Fomento Económico Mexicano - Q4 2023

Transcript

Operator (participant)

Hello, and welcome to FEMSA's fourth quarter 2023 results conference call. My name is Melissa, and I will 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 at the end of the presentation. 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'll be connected to an operator. I'll now turn the call over to Juan Fonseca, Head of Investor Relations. Please go ahead.

Juan Fonseca (Head of Investor Relations)

Good morning, everyone. Welcome to FEMSA's fourth quarter and full year 2023 results conference call. Today, we are joined by José Antonio Fernández, FEMSA's CEO and Executive Chairman of the board, Paco Camacho, our Chief Corporate Officer, Eugenio Garza, our CFO, and Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations. The plan today is for José Antonio to open the conversation with some high-level comments on the full year, as well as the senior organizational changes announced today. Then we'll get a bit more into our strategic progress and business trends, followed by Eugenio, who will focus on the results. Finally, we will turn it back to José Antonio for some closing remarks and open the call to your questions. José Antonio, please go ahead.

José Antonio Fernández Carbajal (CEO and Executive Chairman)

Thank you, Juan. Good morning, everyone. Let me begin by reflecting on a year that was, like no other in recent memory, full of activity and news for the company. We kicked things off with a transformational announcement of FEMSA Forward, through which we focused on strategy—our strategy on our three core business verticals of retail, what we call also proximity and health, Coca-Cola FEMSA, and digital. We then proceeded to execute on most of its related transactions in record time and with great success, divesting our investment in Heineken through two successful transactions, as well as our minority stake in Jetro Restaurant Depot, merging Envoy Solutions with BradyIFS, while reducing our capital exposure to that asset. The effort is still ongoing, as we are in the process of finalizing the remaining divestments.

Furthermore, we are poised to begin deploying the capital allocation strategy announced last week that will allow us to increase our leverage towards our stated objective and to avoid capital idle, to avoid to have idle capital on our balance sheet. During 2023, we made significant progresses executing on the long-range plan of all our business units and in line with our three strategic priorities of accelerating growth, going increasingly digital, and balancing our risk-return profile. We achieved these strong results by combining the right strategies with the hard work of our remarkable team. On that front, and in order to better leverage the FEMSA Forward strategy, back in September, we made important changes to better align the corporate organization with our more focused structure built around our three core business verticals.

In that context, and given the strengthening of the management team, teams of the three verticals, today, we announce two important changes in our leadership team. Paco Camacho and Eugenio Garza have both made the personal decision that this is the right time for them to finish their cycle at FEMSA and move on to seek new professional challenges with effect at the end of April. Their contributions to our company have been many and substantial, and we thank and appreciate them today, wishing them continued success in their future endeavors. Martín Arias, who many of you know from his 25 years of fruitful association with FEMSA, will become CFO, working closely with Eugenio to ensure a seamless transition. With that, let me turn it over to Paco.

Paco Camacho (Chief Corporate Officer)

Thank you, José Antonio. Good morning, everyone. Let me begin with a couple of updates regarding FEMSA Forward. First, the Envoy Solutions-BradyIFS transaction announced in August successfully closed at the end of October, and the new company is already operating as a single entity. Second, we have completed the process of carving out and transferring the distribution assets of OXXO and Coca-Cola FEMSA from Solística to their respective operations. And they are now captive Solística, as well as other non-core operations as defined in FEMSA Forward. Finally, we have fine-tuned our capital allocation plans as we informed last week, putting us in a position to begin returning capital to shareholders as we begin to raise our leverage towards our stated objective of 2x net debt to EBITDA, ex-cost, which we expect to achieve within 2-3 years.

Moving on to the results for the fourth quarter, our numbers continued the positive trend seen during the first nine months of the year.... fully consistent with our strategic priorities and making progress towards the targets set by each business unit's long-range plan. Beginning with proximity, like we did in our last call last quarter, in our call last quarter, it's helpful to talk for a minute about their own long-range plan and their four priorities around which it is built. Strengthening the core, developing new growth avenues, developing multiple successful formats, and growing the footprint beyond Mexico. Looking at OXXO's fourth quarter results through this lens, we see they again made a strong progress in strengthening core, with same-store sales growth of 8.5% against a double-digit comparison base.

This performance was again driven by a broad-based set of tailwinds, including a stronger consumer demand for thirst, gathering, and the snacking occasions, solid commercial income dynamics, better segmentation at the store, and the rapid adoption of the Spin Premia Loyalty program. Continuing with the positive news of a stronger core, store growth was remarkable, with Mexico and LatAm adding 514 net new stores during the quarter, and 1,408 during the past twelve months. Looking only at Mexico, we surpassed the 1,000 new store threshold for the first time since before the COVID pandemic, adding 1,087 net openings.

Moving on to the long-range priority of growing beyond Mexico, during the quarter, Grupo Nós continued its solid advance, with revenues increasing over 119% year-over-year, and with OXXO's footprint in Brazil more than doubling during the last twelve months, reaching 1,716 stores at the end of 2023. Turning to Proximity Americas, but along the priority of developing multiple successful formats, Bara grew revenues by 33.7% and reached a total of 359 stores at the end of the quarter. We will increasingly talk about other successful formats that are gathering momentum, such as our coffee drive-throughs, our specialized OXXO Smart stores for controlled environments, and our traditional trade initiatives. For its part, Proximity Europe, achieving strong operating results with substantial growth in a challenging macroeconomic environment.

