Fomento Económico Mexicano - Q2 2023
July 27, 2023
Transcript
Operator (participant)
Hello, welcome to FEMSA's Second Quarter 2023 Results Conference Call. My name is Laura, I will be your coordinator for today's event. Please note, this call is being recorded, and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 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 will now hand you over to your host, Juan Francisco Fonseca, to begin today's conference. Thank you.
Juan Francisco Fonseca (Head of Investor Relations)
Good morning, everyone. Welcome to FEMSA's second quarter 2023 results conference call. The plan today is a little different than usual because we are joined by José Antonio Fernández, our Executive Chairman of the Board and CEO, who will open the call with some important messages. After that, Paco Camacho, Eugenio Garza, and I will carry on with the second quarter results as we usually do, followed by Q&A. José Antonio, please go ahead.
José Antonio Fernández Carbajal (Executive Chairman and CEO)
Thank you, Juan, and good morning to everyone on the line. Before we begin, I would like to thank all of you who have recently reached out to us with messages to support for Daniel after the news of his stepping down as CEO of FEMSA to focus on his health. We truly appreciate your kind words and well wishes, which we have relayed to Daniel. We are grateful to Daniel for his many meaningful contributions to strategic direction and high-performance standards of our company, always with a steady hand and clarity of purpose. Daniel always makes it easy for his team to rally behind him, follow his lead, and achieve excellence. Beyond strategic acumen of business success, Daniel embodies the values that define FEMSA. Thank you for everything, my friend.
I wanted to be here today to take a few minutes of your time, given the unique circumstances of this recent leadership transition, to convey a few important messages. First, I am now fully engaged with our senior leadership team to continue implementing our strategic priorities, including FEMSA Forward. We have already executed several important steps, and we are totally committed to the strategy to continue unlocking shareholder value. You should therefore expect full continuity, focus, and a smooth transition. That is very important for us that you should have very clear. Second, my dual role as Executive Chairman and CEO is not permanent. At FEMSA, we believe that those roles should be separate, and we plan to go back to that when ready. We know you have questions regarding time frames, but please bear with us while we carefully go through this important process.
We will let you know when we have news to report. Finally, I want to recognize our team. I am fortunate to be surrounded by a truly remarkable group of leaders and advisors that are working hard every day to keep growing and keep delivering on the potential of our great company. The opportunities ahead of us are very significant and compelling. Every business unit is executed at a high level. In fact, the strong quarterly results we announced today are a good example of what we can achieve. With that, I will let Paco, Eugenio, and Juan to discuss the results in detail. Thank you very much for your trust and confidence. Paco, please go ahead.
Paco Camacho (Chief Corporate Officer)
Thank you, José Antonio. Good morning, everyone. Let me begin by updating you on where we are regarding FEMSA Forward. During the second quarter, we achieved two important milestones. First, we were able to divest FEMSA's remaining investment in Heineken, retaining only a residual amount of shares to meet our obligations under our existing exchangeable bonds. Second, we signed an agreement to divest our minority stake in Jetro Restaurant Depot. These milestones have come ahead of plan and under favorable conditions, allowing us to keep our momentum as we continue to pursue the FEMSA Forward structure. As you know, FEMSA Forward is fully aligned with FEMSA's customer centricity and our broader strategic priorities of driving long-term growth, increasingly enabled by digital capabilities, always within our core business verticals and with a disciplined approach to capital allocation.
With that in mind, we can report that our second quarter results show the continuation of the positive trends seen at the start of the year, fully consistent with those strategic priorities and making progress towards the target set by each business unit's long-range plan. Moving on to the results and beginning with Proximity, it will be helpful to talk for a minute about their own long-range plan and the four priorities around which it is built. Number one, strengthening the core. Second, developing new growth avenues. Third, developing multiple successful formats. Four, growing the footprint beyond Mexico.
Looking at OXXO's second quarter results through this lens, we see they made great progress in strengthening the core, as same-store sales growth was again stellar, surpassing 15%, split evenly between average ticket and traffic, and reflecting a structural improvement in segmentation of the store value proposition. We again saw a particularly robust performance in the thirst 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 1,400 during the past 12 months. In fact, once we include stores opened by Grupo Nós in Brazil, we added more than five OXXO stores for every day of the second quarter.
Moving on to the long-range priority of growing beyond Mexico, during the quarter, Grupo Nós continued to advance ahead of plan, with revenues increasing over 200% year-over-year, allowing us to increase OXXO's footprint in Brazil at a dynamic pace of almost 300 net new store, new OXXO stores during the last 12 months. Still in Proximity Americas, along the priority of developing multiple successful formats, Bara from the highlight, achieving 23% same-store sales growth. For its part, Proximity Europe again saw good local currency top-line growth and overall positive profitability trends, driven by a stronger pricing, growth in foot traffic, as well as the higher contribution of Valora's food service outlets. Just as importantly, we continue to advance on exchanging best practices across organizations, with the focus of 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 as a single organization. Additionally, during the quarter, our health business continued to drive to consolidate its competitive across markets, but particularly Mexico, where it increased its store footprint by 12% against a challenging competitive landscape. For its part, our fuel business also had a stable performance, with a strength in the corporate wholesale business offsetting softness in its retail platform.
Regarding digital, the number of active users for Steam more than doubled year-over-year to reach 5.7 million, while active monthly users for our Premia loyalty program also more than doubled to reach 15.8 million, while 24% of OXXO Mexico sales are now associated with the program. We continue to privilege acquisition of higher quality users, while we make progress fine-tuning the use case, value propositions, unit economics, and monetization strategies for each of these products, as well as we look to ensure long-term value creation for the ecosystem. In terms of financial implications, during the quarter, we deployed close to MXN 1 billion on growing this business, roughly in line with the previous quarter as well as budget, as we have indicated.
