Fomento Económico Mexicano S.A.B. de C.V. Q1 2023 Earnings Call

Speaker 1: Good day and welcome to FEMSA's first quarter 2023 results conference call. This call is being recorded.

Speaker 1: I would now like to hand the call over to Juan Fonseca, Head of Investor Relations. Please go ahead, sir.

Speaker 2: Good morning, everyone, and welcome to the first quarter of the 2020 results conference call.

Speaker 2: Today we're joined by Paco Camacho, our Chief Corporate Officer, and Eugenio Garza, our CFO .

Speaker 2: As always we also have Jorge Collado on the line who leads Koch's investor relations team.

Speaker 2: Today the plan is to have Paco share some higher level strategic considerations, followed by an overview of performance trends during the quarter, and then Eugenio will provide more granular comments on the quarter results.

Speaker 2: After the remarks, I will address some changes we have introduced to our disclosure that we hope you will find helpful with some closing remarks by faculty and then we will open the call to Q&A.

Speaker 2: Paco, please go ahead. Thank you Juan, and good morning to everyone on the line. Before we get into the quarter, let me update you on our FEMSA forward vision. Our commitment to achieve a focused platform built on retail, Coca-Cola FEMSA, and our digital ecosystem.

Speaker 2: and the progress we have made in the couple of months since we last spoke.

Speaker 2: As you know, we already reduced our investment in Heineken Group from approximately 14% to 8%. Shufen has talked about concepts and how he throwing a butterfly will help me Add a third book or rather, also help gradient sea last. Do you agree, Shufen? Yeah. If I can draw drift AD. We will extendYeah. He will get you for Cardinals THIS And MAY And Cause Field raises

Speaker 2: Assuming related exchangeable bonds are converted into

Speaker 2: Following these transactions, we carried out a tender offer for some of our outstanding bonds, significantly reducing our financial debt and bringing us slightly below our leverage targets of two times net debt to EDITA XCOV.

Speaker 2: That now expands at 1.8 times.

Speaker 2: Beyond this successful development, we are progressing on the various tracks that will ultimately take us to the target structure in a value conscious fashion.

Speaker 2: We will keep you updated as we move along.

Speaker 2: As you remember, a big part of TENSA Forward is about driving growth in our core verticals.

Speaker 2: And there was a lot of that in our first quarter results.

Speaker 2: that our proximity division has achieved double digit topline growth and the fifth in a row for Coca-Cola Fences. While inflation was a factor, we are still proud of the way our teams find a way time and again to deliver dynamic growth even as our scale continues to expand.

Speaker 2: What this also means is that OTSO and Coca-Cola FENSA achieved double-digit growth this quarter on top of double-digit growth in the comparable period of last year.

Speaker 2: Double-clicking on the Ochsar results, it is particularly encouraging to see that safe-store sales grew by more than 18%.

Speaker 2: Accelerating sequentially in both ticket and traffic.

Speaker 2: This is in contrast to softening Greek-led trends in Mexico.

Speaker 2: To put this in perspective, we went back and looked at 20 years of top line and same store same data for OXO.

Speaker 2: And these squared quarters growth rates are the highest for that period.

Speaker 2: Continuing with the positive news, we also have a good start.

Speaker 2: to the year regarding new store growth not only in Mexico but across markets. With a stellar performance in Brazil where our joint venture Group on OAuth opened almost 100 new office stores during the quarter.

Speaker 2: Our health division continues the stable trend we saw at the end of last year, where the difficult comparison based in Chile along with currency headwinds offset gains in the rest of our market.

Speaker 2: However, we managed to deliver record margins for the first quarter at the gross and evident level.

Speaker 2: For each part...

Speaker 2: Our fuel business continues to see positive consumer dynamics and solid growth throughout its income statement.

Speaker 2: Regarding digital, the number of active users for SPIN more than tripled year over year to reach 4.2 million, while active users for our Cranial Logentry Program more than doubled to reach 12.7 million.

Speaker 2: 20% of folks of sales are now associated with the program. On the B2B front, we closed acquisition of NetPay earlier this month.

Speaker 2: So, we continue to move the studies forward with our efforts.

Speaker 2: Just as importantly, we continue to work on the seamless integration of the three verticals into our physical networks. Moreover, we are also fine-tuning the use cases, value propositions, unit economics, and monetization strategies for each of these products.

Speaker 2: as we aim to ensure sustainable body creation for the ecosystem.

Speaker 2: In fact, just last week we launched the national transition of Foxoprenia into our coalition loyalty program, Ceam texture.

Speaker 2: This first partnership to be operational is with Oxo.

Speaker 2: with OSCQAS and it's off to a great start.

Speaker 2: The coalition platform represents an encouraging step towards the consolidation of our digital ecosystem.