This was driven by higher sales in the food category and the favorable effect from vertical integration. Revenues increased by a strong 16.4%, generating operating leverage. As of the end of the year, Proximity Europe had 2,808 points of sale, a net increase of 42 units over the comparable period. Our health operations showed mixed performance trends and again reflected foreign exchange headwinds from a strong Mexican peso relative to local currencies in South America. In Colombia, we are gradually shifting our business towards more retail and less institutional exposure, given the challenges the institutional health industry is facing in the current political environment. While in Mexico, we continue to see competitive retail activity across territories. In both cases, adjustments to our strategy are in progress, and we will keep you apprised.

In line with our evolving strategy, during the quarter, our health business continued to push to consolidate its competitive position in retail across markets, increasing its store footprint to reach a total of 4,474 locations. In fact, during 2023, our health division added new locations across its territories, a base of approximately one per day. For its part, our fuel business delivered a strong set of results, with our dynamic corporate wholesale business continuing to outperform relative to retail. Comparable sales were robust, with good contribution from traffic and ticket growth. Regarding digital at FEMSA, the number of active users for Spin by OXXO reached 6.9 million during the quarter, and active users for our premium loyalty program reached 19.3 million. Importantly, approximately 31% of OXXO's, OXXO Mexico's sales are now associated with the program.

We continue to privilege the acquisition of higher quality users, while we make progress fine-tuning the use cases, value propositions, unique economics, and monetization strategies for each part of the ecosystem. In terms of financial implications, during the quarter, we deployed around MXN 1 billion on growing this business, roughly in line with the previous quarter, as well as budget. Finally, Coca-Cola FEMSA delivered a remarkable set of results for the fourth quarter, driven by Mexico, Brazil, Colombia, and Guatemala, enabling COF to surpass 4 billion unique cases of non-alcoholic, ready-to-drink beverages for the full year. With that, let me turn it over to Eugenio.

Eugenio Garza y Garza (CFO)

Thanks, Paco. Good morning, everyone. As we continue to execute on our FEMSA Forward strategy, we've made some adjustments to the initial statements throughout the year to reflect the divestiture of our non-core businesses.

During the fourth quarter, we recorded Alpunto and the third-party component of Solística as discontinued operations. To maintain comparability, we modified our consolidated financial statements for the fourth quarter of 2022 to reflect this change. Let's begin with FEMSA's quarterly consolidated results during the fourth quarter. Total revenues increased 4.6%, and EBITDA rose 3.6% compared to the fourth quarter of 2022. Net consolidated income decreased 20.7% and stood at MXN 6.3 billion, resulting from higher gross profit and lower net interest expenses during the quarter. This was offset by a non-cash foreign exchange loss of MXN 6.3 billion related to a U.S. dollar-denominated cash position, and impacted by the appreciation of the Mexican peso.

A MXN 3.2 billion net loss from discontinued operations, mostly reflecting the accounting remeasurement from historical cost to fair value of FEMSA's investment in Solística and AlPunto, net of impairments. Shifting gears to our business unit results, and starting with Proximity Americas. During the fourth quarter, we incorporated 514 stores, bringing our total to 1,408 new stores for 2024, which includes 1,087 new stores in Mexico and 321 in South America. This robust growth has propelled us beyond the annual growth target, renewing our confidence that our growth runway remains long for OXXO across all markets, and the opportunity for our multi-format strategy is equally compelling. OXXO same-store sales increased 8.5% in the fourth quarter, cycling strong double-digit growth from the same quarter of last year.

This result was led by a 6.3% increase in average customer ticket and a 2.1% increase in traffic, as the trend gradually reverts to more sustainable levels after eight consecutive quarters of double-digit growth. Gross margin grew 17.2%, an expansion of 120 basis points, led by healthy commercial income dynamics and higher income from financial services. Income from operations rose by only 1%, reflecting an operating margin of 11.2%, a contraction of 150 basis points, driven mainly by higher labor expenses in Mexico, including adjustments made ahead of further regulatory changes expecting during 2024. Moving on to Proximity Europe.

Total revenues grew by 9.5% in local currency, resulting in 16.4% growth in peso terms, boosted by the food category across all units, and the positive effect of vertical integration, particularly through the B2B pretzel business. Gross margin stood at 44.9%, while operating margin expanded by 180 basis points to reach 5.2%, reflecting the same drivers that supported revenue growth as well as higher promotional income. Turning to FEMSA's health operations, we expanded by 127 net new drugstore additions during the fourth quarter to reach a total of 4,474 units across our territories in 2023. Total revenues increased 2.6%, while same-store sales grew 5.1% in Mexican pesos.

On a currency-neutral basis, revenues and same-store sales increased by 9% and 3.1%, respectively, driven by a positive performance across most of our territories, which was partially offset by a challenging macroeconomic environment in Colombia and Ecuador. Beyond the top line, however, gross margin decreased 110 basis points, and operating margin was down 240 basis points, largely reflecting a deteriorating environment in the Colombian institutional business, where we took a charge of MXN 527 million for uncollectible accounts. As a result of these structural headwinds, we are actively evolving our Colombian operation to rely more on a dynamic and fast-growing retail component, and less on the structurally complex institutional operation. Moving on to gas. Same-station sales increased 4.8%, and total revenue grew by 9% as we continue to develop our corporate business.

During the quarter, gross margin was 13.4%, and operating margin was 4.6%, reflecting tight expense control and operational efficiencies. Finally, moving on to Coca-Cola FEMSA, that again delivered an outstanding set of results in the fourth quarter. Total volume increased 6.1%, driven by growth across most of its territories. Total revenues grew 8.1%, and operating income grew 7.4%, while operating margin was 14.6%. On a more strategic note, they did reach a milestone in their digital transformation journey, reaching more than 1.1 million monthly active users through the Juntos Plus platform, with more than $2.5 billion for the year. You can listen to the replay of their conference call held yesterday in their website. Now let me turn it back to José Antonio for some closing remarks.