Finally, Coca-Cola FEMSA's volume grew across all its territories and surpassed 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 addition, KOF accumulated more than $1 billion of sales during the first half of the year through their omnichannel platform, Juntos+, which represents a significant milestone in KOF's digitalization journey as it strengthens and deepens the connection with their customers. Before I turn over the call to Eugenio, I want to touch briefly on capital allocation, a topic that we are aware is very much on the minds of many of you today and a key component of our FEMSA Forward strategy.
As our cash levels continue to rise, we are accelerating our analysis to determine the optimal capital requirements to support the short- and medium-term growth of our operations, organic and inorganic, because that will help us fine-tune the levels of capital that we could then return to shareholders. This is high priority for us, and we will keep working on it together with our board to have a more specific framework for you as soon as possible. With that, let me turn it over to Eugenio.
Eugenio Garza (CFO)
Thank you, Paco. Good morning to everyone on the line. Beginning with FEMSA's consolidated quarterly numbers, total revenues during the second quarter increased 18%, while income from operations increased 8% compared to the second quarter of 2022. On an organic basis, total revenues increased 9.5%, and income from operations increased 4.5%. Net consolidated income was MXN 8.926 billion, reflecting higher income from operations, a MXN 9.4 billion non-operating income, mostly reflecting the divestment of FEMSA's minority interest stake in Jetro Restaurant Depot, and a decrease in net interest expense during the quarter.
These were all partially offset by a non-cash foreign exchange loss of MXN 6.5 billion related to FEMSA's U.S. dollar-denominated cash position, as impacted appreciation of the Mexican peso and a net loss of discontinued operations of MXN 3.9 billion, driven by the market value fluctuation of the Heineken shares underlying our outstanding exchangeable bond. Moving on to discuss our operations and beginning with Proximity Americas. We added 444 new units during the second quarter to reach 1,391 net new stores for the last 12 months. This quarter's strong expansion set us ahead of our yearly expansion target, and it underscores OXXO Mexico's 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. The expansion curve for the rest of the year should be smoother than usual. OXXO same-store sales were up 50.3% for the second quarter. This was driven by an increase of 7.4% in average customer ticket and a strong 7.4% growth in traffic. This underscores the solid performance we saw across OXXO's categories throughout the quarter, but especially by the strong showing of the gathering and thirst locations. Gross margin was 41%, reflecting a lower contribution from financial services, which more than offset healthy commercial income dynamics.
Income from operations increased 18%, while operating margin decreased 20 basis points compared to the same period of 2022 to reach 10%, reflecting an increase in labor expenses stemming from the labor reforms in Mexico. At Proximity Europe, as Paco mentioned, revenues increased 8.4% in local currency to reach almost 11 billion pesos, reflecting a recovery in traffic and ticket driven by improved customer mobility. Gross margin was 42.1%, reflecting a mixed effect driven by the positive performance of Valora's food service and B2B businesses, while operating margin was 2.9%, reflecting better operating leverage, partially offset by an increase in expenses driven by inflation pressures. Moving on to FEMSA's Health operations.
During the second quarter, we expanded our drugstore count by 81 net additions to reach a total of 4,267 units across our territories at the end of June, and 369 total net new stores for the last 12 months. Revenues increased slightly, while same-store sales decreased an average of 3.7%. However, as was the case last quarter, it is important to note that on a currency-neutral basis, revenues grew 14% and same-store sales 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. At OXXO Gas, revenues increased 9.3%, and same-station sales grew 3.2%, reflecting a dynamic competitive landscape across our footprint. Retail volumes were again complemented by robust pickup in corporate and wholesale activity. During the quarter, gross margin was 12%, while operating margin was 3.9%, reflecting tight expense control offset by increased labor expenses. Coca-Cola FEMSA also delivered a strong set of results in the second quarter. Total volume grew 7%, driven by growth all across its territories. Total revenues increased 7.2%, and operating income grew 13.4%, as operating margin expanded by 50 basis points to reach 13.9%. You can listen to the replay of their conference call held yesterday.
Our Envoy Solutions total revenues increased 23.1%, while relative to the second quarter of 2022, reflecting some of the acquisitions we did last year, together with solid execution, while operating margin contracted 120 basis points, impacted by extraordinary expenses related to synergy capture across the platform. That's it from my end. With that, we can open the line up for your questions. Operator, please?
Operator (participant)
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. We'll now take our first question from Thiago Bortoluci at Goldman Sachs. Your line is open. Please go ahead.
Thiago Bortoluci (Equity Research Analyst)
Yes. Hi, good morning, everyone. Thanks for the presentation and taking the questions. Just before we get started, just want to share once again our best wishes for Daniel and also welcoming back Jose Antonio on your double head position. Good luck on the forward. Look, I have two questions that I'd like to explore. The first one has to be capital allocation, right? Obviously, we understand that you need to be cautious on the communication and on the movements, right? Putting in perspective where you are versus what you communicated on the FEMSA Forward plan, you are already running at roughly $5 billion of excess cash position in the balance sheet, right? Unless there is any large M&A in the horizon, which I don't think is the case-...
Growth shouldn't be a bottleneck or an overhang for a stronger capital distribution, right? This is not to mention your organic cash flow that the business is generating. I would just like to understand internally, right, what is the kind of debate and different views that you are facing that is still preempting and step up on shareholders' return? This is the first one. The second one, we know there is a scope for pretty decent expansion of OXXO, right? Not just in Mexico, but across the other regions, potentially including the U.S. When we look into Mexico and Brazil, which are both countries where you already have a pretty decent footprint and rolling out your convenience stores overlaps your bottling operations, right?
How important it is for you to develop a convenience store in a country to also have somehow, a, asset print, internally on the beverage space? This is just to imagine how the growth scope might move into new regions. Thank you very much.
Eugenio Garza (CFO)
Hi, Thiago, it's Eugenio. Thanks for the question, we'll definitely send along your thoughts to Daniel and the team. With regards to your first question on capital allocation, fortunately, we are well ahead of the divestiture program that we announced back in February. We are in that privileged position that you mentioned of already being well below our 2x net debt to EBITDA target. We are having discussions, very serious discussion at the board level, as to kind of what kind of framework for a capital allocation we are going to be implementing. Having said that, you can feel comfortable that we will be looking at several alternatives.
