Q2 2023 Fomento Económico Mexicano S.A.B. de C.V. Earnings Call
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Okay.
Hello, and welcome to the FEMSA second quarter 2023 results conference call. My name is Laura and I will be your coordinator for today's event.
Note that this call is being recorded and thought the duration of the call your lines will be on listen only.
However, you will have the opportunity to ask questions at the end of the call. There's got to be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point. Please press star zero and you will be connected to an operator.
I'll now hand, you over to your host one since acre mitigate todays call, but thank you.
Good morning, everyone welcome to <unk> second quarter 2023 results conference call.
The plants a day, it's a little different than neutral because we are drilling Banco Santander Fernandez, our executive chairman of the board and CEO , who will open the call with some important messages.
After that Balco Camacho pringles outside I will carry on with our second quarter results as we usually do followed by Q&A.
But as Antonio Please go ahead.
Thank you Juan.
So everyone on the line before.
Before we begin I would like to thank all of you who have recently reached out to us.
We have messages to support for Danielle after the new crop he is stepping down as CEO of FEMSA to focus on key skills.
We truly appreciate your kind words, and well wishes, which we thought would relate to Danielle.
We're very grateful to Danielle for his many meaningful contributions.
The strategic direction and high performance standards for our company always with a steady hand on Larry King Portables, Danielle always makes it easy for his team to rally behind him follow his lead and achieve excellence.
Beyond strategic acumen of business success, Daniela embodies the values have dropped defined Samsung.
Q4, everything my friend.
Yeah.
I wanted to be here today to pick up your minutes of your time given the unique circumstances of this recent leadership transition to convey a few important messages.
First.
I am now fully engaged with our senior leadership team to continue implementing our strategic priorities, including pain. So far what we have already executed several important steps and we are totally committed to the strategy to continue unlocking shareholder value you should therefore.
<unk> expect Falcon team would be focused on a smooth transition.
That is very important for us.
You should.
Very clear second my dual role.
The chairman and CEO is not permanent.
FEMSA, we believe that the overall should be separate.
We plan to go back to that when ready.
We know you have questions regarding timeframe Bob.
Please bear with us while we carefully volcker this important process.
We will let you know when we have news to report.
Finally, I want to recognize our team I am fortunate to be surrounded by a truly remarkable group of leaders and advisors that are working hard every day to keep growing and keep delivering on the potential of our great company.
The opportunities ahead of us are very significant and compelling.
Every business unit.
He has executed at a high level in fact, the strong quarter quarterly results. We announced today are a good example of what we can achieve.
So with that I will let backhaul.
One to discuss the results the results in detail. Thank you very much for your trust and confidence Taco. Please go ahead.
Thank you Jos Antonio and good morning, everyone. Let me begin by updating you on where we are regarding and stuff forward.
During the second quarter, we achieved two important milestones.
First we were able to divert FEMSA remaining investment in Heineken.
Retaining only a residual amount of shares to meet our obligations under our existing exchangeable bonds and.
And second we signed an agreement to divest our minority stake in Jetro restaurant depot.
These milestones have coming ahead of plan and under favorable conditions, allowing us to keep our momentum as we continue to pursue defense half for wireless structure.
I do know FEMSA for work is fully aligned with fantastic customer Centricity and nowhere broader strategic priorities of driving long term growth increasingly enabled by digital capabilities, all within our core business vertical and with a disciplined approach to capital allocate.
Yeah.
With that in mind, we can report that our second quarter results showed a continuation of the positive trends seen at the start of the year.
Fully consistent with doses strategic priorities and making progress towards the target set by each business unit long.
Range plan.
Moving onto the results and beginning with proximity it will be helpful to talk for a minute about their own long range plan and the Ford priorities around which it is built.
Number one is strengthening the court.
Second developing new growth avenues, there developing multiple successful formats and four growing the footprint beyond Mexico.
Looking at Oxford, <unk> second quarter results through this lens, we see they've made great progress strengthening the core same store sales growth once again stellar surpassing 15%.
The split evenly between average ticket and traffic and reflecting a structural improvement in segmentation of the store value proposition.
We again saw a particularly robust performance in the first and gathering consumer occasions.
Further supported by favorable weather during the month of June .
Continuing with the positive news of a stronger core new store growth accelerated and was robust once again with Mexico, and Latam, providing the highlight with adding 444 new stores during the quarter.
And almost 1400 during the past 12 months.
In fact once we include stores opened by Grupo <unk> in Brazil, we added more than five ultra stores for every day of the second quarter.
Moving on to the long range priority of growing beyond Mexico during the quarter Grupo North continue to advance ahead of plan.
With revenues, increasing over 200% year over year, allowing us to increase both sub footprint in Brazil, a dynamic pace of pharma three Congress net new store, new OXXO stores during the last 12 months.
Stealing proximity amerigas, but along the priority of developing multiple successful Florida.
Bart I provided the highlights achieving 23% same store sales growth.
For its part proximity Europe against though good local currency top line growth and overall positive profitability trends.
Driven by a stronger pricing growth in foot traffic as well as a higher contribution of below that foodservice outlets.
Just as importantly, we continue to advance on exchanging best practices across the organization with the focus of settling of setting the right conditions for future growth and value capture.
Our health operations continued the stable trends, we saw at the start of the year, reflecting foreign exchange headwinds from a strong Mexican peso, but again delivering robust margin expansion at the growth and EBITDA levels.
Capitalizing on the benefits of having an integrated Latin American platform working at a single organization.
Additionally, during the quarter or <unk> business continued to drive to consolidate is competitive position across market, but particularly in Mexico, where they.
<unk> increased its store footprint by 12% against a challenging competitive landscape.
Forest Park or a fuel business also had a stable performance with the strength in the corporate cultural business offsetting softness in these retail platform.
Regarding digital the number of active users for athene more than doubled year over year to reach $5 7 million.