Go ahead, José Antonio.

José Antonio Fernández Carbajal (CEO and Executive Chairman)

Thank you, Eugenio. Before we close, let me talk a little about our progress on our sustainability efforts during 2023. As we made progress on several fronts, as an example, in recognition of our ongoing efforts to advance our sustainability agenda, FEMSA was included in the Standard and Poor's Global Sustainability Yearbook for the first time in 2024. We were acknowledged for our continuous improvement in water management, resource efficiency, packaging circularity, and business integrity metrics. The yearbook recognizes corporations that serve as a reference in global sustainability standards. On the governance front, we continue to evolve the composition of our board of directors with the nomination this year of two new independent directors, Elaine Stock and Olga González Aponte.

They are remarkable executives whose experience, acumen, and expertise will surely benefit our company for years to come. No recap of 2023 could be completed without mentioning our great friend, Daniel Rodríguez. For all the strategic success and operational achievements we have talked about today, our hearts are heavy and our mood is tempered by Daniel's passing. Daniel was key in defining the strategy and setting these positive trends in motion, and we hope we are making him proud today. As we look ahead, we are fortunate to have a broad set of opportunities to continue growing in every one of our core verticals.

There is no doubt that the year that begins will bring some headwinds, such as higher labor costs in Mexico, but also the tailwinds of higher economic activity from an electoral period in the short term, and from encouraging macro trends like nearshoring and in the mid, medium, and long term. Across our markets, we will again navigate a mix of challenges and opportunities, and I have no doubt that we will again find a way to thrive and create value for all our stakeholders. We start 2024 keeping our eye on the ball as we carry good momentum into what will surely be another interesting year. All our business units are well positioned for continued growth.

I am particularly excited to see the many ways in which we will continue to apply our growing data analytics and AI capabilities to drive better performance and incremental growth across our three core verticals. We are just getting started. Finally, I want to take this opportunity to thank our entire team for a job well done in 2023, and to thank all of you joining us today for your continued support and interest in our company. With that, we are ready to open the call for questions.

Operator (participant)

Thank you very much. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. To withdraw your question for any reason, you may press star two. We kindly request you limit yourself to one question. Our first question comes from Ben Theurer of Barclays. Please go ahead.

Ben Theurer (Managing Director)

Hiya. Good morning, everyone, and thanks for taking my question. Just wanted to follow up a little bit on the performance at OXXO, the same-store sales composition in particular. Could you talk a little bit about the deceleration sequentially that you saw in store traffic? Because obviously we had a fairly strong first nine-month period with same-store sales growing somewhere in the mid-single digits on the traffic side. But now it kind of came down, and even with the base comparison, that wasn't too high. So any color you can share on that would be much appreciated. Thank you.

Eugenio Garza y Garza (CFO)

Sure, Ben. I think it has to do mostly with the fact that we had a very strong fourth quarter last year, related to the World Cup and other events coming due. So there's a fair bit of that. So that, call it excess traffic from last year, did not repeat. Having said that, the underlying trend in traffic, if you see the services category, that is coming up significantly. So it's a little bit of a mix of both. And fortunately, the average ticket continues to maintain at a much higher level than it did pre-pandemic, given the change in customer tastes. And I think that combination is what I think drove same-store sales to their fantastic performance throughout the year.

But specifically, fourth quarter has to do with lapping of the World Cup and a change in the composition of that traffic.

Paco Camacho (Chief Corporate Officer)

And Ben, also just to add a couple of things and provide some more color on that. Structurally, the performance of the stores is very strong, and we saw a very good performance across segments and across categories. And obviously, that also generates a strong performance in the traffic. So we feel confident about the structurally the traffic trend being strong and as we enter into 2024.

Juan Fonseca (Head of Investor Relations)

Yeah, I would just add, Ben, this is Juan. You know, to be honest, I expected this to happen back in April. You remember, at the call back in April, where I was already guiding people to not put a double-digit same-store sales number in their model. And then I was wrong for three quarters, but eventually the math kind of catches up with you. I think you're, you know, you're also looking at what was a, a very long recovery post-COVID, right? I mean, the traffic fell off a cliff in 2020, and it's been coming back, and there's a lot of stuff, as Paco was saying, I mean, segmentation at the stores and the drivers for growth are very much in place.

But I think the mix that we see today is a more normal mix, quite frankly, and more looking forward, I think our mix is going to look more like what we reported today than the, you know, 6%-8% that we were showing 3 or 6 months ago.

Ben Theurer (Managing Director)

Okay. Thank you.

Operator (participant)

Thank you. Our next question is from Ricardo Alves with Morgan Stanley. Please go ahead.

Ricardo Alves (Managing Director)

Hello, everybody. Thanks for the call. Question on the senior management change. If you could add more details, you know, for instance, on the timing, particularly now in the middle of the same store forward, just to make sure that everything is aligned with the board and so forth. We also noticed that in the part of the release, you mentioned that Eugenio will launch the implementation of the capital allocation elements. Can you tell us what that means exactly? Is that related to the buybacks specific? And then it also states that Eugenio will remain as an advisor. And if that would be related to the second stage of the Envoy that we discussed at length last year, or maybe new ventures in the U.S.

So curious, if you can elaborate to the extent possible, a little bit more on the CFO and the and Paco move as well, evidently very relevant for today. And a follow-up to that question would be on the shareholder return, and on the buyback point that I mentioned. The doubling of the authorization, the $2 billion or whatever the number is, is pretty significant. But we all know that there has been very limited activity to no activity, depending on the time frame.