Speaker 2: and we will keep you posted on your partnerships and developments.

Speaker 2: In terms of financial implications, it is still a bit early to incorporate a full P&L for the digital business into our discussion.

Speaker 2: But we can share that during the quarter, we deployed close to 900 million pesos in growing this business. And we are expecting quarterly figures in that range for the next several quarters. Finally, let me talk a little bit about our logistics and distribution. As we have discussed before, the rapid growth of EnV solutions over the last couple of years has been spread across the same content chain.

Speaker 2: material increase its relevance as part of the FENSA asset base, requiring interns to increase disability in their discussion.

Speaker 2: Therefore, we are now reporting in-book solutions on a standalone basis, and we are no longer breaking out the results of Latin America logistics operations from our consolidated results.

Speaker 2: As you know, we are exploring strategic alternatives for Envoy solutions.

Speaker 2: But as long as we consolidate the results, we will continue to disclose them separately.

Speaker 2: Before I turn it over to Eugenio, I want to talk a little bit about our ongoing efforts to refresh and resize our board of directors.

Speaker 2: During a recent annual general meeting,

Speaker 2: Our shareholders approved the nomination of 15 board members, a further reduction of two members from that year and six fewer than in 2018.

Speaker 2: Beyond which I see, two of our directors are new to our board, and they bring significant expertise in retail and digital.

Speaker 2: Government is a key area of focus for SAMHSA and we will keep the post to the training new development.

Speaker 2: Finally, I want to thank and recognize our teams across business units for performing at such a high level during the first quarter.

Speaker 2: As we said during our recent conversation around FEMSA Forward, the outlook of our company has never been as compelling and promising as it is today.

Speaker 2: And our Q1 performance is a solid first step along that path.

Speaker 2: And with that, let me turn it over to Kenya.

Speaker 2: And with that, let me turn it over to Cremio. Thank you, Paco, and good morning to everyone on the line.

Speaker 1: Beginning with PEMSA's consolidated quarterly numbers, total revenues during the first quarter increased 22%, while income from operations increased 5.5% compared to the first quarter of 2022. On an organic basis, total revenues increased 12.4% and income from operations increased 3.3%. Net consolidated income was 50.329 million pesos driven by a 40.6 million gain in the accounting remeasurement from historical cost to fair value, offensive investment in Heineken, as well as the partial divested...

Speaker 1: with SAMHSA Forward. Moving on to discuss our operations, beginning with Proximity America.

Speaker 1: We added 157 new units during the first quarter to reach 1,115 new stores for the last 12 months.

Speaker 1: This includes 120 stores from our OK Market acquisition in Chile that we began consolidating during the second quarter of last year.

Speaker 1: These numbers include also Mexico, but also our also lifetime operations comprised of Colombia, Chile, and Peru that are gradually increasing their contribution to the growth of porcelainly America.

Speaker 1: Oxo's same store sales were up 18.3% for the first quarter, which as Paco mentioned, is the highest rate of growth we have ever seen in the last 20 years.

Speaker 1: This was driven by an increase of 11.9% in average customer tickets and a very strong 5.7% growth in traffic.

Speaker 1: This underscores the solid performance we saw across OCSO's categories throughout the quarter, but especially by the strong showing of the gathering occasion.

Speaker 1: Gross margin was 40.3%, continuing a recent trend where our fast-growing loyalty program and the lower contribution from our financial service was more than offset by healthy commercial income dynamics. If you think cosui can cause you to proceed, Lopez hasLD screen Electronic World- affecting

Speaker 1: We remain comfortable that the manned elasticity driven by our loyalty program is more than upsetting the gross margin contraction.

Speaker 1: Income from operations increased 19.7% while operating margin decreased 20 basis points compared to the same period of 2022 to reach 7.3%, reflecting an increase in performance-based compensation schemes for obsessed in-store personnel and by an increase in labor expenses staining from labor reforms in Mexico. At proximity Europe , revenues came in slightly above 10 billion pesos.

Speaker 1: our drugstore count by 80 net additions to reach a total of 4,186 units across our territories at the end of March and 453 total net new stores for the last 12 months.

Speaker 1: Revenues decreased slightly, while same store sales decreased an average of 5.5%.

Speaker 1: However, as was the case last quarter, it is important to note that on a currently neutral basis, revenues grew 14% and same-store sales increased 5.8% during by good performance at most of our operations, partially offset by a demanding comparison based in our operations in Chile and Mexico.

Speaker 1: Gross margin increased 160 basis points in the quarter, mostly reflecting positive margin dynamics across our operations, especially in Mexico. Operating margins increased 30 basis points, representing an increase in labor expenses in most of our markets.