Active monthly users forward Premier loyalty program also more than doubled reached $15 8 million.
While 24% of folks from Mexico sales are now associated with the program.
We continue to previously acquisition of higher quality users, while we make progress fine tuning the use case.
Value propositions unit economics, and monetization strategies for each of these products as well as we look to ensure long term value creation for the ecosystem.
In terms of financial obligations during the quarter, we deployed close to 1 billion pesos on growing this business roughly in line with the previous quarter as well as budget and we have indicated.
Finally, Coca Cola FEMSA.
<unk> grew across all its territories and surpassed 1 billion unit cases for the first time during a quarter.
That combined with cost optimization and expense efficiencies allowed margins to expand sequentially in.
In addition cost accumulated more than 1 billion U S.
Direct of safe during the first half of the year to their Omnichannel platform, Qantas, plus which represents a significant milestone in car digitalization journey to strengthen and deepen the connection with their customers.
Before I turn over the call Iranian I want to touch briefly on capital allocation.
Topic that we are aware is very much on the minds of many of you today and a key component of our FEMSA for waste pricing.
So our cash levels continue to rise, we are accelerating or analysis to determine the optimal capital requirements to support the short and medium term growth of our operations organic and inorganic.
That will help us fine tune the levels of capital that week will then return to shareholders.
This is high priority for us and we will keep working on it together with our board to have a more specific framework for you as soon as possible.
And with that let me turn it over to Kenya.
Thank you Michael and good morning to everyone on the line.
Beginning with Panthers consolidated quarterly numbers total revenues during the second quarter increased 18% while income from operations increased 8% compared to the second quarter of 2022.
On an organic basis total revenues increased nine 5% and income from operations increased four 5%.
Net consolidated income was eight 9% to 6 billion pesos, reflecting higher income from operations, a $9 4 billion pesos nonoperating income, mostly with Brexit, reflecting the divestment of <unk> minority interest stake in Jetro restaurant depot and a decrease in net interest expense during the quarter.
These were all partially offset by a noncash foreign exchange loss of $6 5 billion pesos related to defense is U S. Dollar denominated cash position as impacted by the appreciation of the Mexican peso and a net loss of discontinued operations of $3 9 billion pesos driven by the market value fluctuations of the Heineken shares underlying our.
Outstanding Exchangeable bond.
Moving on to discuss our operations and beginning with proximity Americas. We added 444, new units during the second quarter to reach 3100 91 net new stores for the last 12 months. This quarter's strong expansion and set US ahead of our unit expansion target and it underscores OXXO, Mexico strong growth potential having.
Said that we will stick to an objective of 900 net new OXXO stores, just in Mexico for the time being and the expansion cohort the rest of the year should be smoother than usual.
OXXO same store sales were up 53% for the second quarter. This was driven by an increase of seven 4% in average customer ticket and a strong seven 4% growth in traffic.
This underscores the solid performance, we saw across all of those categories throughout the quarter, but especially by the strong showing of the gathering and tourist locations.
Gross margin was 41%, reflecting a lower contribution from financial services, which more than offset healthy commercial income dynamics.
Income from operations increased 18%, while operating margin decreased 20 basis points compared to the same period of 2022 to reach 10%, reflecting an increase in labor expenses stemming from the labor reforms in Mexico.
At proximity Europe , as Pekka mentioned revenues increased eight 4% in local currency to reach almost 11 billion pesos, reflecting a recovery in traffic and ticket driven by improved customer mobility.
Gross margin was 42, 1%, reflecting a mix effect driven by the positive performance of Valores foodservice and B to B businesses, while operating margin was two 9%, reflecting better operating leverage partially offset by an increase in expenses driven by inflationary pressures.
Moving on to FEMSA health operations during the second quarter, we expanded our drugstore count by 81 net additions to reach a total of 4200 67 units across our territories at the end of June and 369 total net new stores for the last 12 months.
Revenues increased slightly while same store sales decreased an average of three 7%.
However, as was the case last quarter. It is important to note that on a currency neutral basis revenues grew 14% and same store sales increased almost 8% driven by good performance at most of our operations, but partially offset by a demanding comparison base in our operations in Chile and Mexico.
Gross margin increased 170 basis points in the quarter, mostly reflecting positive margin dynamics across our operations, especially in Mexico.
Operating margin decreased 10 basis points, reflecting an increase in labor expenses in most of our markets.
<unk> revenues increased nine 3% and same station sales grew three 2%, reflecting a dynamic competitive landscape across our footprint.
Retail volumes were again complemented by robust pick up in corporate and wholesale activity during the quarter gross margin was 12% while operating margin was three 9%, reflecting tight expense control offset by increased labor expenses.
Moving on Coca Cola FEMSA also delivered a strong set of results in the second quarter total volume grew 7% driven by growth all across our territories.
Total revenues increased seven 2% and operating income grew 13, 4% as operating margin expanded by 50 basis points to reach 13, 9% you can listen to the replay of the conference call held yesterday.
Finally, our envoy solutions total revenues increased 23, 1% while relative to the second quarter of 2022.
Collecting some of the acquisitions, we did last year together with solid execution, while operating margin contracted 120 basis points impacted by extraordinary expenses related to synergy capture across the platform.
That's it from my end with that we can open the lineup for your questions operator. Please.
Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one on your telephone keypad kindly take note. This is limited to only one question each thank you.
Yes.
We'll now take our first question from Thiago <unk> at Goldman Sachs. Your line is open. Please go ahead.
Yes, hi, good morning, everyone. Thanks for the presentation I'm, taking the question just before we get started yes sure once again, our best week, thus far Danielle and also welcoming back our Hudson yards the bulkhead.
Our partnership with <unk>.
On the forward look I have two questions then electric Florida parks, one it has to be kept colocation rates. Obviously, we understand that you need to be call. It shows on the communication and the movements right but.