So now that the announcement is behind us, can you share with us the key, you know, hurdles or the accounting flexibility that you now seem to have overcome so that you are now really confident that you're gonna be able to be active on the buybacks? Is there a timing for us to be expecting more activity there? Just a little bit more granularity on the buyback component. Sorry for the long question.

José Antonio Fernández Carbajal (CEO and Executive Chairman)

Well, I will start with the first part of the question, and we'll let Eugenio and Paco explain the second part. But on the first part, what we have agreed with Paco and Eugenio is that they will stay with us, helping until at the end of April. By then, and starting next week, Martín Arias is already fully involved, is going to start fully involved, and the transition of Eugenio and Martín will go very smoothly. At the same time, Eugenio, he, thank God, he offered us to continue as an advisor per project.

And yes, there could be some projects that we could do one of investments or new investments that we could do, and obviously to continue putting an eye and advising us on all the capital allocation strategy that we have designed and have presented to you recently. On the rest, I will ask Eugenio to explain.

Eugenio Garza y Garza (CFO)

Sure, Ricardo. Yes, definitely what, what I'm gonna be more focused on over the next couple of months, during the transition with Martín, is on the implementation of the, capital return, portion of the, of the capital allocation program we announced last week. So it does have to do with share repurchases, and continue to- continually monitoring, the investment, both in organic and inorganic investments, as we, aim to reach that 2x net debt to EBITDA over the next, few months. So to your question with regards to the timing of the share repurchases, with the announcement behind us, clearly now we will start to have an open to, to start to use that more heavily.

What we will be asking the shareholder meeting in March is to increase the capacity that we currently have. But again, we have capacity currently in place to start to operate as soon as next week. So we will be implementing that capital return strategy, as we mentioned in the release last week, in a way that maximizes per share value from an intrinsic perspective in the long term. So that will be a combination of both share buybacks and extraordinary dividends. As you saw, we already started with our first one, and there will be additional ones to come, if indeed we realize that through the operating environment, we're not able to reach the 2x net debt to EBITDA on our own.

So those will be the levers that we will be pulling, again, with me at the helm for the next couple of months, and then with Martín and the rest of the team helping him going forward.

Juan Fonseca (Head of Investor Relations)

No, I would like to add, Ricardo, this is Juan. Since we did not have a call kind of dedicated to the capital allocation release, so the fact that we're all here today, I understand that there may be some questions, and yours is the first one on continuity, right? And so I would like to ensure that the strategy that was communicated last week is fully in place, that the 2x net debt to EBITDA target is fully in place, and that you know, there will be no deviation from that. So I just wanted to put that out there, because I know that the concern is gonna be among investors. Yeah.

Ricardo Alves (Managing Director)

That's helpful, gentlemen. Thank you so much.

Eugenio Garza y Garza (CFO)

Thanks, Ricardo.

José Antonio Fernández Carbajal (CEO and Executive Chairman)

Thanks.

Operator (participant)

Thank you. Our next question is from Alvaro Garcia of BTG Pactual. Please go ahead.

Alvaro Garcia (Associate Partner)

Hi, gentlemen. Thanks for, thanks for the call. Eugenio, Paco, all the best, going forward. My question is on labor costs in Mexico. I know that FEMSA has a philosophy of paying more than the street, of paying more than competitors or similar outlets, and that's very much true of OXXO. And I'm just curious of where we are in that process of you know, upping pay for your employee base at OXXO. You know, how much more difficult has it been to get that premium? And what's your outlook for labor costs into 2024? Thank you.

Paco Camacho (Chief Corporate Officer)

Hi, Álvaro, this is Paco. Good to hear from you. I'll start, and then I will let the team provide further perspective. But I guess that what we need to keep in mind when it comes to cost management, particularly in OXXO, and understanding that the labor cost, or specifically the labor cost during the last year, was, I would say, a special situation versus other years because of its magnitude. But the reality, what we need to keep in mind is that OXXO is extremely good at working consistently on making our operations more efficient. So the team has been focused on making sure that all the verticals and all the possibilities that they usually explore as part of the way they do their operations of the stores, continue to progress towards further efficiencies.

And I guess that, that has to do with store management, that has to do with headcount, that has to do with, with how we look into the specific cost in the stores. So this is just to reassure you that structurally speaking and, and the way we approach this in the stores hasn't changed. We will continue to do so, and evidently, every time something like this comes, the teams double the efforts, on maximizing the efficiency. But, for 2024, we have included the increases in the plans, and we are confident that we can deliver on those plans as we enter the year. Eugenio, you want to add something on that?

Juan Fonseca (Head of Investor Relations)

I would add one thing, Alvaro, this is Juan. Just because, you know, when you look at the numbers and you look at the OXXO P&L, and we're making some comments about how the operating margin was impacted by, among other things, but largely by the labor cost situation. And so, you know, in terms of 2024, I just want to put out there, I hate to call it guidance, but, you know, our expectation is that operating margins for the year will be flat, right? That's kind of our base case. So I think the year is gonna start a little bit softer, and it's gonna gather strength as the year goes by.

For the full 2024, our expectation is for operating margins to be flat for OXXO Mexico, and I think that's an important data point.

Alvaro Garcia (Associate Partner)

Okay, great. Thank you very much.

Paco Camacho (Chief Corporate Officer)

Gracias, Alvaro.

Operator (participant)

Thank you. Our next question is from Héctor Maya of Scotiabank. Please go ahead.

Héctor Maya (Director of Equity Research)

Hi, thank you very much for taking my question. So I just wanted to know about your update of the FEMSA Forward plan. We saw that the execution and the investments had come ahead of time, and it was exceeding expectations. So just wanted to understand why you considered it was necessary to extend the timeline window for cash deployment by an additional year, potentially. And would that be because maybe M&A opportunities take longer to appear, or is there a concern for either the economic or political environment in your operations that drove the decision to keep a relevant cash position for a little longer?

