Helen of Troy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 11 speakers on the call.

Operator

Hello, and welcome to the FEMSA's Second Quarter 2024 Results Conference Call.

Operator

My name is George. I'll be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call, your lines will be in a listen only mode. However, you will have the opportunity to ask questions I'd now like to hand the call over to your host today, Mr. Juan Fonseca, Head of Investor Relations to begin today's conference.

Operator

Please go ahead, sir.

Speaker 1

Thank you, George. Good morning, everyone. Welcome to FEMSA's Q2 2024 Results Conference Call. Today, we are joined by Martin Arias, our CFO and Jorge Collazo, who heads Coca Cola FEMTA's Investor Relations team. The plan is for Martin to open the conversation with some high level comments on our strategic progress and business trends, followed by a more detailed discussion of the results and finally opening the call for your questions.

Speaker 1

Before I hand over the call to Martine, I want to address the disclosure at the end of today's press release related to changes to our Q1 results as reported. In the press release for the Q1 of 2024, we classified certain results related to non core discontinued operations on several incorrect lines, and we are reclassifying them today. The changes only impact the consolidated income statement and mainly cause a decline in income from operations. However, they do not impact consolidated net income and do not impact any of the results of the business units reported separately. You can find a detailed table at the end of today's press release, and Martine will briefly explain the main differences before we open the call for your questions.

Speaker 1

Martin, please go ahead.

Speaker 2

Thank you, Juan. Good morning, everyone. Before we review our quarterly results, I would like to update you on the most recent steps we have taken as we continue to execute on the FEMSA forward strategy regarding initiatives related to capital returns for shareholders as well as asset divestitures. As you are aware, we remain actively engaged in share buybacks. In the Q2, we completed our 1st accelerated share repurchase program for $400,000,000 and initiated a new program for $600,000,000 Additionally, during the 1st 6 months of 2024, we have bought back approximately $180,000,000 in shares in the Mexican stock market.

Speaker 2

Earlier this year, we also secured shareholder approval for an extraordinary dividend of approximately $600,000,000 half of which has already been paid. This brings our extraordinary return of capital to shareholders for 2024 to nearly $1,800,000,000 equal to approximately 60% of what we committed to by the end of 2026. These figures do not include the ordinary dividend of approximately $800,000,000 half of which has been paid to date. This is all consistent with the capital allocation framework we communicated last February and we will continue to advance towards our stated objectives. In terms of our progress on asset divestitures, we announced last week that we have reached a definitive agreement to divest our refrigeration and food service equipment operations in Embeda and Torre for a total amount of approximately $450,000,000 This transaction is expected to close before the end of the year.

Speaker 2

And finally, in the 1st week of July, we received the remaining payments from our divestment in Gentro Restaurant Depot totaling $945,000,000 This means we have now received the full amount from the JETRO transaction. This is not reflected in our financials reported today, but the cash is now on hand. We will continue to analyze opportunities to return capital to shareholders beyond our ordinary dividend, consistent with our stated objective of a total of approximately $3,000,000,000 by the end of 2026. In addition, as we gain greater clarity and all the organic and strategic opportunities available and in light of developments on the macro front in the coming years, we will analyze the possibility of launching additional capital return initiatives. Let me turn to the general trends we saw in our operations.

Speaker 2

In the Q2, we continue to see good momentum and strong performance from our core business units. Once again, most of our operations, including the 2 that contribute most to our results, delivered a solid set of numbers. Proximity Americas saw deceleration in the pace of the same store sales growth in Mexico against a tough comparison base due in part to a shift in the timing of Holy Week celebrations relative to last year, as well as volatile weather, but offset by a stellar gross margin and solid store expansion. For its part, Coca Cola FEMSA delivered a remarkable performance, showing double digit increases across its own income statement, driven once again by strong volume and revenue growth in its major markets. We continue to see good results at Allora and OxoGas with both businesses delivering double digit growth in income from operations.

Speaker 2

At our Health division, we saw sequential improvement in our fastest growing retail operation in Colombia, combined with stable results from Chile. But we again face competitive headwinds in Mexico and we are laser focused with our plans to change the trajectory in that market to bring it in line with the positive dynamics we see elsewhere at FEMSA. Finally, at digital, we continue to add users and advance towards our ecosystem objectives. Now let me go over the quarter's results in more detail. Let's begin with FEMSA's consolidated second quarter results.

Speaker 2

Total revenues increased 12.2% and operating income rose 15.8% compared to the Q2 of 2023, driven largely by strong growth of Proximity, Fuel and Coca Cola FEMSA and despite weaker performance in our Health division. Net consolidated income increased 75.5 percent to ARS 15,700,000,000, mainly explained by improved operating income, a non cash foreign exchange gain of ARS 6,100,000,000 related to our U. S. Dollar denominated cash position and derivative financial instruments and a higher interest income related to an increase in our average cash balance. This was all offset by a significant shift from a large other non operating income to a small non operating expense related to the receipt of Heineken dividends and the gain from the sale of JRD in the Q2 of 2023 and was also offset by higher interest expense reflecting a benefit in the Q2 of 2023 from a one time gain related to the repurchase of debt.

Speaker 2

Now turning to our operational results. Proximity Americas delivered a solid performance in the 2nd quarter. OXXO same store sales increased 4.1% in the Q1 I'm sorry, in the 2nd quarter, driven by an increase of 4.7% in average customer ticket and a decrease of 0.6% in traffic. The Q2 was an atypical one, where each month reflected a unique set of mixed effects, generally more negative than positive. For example, the month of April had a tough calendar effect due to the shift in the Holy Week celebrations.

Speaker 2

While May benefited from extremely high temperatures across Mexico and June faced a comparison base of approximately 20% growth in 2023 as well as some early tropical storms and the restriction of alcohol sales ahead of the national elections. Ultimately, these factors combined to contribute to the deceleration of same store sales. However, gross margin expanded by 3 10 basis points to reach 44.1%, strong trend driven by strong trends in commercial revenue income I'm sorry, in commercial income, a positive contribution from financial services and revenue management initiatives. Income from operations increased 7.6%, while the operating margin contracted 10 basis points to 9.9%, reflecting higher operating expenses as we build our platform in South America, higher labor costs across markets and investment behind capability building and strategic initiatives such as store segmentation and revenue management. On our store expansion front, OXXO added 404 net new stores during the quarter, of which 332 were opened in Mexico and 72 in South America.

Speaker 2

This figure includes 14 openings by Grupo NOS in Brazil. Historically, store openings typically have lagged in the first half of the year, complicating our operations in the second half and resulting in lower incremental revenues from those stores for the full year. Therefore, in an effort to improve the shape of our annual expansion curve, we have shifted our focus this year to opening as many stores as we can during the first half. This approach will enhance the efficiency and productivity of the new stores and avoid the operational congestion in the key Q4. This means our full year target for OXXO Mexico remains between 1100 net new stores, which is the sweet spot for which our growth engine is currently optimized.