Speaker 1: At Opsovat, revenues maintained a recent upward trend and increased 20.6%, and same station sales grew 17.4%, as vehicle mobility continued to improve relative to the first quarter of 2022. Retail volumes were again supported by robust pickup in corporate and wholesale activities.

Speaker 1: During the quarter, gross margin was 4.4%, while operating margin was 4%, reflecting tight expense controls and improved operating leverage.

Speaker 1: Moving on, Coca-Cola themselves also delivered a strong set of results to start the year. Total volume grew 6.6%, driven by growth across all of its territories. Total revenues increased 12% and operating income grew 12.9%, as operating margin expanded by 10 basis points to reach 13.5%.

Speaker 1: you can listen to the replay of their conference call that's available online. Finally, at Envoy Solutions, total revenues increased 23.7% relative to the first quarter of 2022, reflecting effective cross-selling initiatives across the company, as well as some of the acquisitions that we did last year, while operating margin contracted 140 basis points.

Speaker 1: impacted by higher transportation, labor costs, and other integration operations.

Speaker 1: Now let me turn it over to Juan who will briefly go over some of the changes we made to the press release that we hope you will find helpful. Juan?

Speaker 2: Thank you, Eugenio. The first relevant change you will see on our press release is the Net Debt to Iberda X Coca-Cola FEMSA table on page 3 where we calculate and show the leverage ratio as we established when we discussed FEMSA Forward a couple of months ago.

Speaker 1: There was some confusion in trying to replicate it, so here we give you the numbers. And there is a table in the back on page 16 that goes into the adjustments in more detail.

Speaker 2: Next, the proximity America section is presented in two parts.

Speaker 2: First, we present information for OCSO that includes Mexico as well as the three countries that we refer to as LADAM, which is Colombia, Chile, and Peru.

Speaker 1: All the information on page 4 refers to these operations and is presented in Mexican pesos.

Speaker 2: Then, on page 5, we show a paragraph on Bata and another on the Group of North Joint Venture in Brazil. In time, the plan is to provide income statement tables and more information for these businesses as they continue to grow.

Speaker 1: for other developing formats like Toronto, OXO Smart and our coffee drive-throughs. The next important change comes on page 9 where we are introducing a table that shows growth rates for revenues, units and same-store sales for our retail operations, breaking up the countries for OXO and for health in currency-neutral terms that better reflect their on-the-ground performance.

Speaker 1: We believe this table will come in very handy as these operations accelerate their pace of growth and begin to move the needle.

Speaker 1: Finally, you will see that we are now presenting Envoy Solutions on its own, as Eugenio just mentioned, no longer as part of logistics and distribution. Envoy has tripled in revenues in the past couple of years, and it merits its own disclosure for as long as we continue to consolidate its results.

Speaker 2: We are aware that the rest of the year will continue to be challenging. We will be cycling against the strong results last year, inflation will remain high, and there will always be macro and regulatory uncertainties happening somewhere in our job area. In this context, we will remain laser focused on creating value by meeting customers and consumer needs and executing with excellence. We are prepared to quickly adjust to the challenging environment and deliver results. We are convinced that we have a structurally strong business platform, a rich opportunity set, and most importantly, we have the best team to execute our strategy and consistently win in the offshore market.

Speaker 2: And with that, let us open to the line for questions. Operator, please.

Speaker 1: Thank you. If you would like to ask a question please signal by pressing star 1 on your telephone keypad.

Speaker 3: Please ensure that the mute button on your telephone has been switched off in order to allow your signal to reach our equipment and Please limit yourselves to one question in order to allow all participants the opportunity to ask a question. Thank you And with that our first question today comes from Ben

Speaker 3: Terror of back, please

Speaker 4: Thank you very much and good morning. Congrats on the strong results. So the one question I had is, if you don't mind, help us understand a little bit better some of the growth dynamics you're seeing in the health division. And thank you, by the way, for the table on page nine. But looking into that, it seems to me that the

Speaker 4: is one part of the core of the new femta. Thank you very much.

Speaker 1: Sure. If you want to start, the softness in Mexico comes from the same store sales basis. They're referring to the negative 7.1%. Correct. That is just a very tough comp coming from the last leg of COVID-induced increase in sales at the same store level.

Speaker 1: I mean, having said that, I mean, going forward, we do expect a strong unit growth in Mexico as well as a little bit of improvement in the overall top line on a same-store sales basis. But more importantly, what is driving value in Mexico has been, I mean, a few hundred basis points increase in gross margin as we have been...