Eugenio Garza y Garza (CFO)

Hi, Hector. Thanks for your question. It's Eugenio here. Look, really nothing has changed from what we said last year, and we continue to reiterate it. We are going to get to the 2x net debt to EBITDA. We can get there in several ways. One is through special dividends, the other one is through share repurchases, and the other one will be through organic and inorganic investments. At this point, yes, we're sitting on, on a pile of cash that's accumulated at a higher pace than we expected because of the success that we've had with the divestiture so far. There will be more of that cash come both from the remaining sales of the remaining assets, as well as the Jetro stake, which we sold in installments.

The operations will also be generating cash. So we are, I mean, painfully aware of the problem of holding too much cash. Having said that, we want to deploy it in a smart way that maximizes long-term intrinsic per share value. So I think, still within the range of the same 2-3 years, we will get to the 2x net debt to EBITDA. It makes us, to be honest, feel a little bit more comfortable holding onto the cash right now at 5% interest rates that we're investing it in, rather than where it was 2 years ago. So we're being patient as opportunities arise.

But again, even if, if we do see inorganic opportunities, we've stated they will be in the core business verticals that we identified on the FEMSA Forward, and they will be financially accretive to long-term intrinsic per share value. So, we want to maximize that flexibility that we have to invest across all businesses and in the best investment that we have, which is our own share, and get to that 2x net debt to EBITDA in due course.

Héctor Maya (Director of Equity Research)

Thank you. That's, that's very clear. And also, the conversation around the hard discount category and private label has been very hot right now, very active. So just also wanted to understand if we could expect your strategy with Bara to, to become more aggressive in the future, and how relevant could private label become for your overall strategy and maybe then for OXXO?

Paco Camacho (Chief Corporate Officer)

So, I'll, Hector, just to answer, this is Paco, just to answer that very quickly and continue with the questions from the rest of the attendants. Look, as you know, and as we highlighted in the opening remarks, I mean, clearly one of the strategies that we are following in Proximity, and we have stated before, is multi-format. Bara is an important component of the multi-format vertical. Bara, we reported, has had very strong growth in 2023, and our intention is to continue strengthening that business in 2024 and in the years to come. Private label is a very important part of the equation of that business. It has been performing really well. So what we are doing.

And what we have explained we're intending to do in that business has nothing to do with the recent announcements on that part, on that segment of the retail. But basically just following the strategy we have highlighted before. And to your point, I mean, clearly private label is an important component. We are doing very well in that segment of the business in the results we posted, and our intention is to continue doing the same in the years to come.

Eugenio Garza y Garza (CFO)

And again, with regard to your specific question on Bara, I mean.

Héctor Maya (Director of Equity Research)

Thank you very much.

Eugenio Garza y Garza (CFO)

Oh, go ahead. No, I was just gonna say on, on Bara.

Héctor Maya (Director of Equity Research)

Oh, sorry.

Eugenio Garza y Garza (CFO)

We're happy that the market is recognizing the value in hard discount, and there's a long, long way in that format ahead. And again, we're happy that now the market has another view into how that business is performing, and that will continue to be friendly competitors in the market.

Juan Fonseca (Head of Investor Relations)

Let me just add, I don't know if you're aware, we hired a new director for that area called Jacobo Caller, who's an expert on this kind of multi-format and hard discount stores. He has been here for the last three or four months already, and he's completely convinced that the potential of our Bara project is now ready to jump and to grow fast under him. So we are really looking for how to develop and to grow all over with Bara as we speak.

Héctor Maya (Director of Equity Research)

Excellent. Very, very clear. Thank you very much. Thank you.

Eugenio Garza y Garza (CFO)

Thanks, Hector.

Operator (participant)

Thank you very much. Our next question is from Alan Alanis with Santander. Please go ahead.

Alan Alanis (Managing Director)

Thanks for taking my question, José Antonio, Paco, Eugenio, Juan, and best of luck to Paco and Eugenio. Let me put some context on the question first. I mean, FEMSA's share is down 9% this morning in the first hour of trading. That's four billion dollars of lost market cap, and I think that the market is reading three negative things on this. First, the uncertainty of the CapEx, and that will be my question. I'll come back to that in a moment. The second, the unexpected management changes. I mean, I happen to know Martín Arias, I think he's super competent, and I'm sure he, he's gonna do also a very good job, but the market doesn't know him yet. And the results regarding the margin contraction and the disappointment same-store sales.

I think what would be very useful in this call, José Antonio and team, is to elaborate a bit more in terms of how are you gonna deploy $14 billion in the next 5 years, of which you've indicated that 70% of that is gonna go to Mexico. That means that on average, you will be putting $2 billion invested in Mexico. How are you thinking about that in terms of in which businesses, in which sectors, and how much of that money is going to OXXO Spin and the aspirations that you have for OXXO Spin? That would be my question. Thank you so much.

Paco Camacho (Chief Corporate Officer)

Yeah. Thank you, Alan, for your question. Look, I think that we need to go back to answer your question, to go back to what we announced during FEMSA Forward. Because strategically speaking, we announced that we are committed toward three core verticals. Basically, retail, digital, and Coca-Cola FEMSA. So you should expect that the discipline that we will have in terms of deploying capital is going to be fully aligned to this strategy that we announced. So anything that we do will, first of all, be consistent with that, but second importantly, will be extremely disciplined on how we select potential inorganic opportunities moving forward.