Putting in perspective, where white boxes, what you communicated on the forward plan, you're already running at roughly $2 billion of excess cash position and the balance sheet right. So unless there is annualized Germany, India horizon, which I don't think the case.
Growth shouldn't be.
Our bottleneck or an overhanging farm by stronger capital distribution right.
And David that you mentioned are again cash flow that the business is generating so I would just like to understand internally right. What is the kind of debate and different deals that you are facing.
<unk>.
<unk> F up on shareholders return business. The first one and the second one the one we know there is a scope for <unk> from the pulse ox alrighty object in Mexico.
Across all our regions potential, including David Botswana were Lucky to Mexico and Brazil.
Bulk transfers of all are you already have upgraded difficult Brooklyn wrong.
Where continental stores over a lot.
<unk> operational results.
Paul continues to baffle awkward in the circle in our country. So also had somehow ascertained internally on the beverage space.
Can you imagine how the growth is.
Mike most intriguing thank you very much.
Hi, <unk>. Thanks for the question and I will definitely send along your thoughts to add to that Neil and the team.
With regards to your first question on capital allocation.
Fortunately, we are well ahead of the divestiture program that we announced back in February . So we are in the privileged position that you mentioned have already.
<unk> well below our two times net debt to EBITDA target. So we are having discussions very serious discussion at the board level.
Two kind of what kind of framework for our capital allocation, we are going to be implementing having said that you can feel comfortable that we.
We will be we will be looking at several alternatives one and for the most part as you know organic growth within the businesses that we decided to focus on with FEMSA forward still continues to be strong and we feel over the next five or six years, we could deploy seven or $8 billion easily in terms of new store openings.
Further additions to our Coca Cola bottling operations et cetera. So there's there's plenty of room to put capital to use in low risk projects at very high returns to continue on the growth, having said that and to your point. Most of this will be funded with just internally generated cash and we will still have this cash leftover. So a second part of the cap.
The allocation will be reserving some amount of capital again within the construct of a two times net debt to EBITDA, our capital structure at the end, but reserving some capital for strategic Optionality is that might arise again within the core businesses that we have identified and also sticking to very tight <unk>.
Financial return guidelines, so that the capital allocation into new initiatives, whether it be at proximity whether it'd be at golf, whether it'd be in Latin America or elsewhere that they stick to not only straight strategic criteria, but also very strict financial and value creation criteria.
And then finally I mean, there is a very high likelihood.
After allocating this sat in this capital to strategic initiatives, there will be some capital left over and we will we will consider what the best way to return that capital to shareholders will be an ongoing share repurchase program, a bigger share repurchase program and our extraordinary dividend. So those are all other things that were discussed.
Being at that at the board level, we will hope to have some more clarity for you hopefully by the end of the year is not very early next year, but again, we're being patient we're focusing right now on executing on the divestment part of defense a forward strategy and then shifting our attention to this but you should feel comfortable that through the combination of organic inorganic.
And in capital returns to shareholders. We will continue to of course make sure that that shareholders can maximize their value and their stake in FEMSA and at the end when we reach this final two times net debt to EBITDA ratio you will be you will be exposed to a portfolio that has fantastic.
Growth.
And and cash flow generation.
Characteristics to it so that's it on capital allocation I don't pack or if you want to take the.
The other question on the expansion of OXXO in beverages.
Yes actually on the second question on OXXO can you repeat it.
The line wasn't totally clear when you phrased the question the first time around.
Sure Tycho sorry, the question was.
One of we manage on a new bond trading or other regions with convenience stores right with Vauxhall, allowing for NPD.
<unk> operations also to partner with some sort of beverage and distribution being up year on soft drinks.
Okay.
Thank you Daryl just one I mean actually on the proximity side. We are we are really agnostic right.
Obviously in Mexico, we have the legacy of our beer business.
That eventually became.
Heineken and that was the reason why.
Obviously, there was there was.
For a number of years, we only sold the Heineken portfolio.
But you know when we started the OXXO in Brazil as you will know.
Have to obviously work with Ambev.
As well our Heineken, but you don't I don't think we need to be special partnership was with a beverage company in every place that we think about opening retail I mean, obviously in Europe , we don't have such.
Such a federal and it should not be a prerequisite.
Obviously, we know everybody in the beverage business, we were close to many of them, but it's not a prerequisite and you should not see it as either.
And on an obstacle or a facilitator necessarily I mean, the two things vehicle separately.
That's great. Thanks, one Pennsylvania.
Thank you we'll take our next question from Bob flawed.
With Bank of America. Your line is open. Please go ahead.
Thank you very much good morning, all sense on your backlog and your one. Please note that our prayers are certainly with Daniel and his family.
But you mentioned the 1 billion pesos and digital investment can you discuss areas of focus in terms of functionality, how youre thinking about the development roadmap.
Whereas consumer and small business credit resides in that sequence.
Yes.
<unk>.
The investment that we're doing is basic thank you Bob for the question, but the as we had announced before and we have been critical assistant with with that investment we are a decent stake or part of that is basically going into the expenses of operating that business and growing. It. So we have put significant amount of money on making sure that we have the right team that we bring.
The right people.
And so those those are part of the operational expenses that are taking part of that investment as we move forward.
We continue developing the three verticals in digital that we.
<unk> told you guys overtime first.
Fintech or wallet second or loyalty program and third enabling the b to B business.
We're creating is really an ecosystem. So at this stage, what we're focusing on is making sure that the consumer experience of those.
Consumers now be getting through to the different services and for the call ecosystem.
Improved.
Would they be experiencing with ever use of the platform.
When you look at the speed for example, I mean, clearly as you said at this stage we are focusing on.
Getting a better use of the platform through the services that we have today, which is basically the wallet and the team has become increasingly increasingly knowledgeable of the different use locations for each of the cohorts that they are.
We have identified both demographically geographically and geographically and that will continue to be the case second optimizing expenses. For example, when you look at the cost.
Of acquiring new users because review significantly sequentially over the last quarter.