Speaker 1: a strong market share there, and we're also coming off very strong results, stemming from consumer pickup in demand, given all the liquidity that was released to the consumer during the COVID era in Chile. So, in Chile, we're also working off a strong comparison base, not as strong as in Mexico, but we do expect there that with commercial efforts and also with the multi-

Speaker 1: but we are also growing in the retail channel significantly, which would also drive our growth. And again, Ecuador, although there's still a very good value proposition, I mean, political and economic factors there, have been, I think, the most important driver of top-line growth there. Yeah, just to add on the Mexico side, Ben, we need to remember that...

Speaker 2: 2022 Q1 we had the Omicron variant, so there were strong sales related to that, number one. And number two, year to date the Mexico share has increased slightly. So that's very short of that structure and we have a very solid business.

Speaker 3: Thank you. Our next question comes from Thiago Bartolucci of Goldman Sachs.

Speaker 2: Yes, good morning everyone. Thanks for taking the questions and congrats on the very solid print. I have two things here that I'd like to explore. The first one obviously is related to the central forward priorities, right? I know you have to be very cautious on the forward statements and guidance that might provide.

Speaker 1: But from what we understand, there are two priorities on the plan. One is growth and the other is capital allocation. You mentioned in the press release and it's clear that leverage is trending pretty well, which allows you to execute those priorities. So I'd just like to understand from a growth perspective, what are the kind of opportunities that we're envisioning for the short and medium term.

Speaker 1: from UNTAD, right? I'd like to understand a little bit more from you. How do you have you seen the terms for sale trend building out throughout the quarter, especially early reads from April or whenever you saw in March? And how correlated do you think OXO performance could be to UNTAD going forward?

Speaker 1: Those are the questions. Thank you very much and once again, congrats on the results. First, with regards to growth and where we see it coming, as we discussed last year, all of the business units embarked on the long-range plans that involve trying to double the growth and where we see it coming.

Speaker 1: their EBIT over the next five years. And frankly, all of the different business units have plans on an organic basis to achieve that. I mean, most notably, OXO through the multi-format category, we believe that we could add, I mean, on top of the natural growth in OXO stores, we could add in other formats or use cases, a significant amount of additional revenue there.

Speaker 1: In Latin America, clearly a lot of more room to grow in Brazil with all the different formats. And then again, with regards to the basic ops of store, there are a lot of additions to the value proposition with regards to cash management products, integration with the digital side.

Speaker 1: And more importantly, the loyalty program where we do believe that we could capture same store sales growth at traditional also store in a very, very healthy fashion. And with regards to capital allocation, most of these plans are actually self-funded by the operation. So they would not require a significant amount of.

Speaker 1: that we could grow organically, but also in Mexico there will be, I'm sure, at some point, inorganic opportunities that would require additional capital allocation. I don't know, Paco, if you want to talk about any of the others. No, just basically to reinforce the point that as we enter into 2023, we are going to meet.

Speaker 2: The results we are announcing today already reflect the fact that all the businesses are walking the path on the long-range plan as it was presented to us at KENSSA and as it is included as part of FENSA Forward. So the results start to reflect already the plans that were deployed as part of FENSA Forward in each of the businesses.

Speaker 2: importantly on the organic side as...

Speaker 1: The other thing to add on your question regarding relative performance vis-a-vis Walmart and DAB and the other sales, we did see a significant performance this quarter. And if you look at category by category, use case by use case, it was mostly the gathering of patients that is bringing us more traffic in the store. So I think what we are seeing if you go back to when the pandemic started.

Speaker 1: as to how convenience formats started to lose a little bit of share, and grocery formats started to gain some of that share. I think you are seeing some of that come back slowly but surely. But more importantly, we are experiencing that growth in traffic and changing consumer habits with a much more well-known...

Speaker 1: basket of products that are accessible at O and the combination of a higher ticket and a recovering traffic is why you're seeing a very strong performance on O in the first quarter.

Speaker 2: And I think that that second question of yours, Diego, is related to your first question. Because as part of Oxus long-range plan and opportunities to continue growing organically, is a significant further sophistication under segmentation strategy.

Speaker 2: and the ability to rapidly change the portfolio on SKU offerings and everything they do around the consumer need. I mean, they started to do that for a long time, but then they significantly improved their abilities during COVID and frankly speaking, they have continued to do that and it's an important part of what they expect to do over the next.

Speaker 2: several years as part of the long-range plan to continue sophisticated in this ability to give consumers what they want. And that is reflected there. The results reflect that and that's why we are confident that moving forward we will continue to see that.

Speaker 2: Yeah, I'd just like to add, hi, Piavo, this is Juan, I think building on what Eugenio said, more on your, on your, on that related question. I mean, during COVID, obviously,

Speaker 2: the market developed a couple of concerns with our docs, and I'm oversimplifying here, but people were worried about the relevance of the storm, and would it still continue to play the very important roles in people's lives, and obviously the slowdown in openings.