Juan Fonseca (Head of Investor Relations)

Yeah, let me add something on the CapEx, Alan. This is Juan. I mean, if you look across formats, and, you know, a lot, a lot of what you see is going to be deployed in organic expansion. What we're seeing, I mean, obviously in Mexico, we've talked about the runway, but what we're seeing in multi-format and what we're seeing in other geographies is very, very compelling opportunities to accelerate the pace of growth. Even today, and we'll, you know, we'll detail this over the next months and quarters, but even today, if you look across all retail formats, we are opening in the order of seven units per day, right?

If you think about, you know, OXXOs here, OXXO South America, drugstores, OXXO Smart, coffee drive-throughs, you know, it, it, it's going to ramp up from an already very dynamic place. And that's really a big part of the CapEx numbers, right? I mean, don't, don't straight line it, horizontally, but rather straight line it as a, as a, as a, you know, with a slope, because that's what you're gonna see. If you think about Colombia, you know, we're about to accelerate significantly in Colombia. I was in Brazil a couple of weeks ago. The opportunity for Grupo Nós is fantastic. So a lot of, a lot of the CapEx is really going to take the, the form of stores and DCs and distribution assets.

We've said in the past, on the M&A front, we're looking for, you know, a potential entry model into the U.S. on convenience. That's, that's, everybody knows that. We've been looking for drugstores in Mexico, that's proven a bit more elusive. And that's pretty much it, in terms of what we've identified at this point. Do we like our flexibility? Sure. But, but it, it's mostly about organic growth, Alan. And, and, I, I've, I've gotten a lot of questions, we've gotten a lot of questions about the bigger CapEx numbers that were communicated last week. So hopefully this, this, helps understand where that capital is going.

Alan Alanis (Managing Director)

Yeah, yeah. Well, I thank you so much for that. And if you can just final question here. I mean, what would you—what do you think investors are missing with such an abrupt stock reaction? And how important is that stock price for you, for the controlling group, for management and so forth? What's the market missing? If I maybe misdiagnosed the reason why the stock is down 9% today, but if any color on that would be a key for those clarifying and hearing you do as managers and as the controlling shareholders. That would be all, and thanks so much for taking the question.

José Antonio Fernández Carbajal (CEO and Executive Chairman)

Alan, you know us very well, and you know that we all think long term.

Alan Alanis (Managing Director)

Yes.

José Antonio Fernández Carbajal (CEO and Executive Chairman)

We will continue being very disciplined on our strategy. FEMSA Forward has huge potential. You know, cash is king. We always have said that. You remember Don Eugenio saying that. And Don Eugenio also said that the opportunity is the queen, and we have to keep both. The cash, some cash for doing new projects. Coca-Cola FEMSA hasn't been mentioned, but it's going to invest largest CapEx in history because of lack of capacity. We lost volume this year because we didn't have enough capacity in certain places. We have to fix that, so we are going to have a huge investment in capacity in Coca-Cola, in various countries. And obviously, we will still go looking for good opportunities on our three verticals. That's why we... But our intention is there.

We go all the way to 2x EBITDA and divest as much as possible or repurchase as many as possible on shares because that, or pay dividends, because we don't like to have the resources just getting a very low interest rate.

Alan Alanis (Managing Director)

Yep. Thank you so much, José Antonio. Really appreciate it. Thanks, guys.

José Antonio Fernández Carbajal (CEO and Executive Chairman)

Thanks a lot.

Operator (participant)

Thank you very much. As a reminder, if you'd like to ask a question on today's call, you may press star one on your telephone keypad, and we kindly request you limit yourself to one question. Our next question is from Thiago Bortolucci with Goldman Sachs. Please go ahead.

Thiago Bortolucci (Equity Research Analyst)

Yes, good morning, gentlemen. Thanks for taking my question. Let me just catch back one mention from one related to the target leverage of two. Is committed to that, no deviations, right? I think one of the reasons for the volatility we're seeing is lack of visibility on how you will get there, right? You are mentioning 2x leverage. This might give you $7 billion-$8 billion in excess cash, but at the same time, you are mentioning you are committing to give back up to 6% of your market cap, which is 3%, right? How will we add back 2, 2, 2x, and to where this incremental $4 billion-$5 billion might be going? This is the first question. And if I may just take advantage of José Antonio being in the call.

José Antonio, today, you have two interim positions, right? The CEO and the CFO. How is the board thinking about this, and how important it might be to fill definitely these positions in order to keep the plan moving forward? Those are the questions. Thank you very much.

Eugenio Garza y Garza (CFO)

I'll start with the first one, and then I'll turn it over to José Antonio. Yes, my math is a little bit different than yours, but ballpark, it's the same. I think to get times, we're talking about a number close to $6-$6.5 billion in that neighborhood. Thiago, and yes, 6% of the market cap as of last week was $3 billion, so there is still some undefined allocation of resources. Having said that, we still believe we're gonna get to two times, and that excess amount, plus the cash that will come in from the operations, will be looked at very closely between organic, inorganic, and additional return to shareholders. So it's gonna be a mix of all of that, that will get us to 2x.

I understand the anxiety about not being it all spelled out in stone about where that additional $3 billion-$4 billion are going, but the commitment is to get to 2x while maximizing shareholder value. So we don't have all the answers yet. What we can tell you is that at least the $3 billion will go to shareholder return at this point, and the rest, we will deal with it, as opportunity to rise.

José Antonio Fernández Carbajal (CEO and Executive Chairman)

Let me just comment on that before, José Antonio. Another way of what Eugenio just said is, and this is the question we've been getting: Could there be some upside to the $3 billion? And I think Eugenio just said, you know, in other words, yes. But like I said a few minutes ago, we really value our a little bit of flexibility, and so those questions will be answered over the next couple of years. And on the second question that you had, we have discussed this at length with the board, and we have agreed that on the CEO position, I am willing and open, and I'm very happy to stay for at least 24 months as CEO and chairman at the same time.