But importantly, we also know that once we have established is Disney.
These new.
These services.
He is very likely that we will need to move to additional services such as insurance such as credit, but that is in the pipeline, but it is not something that we are rushing into without making sure that the first stage of the.
Of the business is completed successfully which is making sure that they have the right consumer experience then when it comes to the loyalty program is similar we feel confident on the on the service we're providing today that we said that vendors that 'twenty four 'twenty, 5% right now.
We are seeing already the improvement of OXXO sales behind the the loyalty program. So they're making sure that we continue improving the consumer experience. One that is important for US is the same for the partners that we have today as you know we have a large for example, so we are focusing on improving the experience for consumers is behind us.
And that is that is the focus at this stage.
The other thing I would add Bob just so you don't get scared witnessed 1 billion peso per quarter.
Operating loss at digital is that digital is generating revenues at the proximity division as well.
For the overall <unk> ecosystem.
Cash burn is less than what you see reflected in the in the loss in the others column four also.
Right now there is a transfer price that has been assigned because of the use of the retail network, but overall the cash burn in the ecosystem is less than what you just see there some.
Thank you, we'll now move onto our next question from Ricardo Alves.
Welcome to Stanley. Your line is open. Please go ahead.
Yes, thanks, everyone first of all of course, all the best to Danielle and I will jump. The line. It's nice to hear from you again I think that your your message in the beginning of the call on the.
So far it's Glenn was really important so I appreciate that.
First very quick follow up you mentioned the buybacks the dividend policy or eventual extraordinary dividends qualitatively speaking is there a kind of a preference you guys are leaning towards here I don't know if many studied these issues for a while is there anything that you guys learned perhaps on the buyback front anything that you could share.
In terms of what you have learned so far this year when you were discussing those topics.
Then my question My my other question is more related to OXXO.
Obviously very impressive same store sales the gross margin was also.
Good, but we had a little bit of a higher expectation for EBITDA. So can you guys expand.
A little bit more on the SG&A dynamics for <unk> specifically.
Labor, obviously has been a factor in Mexico, but is there anything else that you you care to highlight.
I don't know if maybe the stepping up of the new store openings that you had from the first quarter the second quarter. The most relevant enough to move the needle on the on the <unk>.
The scale front, but just a little bit more thoughts on the SG&A level. Thank you so much.
Sure it kind of all thanks for the questions.
First with regards to buybacks as you can tell we can we have been looking at all sorts of academic research about kind of what the reaction is for the market for either a large dividend or a share repurchase program et cetera, and they can I'll tell you kind of what you want to hear at the end of the day, we're focused on generating value for the shareholders and using that excess capital.
To generate as much value. So I think the question. There is obviously a tax element that we're looking closely at but we are I mean, mostly comfortable at this point that that taxes will be relatively agnostic with regards to either choice, we make but were still perfecting that and against the question is going to.
To depend number one on what's the size of the return of capital program and then what the market dynamics and the valuation of the stock is at that moment in time and how much we can achieve on one versus the other at specific prices to ensure that we are generating as much value on a per share basis for the FEMSA shareholders, who do decide.
To add to remain with us for the long term. So again, we are looking at all of the academic studies.
And again, taking taking them with a grain of salt, but focusing more and more of the analysis on what generates the most value on a per share basis for the FEMSA shareholder.
And then on the OXXO on the SG&A front, there are several things going on there I mean number one hand, starting with the gross margin you do have a little bit of a mix effect with less services and more merchandise and that obviously brings gross margins down the.
The other effect as you know has a lot to do with the loyalty program, where we are reserving for the points that are being earned there a little bit that's more than being offset with increased traffic and increased ticket size. So we're happy to have a lower gross margin, but more sales so that obviously helps.
And then on the SG&A side again Labor reform I would say the biggest factor.
But you're right, it's not only the new store openings.
That youll see it ramping up in the second quarter, but it's all these other initiatives that we are pursuing the Broncos the opening of the lighthouse and the opening of a lot of initiatives that cost a little bit more at the beginning we're implementing new operating models in the stores to be a little bit more efficient on the supervisor.
Our upfronts, we are investing in in cash recycling machines to have higher cash availability for cash out in the OXXO stores et cetera, and all of those initiatives are being funded heavily during the first part of the year some of them cannot be capitalized they need to be expense and thats why youll see a little bit of the softness in the second quarter.
Numbers, but for the most part I would say it has to do with the labor reforms.
Yes.
Yes, just to add to that.
It is clearly as you said of two main factors is the labor cost and second the.
The new store opening but I think that is also important to know that as you look at the numbers and also the fact that the sales are increasing is also helping to absorb the cost. So when you look at quarter to quarter, we have a reduction of administrative expenses as a percentage of revenues for example.
So so the performance of oxo continues to be very very dynamic and absorbing costs as we grow the ribbon.
Very helpful gentlemen, just one quick eh.
I think I misunderstood, but is the loyalty still affecting OXXO I understood that it was not.
Yes.
Very little.
Okay. Thank you so much for the time.
Thanks Ricardo.
Okay.
Thank you.
We will now move onto our next question from Alan Alanis at.
Santander. Your line is open. Please go ahead.
Thank you so much for taking my question I'm going to two vehicles Antonio Please for everyone. Several players.
As for the World.
The most important thing.
<unk>.
Thank you.
Question regarding there are long term bullish on our long term strategy that you have or want to digital that you have for the next five years for the company overall I think that'll be a good opportunity.
Our investors two key ones that might be from you. So how would you perceive the company will be deferred.
In five years from now.
If you could touch regarding the relationship with the Coca Cola Company and Coca Cola FEMSA.
Many of them in this call know this.
Sure.
We celebrated three decades with the Coca Cola FEMSA 1983, and now you have the largest Coca Cola bottler by volume.
Do you foresee the relationship and the ownership will be out with Coca Cola in.
The next five years.