Speaker 2: which was a consequence of COVID and us being able to see what was happening with some marginal stores, also concerned the market because we, as you remember, we closed a chunk of stores and we slowed down significantly and we made it harder for us to approve new locations. I think what we're seeing this quarter, and it really builds on the...

Speaker 2: behavior patterns and habits and there's county fairs and people are going to concerts and people are out and about. You see a very healthy performance at the stores, as Paco was saying, the stores have transformed their value proposition accordingly.

Speaker 2: But the other point is we are opening, I mean we are not yet back to a thousand stores per year, but we are moving in that direction in addition to everything that is happening outside of Mexico. But I just wanted to put a highlight on that fact that I think this quarter again, demonstrates the super high relevance and all the roles that OXO continues to play and how this translates into a very very powerful set of numbers.

Speaker 2: And in terms of ANSTA specifically, unfortunately, as you know, we are not a part of that. There are other big players in the industry that are not a part of that, and so the number maybe has become a little bit less relevant. And we don't have a perfect peer, but directionally, obviously, it will give you some information, and hopefully we can continue to outperform it more often than not.

Speaker 5: That's super, Juan. Thank you very much.

Speaker 3: Our next question comes from Ricardo Alves of Morgan Stanley .

Speaker 6: Hello, everybody. Thanks for the call. My first question was partially answered already on a very, very impressive OXO SamsStar sales. Just wanted to expand a little bit more on that. The average ticket seems to have been the main source of acceleration.

Speaker 6: sequentially speaking, the 12% increase. So, can you expand just a little bit on that?

Speaker 6: We appreciate the fact that the unit revenue has been improving since the start of the pandemic. We've discussed this in many instances, but on the margin, fourth quarter into the first quarter, we saw a big jump in average tickets. So just wanted, you know, if there's any.

Speaker 6: category that you care to highlight. I think that that average ticket is something that surprises quite positively. And maybe just more important, how did you see April ? I mean the issue of the Holy Week, so just wanted, some additional color looking forward would be helpful on the OCSO same source sales. That's my first question, kind of a follow up. The second question, you said more or less around the Golden Age, services of the priority wh hospital care-supply garden that provides momentum to the population and people?

Speaker 6: on the sensor forward, just a little bit more of an update as well. And I think, first of all, appreciate we're applauding the disclosure and the release, so really appreciate that, it's really helpful. But besides that, qualitatively speaking, can you comment a little bit more around envoy negotiations?

Speaker 6: If the commitment is still there, just an update on those two fronts, Envoy and Heineken. Thank you. Just a second, I need to go back to you. Sure, just to step forward, we continue to work on all fronts. As you mentioned, Heineken, Envoy and a couple of the other ones, I think we're making good progress. We have been…

Speaker 1: conducive in all of these for us to continue on our path going forward. And again, we will update you when we can. But at this point, we feel comfortable that we are on track, if not ahead of track, to meet the original expectations outlined in the FEMSA Forward announcement in February . And just to provide a little bit more color to your question and also, I think we have

Speaker 2: what consumers need, what consumers want, how they need to adjust the portfolio. So it is true that following the pandemic, there are some changes in consumer habits. Some of them started to buy different things in different places. And I think that also has been quick to adapt to categories that have

Speaker 2: just being the main categories in the store such as snacking, such as beverages. But same thing, they have been changing and they are buying more multi-packs etc. So that's it. In the paper as far there is also

Speaker 2: Beer, I mean beer has been performing quite strongly as we have finished the Mixteo and now we have also the Grupo Modelo brands in most of our stores. So that is also affecting the ticket side. And then last but not least I would say that the team has also done a very good job.

Speaker 2: adapting the offering for the pantry in the household. So that offering has improved its importance in the store. And all those adjustments are what maintain the ticket going up. As I said, I think that what is important to keep in mind, is that this is not a standalone.

Speaker 2: one quarter effect is something that has been continued throughout the pandemic and now it's kept that way. And hopefully we will continue to see that performance in the quarters to come. Yeah, now let me just add a little bit to what Paco just said, just to focus on beer. And the reason for that is, obviously when we launched the...

Speaker 2: the four-year process of incorporating the ABI portfolio into the stores. That was a big deal and unfortunately it was kind of overshadowed by COVID. Right, I mean we started literally a few months before COVID arrived.

Speaker 2: And so I don't think we fully saw the impact, I don't think we have seen the impact yet, but certainly you begin to see behaviors in the beer category that are very, very encouraging as you now have both brewers basically duking it out in what is their most important battleground.

Speaker 2: I think also as you know for a long, long time we have been the most important channel for our brand, for Heineken. I think we are on our way to becoming a very important channel for the ABI brands as well. And so obviously in terms of the actual number of cases that you sell.