One, and for the most part, as you know, organic growth within the businesses that we decided to focus on with FEMSA Forward, still continues to be strong, and we feel over the next five or six years, we could deploy $7 billion or $8 billion easily, in terms of new store openings, further additions to our Coca-Cola bottling operations, et cetera. There's plenty of room to put capital to use in low-risk projects at very high returns to continue on the growth. Having said that, and to your point, most of this will be funded with just internally generated cash, and we'll still have this cash left over.
A second part of the capital allocation will be reserving some amount of capital, again, within the construct of a 2x net debt to EBITDA capital structure at the end, but reserving some capital for strategic optionalities that might arise, again, within the core businesses that we have identified, and also sticking to very tight financial return guidelines so that the capital allocation into new initiatives, whether it be at Proximity, whether it be at Golf, whether it be in Latin America or elsewhere, that they stick to not only strategic criteria, but also very strict financial and value creation criteria.
Finally, there is a very high likelihood that after allocating this capital to strategic initiatives, there will be some capital left over, and we will consider what the best way to return that capital to shareholders will be, be it an ongoing share repurchase program, a bigger share purchase program, and/or extraordinary dividends. Those are all of the things that we are discussing at the board level. We will hope to have some more clarity for you, hopefully by the end of the year, if not very early next year. Again, we're being patient. We're focusing right now on executing on the divestment part of the FEMSA Forward strategy, and then shifting our attention to this.
You should feel comfortable that through the combination of organic, inorganic, and capital returns to shareholders, we will continue to, I mean, of course, make sure that that shareholders can maximize their value and their stake in FEMSA. At the end, when we reach this final 2x net debt to EBITDA ratio, you will be exposed to a portfolio that has fantastic growth and cash flow generation characteristics to it. That's it on, on capital allocation. I don't know, Paco, if you want to take the other question on the expansion of OXXO and Beverages.
Juan Francisco Fonseca (Head of Investor Relations)
Yeah, actually, Thiago, 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.
Thiago Bortoluci (Equity Research Analyst)
Sure, Paco, sorry. The question is, when we imagine you penetrating other regions with convenience stores, right, with OXXO, how important it is for FEMSA or for the operations also to partner with some sort of beverage and distribution, being on beer or on soft drinks?
Juan Francisco Fonseca (Head of Investor Relations)
Thank you, Thiago. This is Juan. I mean, actually, on the Proximity side, we are really agnostic, right? I think obviously in Mexico, we have the legacy of our beer business that eventually became Heineken, and that was the reason why obviously there was a for a number of years, we only sold the Heineken portfolio. You know, when we started the OXXO in Brazil, as you well know, you obviously work with Ambev as well as Heineken, but you don't I don't think we need to be, you know, special partnership with a beverage company in every place that we think about opening retail.
I mean, obviously, in Europe, we don't have such a setup, and it should not be a prerequisite. Obviously, we know everybody in the beverage business. We are close to many of them, but it's not a prerequisite, and you should not see it as either an obstacle or a facilitator necessarily. I mean, the two things really go separately.
Thiago Bortoluci (Equity Research Analyst)
That's great. Thanks, Juan. Thanks, Eugenio.
Operator (participant)
Thank you. We'll take our next question from Bob Ford at Bank of America. Your line is open. Please go ahead.
Bob Ford (Senior Research Analyst)
Thank you very much. Good morning, José Antonio, Paco, Eugenio, Juan. Please know that our prayers are certainly with Daniel and his family. Paco, you mentioned the MXN 1 billion in digital investment. Can you discuss areas of focus in terms of functionality, how you're thinking about the development roadmap and, and where the consumer and small business credit resides in that sequence?
Paco Camacho (Chief Corporate Officer)
In fact, the investment that we're doing is basic. Thank you, Bob, for the question. As we had announced before, and we have been pretty consistent with that investment, we are at this stage, a part of that is basically going into the expenses of operating that business and growing it. We have put significant amount of money on making sure that we have the right team, that we bring the right people. Those are part of the operational expenses that are taking part of that invest. As we move forward, we continue developing the three verticals in digital that we have told you guys over time. First, our fintech or our wallet. Second, our loyalty program, and third, enabling the B2B business.
What we are creating is really an ecosystem. At this stage, what we are focusing on is making sure that the consumer experience of those consumers navigating through the different services and through this whole ecosystem improves with every experience and with every use of the platform. When you look at the Spin, for example, I mean, clearly, as you said, at this stage, we are focusing on getting a better use of the platform through the services that we have today, which is basically the wallet. The team has become increasingly knowledgeable of the different use occasions for each of the cohorts that they have identified, both demographically, sociographically, and geographically, and that will continue to be the case. Second, optimizing the expenses.
When you look at the cost of acquiring new users, it has reduced significantly, sequentially over the last quarter. Importantly, we also know that once we have established this, this new, these, these services, it's very likely that we will need to move to additional services such as insurance, such as credit, but that, that is in the pipeline, but it's, it's not something that we are rushing into without making sure that the first stage of the business is completed successfully, which is making sure that they have the right consumer experience. When it comes to the loyalty program, it's similar. We feel confident on the service we're providing today. As we said, the tender is at 24%-25% right now.
We are seeing already the improvement of OXXO sales behind the, the loyalty program. Making sure that we continue improving the consumer experience, and that is important for us, so we're the same for the partners that we have today. As you know, we have Volaris, for example, so we are focusing on improving the, the experience for consumers behind that. That is the focus at this stage.
Eugenio Garza (CFO)
The other thing I would add, Bob, just so you don't get scared with this, MXN 1 billion per quarter operating loss at digital, is that digital is generating revenues at the Proximity division as well. For the overall FEMSA ecosystem, the cash burn is less than what you see reflected in the loss, in the others, column for us. Right now, there is a transfer price that's being assigned because of the use of the retail network, but overall, the cash burn in the ecosystem is like you just see there, so.