But that will be felt in my questions. Thank you so much.
One of them.
Yeah. Thank you. This is Bob I will just.
Answering your question and then I'll pass it onto us Antonio he wants to add.
Something so.
On the first part of the question related to two the next five years I would like to go back to what we have discussed a couple of times, which is the long range planning exercise that we put together.
Recently, and then we have explained to you in a number of locations and clearly that continues to be.
Our guiding light towards for the next five years.
Each of the business that have.
Very thorough very complete.
The five year plan.
Develop they are walking towards those plans in 2023 and that will continue to do that into next year as part of the results that you are seeing is precisely behind the AARP that they have developed so you should expect that that is not going to change.
We are always need.
Many processes such as long term planning.
We will review the plans is to check that if anything changed in terms of context in terms of competitive.
Activity et cetera, So you should expect that that might happen, but clearly we have.
Very strong plans in place on each of the divisions will continue to to.
So a trend level.
And we aggregated the plant.
We clearly saw the opportunities to continue our target of doubling the size of the business every five years.
So that shouldn't change either so we feel confident about the AARP and you should expect that we will stick to them both at the business level at <unk> 11.
And part of it as you know is finishing and making sure that.
But we continue deploying the defense of forward strategy and you will hear news about that as they come along but you shouldn't see any surprises on that.
Okay.
I'm curious Jose Antonio Thank you Alan for your question.
On behalf of the what we foresee for the next five years in Coca Cola FEMSA. We I can tell you and you know that I've been around with Coca Cola FEMSA seems real well for what it's worth and we cannot.
We cannot.
B a copier.
The separation of our relation with Coca Cola today.
Have a complete online critical success factors of our executives we can come on.
Okay.
So what is coming.
We want to continue growing we just formed the Candler Cup.
It was assigned to where Novartis are female and where does that is there a superb job and we wanted again as many many other times and we are very happy we see a very.
Good unprofitable in relation for the future with Coca Cola.
Got it.
Capital deployment go wall to wall is expanding.
I know you've talked with maybe.
Maybe can look a little dopamine lumpy, but could you grow capital, but EBIT will continue to support the expansion of Coca Cola FEMSA.
Yes.
This is Michael.
<unk> is always looking for inorganic opportunities as they will continue to do so and obviously, we'll support them as needed but.
There is there is no change in that we have been always.
Actively looking for opportunities.
I think Alan this is Juan.
The nature of the relationship and the clarity that we now have in terms of the business and the cash flows as you know is prompting.
The business itself to invest more right than you've heard.
The team at call yesterday talked about their capex I mean, they've been talking about it for months Theyre investing more.
This year in the next couple of years than they ever have and adding capacity and just.
Growing the business. So it really is looking like.
Have a time ahead of us when.
The conference is going to be deploying more capital in a package of said.
We would be ready to step up under the right conditions for M&A.
Got it thank you so much.
Thank you Alan.
Thank you, ladies and gentlemen, kindly be reminded that this is limited to one question.
We'll now move onto our next question from Louisville lot at GBM. Your line is open. Please go ahead.
Hey, guys good morning.
For taking my question, we'll come back with something on that during my colleagues in Wuxi.
Danielle the best of your some of your scores as well.
So.
This one's a bit philosophical.
Love to pick your brain and ask you, which characteristics do you think the next central CEO should have.
<unk> is a relevant part of the FEMSA forward strategy would likely be already on their way.
If not completed.
And then I have another one that's been very very short one.
Well, thank you Lisa.
The characteristics.
We would love to find first of all we will love to caveat Danielle back we don't know, we hope, we're still brain and rehab.
I hope that the seasonal recovery will come back otherwise, we would look for as you know these jobs and Daniel <unk> <unk> CEO that coordinate Ceos. So he has to have a very good follow through he got through.
We're able to hear from the whole team.
It makes them you have to complement on I'm bullish on motivate the Ceos of the different divisions.
We are in a very different pattern that we had in the last 20 years I mean today we.
A very nice problem of having.
A lot of cash.
Another very nice problem of lots of opportunities geographically to develop Latin America U S and.
And even in Europe .
<unk>.
His stores. So this is this has to be a matter of priority piece.
A matter of starting very well the project and decided which one goes first.
There is not.
In order of the priorities because we don't know what we could find us opportunity anywhere in the world.
We will follow the growth of all the divisions as we speak.
The potential of digital is great we need to know more about this with the business, obviously, a new venture for us completely different and nonoperating beer or soft drinks or retail but.
The CEO should be very open to new ideas very cautious on how do we invest and which projects to pursue but.
Yeah.
I hope Danielle.
Since the mill contract that's that's my expectation.
Absolutely we will hope that's happened thank you and thanks for the for the answer.
So another one just very quick I think I may have asked this in the past but.
Is there any relationship that you might have detected between <unk>.
The ongoing lower show financial services at OXXO, it's not the first quarter it happens.
And the strong advancements spin users I'm thinking that.
There is a relevant share of financial services that are now being.
Made are transacted through the ups at a lower profitability. Thank you.
This one.
I think in the long run in the long run you should expect to see a migration of some of the physical users moving to digital.
I think what we're seeing today is still is much more related to.
Kind of the vagaries of the ups and downs of the relationship with correspondent banks I mean.
As you know we've had a couple of banks that reduced there.
Moshe to work so they are coming back and we are.
Do you need to be very careful about.
The fees.
With inflation, how do you manage your fee structure.
So I don't I don't think that the.
The changes that we're seeing right now is necessarily driven by the by the secular trend of a fit.
Michael becoming digital I do think it is still much more related to weather one of our big banking partners left there is coming back or what's happening to the fee structure. So.
I think it will happen, but I don't think were seeing that yet.
Understood.
Thank you.
Thank you we'll take our next question from Bill SaaS at J P. Morgan. Your line is open. Please go ahead.