Speaker 2: implications that this might have at the commercial income level. I mean it's just beginning to look like I always hoped it would look once we had both portfolios from the store. So just to kind of highlight that, B-RAISE is the most important category for OXO, continues to be, probably always will be. The other...

Speaker 2: I wanted to put a little bit of a dampener out there in the sense that I don't think what we saw in the first quarter is

Speaker 2: necessarily the new normal, right? I mean, don't expect to see 18% same store sales throughout the rest of the year. I think there is no calendar change. I mean, Holy Week happened in April in both years, 23 and 22, so there is no kind of distortion there. But as healthy as things look...

Speaker 3: Again, don't put 18% in your model because I don't think we're going to get there, but it's still looking like a very, very strong year. Very helpful. Thanks, everybody. Thanks, Ricardo. And as a reminder, ladies and gentlemen, please limit yourselves to one question in order to allow all participants to opportunity to ask a question.

Speaker 3: 18% in your model because I don't think we're going to get there, but it's still looking like a very, very strong year. Very helpful. Thanks, everybody. Thanks, Ricardo. And as a reminder, ladies and gentlemen, please limit yourselves to one question in order to allow all participants the opportunity to ask a question. Thank you very much.

Speaker 5: Our next question comes from Bob Ford of Bank of America. Thank you. Good morning Juan Paco El Reño and thanks for taking my question. We back out at 1.1 billion peso loss in the other division and I was wondering if you could comment on the level of investment in digital initiatives, whether there were any non-recurring expenses associated with the strategic review book there and what your expectations are for the segment going forward.

Speaker 1: Part of that, if you just look at the overall ecosystem, is compensated by revenues that are being generated at the proximity division related to the use of spins that are obviously reflected. So on a consolidated basis, it's less than $900 million. Having said that, it continues to be a relevant amount. A lot of that is... We'll see what happens next.

Speaker 1: development of the product, staffing up in terms of people, outside consultants and whatnot. We're not capitalizing a lot, any relevant amount of that. So we continue to invest, number one, in obviously getting the user base to a level that we need to, but more importantly, making sure that the use cases, the functionality...

Speaker 1: and the eventual monetization strategy for these customers, be it through the financial side or the loyalty side are attainable. For this year, I would expect cash burns at or above those levels. And hopefully as revenues come up in the persimmony division.

Speaker 1: and other divisions via the loyalty program, that cash burn over the course of the next 18 to 24 months will start to turn. But at this point, we are committed to basically putting out a product out there that consumers will enjoy interacting with and that will generate what we believe is long-term value for the overall ecosystem.

Speaker 1: And Elhenio, how should we be thinking about the functionality roadmap? The functionality roadmap, right now as you know the Spin product is migrating to the three products basically of digital which is the B2B side, the B2C side, and then the loyalty program. They are slowly migrating to this new platform called Spinpremia.

Speaker 1: Spin Plus, sorry. And the idea is to have a single app that will be able to manage all of the different accounts there. So from a functionality perspective, first and foremost, it's just consolidating all of the products offerings into a single app, and then slowly but surely adding on what we believe are going to be very useful. Right now.

Speaker 1: risk measurement and whatnot. And then eventually through the loyalty program, being able to offer RCPG customers with the digital advertising space, promotions, et cetera, and grow from there on the consumer side. And then on the business side, now with the Netly acquisition, the idea is to be able to kind of close.

Speaker 1: the vice grip on the overall consumer experience by affiliating mom and pops, by affiliating other customers that Coke is serving, and putting them into the digital ecosystem by offering them the same product so that they can start to charge.

Speaker 1: with either a debit or a credit card or a spin card with a QR code, be able to offer the multi-category and omnichannel offering to the mom and pop, and have them earn loyalty points as they run their own business as well, and make that part of the overall value proposition. And again, try to establish this closed-loop system where hopefully, consumers...

Speaker 2: walks towards that path of all these value-added services, their focus right now is to make sure that they increase the number of active users monthly. So it is crucial that consumers, that users come back and continue to use the app. I'm Second.

Speaker 2: to improve the NPS. And on both sides we have good news. I mean the multi-active users continue to grow and the NPS continues to improve. So that's the path today.

Speaker 2: improve the NPS and on both sides we have good news. I mean the multi-active users continue to grow and the NPS continues to improve. So that's the path today. Very interesting. Thank you both.

Speaker 3: Thanks, Bob. Our next question comes from Lewis Willard of GBM. Hi, everyone. Good morning and thanks for taking my question. I wanted to talk about a bit of the dynamics in financial services and the payments that you're receiving at OXI. He helped me understand.