I'm making this effort, I'm enjoying it, and I will stay doing it. While we are going to start the process of looking for a new CFO, as you could imagine, it'll take us hopefully less than a year or maybe a year or 18 months at the most, but we will find a new CFO for the company. As we speak, we will start the process of looking for one.

Eugenio Garza y Garza (CFO)

And then just to be more clear about this, and I'm sure Paco will have his own views. But I think in my personal decision to leave the company at this point has more to do with kind of my personal interest. I think the skills that I brought to bear were put in place during the FEMSA Forward program over the past 18 months. And we and the team had, I mean, a lot of success doing it. And at least for me, it's on to the next project. So nothing more than that, and I'll continue to be close to the company as an advisor over the next few years, hopefully.

Paco Camacho (Chief Corporate Officer)

Yeah, and Thiago, taking the opportunity, also this is Paco. Look, I'm extremely proud of what the team has accomplished in FEMSA, developing the long range plans, having a clear perspective on what the future looks like. And in reality, my decision is something that didn't come... I didn't take that lightly, and it's exclusively related to what I want to do with the next stage in my professional career. FEMSA is an incredible company with a bright long-term perspective that I will certainly miss. I will miss the team, I will miss José Antonio, I will miss everybody here. And the prospects of our company, I believe, are brighter than ever. So that made the decision even more difficult.

But, again, it's exclusively personal, and FEMSA will always be a highlight in my over 35-year career in many big companies, and FEMSA clearly stays at the top of that.

Thiago Bortolucci (Equity Research Analyst)

Thank you, and we'll also miss you both too, for you. Thank you very much, Paco and Eugenio. Thank you very much.

Eugenio Garza y Garza (CFO)

Thank you, Thiago.

Operator (participant)

Thank you very much. Our next question is from Luis Willard with GBM. Please go ahead.

Mr. Willard, you are open. Please go ahead.

Luis Willard (VP of Equity Sales)

Hi. Hi, guys. Can you hear me?

Eugenio Garza y Garza (CFO)

Yes, we can.

Operator (participant)

Yes.

Luis Willard (VP of Equity Sales)

Thank you. Perfect. So my question is quite mundane and perhaps I'm reading this all wrong, but I just wanted to ask you if you could, you know, go over a bit on the changes that you mentioned on your remarks. Eugenio, I think it was you, about the deconsolidation of operations. Because, I mean, you're reporting on a consolidated base of 4.6% growth in sales. But if you look at each of the subsidiaries that you break down, all of them in pesos grow, except for health, all of them grow above that average.

So I just wanted to make sure that I'm reading this correctly in a year, but perhaps there's some deconsolidation that's not registered in the base, but it is in the fourth quarter 2023 numbers. Is that correct? Or what am I missing on the.

Eugenio Garza y Garza (CFO)

Sure.

Luis Willard (VP of Equity Sales)

Let's say, on this closed breakdown of that? Thank you.

Eugenio Garza y Garza (CFO)

Yeah, Luis, we can touch base offline if you want, and walk you through the exact numbers. But there were, as you know, because of the peso, some currency mismatches. So depending on whether you're looking at it on a currency neutral basis or on a peso basis, then some numbers are weird, especially this quarter, in a lot of lines, including the non-cash items and the taxes. And then there is also the deconsolidation, as you well said, it doesn't move the needle that much, but at the margin it does. We deconsolidated both the Alpunto business as well, the part of the Solística business that is in the process of being divested right now.

But, but yeah, those averages do work out, and the 4% number after all these adjustments is, is correct, despite the fact that, that the retail businesses and, and most of the other businesses are growing higher than that average.

Luis Willard (VP of Equity Sales)

All right. Well, that was it. Thank you.

Eugenio Garza y Garza (CFO)

Thank you, Luis.

Alan Alanis (Managing Director)

Thank you, Luis.

Operator (participant)

Thank you. Our next question is from Luis Yance with Santander. Please go ahead.

Luis Yance (Head of LatAm Region Strategies)

Hi, guys. Thanks for taking my questions, and good luck, Paco and Eugenio, on the next projects. My question is a follow-up on what Alvaro asked about, you know, the margin pressure, and I guess in particular, you know, driven by the pressure on labor. I mean, could you talk a little bit about, you know, where exactly is that, did that pressure come in the fourth quarter? Was it perhaps preparing for the minimum wage increases? Is it related to, I guess, the vacation or the pension reform, you know, that has an impact there? Or... And you did mention that, you know, also part of it has to do with adjustments ahead of expected regulatory changes.

I guess you meant perhaps, you know, the potential change in working hours. So just trying to understand a little bit, you know, what drove the additional pressure in the fourth quarter. And I guess a related question to it is, you know, Juan mentioned that, and I appreciate the color on the margins being, you know, kind of maybe flat for this year, but maybe start soft and get better. Just trying to understand, what would be the driver of the improvements in margin as we move towards the second half of the year? And I guess related to that, but also in proximity, I mean, very strong margins on the European side of the equation.

Just wondering if what we saw there is kind of like a sustainable level that we should think going forward. Thanks.

Eugenio Garza y Garza (CFO)

Let me start, if you want, Luis, on the margin pressure in Proximity Americas. On a like-for-like basis, what you said is correct. I mean, we are contemplate-- We already obviously implemented all the changes related to labor reform, including vacations and whatnot, keeping up in place with just minimum wage increases and others. So that is, I think, the driver of the like for like comparison. But you have to remember that on top of that, we are starting a multi-format business that is quite ambitious as well. So there are a lot of staffing needs, new facilities that we're staffing up, et cetera, that are coming up, as well as all the other costs, which, as you know, we don't capitalize on the balance sheet.