Operator (participant)
Thank you. We'll now move on to our next question from Ricardo Alves at Morgan Stanley. Your line is open. Please go ahead.
Ricardo Alves (Equity Research Analyst)
Yeah. Thanks, everyone. First of all, of course, all the best to Daniel. Jose Antonio, it's nice to hear from you again. I think that your, your message in the beginning of the call on the, the, the same support plan was really important, so I appreciate that. First, very quick follow-up to Eugenio. You mentioned the buybacks, the, the dividend policy or eventual extraordinary dividends. Qualitatively speaking, is there kind of a preference you guys are leaning towards here? I don't know if you've been studying this issue, or is there anything that you guys learned, perhaps on the buyback front, anything that you could share in terms of, you know, what you have learned so far this year, on when you're discussing those topics?
Then my question, my other question is more related to OXXO. Obviously, very impressive, same store sale. The gross margin was also good, but we had a little bit of a higher expectation for EBITDA. Can you guys expand a little bit more on the SG&A dynamics for OXXO, specifically? Labor obviously has been a factor in Mexico, but is there anything else that you care to highlight? I don't know if maybe the stepping up of the new store openings that you had from the first quarter, the second quarter. I don't know if that's relevant enough to move the needle on the scale front, but just a little bit more thoughts on the SG&A level. Thank you so much.
Eugenio Garza (CFO)
Sure, Ricardo, 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. They can all tell you kind of what you want to hear. At the end of the day, we're focused on generating value for the shareholders and using that excess capital to generate as much value. I think the question, there is obviously a tax element that we're looking closely at, but are, I mean, mostly comfortable at this point that taxes will be relatively agnostic with regards to either choice we make, but we're still perfecting that.
And I guess the question is going to depend, number one, on what's the size of the return of capital program, and then what the market dynamics and the valuation of the stock is at that moment in time, and how much we can achieve on one versus the other at specific prices to ensure that we are generating as much value on a per share basis for the FEMSA shareholders who do decide to remain with us for the long term. Again, we are looking at all the academic studies, and again, taking them with a grain of salt, but focusing more of the analysis on what generates the most value on a per share basis for the FEMSA shareholder.
On the OXXO, on the SG&A front, there are several things going on there. I mean, on the 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 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. We're happy to have a lower gross margin, but more sales, so that obviously helps. On the SG&A side, again, labor reform, I would say, is the biggest factor.
You are right, it's not only the new store openings that you see ramping up in the second quarter, but it's all these other initiatives that we are pursuing, the Pronto, the opening of the Bara, and the opening of a lot of initiatives that cost a little bit more at the beginning. We're implementing new operating models in the stores to be a little bit more efficient. On the supervisor front, we are investing in cash recycling machines to have higher cash availability for cash out in the OXXO stores, et cetera. All those initiatives are being funded heavily during the first part of the year.
Some of them cannot be capitalized, they need to be expensed, that's why you see a little bit of the softness in the second quarter numbers. For the most part, I would say it has to do with the labor reforms.
Paco Camacho (Chief Corporate Officer)
Just to add to that, it's clearly as he said, the two main factors is the labor cost and second, the new store opening. I think that it's also important to know that as you look at the numbers in OXXO, the fact that the sales are increasing, it's also helping to absorb the cost. When you look at quarter-to-quarter, we have a reduction in administrative expenses as % of revenues, for example. The performance of OXXO continues to be very, very dynamic and in cost as we grow the revenue.
Ricardo Alves (Equity Research Analyst)
Very helpful, gentlemen. Just one quick, I think I misunderstood, but is the loyalty still affecting OXXO? I understood that it was not.
Paco Camacho (Chief Corporate Officer)
It's very, very little, Ricardo.
Ricardo Alves (Equity Research Analyst)
Okay. Thank you so much for the time.
Paco Camacho (Chief Corporate Officer)
Thanks, Ricardo.
Operator (participant)
Thank you. We'll now move on to our next question from Alan Alanis at Santander. Your line is open. Please go ahead.
Alan Alanis (Managing Director)
Thank you so much for taking my question, and great to hear you, Jose Antonio. Please, for everyone can send our prayers for the well-being of Daniel Castillo. That's the most important thing. You have time to go over here. I want to ask a question regarding the long-term vision and long-term strategy that you have, or long-term vision that you have for the next five years for the company overall. I think that'll be a good opportunity for all investors to hear directly from you in terms of how do you foresee the company will be different in five years from now. Specifically, if you could touch regarding the relationship with The Coca-Cola Company and Coca-Cola FEMSA.
As many of us in this call know, this year is celebrating three decades of listing Coca-Cola FEMSA in 1993, and now you have the largest Coca-Cola bottler by volume. How do you foresee the relationship and the ownership that you have with Coca-Cola FEMSA in the next five years? That'll be my question. Thank you so much.
Paco Camacho (Chief Corporate Officer)
Yeah, Alan, thank you. This is Paco. I will just start answering your question, then I'll pass it on to Jose Antonio in case he wants to add something. On the first part of the question related to the next five years, I would like to go back to what we have discussed a couple of times, which is the long-range plan exercise that we put together recently, and that we have explained to you in a number of occasions. Clearly, that continues to be our guiding light for the next five years. Each of the businesses have a very thorough, very complete five-year plan that they developed. They are working towards those plans in 2023, they will continue to do that in the next years.
Part of the results that you are seeing is precisely behind the LRPs that they have developed. You should expect that that is not gonna change. We are obviously, as in any process, such as long-term planning, you know, we review the plans just to check that if anything changed in terms of context, in terms of competitive activity, et cetera. You should expect that that might happen, but clearly we have very strong plans in place, and each of the businesses will continue to do so. At FEMSA level, as we aggregated the plans, I mean, we clearly saw the opportunities to continue our target of doubling the size of the business every five years. That shouldn't change either.