Speaker 2

Moving to Proximity Europe. Total revenues increased by 5.8 percent in pesos. This positive performance was driven by growth in all business lines. Gross profit increased 8.8% in pesos, while gross margin improved by 120 basis points reaching 43.3%. At the operating income level, Valora again delivered strong growth with 41% growth and 100 basis points margin expansion, reflecting the continued ad performance of the B2B operation, healthy results from the Retail and Foodservice businesses and consistent cost management.

Speaker 2

Turning to the Health division. Total revenue showed a slight contraction of 0.4% with the same store sales decreasing 1.1%. This outcome was primarily driven by a highly competitive environment in Mexico and Ecuador, which was offset by stable performance in Chile and continued good momentum in Colombia Retail. As a result, operating income fell by 14.8% in pesos and the operating margin contracted by 70 basis points reaching 4.1%. While these numbers show a sequential improvement from the Q1, this challenging dynamic continues to highlight the need for strategic adjustments to overcome the challenges and change the trajectory of our business, particularly in Mexico.

Speaker 2

As we have mentioned before, we are dedicating considerable efforts to addressing the issues within the Health Division. In Colombia, we continue to see encouraging results from our strategic acceleration of the retail component of our business, making us the retail leader in that market and reducing our exposure to the institutional sector. This transition is steering us towards a more profitable and structurally robust operation, enhancing our overall performance and stability. Meanwhile, in Mexico, we are undertaking several significant strategic measures, including the launch of a new store format following the successful template used in our South American markets, which among other things emphasizes the Beauty and Personal Care categories and strengthens consumer promotional activities. We will keep you posted as these initiatives progress.

Speaker 2

Turning to OXO Gas. We posted a notable 15 point 9% increase in same station sales and 16.2% in total revenues, reflecting solid performance in retail and institutional sales. During the quarter, the gross margin reached 11.6%, while the operating margin stood at 4.2%. Although the structured profitability from our fast growing institutional business is lower than that of retail, this was offset by operational efficiencies. Turning to digital at FEMSA.

Speaker 2

We continue to make significant progress during the quarter. The number of active users for Spin by OXO reached 7,900,000 marking a 37% year on year growth. This demonstrates consistent customer adoption and an increase in transactions per user. Our Spindrenia loyalty program also showed impressive growth with a 44.3% year on year increase reaching 22,800,000 active users. Approximately 36 percent of OXXO Mexico sales and 40.6% of OXXO Gas sales are now linked to Spin Premium.

Speaker 2

This integration strengthens our data gathering and utilization capabilities. We expect to gradually focus less on total users with a shift towards a higher number of transactions per user. Finally, Coca Cola FEMSA reported another impressive quarter, achieving double digit growth across its income statement. This remarkable performance was driven by consistent volume growth across most of its markets, coupled with effective revenue growth management initiatives and despite the challenges faced to the flooding of its plant in Port Alegre, Brazil and the Holy Week calendar shift. A replay of COF's quarterly call, which was held last Friday, is available on our website.

Speaker 2

Regarding CapEx deployment, our key priorities remain to enhance our operational capabilities, drive innovation and sustain organic growth across our operations. In the Q2, our CapEx reached ARS 11,300,000,000 representing 5.7 percent of total revenue and 35.1% increase over the same period last year. This growth was driven by the expansion and remodeling of storage at OXXO Mexico, the continued development of OXXO LATAM, increased investments in production and distribution capacity at COF as well as continued investment in our FEMSA wide digital transformation initiatives. Finally, let me go over the table that we included at the back of our press release which presents in detail a comparison between the Q1 2024 consolidated income statement and the comparable Q1 2023 results and the reclassified statement published today. The main effect of these changes are the following.

Speaker 2

Total revenues grew 10.5% in the new numbers as opposed to 11.3%. Gross margin was 38.7% in the new numbers as opposed to 39.4%. Income from operations were ARS 12,935,000,000 versus ARS 14,767,000,000 and reflected a margin of 7.3% in the new numbers versus 8.3% relative to the reclassified 2023 figure. Income from operations grew 12.2% in the new numbers as opposed to 14.4%. Other operating expenses other non operating expenses were only 487,000,000 instead of ARS2.4 billion.

Speaker 2

As mentioned in our press release, this does not impact the consolidated net income figures nor does it impact the results of the businesses reported individually in either period and does not affect the 2023 audited statements. And with that, let's open the call up for questions. Operator, please.

Operator

Thank you very much, sir. The first question today is coming from Ben Taurer coming from Barclays. Please go ahead sir. Your line is open. Yes.

Operator

Good morning. Thank you very much for taking my question, Martin. So one thing I wanted to follow-up is just the strength of the gross margin at OXXO. I mean, that was obviously, as you've highlighted in your prepared remarks, a lot driven by the commercial initiatives, but it also feels like the financial services. So wanted to understand if you can help us bridge the success that you're having at your digital initiatives, be spin by OXXO, but also premia as it relates to that boost on the gross margin.

Operator

So how sustainable is that boost and how much of that is really related and interconnected with all the success you've pointed out in the press release when it comes to the digital initiatives? Thank you very much.

Speaker 2

Yes. Just to clarify, I mean, the digital initiatives, many of them are housed in digital at FEMSA and are not reflected in the proximity numbers per se. What you will see in proximity that is related to digital is that the initiatives of many of our those efforts benefit the store and tend to drive traffic and consumer engagement. As I said in the past, tomorrow for any reason we decided that Digital FEMSA should be reintegrated into OXO, a significant portion of the initiatives that Digital FEMSA undertakes would have to continue to exist exactly as they continue to exist. For example, Premia spin by OXO.

Speaker 2

So we are still not, I would say, seeing the full potential of the digital at FEMSA monetization of data or consumer promotions through the app at the level that we expect they will occur in the future. That's an ongoing process. So the improvement in the gross margin that you're seeing today is really very typical work of retailers gaining commercial income from suppliers, to promote their products and to give them prominent placements and to drive promotions. In the case of Financial Services, as you may know, Financial Services has a relatively higher gross margin. It's a service.

Speaker 2

So it doesn't really have a very large COGS associated with it. And so when that business does well, it tends to improve the overall gross margin of the business. That effort on the commercial income related to suppliers, I would tell you, is a product of many years of capability building and focus. And as you know, the history of OXXO has been one of every year creating a series of initiatives that create new layers of value. And we're always thinking 1, 3, 5, 10 years out, what do we need to be doing today.

Speaker 2

So today you're seeing the harvest of years of capability building, hiring of people, development of the systems, so that we can offer suppliers very varied and segmented opportunities for consumer promotions. So that is we're harvesting that today. I don't know if you have anything to add.