So it's a little bit of a mixed bag on a like-for-like basis, explains, I would say, maybe half of the effect, but the other half has to do more with how we're ramping up for that.

Juan Fonseca (Head of Investor Relations)

Yeah, no, and I think the word you mentioned, Luis, preparing for, obviously there are still some uncertainties in terms of the lawmaking and some potential changes to the labor law that we're obviously all monitoring closely, but there's a lot of getting ready for 2024 that took place in 2023. And in the case of Europe, I mean, I think, you know, this was obviously a very good quarter. I wouldn't necessarily expect all quarters to be that strong. There are some currency issues at work, too. I mean, if you look at the numbers in local currency, it's a high single digit as opposed to a double digit top line growth.

But, having said all that, there's no question that the team in Valora is executing very well in the midst of a challenging environment, so very encouraging.

Paco Camacho (Chief Corporate Officer)

But again, and this is Paco, Luis, I guess that the overarching element of all this is that structurally, the teams have done a terrific job, both on this side in Americas, but also in Europe, in terms of strengthening the operation itself to make it more efficient. And that, as you know, those are things that stay, and that you need to keep in mind.

Luis Yance (Head of LatAm Region Strategies)

Great. Thanks a lot, guys. And maybe as a follow-up, I know you've done most of the divestitures, at least the big ones, I mean, but there's still a few, you know, non-core assets that you've mentioned in the past that you're willing to sell. Any updates on that, and can we expect that to perhaps being achieved this year as well?

Eugenio Garza y Garza (CFO)

Yeah, we're cautiously optimistic that they will get done, I mean, much earlier than when we expected, and probably faster than most people think. So, we're making good progress on that.

Luis Yance (Head of LatAm Region Strategies)

Great. Thanks a lot, guys.

Juan Fonseca (Head of Investor Relations)

Thank you, Luis.

Operator (participant)

Thank you very much. As a final reminder, if you'd like to ask a question on today's call, please press star one on your telephone keypad, and we do ask that you limit yourself to one question. And our next question is from Federico Galassi with TRG. Please go ahead.

Federico Galassi (Partner and Head of TRG Argentina)

Thank you, guys, for taking my question. Well, one question related, and you took this part, part of the answer if you want. But the question is related to Mexico and same-store sales in the different formats that you have. You're talking about ops, et cetera. But do you believe that this is more related with any format in particular, or do you see some deceleration in the consumer in Mexico? And maybe, if you can explain and better, what are you seeing in the healthcare business when you have two quarters of, again, in Mexico, two quarters of negative same-store sales? That's the question. Thank you.

Juan Fonseca (Head of Investor Relations)

Did you say in health, Federico?

Federico Galassi (Partner and Head of TRG Argentina)

That was the second question.

Juan Fonseca (Head of Investor Relations)

Second question?

Alan Alanis (Managing Director)

I'm.

Federico Galassi (Partner and Head of TRG Argentina)

Yeah.

Eugenio Garza y Garza (CFO)

Sure. I mean, the first part of the question, just with regards to Mexico, I mean, the consumer continues to be strong. I mean, you're seeing it again on a lapping basis, maybe it's the traffic is not as strong, but on an absolute basis and compared to what we saw in, I mean, for a long time, the consumer continues to have cash available and at least with the everyday items that we sell at all. So we continue to see, I mean, strength there, and the margin pressure, again, has to do more with what we just discussed on labor, and it's consistent throughout all formats.

I wouldn't say it's specific to either hard discount or proximity. And then with regards to your second question on health, we are seeing a more aggressive competitive environment, generally speaking, in Mexico. Expansion of stores of our competition continues to be at a very healthy pace. We're keeping up, but you're seeing a much healthier competitive environment and different value propositions propping up that are making the operating environment a little bit more challenging from a gross margin perspective.

Paco Camacho (Chief Corporate Officer)

Yeah, Federico, just, just to add a, a couple of additional points. This is Paco. Look, I mean, when you look at the results, Mexico posted very strong results. And, you know, when you look at OXXO, when you look at Coca-Cola FEMSA, we didn't talk a lot about digital, but we have also very good results. So in general, the, the businesses are doing really well in Mexico. The, the situation with health is punctual, and it happens every now and then. You have a, a competitive situation, or you have a specific plan that didn't go as you, as you were thinking. In this case, I mean, really, as Eugenio said, it's, it's, it's something related to how active competition has been, has been, being.

Honestly, it's good news because that means that the market is healthy, that we are in an interesting segment of the market, and the teams are working on adjusting our strategies to face that. Honestly, we are confident that the situation will get better. But again, we are not concerned on how the businesses are performing in Mexico. On the contrary, we remain confident that 2024, even though we have some headwinds as usual, but we'll deploy our LRPs, we'll deploy the plan, and we should expect good results.

Juan Fonseca (Head of Investor Relations)

Yeah, and I would add, I mean, we mentioned it in the remarks, but Mexico and Colombia, on the health side, yes, there have been some issues in terms of competitive landscape and the shift from institutional to retail in the case of Colombia. But in both cases, the strategies are defined and, in, you know, we're starting to address that very, very diligently. So, hopefully, in the not-too-distant future, we'll, we'll have different things to report on, on those fronts.

Federico Galassi (Partner and Head of TRG Argentina)

Okay, guys. Thank you so much.

Juan Fonseca (Head of Investor Relations)

Thank you. Thanks everyone for attending today, for your you know permanent interest in our company. Obviously, the team and I are always available for follow-ups, and we'll be in touch. Thank you.

Operator (participant)

Thank you very much. That concludes today's conference. You may now disconnect. However, you may stay on the line.