Hi, guys. Thanks for the space for questions here, and obviously echoing the the good wishes there for further Neal. So the question that we had was more if we could explore a bit on the other retail formats in Mexico, particularly around <unk>.
Maybe if you can comment a little bit on what the outlook is for for the rollout any short term targets that you can share there and obviously any colors there around.
How profitability sorry, so all the capex requirements all of that that would be Ivy I. Appreciate it. Thank you so much.
Yes, let me just thank you I think before.
The question, Indeed, I mean by that.
<unk> is one of the formats that.
They are certainly exploring as part of their multi format strategy.
<unk> frankly has has been doing at.
Terrific.
Performance during the quarter. So when we look at the result.
Nope.
And we've taken the results.
<unk>, 2% ahead of year ago.
Thrown in the in the double digit net profit increased by 12%.
And we continue to see statements are safe.
12%.
The.
Private label, which is a strong part of the <unk>.
Our value equation. It is it is social performing significantly well.
They continue to improve all the operational aspects of the stores, reducing the inventory reducing the operational costs.
We are applying the success that OXXO gas cut on the segmentation.
And importantly, they also continue improving the number of the opening of exports. So right now we have 200.
But our stores.
300 <unk> stores.
In particular in the central part of Mexico.
And our idea is that we'll continue with that expansion in the strongly in the years to come once again, making sure that we first.
Continuing the geographic areas that we are and we slowly expand to expand to others.
Continue fine tuning the value proposition, but we are very confident that the states that we have cracked.
That value proposition and it's a matter of making sure that we do.
Gradually expanded in the other parts of the yogurt in Mexico, specifically Mexico.
And if I may complement our regards to the unit level economics, I think with the gross margin structure that has been achieved through the different categories value prop and private label penetration, we have been able to I mean reach.
Unit level economics that out from a marginal perspective in terms of the store investment and the operating model that can give us I mean returns on investments well into the double digits.
And again at the firewall level that reaching the mature stores are reaching and exceeding the contribution that we originally set out for the rebranded under rebranded but the reformulated value prop three or four years ago. So we're very comfortable that as the scale girls distribution centers fill up et cetera that we will be achieving I mean.
Much better EBIT margins than what we're seeing right now and that the marginal dollars that are being invested here are earning I mean spectacular returns. So we're comfortable again at the unit level economics on BARDA are working out.
Either as or better than expected.
Alright, thanks for that Super Super helpful and if I may just to follow up on that on the on the point there on private label do you have any sense or any level that you can share with us around how much private label actually represents there within the formats. Thank you.
Yes.
Look at the total sales.
Private label is up around 21%.
Of the safety restore but then obviously it changes depending on the categories. So it goes very high when you look at <unk> product for example, it is around 27%.
What general merchandise is also higher at 27% so it changes, but it's an important part of the of the <unk> value proposition.
Okay perfect. Thanks for that and congrats on the on the results guys.
Thank you we'll take our next question from Rodrigo.
UBS and before that kindly be reminded that this is limited to one question. Each session. Thank you Rodrigo Your line is open. Please go ahead.
Sure. Thank you good afternoon, good morning, guys.
So on Jan one.
Danielle.
I will limit my question, one I would like to explore.
Thoughts on that.
Brookfield like you do.
<unk> formula there that you're bringing very impressive results in essentials.
Same store sales.
Two questions here and I would like to hear your thoughts the first one is the cash.
Cash needs.
Near term mid next year, and a scenario where or how much you could be like in the states Mexico at some point like opening one store per day.
Yeah.
But just keep that happened you mean Brookfield for instance, and the second one is you can.
And then there's to me most of the stores in or even all of the stores in OXXO.
<unk> been through pretty much.
Everything we counties coming from you guys.
Just as you kind of remind us.
What what's essentially the contribution shift from from.
Park's income base in the J D that would be.
Alright, great to cure it and congrats Gilberto results. Thank you very much.
Hey, Rod let me take the first part and then I'll tackle the comp.
Compliment I think on the on the one store per day, I mean, I don't want to put our colleagues.
In the hot seat, but thats actually what they did during the first quarter right.
If we remember that in Brazil, they use a different fiscal year. They are there. They are end of the year is at the end of March because of Victoza harvest has suffered a year or so so our first quarter was their fourth quarter.
They actually opened like 90 stores during that quarter. So it is doable now or is that a run rate for the full year no.
But is that possible, yes, I think.
In the in the short to medium term I got the kind of growth that we are looking for.
I'll, let Pat will talk about the partnership which is really growing very very well.
Yes, yes. Thank you good Eagle Ford the question look I mean first and foremost we are extremely happy with the relationship we have in Brazil, we're extremely happy with the way the joint venture is working we are extremely happy with.
<unk>.
We did.
I will call it learnings that we have under we share between the two between the two entities. When you look at Brazil today, we have a very strong base of OXXO stores right now, but we also have.
A very strong base of the selected stores they have or the partners cover were shifting Congress toward in Brazil, and they opened 35 units.
In the last quarter or so at the end of the day, we have an ecosystem of.
The stores being in Brazil between the select and the OXXO that are very powerful and very strong.
As you know they are experts on the fuel side.
And.
It's something that we plan to even learn more as we move forward with our expansion plans in other places so I mean clearly the the.
The joint venture we have there is growing ahead of expectation and we have a strong relationship with our partners that we plan to continue building in the future.
If I may add to our <unk>.
Sure Glenn.
I just want to add to one's earlier point you have to remember the 90 stores we opened in.
In their last quarter.
We're just in Sao Paolo in Campinas, because we just have one.
In D C. In place eventually will be real will be in other places. So again I'm trying to be a little bit more aggressive than than what than what one is and I'm sure I won't put the Brazilian our Brazilian colleagues on the spot here, but once we have three or four different areas, where we are saturating the market. Thus Hamilton.
Honestly, we should be able to reach that growth ended up and it can also just to complement on Barco's point you have to remember that.
