, at 45 hours and at 40 hours to see how we would change our operations. And those plans are producing very valuable insights of how you want to use dynamic shifts So in other words, not everybody in a store has to be at the store the same amount of time. So you can start the day with less people if it's a slow breakfast store and then bring in more people during lunch when you have a lot of activity if it's a store in a downtown business district. And then in the evenings also you can move down. You can move people so that they work a total of 40 hours or 45 hours or 43 hours wherever the labor reform ends up. but you can ask them to work a little bit more certain days and a little bit less other days, or give them more days off so that you use them. There are a lot of learnings that are being developed as we speak, so when the law is passed and we have greater clarity, we will be in a position to rule out that as quickly as possible. With regards to the issue of administrative expenses, this is a focus of the OXO management team. We hope over the next couple of quarters to give you a little bit more insight on that. I think they are very sensitive to one, they need to prioritize their transformational initiatives. The growth in that has been driven in many cases has been driven by the issue of thinking about transformational initiatives The instruction that has come from FEMS is we need to prioritize in times like this. We need to focus and have this very clear and we can postpone some of them for some period of time. Number three, that number's a little bit impacted also remember by the OXO USA incorporation into the consolidation of Proximity Americas. So the number's a little dirty relative to that and there we're having to build out an overhead because remember this was a carve-out of a business, so you'll probably be seeing a little bit of that impact and a little bit of that effect. But we would expect to see that improve during the second half and certainly during the beginning of next year. Again, understanding this is a big organization and we need to be thoughtful on changes that we make. And then finally, as to the trend on labor expenses, Again, the government will continue to likely increase minimum wage. I think the number that they're targeting is 12%. So we're going to continue to battle with that percentage. Again, it's very hard for me to predict to you where is the physical limits of the savings that we can drive through this issue of use of technology and more variable shift policies. I can assure you we will leave no rock unturned, but to give you, I'm not in a position right now to give you a guidance as to how much more we can extract from that. I do think that there is more that we can extract, but it's hard to tell you where the limit is.

No, yeah, for sure, absolutely. Thank you, Martin, for the answers.

The next question comes from the line of Ricardo Albes calling from Morgan Stanley. Please go ahead.

Hi, everyone. Thanks so much for the call and for the opportunity to ask your questions. First question on net income. considering you know your operations were relatively in line with uh what we expected at least uh but uh as it pertains to the the bottom line we saw a big miss relative to what we expected we saw higher taxes and uh significantly lower equity income i believe from 90 million pesos in the first quarter to to almost 800 million in the second quarter probably i would assume that most of that could be related to oxo brazil so Can you just share more details on what's driving this volatility below the line, just so that we have a better basis to model the second half of the year as it relates mainly to equity income, the equity income line, and then also taxes? Because effective taxes were also higher than expected. So that's my first question on EPS. The second question is actually a follow-up on OXO Mexico. We share the view that the second half could be better in terms of traffic and themes to our sales, but we are lacking evidence of that yet. And I think that some of the discussions that we had with you guys, with senior management, as it relates to all the initiatives that you are taking to improve traffic, I think that that discussion is very timely, it's very important, it's very helpful. But it's not very clear to us where... what do you think is going to move the needle most into the second half? Can you go into the qualitative examples of the biggest initiatives that you're taking? Is it the new proposition with the tobacco companies? Is it the soft drinks initiatives that you're taking? Retail media? What do you think is going to really move the needle for us to see a second half that is better, for us to see a rebound? So also that we can have you know, better visibility into the key drivers to see the light at the end of the tunnel, if you will. I don't know, maybe July was better, maybe that could be an evidence. Those are my questions, thank you so much.

Let me start with a below the line question. The single most important reason for the decline in net income is one thing, is that 10 billion pesos swing caused by foreign exchange losses on our US dollar excess cash balances. And that just happened to be, it was a very good year last quarter, the second quarter of 2024. And here it was worse because the peso declined. And in that way, it's a little, not tricky, particularly difficult to understand, but the balance sheet items are impacted quarter on quarter with FX moves quarter on quarter while P&L are moving really with year to year FX movements. And so, if you back that 10 billion out, that explains most of it. So, without a doubt, If you believe that the exchange rate is going to remain stable, that number should be 10 towards zero. If you believe that the peso will devalue, you will see again periods where we have very good profits. I would tell you below the line, that is the thing that's moving. The second thing is the issue of taxes. I'm sure somebody will ask about this. We explain it in quite a bit of detail in the press release. The taxes in a period where our pre-tax income has been impacted by this loss, it tends to magnify two things in a relative marginal tax rate perspective, which is one, the non-deductible expenses part of labor. As you know, in Mexico, you cannot deduct 100% of labor expenses because a portion of labor expense doesn't pay income tax. So the government is taking the position, well, if employees are not paying income tax on this part of their compensation, they only allow you to deduct, and I'm going to say approximately 50% of that portion of your labor expense, which the employee doesn't pay. As our operations have continued to grow and the labor expense has grown, such has so has the non-deductible amount, and that is unlikely to change. There is a second part, which is the SPIN losses. The SPIN losses, because of where they're located within our corporate structure at this point, we cannot deduct them, and we are not accruing or adding to our tax assets from the future application of those losses to profits from the SPIN business simply as a conservative prudent accounting matter, we no longer do that. Remember that in Mexico, accumulated losses only last 10 years, so they don't last into infinity. And so therefore, at some point, you have to make a judgment of whether you will be using those losses within the remaining life of those losses before they expire. That second item is really non-cash if you think about it, removing the losses from spend. You just don't have a tax shield on it and so it increases your relative tax rate. But the tax rate on the remaining businesses which generate the profits of the business don't have that 40% marginal tax rate that you saw. It's a tax rate much more than the 35%. Also reminding you that we have operations that pay higher taxes than the Mexico tax rate. The number you're seeing is consolidated. Brazil has a higher marginal tax rate than Mexico. And there are some other countries in South America where the tax rate is above 30%. That is as to this issue of what's happening below the line.