We feel confident about the LRP, and you should expect that we'll stick to them, both at the business level and at FEMSA level. Part of it, as you know, is finishing and making sure that we continue deploying the FEMSA Forward strategy, and you will hear news about that as they come along, but you shouldn't see any surprises on that.
José Antonio Fernández Carbajal (Executive Chairman and CEO)
Here is Jose Antonio. Thank you, Alan, for your question. What we foresee for the next five years in Coca-Cola FEMSA, I can tell you, and you know that, I've been around with Coca-Cola and FEMSA since Roberto Goizueta, and we cannot be happier of the situation of our relation with Coca-Cola today. We have a complete aligned critical success factors of our executives. We have a common perspectives of what is coming. We want to continue growing. We just won the Kandler Cup. It was assigned to Buenos Aires. Our team in Buenos Aires did a superb job, and we won it again, as many other times, and we are very happy.
We see a very good and profitable relation for the future with Coca-Cola.
Alan Alanis (Managing Director)
Got it. Some of the capital deployment can grow also in expanding the franchise if needed. I know you've talked that maybe Coca-Cola FEMSA doesn't need that money, they can use their own capital, but if needed, you will continue to support the expansion of Coca-Cola FEMSA.
Paco Camacho (Chief Corporate Officer)
Yes, as Alan, this is Paco. You know, Coke is always looking for inorganic opportunities.
Alan Alanis (Managing Director)
Yes.
Paco Camacho (Chief Corporate Officer)
They will continue to do so, and, obviously, we will support them if needed, but, there is no change in that. They have been always actively looking for opportunities.
Juan Francisco Fonseca (Head of Investor Relations)
I think, Alan, this is Juan. I mean, the nature of the relationship and the clarity that we now have in terms of the business and the cash flows, as you know, is prompting the business itself to invest more. You heard the team at Coke yesterday talk about their CapEx. I mean, they've been talking about it for months. They're investing more this year and the next couple of years than they ever have in adding capacity and just, you know, growing the business. It really is looking like we have a time ahead of us when we, you know, Coke FEMSA is gonna be deploying more capital, and as Paco just said, we would be ready to step up under the right conditions for M&A.
Alan Alanis (Managing Director)
Got it. Thank you so much. Yeah.
Paco Camacho (Chief Corporate Officer)
Thank you, Alan.
Operator (participant)
Thank you. Ladies and gentlemen, kindly be reminded that this is limited to one question each. Thank you. We'll now move on to our next question from Luis Willard at GBM. Your line is open. Please go ahead.
Luis Willard (Senior Equity Research Analyst)
Hi, guys. Good morning. Thanks for taking my question. Welcome back, José Antonio. I join my colleagues on wishing Daniel the best and his family, of course, as well. This one is a bit philosophical. I would love to pick your brain and ask you which characteristics you think the next FEMSA CEO should have, especially as a relevant part of the FEMSA Forward strategy would likely be already underway, if not completed. I have another one on Spin, very short one.
José Antonio Fernández Carbajal (Executive Chairman and CEO)
Well, thank you, Luis. The characteristics we would love to find. First of all, we would love to have Daniel back. We don't know, we hope, we're still praying, we have a hope that he will recover and will come back. Otherwise, we would look for, as you know, this job, Daniel's job is he's a CEO of, that coordinates CEOs. He has to have a very good follow-through. He will be able to hear from the whole team, ideas and mix them. He has to complement and push and motivate the CEOs of the different divisions. We are in a very different path of that we had in the last 20 years.
I mean, today, we have a very nice problem of having a lot of cash. We have another very nice problem of lots of opportunities geographically for, to develop Latin America, U.S., and even Europe, organically with stores. This has to be a matter of priorities, a matter of studying very well the projects and deciding which one goes first. There is not a special order of the priorities because we don't know what we could find as opportunity anywhere in the world, but we will follow up the growth of all the divisions as we speak. You know, the potential of digital is great.
We need to know more about this. We think this is obviously a new venture for us, completely different than, than operating beer or, or soft drinks or retail. The, the, the CEO should be very open to new ideas, very cautious on how to invest and which projects to pursue. I hope, Daniel, is, I insist Daniel comes back. That's, that's my expectation.
Luis Willard (Senior Equity Research Analyst)
Absolutely. We'll hope that to happen. Thank you, and thanks for the answer. Another one, just very quick. I think I may have asked this in the past, but is there any relationship that you might have detected between the ongoing lower share of financial services at OXXO, it's not the first quarter it happens, and the strong advancement of Spin users? I'm thinking that if there's a relevant share of financial services that are now being made or transacted through the app at a lower profitability. Thank you.
Juan Francisco Fonseca (Head of Investor Relations)
Hi, this, this is Juan. Yeah, I think in the long run, you should expect to see a migration of some of the physical users, moving to digital. But I think what we're seeing today still is much more related to, kind of the, the vagaries and the ups and downs of the relationship with correspondent banks. I mean, as you know, we've had a couple of banks that reduced their exposure to OXXO. They're coming back, and we're obviously need to be very careful about the fees. You know, with inflation, how do you manage your fee structure?
I don't think that the changes that we're seeing right now is necessarily driven by the secular trend of physical becoming digital. I do think it's still much more related to whether one of our big banking partners left or is coming back or, you know, what's happening to the fee structure. You know, I think it will happen, but I don't think we're seeing that yet.
Luis Willard (Senior Equity Research Analyst)
Understood, Juan. Very clear. Thank you.
Operator (participant)
Thank you. We'll take our next question from Ulises at JPMorgan. Your line is open. Please go ahead.
Speaker 14
Hi, guys. Thanks for the space for questions here, and obviously echoing the good wishes there for Daniel. The question that we had was more if we could explore a bit on the other retail formats in Mexico, particularly around Bara. Maybe if you can comment a little bit on what the outlook is for the rollout, any short-term targets that you can share there, and obviously any colors there around how profitability is evolving, CapEx requirements, all of that, that would be highly appreciated. Thank you so much.