Speaker 1

Yes. Hi, Ben. This is Juan. I mean, I would just add within that role that OXXO has increasingly played as a partner of our suppliers' marketing efforts, you are seeing kind of the early days of not just in the physical store, obviously, banners on the walls, decals on the doors of the coolers, that sort of thing, displays, kiosks. But the early days of digital, screens at the stores and other ways through which the commercial income is being expanded into the digital realm.

Speaker 1

And of course, this also will involve digital FEMSA in larger ways. The other comment I wanted to make is in the kind of the old school services, which to Martin's point continues to perform well, in addition to whatever is happening on the digital offensive side, we did see double digit growth in the financial services. But that's just kind of more people going to the store and paying their bills and paying for their purchases and other different things that we're doing with Amazon. And so kind of the same old bricks and mortar give people more reasons to come to the store. And we are being our colleagues are being very successful on that front.

Operator

Okay, perfect. Thank you very much. Thank We'll now move to Rodrigo Alcantara calling from UBS. Please go ahead. Your line is open.

Speaker 3

Hi, thanks for taking my question. Just a follow-up here on the gross margin. It was quite impressive. I mean, maybe you can just break down, I mean, how much also a proportion would you say could be attributed to the commercial income? And how much would you say could be attributed to the services, which is also very interesting what you commented, Juan.

Speaker 3

I mean, fifty-fifty, forty-sixty, if you could give us some more granularity on that just for us to assess the sustainability of the gross margin expansion would be very helpful. That would be my question. Thank you.

Speaker 1

Hey, Rodrigo, this is Juan. I could tell you, but then I'd have to kill you, right? So look, commercial income is very relevant, right? I would say and some of you will remember my comments from a year ago or 1.5 years ago, having opened the stores to both brewers, right? I mean, opening the stores to the Modelo portfolio always held potential in the sense of having the 2 large brewers competing for space in what is the most important channel for them.

Speaker 1

So that is beginning to actually take place. We've become important for a number of suppliers or number of categories for whom OXXO is, bar none, the most important place to deploy resources because we are a not just a double digit, but significantly double digit part of their channel structure in Mexico. So it works as a partnership obviously, and it is I mean, again, I'm not going to tell you a number, but it's very relevant. Now I did mention a few moments ago that after some years, also for many of you who have been in service of the company for a long time, where we had seen financial services kind of plateau, we are seeing, I don't know if a resurgence is the right word, but certainly having brought as Manorte came back, we made some changes to our relationship with BBVA. And I mentioned that a few moments ago, some of these bigger e commerce players for whom a lot of the purchases are people will do the purchase online, but then they prefer to pay in cash at the store because they don't want to provide their data online or for whatever reason they feel more comfortable paying in cash.

Speaker 1

So things that did not exist 2, 3 years ago are happening now on the financial services side. So I would say those 2 are obviously the bulk of what's driving the expansion, But that's been true for a long time, right? And I would say if I have to say which is bigger, I would say commercial income is bigger. But yes, that's I think as far as I would take it.

Speaker 3

That's helpful, Juan. Also on this front, I mean, you a couple of quarters ago, months ago, you announced kind of like a partnership with Amazon Mexico on that. I mean, is this could you give us any update on this? Is this something also that is contributing to the service income line? That would be all.

Speaker 3

Thank you very much.

Speaker 1

I mean, we've been working with Amazon for a while, as you know, in terms of the click and collect and having packages kind of under the counter. We are making some efforts to see whether there's a lockers alternative that we can deploy at some of the stores. We work with not just Amazon, we work with other e commerce players where you can pay for your purchase, as I mentioned, some of them, but people like Mercado Libre where you can also do that now. You can obviously through gift cards and other products. I mean, it's a very dynamic part of the business, right, where every month, every quarter, we try to have more again, more at the end of the day, it's more reasons for people to come to the store.

Speaker 1

They generate profit streams, but they also bring footfall, right? So it works out for us.

Speaker 3

Great. Thank you, Juan.

Operator

Sure. Thank you, mature. We'll now move to Ricardo Alves calling from Morgan Stanley. Please go ahead.

Speaker 4

Hi, everyone. I had some technical issues. Can you hear me?

Speaker 2

Yes. Yes, Ricardo.

Speaker 4

Thank you very much. Thanks for the call. Thanks for the opportunity. What's even more impressive to us about your gross margin expansion is that you delivered that in the context of average tickets that were in line with inflation and not above inflation as we've seen consistently over the past few quarters. So I wanted to talk about your average ticket as well.

Speaker 4

Appreciate already the comments you made on the gross margin expansion. But thinking about your same store sales and the component of average ticket, what were the main drivers in your view to deliver above inflation before the Q2? And then in turn, what were the drivers for it to perform just in line with inflation in the Q2? I'm just trying to think of reasons that impaired that performance in the second quarter so that we can see above inflation figures as we move into the second half. I mean, I would understand the traffic being down because of the holiday shift, but maybe there's more details on the mix of products and maybe categories that were under inflation ticket.

Speaker 4

So that's my first question kind of related to same store sales going forward, but focused on average ticket. My second question, we've been positively impressed over the past few months on the shareholder remuneration front, over $2,500,000,000 of buybacks and dividends. When you reflect I think that maybe this is a question to Martin. When you reflect on the announcement made on February versus your current execution, which in my opinion is above expectations, what are the key learnings? Or with the learnings that you've had, are you willing to change in any way the announcement that you made in terms of your cash allocation down the road?

Speaker 4

You did another accelerated share repurchase. Is that the main focus going forward or perhaps another dividend early next year? And specifically for 2024, can we be getting closer to $3,000,000,000 in total return based on everything that you did and you can still be active on local buybacks in Mexico? Sorry for the long question and thanks again for the time.

Speaker 2

So on the capital allocation, I mentioned it in my comments. We will always consistently reevaluate capital return to shareholders, which is one of the core commitments made during FEMSA forward. So that is a history that will never end. There's no final chapter on capital return. So as we gain clarity on organic and inorganic opportunities available to as we understand the macro environments in which we're operating and the challenges or opportunities that creates.

Speaker 2

And as we see the cash generation that our businesses are generating and in particular, the return that we're getting from the organic investments that we're making, we will have to reevaluate this consistently. But we're now our dividend now is up to over $800,000,000 That's the ordinary. That's a very sacred number that going forward, we will protect and maintain as much as that is possible for us. As to the extraordinaries, again of the $3,000,000,000 that we promised that we would return to the markets in an extraordinary fashion, we've returned 1,800,000,000 dollars As to whether we will accelerate the remaining $1,200,000,000 that is yet to be seen and the determination of whether it will be dividends or shares will be determined by market conditions generally. So when we see opportunities to buy our shares at a compelling price, we will do so.

Speaker 2

And if not, we always have available to us the ability to repay through extraordinary dividends. And I make this judgment almost every month. We meet, we discuss what our plans are, how our results are coming, how we see the markets, how we see the opportunities in the short, medium term and on the basis of that. So I don't want to tell you that whether we will or will not return the additional $1,200,000 because that's the decision that's made when we will return that $1,200,000 because that's the decision that's going to be made based on market conditions. So I hope that's helpful and that answers your question.