Speaker 3: We've seen traffic up year-over-year significantly, but you mentioned the pressure the commercial services is contributing less to the top line. And I would assume it's profit. So to understand a bit more the dynamics of the storms, what's the...

Speaker 1: and anything that you can comment on that would be helpful. Thank you. Alejandro? Sure Luis. With regard to financial services, remember they are made up of obviously people paying for their bills, but the biggest part of it comes from the correspondents, banks doing transactions to the offshore network. And over time as you know, we've added...

Speaker 1: different banks in Mexico, but then also some banks have dropped. So the volatility, if you want it, in the traffic related to financial services, has more to do with banks that are either coming on or offline any given quarter. And then certain banks, just because of their own value proposition, are sometimes limiting the number of transactions.

Speaker 1: that customers can do at OBSO in any given month. So it has a lot more to do with that. I would say we had slow traffic during the middle and latter half of 2022. That traffic is coming back, but again, coming off from a low base in the first quarter of 2023.

Speaker 1: And the other thing to note just from a PESO perspective is that the commissions that we are charging have remained pretty much flat in PESO terms. So when you see these numbers that are reported in real terms, we've lost some real, call it real PESO revenue growth in those categories related to pricing more than traffic and volume. But that kind of...

Speaker 1: the nature of the beast. Having said that, I think the work in terms of the financial institutions that are participating with us more and more, we are seeing some of them that have left come back at a more aggressive pace. And the number of transactions that have been limited to some in the past have been opening up. So I think in the first quarter, we're starting to see the tip of the iceberg in terms of that profit coming back.

Speaker 3: So if I may follow up, this let's say lower PESTO commission has to do with the fact that probably transactions especially on the money transfers and deposits are being done throughILL.

Speaker 1: Not really. We are seeing growth in people doing their financial transactions via SPIN. Having said that, the pricing strategy of SPIN and the pricing strategy of the financial institutions are in lockstep and have been relatively constant and we are seeing growth in people doing their financial transactions via SPIN.

Speaker 7: of thunder. Please go ahead.

Speaker 8: I appreciate it. Hi Paco. I am Daniel Juan. Congratulations on the results and thanks for taking my question. My question has to do with Gav back to the shareholders. What needs to happen in order for you to either…

Speaker 8: to activate a significant share buyback program or an extraordinary dividend. In the context that, if I get the numbers correctly, you paid $650 million of ordinary dividends. You have $4 billion of gross cash, almost $4 billion of gross cash. You could pay another similar amount.

Speaker 8: of $650 million and you would still be under two times net debt to EBITDA. So what's the thinking process regarding cash back to shareholders in terms of catalyst and in terms on timing going forward please. Thank you so much.

Speaker 1: Sir, I appreciate the question and clearly that's top of mind for us right now, no question about it. Having said that, I think the priority right now is to get the asset structure and the portfolio structure in place so we're more focused right now on executing those transactions, see where we end up in terms of leverage. I mean we're already there, we're already at one point.

Speaker 1: current dividend policy, considering extraordinary dividends, doing share repurchases. I mean, in comparing and contrasting that with any inorganic inactivity to the extent that we believe we can create equal or more value to the shareholders than any of the other options. But I think the focus, at least for the next quarter or two, is going to be just on getting that money.

Speaker 1: the sensor forward transactions with greater visibility so that we can make that decision of capital allocation with a lot more certainty.

Speaker 2: And as we said, this is a process, I mean implementing the FEMSA Forward is a process that will take several months. This is not something that would happen overnight.

Speaker 1: Next question comes from Rodrigo Alcantara of UBS. Hi, thanks for taking my question, Michael, okay, one. On the other hand, I just just just here, we'll have that for a minute.

Speaker 1: back, you know, you guys accelerating store openings here at Adder, exploring new spaces. We are just in part 6.

Speaker 1: And if an organic growth accelerates, that would be an option for you guys. That would be my question. And also on the stallions, through openings, any updates regarding Malora, do you have any questions regarding organic expansion?

Speaker 2: As we go back and I think that we had this conversation, Rodrigo, that part of the long range plan strategy for OXO is the multi-forma. Bata being one of the different formats that we plan to accelerate moving forward. The Bata is performing really well. The value proposition.

Speaker 2: has been sharpened over the last few years. And we are confident that that format will continue to grow. And we have a, I would call it a strong ambition in terms of openings for 2023.

Speaker 2: whether or not there will be inorganic opportunities there, well, it's not something that this state, the team is focused on, it's more on the organic growth opportunity for specifically for bio. Regarding Valora, yeah, your point is absolutely right. A priority from an organic standpoint.

Speaker 2: We have 80 million people and we have the same number of stores. So the opportunity for organic growth in Germany is strong. Or priority at this stage for organic growth is precisely that country. And we see the possibilities in 2023 and forward.