Paco Camacho (Chief Corporate Officer)
Yes, Ulises, thank you. Thank you for the question. Indeed, I mean, Bara is one of the formats that the OXXO team is exploring as part of their multi-format strategy. Bara, frankly, has been doing a terrific performance during the quarter. When we look at the results, if I'm not mistaken, the results were 22% ahead of year ago, strongly in the digits. The traffic increased by 12%, and we continue to see same-store sales at plus 12%. The private label, which is a strong part of the value equation, it is also performing significantly well.
They continue to improve all the operational aspects of the stores, reducing the inventory, reducing the operational costs, reapplying the success that OXXO has had on the segmentation. Importantly, they also continue improving the number of the opening of the stores. Right now, there are 300 Bara stores in particular in the central part of Mexico. Our idea is that we'll continue with that expansion in strongly in the years to come. Once again, making sure that we first continue the geographic areas that we are, and we slowly expand to others, and continue fine-tuning the value proposition.
We are very confident at this stage that we have cracked that value proposition, and it's a matter of making sure that we gradually expand it in other parts of the geography in Mexico, specifically Mexico.
Eugenio Garza (CFO)
If I may complement, with regards to the unit level economics, I think with the gross margin structure that has been achieved through the different categories, value prop and private label penetration, we have been able to, I mean, reach unit level economics that, from a marginal perspective, in terms of the store investment and the operating model that can give us, I mean, returns on investments well into the double digits. Again, at the forward level, the mature stores are reaching, and in the contribution that we originally set out, for the reformulated value prop, three or four years ago.
We're very comfortable that as the scale grows, distribution centers fill up, et cetera, that we will be achieving, I mean, much better EBIT margins than what we're seeing right now. That the marginal dollars that are being invested here are earning, I mean, spectacular returns. We're comfortable, again, that the unit-level economics on Bara are working out, either as or better than expected.
Speaker 14
All right, thanks for that. Super, super helpful. If I may just to follow up on that, on the point there on private label, do you have any sense or any level that you can share with us around how much private label actually represents there within the format? Thank you.
Paco Camacho (Chief Corporate Officer)
Yes, when we look at the total sales, private label is at around 21%, of the sales in the store, obviously it changes depending on the categories. It goes very high when you look at a fresh product, for example, it is around 27%. General merchandise is also higher at 27%. It changes, but it's an important part of the value proposition.
Speaker 14
Okay, perfect. Thanks for that, and congrats on the results, guys.
Operator (participant)
Thank you. We'll take our next question from Rodrigo at UBS. Before that, kindly be reminded that this is limited to one question each person. Thank you. Rodrigo, your line is open. Please go ahead.
Speaker 15
Sure. Thank you. Good afternoon. Good morning, guys. Paco, Antonio, Juan, Eugenio. Well, we'll limit the questions to one. I would like to explore your thoughts on OXXO Brazil. Looks like you finally cracked the formula there, delivering very impressive results in terms of same store sales. Two questions here. I would like to hear your thoughts. The first one is, do you envisage, like a near term or even next year, in a scenario where perhaps you could be like in a stage in Mexico at some point, like opening one store per day? Would you see that happening in Brazil, for instance? The second one, if you can, I mean, appears to me most of the stores being, or even all of the stores should be in OXXO.
Looks like in the JV, pretty much what, you know, everything we have is coming from you guys. Just if you can remind us or share with us, I mean, what's essentially the contribution shift from your counterparts and from Raízen and the JV? That would be great to hear it, and congrats on the overall results. Thank you very much.
Juan Francisco Fonseca (Head of Investor Relations)
Hey, Rodrigo, let me take the first part, and then I'll let Paco complement. I think on the one store per day, I mean, I don't want to put our colleagues in the hot seat, but that's actually what they did during the first quarter, right? I mean, if we remember that in Brazil, they use a different fiscal year. They have their end of the year is at the end of March because of it's a harvest, the Safra year. Our first quarter was their fourth quarter, and they actually opened, like, 90 stores during that quarter. It is doable. Now, is that a run rate for the full year? No. But is that possible? Yes.
I think, in the short to medium term, that's the kind of growth that we are looking for. I'll let Paco talk about the partnership, which is, it's really going very, very well.
Paco Camacho (Chief Corporate Officer)
Yes, yes. Thank you, Rodrigo, for the question. 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 the learnings that we have and that we share 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, our partners have over 1,600 stores in Brazil, and they opened 35 units in the last quarter.
At the end of the day, we have an ecosystem of stores in Brazil between the Select and the OXXO that are very powerful, 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. I mean, clearly the joint venture we have there is going ahead of expectation, and we have a strong relationship with our partners that we plan to continue building in the future.
Eugenio Garza (CFO)
If I may add to, to Juan's earlier point.
Speaker 15
Sure.
Eugenio Garza (CFO)
Go ahead. I just want to add to Juan's earlier point. You have to remember, the 90 stores we opened in their last quarter were just in São Paulo and Campinas, because we just have one, I mean, DC in place. Eventually we'll be in Rio, we'll be in other places. Again, I'm trying to be a little bit more aggressive than what Juan is. I'm sure I won't put the Brazilian, our Brazilian colleagues on the spot here. Once we have three or four different areas where we're saturating the market simultaneously, we should be able to reach out that growth.
Again, also just to complement on Paco's point, you have to remember that the first three years of the joint venture were run by someone who came from Raízen. I mean, the local know-how, the local expertise has been invaluable in terms of rolling out the value proposition in Mexico, and we will continue to rely on them for learnings that are being put to use in the region.
Speaker 15
I understood that. That was very clear. Yeah, I totally agree. It certainly exceeded expectations. You are already break even point there, right? Or still in negative operating income? If you can share with us, that would be helpful. Thank you very much.
Eugenio Garza (CFO)
Sure. I think at this point, given that they are also a public company, we'd rather not give out the numbers. Having said that, from a free cash flow perspective, given how much we're expanding, at this point, we're still free cash flow negative, but in a good way. What I can say is that.