Speaker 2

Yes. No, let me take a stab, Ricardo.

Speaker 1

This is Juan, on the same store sales conversation. I mean, certainly, the quarter, as Martin described in the opening remarks, was a very strange quarter in terms of each month having one offs or tough comparison. Generally, I think the subject of tough comparisons is a bit of a constant. I think we've mentioned at the outset that for the month of June, we were lapping a 20% growth for same store sales. And this was both in terms of the ticket that you focus on the question, but also traffic, right?

Speaker 1

So we've talked a little bit about segmentation and revenue management capabilities being developed at OXXO. Obviously, that should continue to help us drive pricing hopefully above inflation. If I take a step back and I look at kind of how the year is evolving, even thinking about margins for a second, we in the Q1, we saw the contraction at the operating level be kind of bigger and hopefully it's getting smaller now. I mean, certainly, sequentially from Q1 to Q2, it did get smaller and hopefully we can continue to shoot for that flat margin for the full year. But on the same store sales front as well, we are getting into easier comps, right?

Speaker 1

As we get into the second half, we're getting into easier comps. So that should help in terms of the number that we print for 3rd Q4. One thing that is true though and that's kind of bigger than FEMSA is that just historically, after elections, second half after elections, sometimes there's a bit of softness out there in terms of the consumer environment. We'll see what happens this time around. But we're optimistic that the tools that we have and the capabilities that we have today that we maybe didn't have a year ago, 2 years ago, combined with a more normal comp base, where we're not lapping 15s 17s 18s should make for a set of numbers for the second half that is kind of which is more normal.

Speaker 1

And as I've said before, we'll see if we the new algorithm for same store sales ends up being better than what we used to have before COVID when we talked about 5% same store sales is kind of the mid single digit that many of you have heard me say a 1000 times. We'll see where we end up if we can do a little bit better than that. But that will also make some assumptions about inflation, right, and where inflation ends up. Obviously, we got some news this morning about inflation picking up a little bit. So we'll have to deal with that.

Speaker 1

But generally speaking, I think we feel good about our ability to structurally improve on the algorithm with these new capabilities that are being developed at OXXO.

Speaker 2

Yes. I would just add, look, in a competitive environment, and we live in a competitive environment, we our policy is not just to look at inflation and to say, I'm going to increase it above inflation. I mean, that's an unsustainable business model because part of the secret that OXXO has always had is that it is price competitive to other alternative retailers, but it is extremely convenient. And so being respectful of that principle of our success, what we need to do is drive more traffic into our stores. We need to drive more opportunities for consumers to come to our store to do more things in that store, be they be services, be they food, be they other solutions that we can bring to them.

Speaker 2

And so we tend to focus really on revenue growth generally, more than the ticket per se, and that ticket relative to inflation because that is dictated in many instances by market conditions as opposed to whatever we feel we want to do or not do. And we focus a lot more on margin. As a good retailer, it's about the gross margin and maximizing that as much as possible. So I understand your question and I know it's a figure that people from the outside look a lot at because it's easy to understand, it's publicly available, you can compare across retailers, but the formula, the secret sauce is a little bit more complex. And to be honest, if you ask me all the ingredients, I could tell you all the ingredients, but the components of those of that the mix actually changes and it's changing over time, it changes by season.

Speaker 2

It changes as we develop new so our secret sauce is always getting better and the mix of the ingredients is changing.

Speaker 4

That's a very fair point, Martin, and Juan as well. So thanks for the color, really helpful.

Operator

Thank you very much, Mr. Chavez. We'll move to Bob Ford of Bank of America. Please go ahead, sir.

Speaker 5

Hey, thank you.

Speaker 6

Excuse me, good morning, Martin and Juan, and thanks for taking my question. How are same store sales in July at OXXO Mexico? And how are you thinking about the legislative proposals to limit the work week and the funding or process changes to accommodate those? And then one you touched on the change curious if you could expand on the comment about the change in the relationship and maybe how these MPOS devices are playing into that? Thank you.

Speaker 1

Let me maybe start Bob, this is Juan. Maybe start with the end of your question and we'll try to cover everything. Generally, I think the relationship with our partners on the financial services side is it's interesting over time how it changes, right, because it's the type of customer that we serve is in the financial services. The different banks have different positions, I guess, in terms of how much of that they want OXXO kind of outsourced to OXXO. So it ebbs and flows, and we have really good relationship with BBVA.

Speaker 1

The number of transactions that each one of their customers can perform at OXXO per month increased recently. It does cover other aspects in terms of having the devices at the stores. But it's a very dynamic process, right? It's I won't say love hate, but certainly different amounts of love in terms of the role that OXXO plays for these retail banks in terms of large chunks of the population that can eventually see OXXO as kind of the place where they bank. And so that's very much a story that is evolving.

Speaker 1

But right now, and I think I connect this to my earlier comment, I think we're going through a really good phase of how we're interacting with our we don't have obviously, the month is not over yet. But I go back to the comment I made a few months ago that second half of election years, there's plenty of data that shows that it would not be surprising to see a bit of a deceleration. We'll have to wait and see if that materializes. But yes, I would say what we've seen is we'll be consistent with that.

Speaker 2

Yes. I've just emphasized what Juan said. Normally as a new government administration takes over, there tends to be a little bit less execution on the budget and as new authorities come in and make judgments about priorities and understanding Obviously, this should be a much softer landing in terms of a transition of government, given that the same political party won and the close working relationship between the soon to be former President and the future President. So we'll have to wait and see on that side.

Speaker 6

And then just lastly, how are you thinking about some of the proposals to reduce the work week? I mean, how abrupt do you think they can be? And how do you think you can fund those?

Speaker 2

Look, literally, we're just reading publicly available information. It's our understanding that the work week will not be treated in this short legislative session that will happen in September. I understand that's off the table. But again, this I'm reading what everybody else is reading. We do expect in the medium term that this the reduction of the work week in Mexico government has been very clear that it's an agenda.

Speaker 2

And as always, we will respect the law and we'll implement the requirements of the law. Generally, our we're sort of agnostic as to these things as long as it's equally applied across the competitive environment because then everybody has to react with the appropriate hours and many of their outlets and dealing with the cost impact of those issues. And till now, all of these issues have been implemented in that fashion. They haven't been particularly targeted towards a particular industry or a particular type of retail. So as long as it's applied equally and across the board, we will react and we believe that at the end of the day, we're in a position to continue to compete as well as we've competed against everyone else.