Yeah, in the first quarter you could see seven net new store openings for Valora, which is on the low side given where we expect them to go going forward. I mean, having said that, as you know, we're still digesting the acquisition, integrating it into our systems, getting everything aligned, and we are juggling a very complicated inflation environment, especially in Germany.

So once we get that under control and integrated, you should see a more aggressive expansion in the store base going forward. Our next question comes from Sergio Matsumoto of Citi. Yes, good morning, Paco and Henion. Thanks for taking my question.

I want to go back to your comment about the consumer habits have changed and just ask the question in a different angle. In the past before the pandemic, there was this value proposition from OXO.

where there will be services being rendered at the stores or the convenience of going there would drive traffic into the stores. And some of that would result in cross selling within the store where they pick up something else to buy. And I'm wondering under the new four.

strategy of PHMSA forward if the SPIN and the PREMIER is now fully offsetting that value proposition or has it taken over? And if not, when do you expect that to take over? Yeah.

Thank you, thank you for the question. And well, look, on the one hand, we believe that OXO continues to have a very strong value proposition on the physical side of the store. I mean, the difference in consumer habits that we saw from before the pandemic to the pandemic, I mean, just let's talk about one to illustrate the point, which is that less people go to the office.

because more people do virtual work, that is there. It is undeniable that that is there. That is affecting everything that consumers do, but related to us, there are a few changes that have taken or gone into the value proposition of the store. We are more careful to see where we open.

look just to illustrate one point. In the past consumers as you said will stop before going to the office will buy something to drink and then go to the office.

Right now, as they probably stay at home for a couple of days during the week, they maybe stop less time, less frequency in the store, but they probably buy more. So now the store is selling for – multi-packing some of our beverages so that consumers can actually shop for whatever they are going to buy for the whole week. So these types of changes and fine-tunings are allowing us to maintain a very relevant value…

to go to the store and then add an additional purchase on top of whatever they are going there to buy. So actually we see that it's not going to be a switch.

in the experiment of the physical store, but actually the way we are seeing it is that this is a digital way of consumer shopping in which they will, on one hand, have the digital platform and the physical store. And frankly, there will be a lot of synergies on that, and that's what we're seeing already, in fact, in increasing traffic because of the...

because of the spin and because of folks who are pregnant. Our next question comes from Carlos Leboy of HSBC. Yes, good morning, everyone. I know you've spoken about this before, but if you could give us some updated thinking on it, it would be helpful. Do you feel that you need to make acquisitions to build out your C-Store footprint in the US?

And if you were to do it organically, what's the biggest challenge to that? Sure, I'll take it out. I mean, the strict – Oh, you have a second question, Carlos?

if you were to do it organically, what's the biggest challenge to that? Sure, I'll take it out. I mean, the strict, does, oh, you have a second question, Carlos? No, that's it.

Okay, I mean the quick answer to that is no, we don't feel we need an acquisition. Having said that, I mean just given the skill set required and the tightness that the convenience formats have in the US vis-à-vis the gas, I mean having some presence with knowledgeable operators and people who know the space.

people who know how to trade oil and gasoline I think will be helpful. Having said that, the short answer is we do not need it. We do believe that we could deploy the value proposition that we have at OTSO in some of the markets where I mean co-nationals will be familiar with the concept, familiar with the value prop and be able to start with that on an organic and slow basis.

allocation and making sure that we are allocating the capital in a way that maximizes absolute, not relative returns, vis-a-vis the other alternatives that we have, including share buybacks and dividends. So bottom line, we will be looking at both, but one does not –

I mean, we do not need to do an acquisition to grow in the U.S. is the bottom line. The next question comes from George. Is Cuerdo of BTG? Good morning, Marco. It's time to turn it over to George.

Thank you for putting my questions. We have to do with thermal solutions. It would be fair to assume that the margin pressure has to do with inorganic conditions that have lower margin. Or this pressure is related to other organic drivers. Also, if you could tell me color on M&A, would be much appreciated. Thank you very much.

Okay, could you just repeat, you asked about margin pressures, where? Yes, here, it might be a better example of this. I was wondering if you could comment on, it has to do with organic additions.

that have lower margin or did it bring to over 90 drivers? Carlos? Yeah, it's a little bit of a combination of both. First and foremost, the first quarter usually in the specialized distribution space is the weakest one in terms of sales volume. So the SG&A expense that we put in starting in the second half of last year and turning to the second half of last year.

margin contraction. Having said that, on the gross margin side, I think it continues to be on track with what we were expecting. There are some pressures from the food service disposable category, but they're more than offset by the strong performance of the Jansan category. And to your point, I mean, some of the, especially the acquisitions that happened during the second half.

explained mostly by those two reasons.

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