The first three years of the joint venture or were run by someone who came from rate and so I mean, the local knowhow. The local expertise has been invaluable in terms of rolling out the the value proposition in Mexico, and we will continue to rely on them for our learnings that that that are being put to use in the region.
Okay.
I understood that that was very clear that the pedigree. It certainly exceeded expectations general already at breakeven right or steel.
Hello.
Call it negative operating income so that you can.
Sure.
That would be helpful. Thank you very much.
Sure.
At this point given that they are also a public company, we would rather not give out the numbers, having said that from a free cash flow perspective, given how much we're expanding at this point, we're still free cash flow negative, but in a good way.
What I can say is that the.
The economics are of the business are better than what we expected. When we originally started three years ago in all in all lines.
Income statement landfill.
Thank you we'll move onto our next question from Ben Theurer of Barclays. Your line is open. Please go ahead.
Perfect. Thank you very much and good morning, It's what Congress from my side.
Just wanted to dig into recent dynamics in offshore surely we saw very strong second quarter. Just continue the very healthy combination between tick.
Ticket and traffic was wondering if you could explore a little bit of how much of maybe that traffic was driven just by the related people more going into storage just because of the heat buying certain beverage and so on and what the trends are into into the third quarter and how you're feeling about the traffic Boris Thank you.
Okay.
Hey, Ben this is Juan.
I mean, we were talking a little bit about this even last quarter.
We were talking about the gathering location.
The first location I remember, making a comment in the call three.
Three months ago about.
Beer being very relevant now that we have I mean, we've opened fully the territory there all of Mexico to both big families of brands.
And it's really beginning to move the needle.
Even though the opening to the ACI portfolio have been doing several years ago, our began happening before years ago.
We were under Colgate people Werent really living their lives normally.
But now we are right and so people are getting.
Putting together a lot more.
Assuming a lot more and so we again see those trends where the beer category in the soft drinks category on the snacks category in the liquor category are all performing very very well now I think if we looked at it intra quarter.
Certainly the month of June was.
The strongest.
Yeah.
You point to the right to the right reason I mean, the heat the weather that we that we've had for June and the better part of July obviously has been an additional tailwind.
To the consumption of beverages. So.
So it looks like July .
Took a took off.
Or June ended so continue to see good trends.
Again, I think the broader reason is people fully going back to the living their lives I mentioned the other time.
Concerts.
<unk> like the one in our study endpoints are really all over Mexico.
Just people people gathering and consuming nor.
Normally where we have not for several years that will be my comments, yes, no and then this is the only thing that I would like to do that is that when we look at traffic.
It has been improving as you know sequentially for a few quarters now.
The strong performance that we're seeing the additional good news is that it is coming behind the general merchandise I mean, basically every single segment of the store is growing and adding <unk>.
Traffic and that is being reflected also in the on the on the market share I mean also continues to gain market share.
And that has to do with the basic the basically can be core value proposition of the of the store.
Yes.
<unk> work that is being done is paying a dividend and I guess that the consistency of it is what is helping to traffic and thats why.
We believe that in the in the in the acquired come hopefully, we'll continue to see the same.
Okay. Thank you very much.
Thank you we'll move on to our next question from Alberto Garcia and BTG. Please go ahead.
Hi, Good morning, welcome players with Millennium.
Just one quick one on spin.
Wondering receive higher transactions per user in the release you mentioned.
Increased transactions per month.
But I was just wondering if within certain cohort youre seeing.
With higher balances is higher movement on a per user basis. Thank you.
Yes, Hi, Alberto Thanks for the question.
On Spain, Yes, we are seeing different cohorts, especially the newer ones being more prolific in terms of their transaction volumes.
As they find different used cases for up for the product again cash in cash out continues to be the main one but whats really picking up now as peer to peer which is what we want to because it creates the network effect and it creates stickiness that to the product.
I would say that that for the most part we are seeing an increase in in transactions per user the way, we would want to love.
To see them and as people see the functionality of peer to peer and also the payments that.
We were seeing.
Being done on an annual basis I taped out of the services et cetera that is also being I mean, your top up once in a month and then you use it to pay for three or four services online instead of having to come back to the cashier and paid for three or four services over the course of the month. So I think it's moving in the right direction is that as we expected. It there is.
I mean, some I mean shift as say one of the other questions with regards to what that is doing I think overall to the financial services line, but having said that it's it's it's I think from an economic perspective, its not its not extremely dilutive, but more importantly, we are having more engagement in the platform, which is at the end of the day, what we want.
Great. Thank you very much.
Good afternoon.
Thank you, we'll now move onto our next question from.
At Citigroup. Please go ahead.
Yes, Hi, Sergio Matsumoto from Citi. Thank you for taking my question.
And.
Also my thoughts and prayers.
Neil and his family.
My question is on premise that loyalty program.
When you look at the strength of.
The of that program to drive traffic into those stores.
How does that compare against those.
Or non digital or analog Ics.
I just mentioned a few minutes earlier.
Such as the.
The service.
<unk>.
Mobile phone minutes top up.
That's my first question related to that is the ubiquity of OXXO stores play a role.
Under.
How does the ubiquity of play a role there.
Customer acquisition and retention and these digital.
Digital platforms. Thanks.
Yes. Thank you. Thank you. This is Pat why will I will take the second the second part of your question first and then hoping you can complement me but.
I mean clearly the.
They also.
Stores play a very very important role in the in both the spin and the loyalty program.
Having the physical store and the approach that the team is taking a set of digital approach which means.
The services that we're providing on the fintech side and on the logic side are leveraging strongly on the store both on the acquisition side, but importantly also in terms of the consumer experience on the type of.
Offers and programs that we put together so.
There is a decent stake the intention is to continue leveraging on the physical presence of the store.
The teams were very close together because clearly the store when we look at all of the store. It basically means the people that work in the store.
They are the ones that many banks have conveyed the message in terms of.
Whether the consumers are going to use the loaded the program or not.