Speaker 2

As to the minimum wage, again, during the campaign, reading exactly the same thing everybody else is reading. The future President announced that it is her intention continue to increase the minimum wage, albeit at a slower rate than it was in the last 5 or 6 years. So we continue to expect that to happen. Reacting to that, we are being proactive in every quarterly business reviews that we do. The OXXO team is doing an amazing job of finding areas of opportunity for efficiencies through technology, through dynamic scheduling, through shifting responsibilities between store leaders and store area supervisors, the use of part time work.

Speaker 2

The other day, they were showing us a mapping that they're doing. They did it across 200, 300 types of stores with different segmentation to figure out where the peaks were versus the labor capacity in a store at any given moment. And despite what you would imagine, they saw an enormous number of opportunities where, hey, do we really need everybody to start their shift at exactly the same time? Or can we have some people starting the shift at 8 o'clock in the morning and finishing at 4 or 5 and have other people start at 10, but finish at 6. And they're playing around with all these mix.

Speaker 2

Again, that segmentation that we always talk about from the perspective of value proposition, is that segmentation that's also happening in an operational level. And again, that we believe will give us flexibility and opportunity. And as I said in the past, the increase is the minimum wage for us as long as it's applied equally, we see it as a positive. It's going to help consumers. It's going to be good for consumers.

Speaker 2

And consumers who are making more money will be spending more money at OXXO's and we'll be buying more soft drinks and we'll be going to more of our pharmacies and taking more trips and using more of our gasoline. So we are in the segments of the economy, which generally benefit from the policies that the current government is implementing.

Speaker 6

That makes sense. Thank you so much.

Speaker 1

Thanks, Paul.

Operator

Thank you, Mr. Ford. We'll now move to Thiago Portolucci calling from Goldman Sachs. Please go ahead.

Speaker 7

Yes. Good morning, everyone. Thanks for taking the questions. My first one is a follow-up on OXXO traffic, right? When we try to isolate here for calendar, on average, you grew traffic by 0.8% in the first half of the year.

Speaker 7

This is a deceleration from last year, clearly, and it still puts you way below where you used to be pre pandemic, right, if this is a reasonable base? I know Juan mentioned in one of the answers how important it is traffic to sustain the business model and profitability going forward. But given this low run rate relatively low run rate that you are printing, how realistic it is to expect an acceleration in traffic in the back end and in 2025? And what are the drivers for this? This is the first one.

Speaker 7

And the second one is still on OXXO, but now on profitability. You posted more than 300 basis points expansion in gross margin, but essentially flattish operating margin, right? I know in the press release, you mentioned labor important? If it's labor, this pressure should ease next year. If it's LatAm, it could be more structural.

Speaker 7

So just to help us framing the evolution of SG and A in OXXO. Thank you very much.

Speaker 2

Just one second, please. Juan will take the part on the traffic and then I'll take the one on the operating margin operating income margin. Yes. So let me start, hey, Thiago.

Speaker 1

I mean on the traffic side, if we go kind of back a few years to and you were talking about pre COVID, and I think that is very relevant. We had this conversation, I'm sure, with many of you before COVID. We would talk about within that 5% same store sales that I mentioned a few minutes ago, that was kind of my go to number, assuming the Banco de Mexico, the ban for inflation between 34, we would get of that 5, it would be basically 4% ticket and 1% traffic, right? 1% traffic was kind of what we aspire to back then. And I would say, it probably continues to be what we would aspire to right now.

Speaker 1

I mean traffic is a lot harder to come by than ticket. There's also the factor of how the fact that we're adding 4% somewhere between 4% and 5% new stores every year, what does that mean for the individual traffic of a store. But I would personally sign on the dotted line if we could get to that one point of incremental traffic because to Martin's earlier comment, I mean, at the end of the day, getting more products and services and just figuring out more needs to satisfy at the store is really hard, right? And we do it well and we've done it for a long time. We expect to continue to do it.

Speaker 1

But generally, it will be I'm talking to you about 20% of the same store sales number. If you can do 20% of that being traffic, I think you're doing a great job. Quite frankly, what we've seen in the last couple of years is is just not where we were doing 15% since our sales growth, where 8% was ticket and 7% was traffic, that's just not replicable and it was it certainly had a component as we discussed at the time that had to do with recovery post COVID, right? People going back to certain activities, going back to certain places, going back to the office, which is something maybe the one that continues to happen as we speak. But I would expect traffic again to normalize somewhere around 1 point within the same store sales calculation, And I think we'll be happy with that.

Speaker 2

As to the issue of expenses, yes, they were 20 plus percent this quarter. Part of what you're seeing is the acceleration of growth in LatAm OXXO, where there has been an investment in people and capabilities relating to the more accelerated expansion that we're trying to achieve in some of these countries, which are not Mexico. Without a doubt, labor is an issue, But so the number the total number for Mexico is actually below that by, I would say, 25%. So Mexico itself was more in the sort of 15% range. And then what you're seeing is OXO LATAM and that investment And so I would say labor is a driver and I would say capability building and building out the teams for more aggressive expansion for implementing some of the initiatives that we're developing in Mexico, transporting them to the countries in OXO LATAM.

Speaker 2

That's what I would have to say on cost and expenses. And I would just connect,

Speaker 1

I mean, that last comment on Oksalata. I mean, the reason this is beginning to move the needle a little bit here is that in some of these places, in particular, I would say in Colombia, we have gotten to the place where the value proposition is, we believe, the right one. And so the pace of growth is increasing. And so the platform, the team that you need in place to kind of take that operation to the next stage in terms of just sheer scale, we are at that inflection point. And so that's, I think, where Martin is coming from.

Speaker 1

And in terms of those expenses increasing in what is otherwise a very small part of the division, right, as we think about South America versus Mexico.

Speaker 7

Thanks, both. If I may, just a quick follow-up. When you frame your ambition, right, for Latin America, which is huge, would you say you would need to invest more OpEx to get there or you already ballpark where you want to be?

Speaker 2

I mean, there will definitely be an investment. I mean, the more success you are and the more stores you have, I mean, when you reach a certain level, you get some operating leverage. But in the retail business, as compared to other businesses, the number of people in the stores is a function of the number of stores that you have. There's no after you found the right mix of people that you need in a store ideally, it sort of starts being a bit variable. Your distribution costs, yes, it's sort of a step function because you build a distribution center, you have some excess capacity and you fill it up, but at some point you fill up your distribution center and you ideally have enough stores that distribution center reaches peak efficiency.

Speaker 2

And then but every certain number of stores, you're going to be opening up a certain amount of distribution centers. So now if you're growing your top line, it will make sense. The beginning is the most painful. The beginning is always the most painful because you have to invest ahead of the profitability that's coming from the new store to construct the capability to be opening up hundreds of stores in a country. The lead time for opening up hundreds of stores will be a year, 6 months to a year.