If you can remind me your second question. More evidence to be optimistic about the second half, to talk a little bit about July. I would like to talk a little bit about July. Martin always gives me a little bit of a hard time because I look for the green shoots. I mean, if the month of July ended today, same-store sales are positive in the low single digits, for whatever that's worth. Certainly, I think on the other part of that question, in terms of some of the stuff that's being done, you know, that rotation in and out of larger presentations, returnables, kind of changes to the price package, those have happened over time several times, right? I mean, in my tenure, I've seen it happen probably, you know, two, three times where the consumer begins to ask for those multi-serve presentations in both beer and soft drinks where returnable mix goes up and then eventually things get better and people don't want to deal with the hassle of returnables and then you go back to the single serves one ways. I think we're kind of in the middle of that and we're in this process where more of the SKUs at OXO are going to resemble some of those SKUs at the mom-and-pop where you can kind of do the sharing that Martin was talking about and the multi-service and the returnables. But, you know, there are also these two big external factors, right? The weather and, you know, again, if you look at Koch-Frems' numbers and other people that have reported They all seem to converge on how beverages and convenience categories suffered during the quarter. And then just the overall health of the Mexican consumer and whether construction activity picks up a little bit in the second half, which is something we all hope and expect will happen. And it has a lot to do with permitting and kind of government policy. So, I mean, I don't know, Martin, if you have more on that.

Yep. Again, some of these things are outside of control, the economy and weather. And I would suspect you guys have a view on this, particularly on the economy. I assume not on the weather. And implementing many of these commercial activities, you don't just flip a switch when you want to introduce returnable packaging into the OXO system. You have to develop the systems for recollecting the bottles and cases and DMRO account for them. As a boss of mine used to say, the most expensive packaging in the world is a returnable package that doesn't return. So that has to be accounted for, and we need to adjust. And then we need to negotiate with our suppliers. And as you can imagine, some suppliers want to save certain packaging presentations for certain channels, and then that's where it's important that Oxo uses its commercial muscle to demand sort of equal treatment in terms of packaging. And until now, positive. There are also some commercial negotiations with some very, very, very important suppliers that are being finished as we speak, which should give us an uplift. I prefer not to identify them, but there are some important categories where we've made some very important negotiations in terms of promotions, commercial income, the margin as a retailer. We're going to be able to keep on them. that should flow through towards the second half that you don't see today in the first half. Also, we have been planning for the labor reform to occur this year. We're pretty confident it's not going to happen this year. I think the government has been very sensitive to the fact that in the current economic environment, reducing work hours is likely to be somewhat recessionary. And so I think that's going to give us some breathing room with regards to things that we had otherwise planned for this year.

Martin, Juan, thank you. Thanks again. Thanks, Ricardo.

Next question comes from the line of Bob Ford, calling from Bank of America. Please go ahead.

Hey, thank you. Good morning, Juan, Juan Carlos, Martin. Thanks for taking my question. Juan Carlos, how do you think about the sustainability of SPIN's consumer fee-based revenue and And how do you see that evolving over time, if at all? And can you talk a little bit about your deal with Mercado Pago? How should we think about the fee income and traffic generation with Mercado Pago versus other correspondent banking agreements? And is the deal limited to cash in and out, or does it encompass pickup returns or other services? Thank you.

Thank you. I'll start with the second part of your question, which is the deal with Mercado Pago. There, I would highlight that we're committed to continuing to open our infrastructure to all players in Mexico. We see an opportunity to continue to grow our ecosystem, and hence, we do the deal with McAlepalo, similar to many of the other fintechs that are now part of our network, as an enabler of consumer choice and ensuring that we have a robust offering as customers access the store. It's primarily related to both cash in and cash out. There are currently some pilots around PUDO pick up and drop off that we are doing with MercadoLibre where we are excited about the prospects of how that can evolve into a digital solution over time, enabling our customers to be able to purchase on MercadoLibre and pick up and drop off depending on their needs directly in the store. Those are still very early stage. However, we do think that that's going to be something that could be relevant down the line, especially as we continue to evolve our own digital ecosystem. As it relates to your first question on fees and how we see an increased electronification of cash, the reality is that that is an ongoing trend. Having said that, our correspondent banking fees continue to be quite strong. And hence, through SPIN, we see an opportunity to parlay our position in physical cash into the digital ecosystem. And there, monetization is going to come from the opportunities that we see in financial services, primarily around credit, which were early in our build-up.

Very helpful. Thank you so much.

Yeah, the only thing I would add, one of the things that has surprised me and proves the power of the platform of OXO is every time a new fintech player gains access to OXO, they put out press releases sort of almost describing it as new strategic partnerships that we're developing. And the reality, they're being managed like all the other people who access our payment platform. There's nothing... special or unique about what Mercado Libre is doing within our OXO stores as compared to what any other traditional financial institution or other e-commerce businesses. So for us, it's sort of business as usual to bring in and to give access to more players that gives more optionality to our customers.

You guys are special and unique, and I think that's why they're excited about the distribution. But thank you.

You can say that. I won't. But thank you.

The next question comes from the line of Antonio Hernandez calling from Actinville. Please go ahead.

Very good morning. Thanks for taking my question. Well, two quick ones, actually. The third one, do you get to see an improvement or what? Actually, from a weather perspective, you mentioned this and it was, as you commented, it was already quite expected. But if you could exclude the weather impact on traffic and sensors, how is it according to the performance? And then I have a comment for those. Thanks.

Traffic X weather is the question.