There is a special offer that issue will be taking a look at do you need to know that they are.
For example, this is just an example, but theyre dedicated coupons, but people can use but they already.
Have them available in the in the application in the App.
So many times.
At least at this stage.
The cashier is the one that is going to suggest the user to go and look into the applications to see there any coupons, so that link between the store and on.
And digital is strong today, and we expect it to get even stronger in the future and that takes the takes us today for the first part of.
Of your of your question.
Which is.
The OXXO premiere.
At this stage.
Is.
A big part of the transactions are still on the on the physical side. So people go there and they cover.
The phone number.
They access their accounts through the phone number to the cashier more and more we're seeing that.
Users have their application and they do the transaction the truth application.
But at the end of the day, we believe that is going to be a combination of both.
Forward.
Yeah, if I might add.
In the ubiquity point, according to Banco de Mexico in all of Mexico, There are 62000 Atms.
And only 28000 or 29000 of those 62 are actually outside of our bank branch if.
If you think about OXXO in OXXO, we have 21008.
<unk> APM, so technically we Scott I don't know, 40% of the outside of Bank APM in Mexico, and if you go to the more rural areas of Mexico, we could probably have be the only ATM and down. So clearly that is a significant portion of the value proposition, especially in a cash rich.
Economy, and an informal based economy like Mexico is so clearly that is I think the main driver of the value proposition. Our job obviously is to take that that advantage and turned it into a unique user experience that that flows across not only Spain of course with payments and peer to peer et cetera, but also with the loyalty program to <unk>.
Drive that the symbiotic relationship between the between the digital and the physical store and right now on loyalty again, it's still early days, but I mean, you saw in the press release, we're at 24% tender so 24% of all the sales of OXXO are being done through the loyalty program and these again, we're still running some <unk>.
But these customers are running tickets and traffic and purchases that are significantly higher than they otherwise would have been to a comparable cohort without the loyalty program. So I think that this that this symbiotic relationship again between.
The physical store the digital wallet and the loyalty program is causing exactly the kind of network effect that we wanted to have.
Thanks, Chris.
Thank you and we'll take our last question from Henk Tonight at Scotiabank. Your line is open. Please go ahead.
Alright. Thank you for your time I apologize, if I get disconnected I'm, having some issues with my line.
Just wanted to say Bernstein on what's in front of you shy away from you once again.
All the best.
So the question that Havent stimulated to jump forward.
The announcement you had mentioned the potential to attempt to have.
The traditional channel.
I would like to know how well.
Can congress supplier of the traditional channel.
You have some clarity on the economics, so how would you would argue nigel.
The red trucks with Coca Cola company.
Uh huh.
Do you believe that we could eventually start to perform a relevant supplier or even at the one stop shop with a traditional channel in Mexico. Thank you.
King.
Hi, This is packed with thank you for your question the language breaking up so I will try to answer that.
But basically.
We continue to believe that there is a lot of opportunity of enabling.
The traditional channel and solving key.
Key pain points for.
For many many years they have cut I mean first of all I mean, clearly the pricing is a concern for that.
And that is almost at Brightcove entry, making sure that they have the right price.
It's something that is a very important part of the of the value proposition on that side you can imagine that I mean, clearly we believe that we are well equipped to.
To solve by one or two to at least address it simply because we have a very strong commercial relationships on the OXXO side, but there are a number of other pinpoint but that these segment suffered over the years.
<unk> is the.
The availability of products under delivery.
Because today, but they have to do even most of the time they have to go and look for the product themselves opened store late because they have to go to the wholesaler service in cellular those or other places.
To supply their their products and that means that they lose sales as they go on the combined would have to pay for transportation et cetera, So having an ecosystem in which you cannot really receive the products placed the order the day before two days before one KEPCO year operation for the day.
And then receiving it in food.
At the right price is basically going to solve it.
Very big pain point, and the second one which is not minor. He used is that every time they go out and buy they have to buy full cases.
That is an issue that is unusual because many times they only need to buy a few units and.
And given that they don't have access to credit they don't have <unk>.
To any source of financing they have to work with their own.
Working cap to pay for these things and if they buy a full case of something that is going to take two months to repay you can imagine they kabbani trap that they cannot move further.
In reality, we're ecosystem can actually offer them Wi Fi the unit.
Simply because also has been doing that by supplying their stores by the union. So that's not a minor thing it's a difficult thing to do because you have to make money as you do it.
So it's an expert at doing that so so clearly we are planning to continue exploring all the alternatives we have to provide the platform that we installed royalties tissues for an hour.
Traditional channels. The traditional channel continues to do we had an important segment for.
For the retail and Mexico, and we expect it to continue to be as such so so clearly all playing a role in helping them is going to be important.
I think I would just add this is juan.
Now this is a question that has come up.
On the Coke FEMSA side as well just remind everybody that it's still early days in.
In terms of how we build this thing and how roles and responsibilities and capabilities and interactions.
What is still to be defined so.
It's looking very promising.
But it's still early days.
Okay.
Okay.
Thank you.
Thank you there are no further questions in queue.
I'll now hand, it back just one for closing remarks. Thank you.
Thank you everyone. Thank you obviously for all of your kind words again regarding Ananda, we will definitely relay them to him he might very well be listening to the call. So maybe if you already caregivers.
We're always available as always myself on the team with.
Antonio you want to also youre going to find out how we can.
Have a great end of the week and weekend guys.
We'll be in touch.
No. Thank you. Thank you Juan Thank you for your time, thanks for the interest on the company as always.
I will try to be at least on a couple of these.
This kind of conference calls per year not on all of them unless there is an important news that we got to announce.
Gladly.
<unk> com.
Also you should know that through one you kind of contact bolster all the time and we will stay in touch and thank you very much and see you soon thanks.
Thanks.
Thank you ladies and gentlemen, this concludes today's call. Thank you for your participation.
You may now disconnect.
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