Speaker 2

The negotiation of the rent, finding the right locations, getting the appropriate permits in place, negotiating with

Speaker 1

all the

Speaker 2

suppliers, so that that store could open is a process. So the most painful part is at the beginning and thereafter operating expenses as a percentage of the total start coming down and then you're normalized and everything sort of starts growing relatively in line and related to each other. It's hard to predict. Now I will tell you, we always have the ability, if things are not working out, to turn off certain valves and certain costs. So these are not costs that remain embedded with you for forever if you're not getting the level of success that you're expecting.

Speaker 7

That's great. Thank you very much both.

Speaker 1

Thanks, Adam. Thank you

Operator

very much. Sorry to interrupt you, sir. We'll now move to Alvaro Garcia of BTG Pactual. Please go ahead.

Speaker 8

Hi, Martin Juan. Thanks for the space for questions. My question is on other expenses. So on Page 16 of your release where you walk through sort of your net debt, The other expenses were $405,000,000 versus $261,000,000 last quarter, so a big sort of sequential uptick there. It implies sort of $100,000,000 run rate.

Speaker 8

I was wondering if that's related maybe to some intercompany stuff or maybe is there a potential change in your guidance for expenses at digital and corporate going forward? Thank you.

Speaker 2

Could you repeat those numbers just to make sure we can find the right place and make sure that we're responding?

Speaker 8

Sure. It's Page 16 of the release. It's where you walk through your net debt and adjusted EBITDA ex cost. And there's an other when you walk through your EBITDA of 405,000,000 dollars That's the other I'm sort of referring to. I suppose I could also refer to the difference between your consolidated EBITDA and your EBITDA of all your reported sub segments, which also seems to be inching closer to $100,000,000 a quarter.

Speaker 8

So just wanted to really just clarify that guidance for the cash burn at digital and corporate going forward?

Speaker 2

Okay. Yes. Again, I'll respond quickly. I'll let team members jump in here. This other, if you look at the footnote, it includes FEMSA's other businesses, so it includes Bara and Digital and FEMSA corporate expenses.

Speaker 2

I would tell you the bulk of that is digital with FEMSA and FEMSA corporate expenses. FEMSA corporate expenses, as we've mentioned in the past, is we have an expectation, again, of non reimbursable expenses and by non reimbursable expenses, expenses where the business is we're not providing a service to the business that if it weren't here would by definition need to be in the operations. For example, we have a centralized mergers and acquisitions team. We have a centralized treasury that provides services to the operations. We provide our security arm that provides security to executives and to many of our facilities is here.

Speaker 2

All that gets reimbursed to us. And again, if we didn't have the security here, each one of the operations would have to have the security. So there's a sort of $100,000,000 of corporate expenses that I've mentioned in the past. And there is the burn rate for digital is around $200,000,000 to $250,000,000 That $200,000,000 to $250,000,000 does not include the benefits that it brings to OXXO, okay? It does include some payments that OXXO makes for example, the loyalty program points, because it's an arm's length transaction between the loyalty program and OXXO and the loyalty program and the GAAP, but the burn rate is around 2.

Speaker 2

So right there, you probably have 300 to 350 of the total 405 number that you see there. Yes. I would add Alvaro.

Speaker 1

In terms of some of the things that are being divested that were part of the other. Like if you think about Solistica, you think about Embeddeda, I mean, those are EBITDA positive companies that are being sold. And so in the comparison, we're losing some of the entities that contributed to positive numbers to that other. So that's also, I think, impacting the number.

Speaker 8

Great. Thanks for taking the question. Appreciate it. Sure.

Operator

Thank you, Juan, sir. We'll move now to Carlos Laboy of HSBC. Please go ahead.

Speaker 5

Yes. Thank you. 1, on Ben's question earlier, you may want to give some context of how OXXO's margins have expanded since you arrived at the firm, right? Because it's the scale up that this business has to go through is important context. My question was a different one.

Speaker 5

Carlsberg just paid 14 times EBITDA for a weak Pepsi bottler with an unclear strategic purpose. So with one of the best Coke bottlers in

Speaker 8

the world sitting

Speaker 5

right there at half the valuation next to you, why isn't it cheap enough for you to buy out the float and deal with the governance problems that relationship with FEMSA Dehittal and Coke FEMSA raises?

Speaker 1

Hey Carlos, this is, I mean on your comments about the what's happened to the margin since I got here, I would like to take some credit for that, but I don't. I just have really good colleagues. I mean, I'll let Martin talk a little bit about the kind of the strategic part of the COF conversation. Maybe just set it up by saying, obviously, you saw the numbers and you wrote on the numbers that Cofenser delivered. The current place where the system is so good and the level of alignment is so good between the buffers and our partners over in Atlanta that is just everything is working so well.

Speaker 1

And this obviously takes us back to the conversations about animal spirits and consolidation and things that could happen. And so those are are questions that I know that you've all been asking of Ian and his team, but it's good times in Coca Cola land. But I'll turn over to Martine to maybe make a comment about how we why the current structure makes sense and what we might be thinking about.

Speaker 2

Yes. I mean, in effect, you seem to be suggesting and taking private transaction for Revolafemcen. And as happens with any topic of FEMSA, everything is always on the table discussed and debated. So I can't tell you this is not an idea that at any given time we've discussed and debated. And part of what has weighed historically in our thinking has generally been there are advantage to having Coca Cola FEMSA publicly traded.

Speaker 2

1, it provides a currency through which in the past we've been able to offer bottlers the opportunity to participate in the equity of whatever combination results from transactions that we undertake. And those bottlers have not always historically wanted to participate in other parts of our necessarily participate in other parts of our business. Number 2, Coca Cola FEMSA has historically its balance sheet has historically been a stronger balance sheet than FEMSA's in the regard that it's slightly better rating, it has slightly better cost of funding, driven by the participation of the Coca Cola and the stand alone of a bottling business, which has slightly different dynamics than retail business and a retail business of the nature such as retail. So there are number 3, I think FEMSA has always felt that Coca Cola FEMSA being a publicly traded company has generally helped the governance of Coca Cola FEMSA itself and its relationship with Coca Cola and with the public, because it requires everything to be discussed through a public board and that I think everybody has seen the merit of that. So it's not taking Protradir or FEMSA is not nearly a financial decision.

Speaker 2

There are other elements that one has to think about. If you find someone as to the 14 times EBITDA, again, sometimes one plays a higher EBITDA for a lower performing for a business, not because it's a particularly good business, but because it's such a bad business that you believe that you can improve so much profitability that you can grow yourself into a lower multiple. And although I do strongly believe, as you suggest, the cobraimolefemcen should be better valued than it currently is given its returns on invested capital and its cash flow generation and its capabilities building. I mean, we could go on and on and I'm sure both of us would agree because I know that you're a fan of Horvathemse. The reality is the opportunities for dramatically improving the performance simply because we bought out Coca Cola and public or just bought out the public probably is more limited than the example that you're highlighting.

Speaker 2

But I will tell you, we discussed it certainly in the panoply of investment ideas that we consider and maybe it's not even taking pride, buying more, buying some leveraging the balance sheet, which is a form of buying back shares or buying back equity, buying a portion of what Coca Cola, I think part of what Coca Cola owns, doing share buybacks generally are all things that are constantly and repeatedly discussed.