The economics of the business are better than what we expected when we originally started three years ago in all income statement lines.
Operator (participant)
Thank you. We'll move on to our next question from Benjamin Theurer at Barclays. Your line is open. Please go ahead.
Benjamin Theurer (Managing Director)
Well, perfect. Thank you very much, and good morning as well. Congrats from my side. Just wanted to dig into recent dynamics at OXXO. Clearly, we saw a very strong second quarter, just continued the very healthy combination between ticket and traffic. Was wondering if you could explore a little bit of how much of maybe that traffic was driven, just weather-related, people more going into stores just because of the heat, buying certain beverages and so on, and what the trends are into the third quarter, and how you're feeling about the traffic more recently. Thank you.
Juan Francisco Fonseca (Head of Investor Relations)
Hey, Ben, this is Juan. I mean, we were talking a little bit about this even last quarter. We were talking about the gathering occasion, the thirst occasion. I remember making a comment in the call three months ago about beer being very relevant now that I mean, we've opened fully the territory, all of Mexico to both big families of brands and beginning to move the needle. Even though the opening to the API portfolio happened during, you know, several years ago or began happening three, four years ago, we already were, you know, under COVID, and people weren't really living their lives normally. Now we are, right?
People are getting together a lot more, consuming a lot more. We again see those trends where the, you know, beer category and the soft drinks category and the snacks category and the liquor category are all performing very, very well. I think if we looked at it intra-quarter, certainly the month of June was the strongest. You know, you point to the right, to the right reason. I mean, the heat, the weather that we've had for June and the better part of July, obviously has been an additional tailwind to the consumption of beverages.
You know, it looks like July kind of took off where June ended, so continued to see good trends. I, again, I think the broader reason is people fully going back to living their lives. I mentioned the other time, you know, concerts and fairs like the one in Aguascalientes, and really all over Mexico. Just people gathering and consuming normally where we have not for several years. That would be my comment.
Paco Camacho (Chief Corporate Officer)
No. Ben, this is Paco. The only thing that I would add to that is that when we look at traffic, it has been improving, as you know, sequentially for a few quarters now. The strong performance that we're seeing, the additional good news is that it is coming behind the general merchandises. I mean, basically every single segment of the store is growing and adding traffic. That is being reflected also on the market share. I mean, OXXO continues to gain market share, and that has to do with the basic and the core value proposition of the store. That is the good news.
Yeah, all the segmentation work that is being done is paying its dividend. I guess that the consistency of it is what is helping the traffic. That's why we believe that in the quarters to come, hopefully we'll continue to see the same.
Benjamin Theurer (Managing Director)
Okay. Thank you very much.
Operator (participant)
Thank you. We'll move on to our next question from Alvaro Garcia at BTG. Please go ahead.
Alvaro Garcia (Managing Director)
Hi, good morning. Thoughts and prayers with Daniel. Just one quick one on Spin. I was wondering if you're seeing higher transactions per user. In the release, you mentioned, sort of increased transactions per month. I was just wondering if in the concerned cohorts you're seeing, just higher balances and just higher movement on a per user basis. Thank you.
Juan Francisco Fonseca (Head of Investor Relations)
Yep. Hi, Alvaro. Thanks for the question. On Spin, yes, we are seeing different cohorts, especially the newer ones, being more prolific in terms of their transaction volumes, as they find different use cases for the product. Again, cash in, cash out continues to be the main one, what's really picking up now is peer-to-peer, which is what we want to, because it creates the network effect, and it creates stickiness to the product. I would say that for the most part, we are increase in transactions per user, the way we would want to see them.
As people see, the functionality of peer-to-peer, and also the payments, that, we were seeing, being done, on an analog basis, the pay, the, services, et cetera, that is also being. I mean, you top up once in the month, and then you use it to pay for three or four services online instead of having to come back to the cashier, and pay for three or four services over the course of the month. I think it's moving in the right direction as, as we expected it. There is, I mean, some, I mean, shift, as in one of the other questions with regards to what that's doing, I think overall to the, financial services line.
Having said that, it's, I think from an economic perspective, it's 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.
Alvaro Garcia (Managing Director)
Great. Thank you very much.
Paco Camacho (Chief Corporate Officer)
Gracias, Roberto.
Operator (participant)
Thank you. We'll now move on to our next question from Sergio at Citigroup. Please go ahead.
Sergio Matsumoto (Equity Research Analyst)
Yes. Hi, Sergio Matsumoto from Citi. Thank you for taking my question. Also my thoughts and prayers are with Daniel and his family. My question is on Premia, the loyalty program. When you look at the strength of that program to drive traffic into the stores, how does that compare against those that were non-digital or analog, as you just mentioned a few minutes earlier, such as the services and the payments and the mobile phone minutes top up? That's my first question. Related to that is, does the ubiquity of OXXO stores play a role? How does the ubiquity play a role in customer acquisition and retention in these digital platforms? Thanks.
Paco Camacho (Chief Corporate Officer)
Thank you, Sergio. This is Paco. I will take the second, the second part of your question. Start on the first, and then Eugenio can complement me. I mean, clearly, the OXXO stores play a very, very important role in both Spin and the loyalty program. I mean, the having the physical store and the approach that the team is taking is that a phygital approach. The service we're providing on the fintech side and on the loyalty program side, are leveraging strongly on the store, both on the acquisition side, but importantly also in terms of the consumer experience and the type of offers and programs that we put together. There is, at this stage, the intention is to continue leveraging on this physical presence of the store.
The teams work very close together because, and clearly, it's the store, when we talk about the store, it basically means the people that work in the store. They are the ones that many times have to convey the messages in terms of whether the consumers are going to use the loyalty program or not, if there's a special offer that they should be taking a look at. You need to know that they are, for example, this is just an example, but there are dedicated coupons that people can use, but they only have them available in the application, in the app.