Speaker 5

Martin, how do you value the data from Koch FEMSA and the relationship information from Coke FEMSA that FEMSA de Gital needs or could need in the future? What is that worth?

Speaker 2

If I had the answer to that, I'd be a venture capitalist and I'd be raising 1,000,000,000 on dreams. On the I can't assign value to it and I think we won't know for years what that eventually will be valuable to the entire ecosystem. That was a tough one to assign a specific number to. I do think we have a conviction that through our all of our businesses Coca Cola, FEMSA and FEMSA in all its iterations, Our pharmacy business is one of the businesses that has the best data. The problem since it's a significantly smaller business, but I believe it has 6,000,000 people in its loyalty program.

Speaker 2

But even here in Mexico. Just in Mexico, I think they may have 6,000,000 members in their loyalty program. And that's an incredible source of information on consumption patterns and needs of the consumer. Digital Afemsa, that is the mission of Digital Afemsa because it's a long term bet. It's going to require a lot of work by the way, just standardizing the data so that when a consumer buys an OXXO gas, we understand that it's the same consumer that's buying at OXXO Mexico that we understood it's the same consumer that's buying at Pharmacia's ISA that we know that they're a mom and pop in Coca Cola FEMSA.

Speaker 2

I mean, that is a significantly larger undertaking that I think people understand in integration of systems and standards and then using that information for amongst other things, consumer promotions and selling the opportunity to make promotions to those consumers or to extend credit because you have a very clear understanding of spending patterns of developing loyalty programs that drive traffic or consumption or give benefits to a mom and pop. I know that it sounds easy to say it, but when you understand the intricacies of that, what that involves, you understand that it's a huge task ahead of us. And as many huge tasks that FEMSA takes, sometimes they take years to develop and to come to fruition.

Speaker 5

Thank you.

Operator

Thank you very much, sir. We'll now go to Hector Maia calling from Scotiabank. Please go ahead.

Speaker 9

Hi. Thank you very much for taking my question. So could you please update us on how you have been thinking about transactions in the U. S? I mean, if your conviction regarding inorganic growth in convenience stores have changed or the timing to eventually pull the trigger has evolved considering the local and U.

Speaker 9

S. Political environment this year? And also on how you're thinking so far in terms of store sizes or exposure to gas stations? Because from what we see in the U. S.

Speaker 9

Market, stores are much larger in size, like 250 square meters at a minimum. Over 80% of stores sell fuel. So I was wondering on how you're thinking that femtech could tackle the specularities in the U. S. Market?

Speaker 9

Thank you.

Speaker 2

Yes, I mean, we've spoken about this in various forms. We continue to believe that there's an opportunity for FEMSA to contribute value and to create value with its capabilities by entering the convenience store sector. In the U. S, we've had that conviction for many years, but obviously, we had a structural issue relating to the Heineken shares that made it impossible. I would tell you, I don't the issue of political environments in Latin America generally are not the driver.

Speaker 2

We wouldn't diversify. We didn't think we could create value.

Speaker 1

I think Hector was talking about the U. S. Political environment, but I think that has nothing to do

Speaker 2

with things. To be honest, compared to what we deal with on a daily basis and interact, I know that what's happening in the U. S. Creates an enormous amount of passion and opinions about issues and we all probably listen to the U. S.

Speaker 2

News more than we should. People will continue to go to convenience stores, will continue to have to have gasoline, will continue to eat snacks on their way to and from work. And FEMSA has thrived in many different types of environments. We're highly confident that nothing that's going to happen in the U. S.

Speaker 2

Is going to be so surprising to us relative to other experiences in other countries. So you've highlighted some important differences between what is the business in the U. S. And what is the business in Mexico. And we are well aware of them and we debate them frequently.

Speaker 2

But one, I would just note on the gasoline, we own gas stations in Mexico. So and it's a very different business, but it's not like we're new to the gasoline business. Number 2, they are bigger stores and they require more investment. So it requires much more careful thought as to how you expand and the speed with which you expand and the level of certainty that you need to have with regards to the value proposition that you have, very different to open up 100 stores where the investment is $300,000 to $400,000 versus a store where the investment can be $4,000,000 or $5,000,000 So it's a point well taken and one that we are certainly aware of. As we've said, we are looking for opportunities in what we call the Southern Belt that sort of starts through the Southwest, such as California, there is where we believe, particularly in Texas and border states that we can add value, particularly complementing whatever we acquire with trying to develop a proposition with the Hispanic market.

Speaker 2

Again, we are not looking to open up a Hispanic value proposition in the United States as the sole and primary convenience store consumer proposal, but it will certainly be part of it and we think we could sort of add value to that. We are intrigued by the possibility of trying out what has been extremely successful to us in the United States, which a standalone convenience store value proposition. But we understand that, that is something new and gasoline will be part of the mix. So whatever opportunities we're looking at, almost all of them include a gasoline proposition. Again, in terms of size of opportunities, we've spoken about sizes, which are would be considered small growth of the size of all of FEMSA.

Speaker 2

I cannot I don't have in our radar right now opportunities that exceed the $1,000,000,000 $1,500,000,000 numbers. We would like to start out with something smaller, get our feet on the ground, test out opportunities and possibilities before we would undertake a very large transaction. And we've been, till now, very disciplined in how we've gone about that. And our Board and our Strategy Committee have been very clear about that, and we've listened, and we always pay attention to our Board and our strategy committee.

Speaker 1

I hope that's helpful. Yes. I think just I mean, I would just connect kind of as a way to close the comment to what Jose said on the call 3 months ago, right, in terms of the thoughtfulness and the prudence and the as compelling as the industry is and the overall size of the U. S. Market, there's a lot of reasons why it's attractive.

Speaker 1

But in terms of just giving the market the comfort that we will be very, very deliberate and thoughtful in terms of how we go after it.

Speaker 9

Thank you very much. Very clear. Thank you.

Operator

Thank you, Sumayya. We have time for only one question at this time. The last question in the queue today will be from Luis Janssi calling from Santander. Please go ahead.

Speaker 10

Hi, guys. Thanks a lot for taking my questions. Quick one on same store sales. I mean, I appreciate all the color you gave about the one off events that impacted the Q2. But as we think about second half, when you put into the balance what you said on one side easier comps going into the second half, but on the other side historically having a tougher second half after the 1st year of elections.

Speaker 10

Just wondering, where does that take you? I mean, especially to the formula you gave, the 5% same store sales growth on a normalized basis. Does that take you to that number that's kind of sort of your expectation or perhaps a bit lower than that and closer to inflation? So just trying to get a sense of where you think if things happen the way you think could happen, where we might end up in terms of growth? And maybe if you can comment on the differences between the formats because I guess a lot of the focus has been on OXXO Mexico, but on the other side, you have LATAM same store sales going closer to flat, but then Bara, maybe Brazil still growing double digits.

Speaker 10

So if you can comment on the difference in performance on those and maybe the expectations going forward, That will be helpful. Thanks.

Speaker 1

Hi Luis, this is Juan. I mean, in terms of the same store sales number, that 5 that had kind of been my historical go to and obviously based on what the operation has done. Once you isolate a lot of the one offs, again, if you're just charting the numbers, that dip that we saw this quarter, a lot of it can be explained by comp base and some of these one offs, right? So there's I think there's still the sentiment that we could end up at a slightly higher number than the historical average. But the way you phrase the question is the right one, right?

Speaker 1

I mean, there are unknowns in terms of the macro, what happens in the second half. We know what the we know how the comparable base evolves, right? We know that. The one thing we know is the consumer going to be there, just generally. So right now, I would be optimistic, but that's one guy's opinion.

Speaker 1

It really does depend on whether the macro in the second half, to Martin's earlier point, is this a different transition because it's there's a lot of continuity? And so does that mean that the budget gets allocated and money continues to flow? Or do we live against something like what we lived 6 years ago, right, where as you all remember, a lot of things kind of were brought to a stop. I think we're going to be somewhere in between. So right now, my bias would be on an optimistic one, but we're going to have to wait and see.

Speaker 10

Great. Thanks. And if you could comment on the difference on the 4 months, LATAM sensor sales on the lower end, but maybe the double digit ones that we saw at Baaderm Brazil?

Speaker 1

Yes. I mean, I think there we can't really leave out of the analysis just how new these value propositions are, right? And how much of the outsized growth has to do with that. I mean, OXO in Brazil or even Bara, those are not normalized same store sales numbers. So yes, I think in both cases, there's a good tailwind of finding a niche or finding a need that was not being properly satisfied, right?

Speaker 1

I think the strength that we see in OXXO Brazil or the strength that we see in the discount sector in Mexico has a lot to do with a consumer that is avid or thirsty for what those formats provide, but there's also just the newness of the formats, right? And so I don't think we can at this point in either of those examples isolate how much is coming just from the sheer growth. And again, the fact that this is new to the consumer and how much of it is just that you play in a different part of the economy. And maybe discounts in Mexico is going to print better numbers than big box retail for the foreseeable future. But I don't know that.

Speaker 2

The formats are pretty similar in many respects operationally, but in terms of what gets sold in the store, there's a different mix. For example, we would love to have the mix of food that we have in Colombia versus what we have in Mexico. When that proposition was developed Colombia, the value proposal that we're going with in terms of our expansion became clear after some trial and error that the Colombian consumer in that format, convenience format needed to have significantly more food offerings than what we were offering in Mexico at the time. The types of food offerings that you make are completely different. Pal de queso in Brazil is sort of like a staple comfort food, while the rest of Latin America means absolutely nothing.

Speaker 2

So in none of the stores in South America, for example, we have services. One, because we don't have the scale for those services to really pay for themselves, There are countries with different levels of banking penetration. Brazil is a country, which in financial terms is quite different to Mexico. And so the value proposition on services is not going to come really from services, but food tends to be a higher margin business. And so you want to focus on food.

Speaker 2

So the propositions, each one of them are different. I would tell you if we battled more in Chile than we're battling more in Chile today than we are in Brazil and Colombia. That's good news because Brazil and Colombia are the bigger countries. But Chile is a more challenging environment for us with significantly more sophisticated retailers who have a significantly more developed convenience value proposition, then I would say that we're finding in either Colombia or Brazil. So we're optimistic on particularly those 2 larger countries, Colombia and Brazil.

Speaker 2

But this is slow difficult work until you create that virtuous circle that you currently have in OXXO. I mean the value of the brand and what people associate with OXXO in Mexico is creates an opportunity where you could quickly acquire the right to win in many new things that you propose to the consumer and just the presence that OXO has. That's why we've dedicated so much time in building out our expansion, but specifically in Sao Paulo because we want to create that sense throughout Sao Paulo, the state, not the city, the state of Sao Paulo, which represents an outside percentage of GDP and population, because if we can make that work in Sao Paulo, that will give us enormous comfort to then roll out to many other cities. And we've resisted the temptation and the pressure from many different forums, say, why don't you go to Rio and why don't you go to different cities? No, no, no, no.

Speaker 2

We want to create that sense of presence in state of Sao Paulo to see how the Brazilian ultimately reacts. Also, I would tell you the same store sales, I believe we calculate on the basis of sort of 18 months.

Speaker 1

13, the public number is 13.

Speaker 2

13, sorry, 13 months. And so it's a little bit of the history of FEMSA and OXXOs and so on, but the maturity curve of different stores in different countries is quite different. So what you would define as a mature store versus not a mature store makes a difference. And in Mexico, generally 13 months was perceived as the proper level of maturity, particularly the size and presence that we have. But when you're developing a value proposition, the maturity may be different.

Speaker 2

So we may still see growth. It's really just the normal maturity of the store as opposed to the steady state sales of a store where you then are measuring the same store sales to see the continued health of that store relative to other alternatives. And so I support a little bit of what Juan is saying that the focus on that number in these new operations can be a little difficult to interpret at times.

Speaker 1

No, I would add, Luis, and it's we're getting to this through the same store sales question, but something we haven't really talked about a lot today that I expect we'll be talking a lot in calls and conversations in the future is prepared food, right? And Martin Olivi made a reference to that. We've done quite well in Colombia. We're doing well in Brazil. Obviously, Valora, it's one of the things they do best is prepared food, the whole food convenience concept.

Speaker 1

They're very advanced in some of their value propositions. But in Mexico, where we've been the longest time and we're the have the biggest scale, I think there's still opportunity for improvements of the prepared food category that would then open or kind of supercharge this vector to bring more people into the store. And I would ask you to stay tuned on that because we are working internally a lot on kind of improving and approaching it in different ways, the prepared food opportunity in Mexico. So that is even as we kind of think about the U. S.

Speaker 1

As a future opportunity, certainly, prepared food plays an important role in U. S. Convenience, as you all know. So again, stay tuned for more and more conversations on prepared food and how we are improving our capabilities on that front.

Speaker 10

Great. Thanks a lot guys for the color.

Speaker 8

Thank you,

Operator

Mr. Yan. This is Sergej of you, sir. We do not appear to have any further questions at this time. I'd like to turn the call back over to Mr.

Operator

Juan Fonseca for any additional or closing remarks. Thank you.

Speaker 1

I mean, just thank you for your interest for joining us today. As always, the team and I, Pamela, Alex and myself are always around to try to help, and we'll speak soon. Thank you.

Operator

Thank you very much. That will conclude today's conference. Thank you for your attendance. You may now disconnect. Have a good day and goodbye.

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Helen of Troy Q2 2024
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