Many times, at this, at least at this stage, the cashier is the one that is gonna suggest the user to go and look into the applications to see if there are any coupons. That link between the store and digital is strong today, and we expect it to get even stronger in the future. That takes us to the first part of your question. Which is the OXXO Premia, at this stage is a big part of the transactions are still on the physical side. People go there, and they have their phone number and they access their account through the phone number to the cashier.
More and more, we're seeing that, users have the application and they do the transaction, through the application. At the end of the day, we believe that it's going to be a combination of both, moving forward.
Eugenio Garza (CFO)
Yeah, if I might add, just in the ubiquity point. According to Banco de México, in all of Mexico, there are 62,000 ATMs, and only 28,000 or 29,000 of those 62 are actually outside of a bank branch. If you think about OXXO, in OXXO we have 21,000 ATMs. Technically we've got, I don't know, 40% of the outside of bank ATMs in Mexico. If you go to the more rural areas of Mexico, we could probably have be the only ATM in town. Clearly that is a significant portion of the value proposition, especially in a cash-rich economy, in an informal based economy like Mexico is. Clearly that is, I think, the main driver of the value proposition.
Our job, obviously, is to take that, that advantage and turn it into a unique user experience that flows across not only spend, of course, with payments and peer-to-peer, et cetera, but also with the loyalty program to drive that symbiotic relationship between the digital and the physical store. Right now, on loyalty, again, it's still early days, but I mean, you saw in the press release, we're at 24% tender. 24% of all the sales of OXXO are being done through the loyalty program. These, again, we're still running some numbers, but these customers are running tickets, and traffic, and purchases that are significantly higher than they otherwise would have been to a comparable cohort without the loyalty program.
I think this symbiotic relationship again between the physical store, the digital wallet, and the loyalty program, is causing exactly the kind of network effect that we want it to have.
Sergio Matsumoto (Equity Research Analyst)
Thanks, guys.
Operator (participant)
Thank you. We'll take our last question from Héctor Maya at Scotiabank. Your line is open. Please go ahead.
Héctor Maya (Equity Research Analyst)
Hi, thank you for your time. Apologies if I get disconnected. I'm having some issues with my line. Just wanted to say first that our thoughts and prayers are with Daniel. We are wishing him all the best.
Also, the question I have is related to FEMSA Forward. In the announcement, it was mentioned the potential that [Juntos+] have with the traditional channel. I would like to know how you are to become the supplier of the traditional channel. If you have some clarity on the economics or how you would organize your and the red trucks with The Coca-Cola Company. In the end, I mean, do you believe that we could eventually start to think of [Juntos+] as a relevant supplier or even as a one-stop shop of the traditional channel in Mexico? Thank you.
Paco Camacho (Chief Corporate Officer)
Hector, hi, this is Paco. Thank you for your question. The line was breaking up, I will try to answer the best I can. Basically, we continue to believe that there is a lot of opportunity of enabling the traditional channel and solving the key pain points that for many years they have had. I mean, first of all, I mean, clearly the pricing is a concern for them. That is the almost the price of entry. Making sure that they have the right price, it's something that it's a very important part of the value proposition.
On that side, you can imagine that, I mean, clearly we believe that we are well equipped to solve that one or two, to at least address it, simply because we have a very strong commercial relationships on the OXXO side. There are a number of other pain points that this segment has suffered over the years. One is the availability of products and the delivery, because today what they have to do is, most of the time they have to go and look for the products themselves, open store late because they have to go to the wholesalers or the Central de Abastos or other places, to supply their products. That means that they lose sales as they go and they combine, they have to pay for transportation, et cetera.
Having an ecosystem in which you can actually receive the products, place the order the day before or two days before, once you have closed your operation for the day, and then receiving it in full, at the right price, is basically going to solve a very big pain point. The second one, which is not minor, is that every time they go and buy, they have to buy full cases. That is an issue. I mean, that is an issue because many times they only need to buy a few units. Given that they don't have access to credit, they don't have access to any source of financing, they have to work with their own working cap to pay for these things.
If they buy a full case of something that is going to take two months to rotate, you can imagine they have money trapped that they cannot use for other things. In reality, our ecosystem can actually offer them to buy by the unit, simply because OXXO has been doing that by supplying their stores by the unit. That's not a minor thing. It's a difficult thing to do, because you have to make money as you do it. OXXO is an expert doing that. Clearly, we are planning to continue exploring all the alternatives we have to provide the a platform that will solve all these issues for our traditional channel.
The traditional channel continues to be an important segment for the retail in Mexico, and we expect it to continue to be as such. Clearly us playing a role in helping them is going to be important.
Juan Francisco Fonseca (Head of Investor Relations)
I think I would just add, this is Juan. I know this is a question that has come up on the call center side as well. Just remind everybody that it's still early days in terms of how we build this thing and how, you know, roles and responsibilities and capabilities and interactions, a lot is still to be defined. You know, it's looking very promising, but it's still early days.
Héctor Maya (Equity Research Analyst)
Thank you.
Operator (participant)
Thank you. There are no further questions in queue. I will now hand it back to Juan for closing remarks. Thank you.
Juan Francisco Fonseca (Head of Investor Relations)
Thank you everyone. Thank you obviously for all your kind words again, regarding Daniel. We will definitely relay them to him. He might very well be listening to the call, or maybe he already heard you. You know, we are always available as always, myself and the team. Jose Antonio, if you want to also, you're gonna sign off, you know, have a great end of the week and weekend, guys, and we'll be in touch.
José Antonio Fernández Carbajal (Executive Chairman and CEO)
Now, thank you, Juan. Thank you for your time. Thanks for the interest on the company as well. I will try to be at least on a couple of this kind of conference calls per year, not on all of them. Unless there is an important news that we have to announce, I will gladly come. Also, you should know that through Juan, you can contact us all the time. We will stay in touch. Thank you very much and see you soon. Bye.
Operator (participant)
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Continue to stay safe. You may now disconnect.