Good morning, everyone. Welcome to FEMSA's third quarter 2026 results conference call.

Today, we are joined by José Antonio Fernández Garza, Garza CEO; Martín Arias, our CFO; and Pamela Ortiz, who heads the Investor Relations team at Coca-Cola FEMSA. The plan is for José Antonio to open the conversation with some high-level comments on the quarter's performance and trends, zooming in on OXXO Mexico's results, followed by Martín, who will provide more granular details on the results across our business units.

Finally, we will open the call for your questions. José Antonio, please go ahead.

Thank you, Juan. Good morning, everyone.

The third quarter was a strong one, during which our two main engines, OXXO Mexico and Coca-Cola FEMSA, delivered strong results, showing an improvement in many of the variables we are trying to impact, and thus reinforcing our confidence in our strategy and its effectiveness. At OXXO Mexico, our year-long effort to drive customer traffic while protecting our profitability produced solid results, while Coca-Cola FEMSA continued to improve results in Mexico and had a very strong set of numbers in South America.

Beyond the two big engines, exciting things are happening across our other business units. In particular, during the quarter, we saw Bara sustaining its pace of store base expansion and improving its maturation curve, while OXXO LatAm continued to deliver promising results across South America, with Colombia leading the charge.

However, this morning, I would like to focus my remarks on OXXO Mexico by covering two topics: first, the continued recovery in sales and traffic, which gained further traction during the third quarter; and second, OXXO's profitability, including how we are balancing the different levers of our value proposition and the strategic framework and operating discipline that are helping us to address the challenges we face. After that, Martín will elaborate on the developments at other business units in his remarks.

Let me begin with sales and traffic. On our last call and in many of our conversations with you since then, a recurring question was how much of our performance was structural and how much was driven by the World Cup.

The third quarter gives us a good read on that issue. With very little benefit from the tournament, with only one Mexico match in early July, same-store sales grew 9.2% in the quarter, driven by an increase of 5.5% in the average ticket and 3.5% in average traffic.

Given that ticket growth is nominal and includes the impact from excise tax increases on soft drinks and cigarettes, the highlight of the quarter is traffic, coming in 150 basis points above the level reported in the second quarter, despite having only a small benefit from the World Cup. While warmer weather provided some support, our data suggests it explains only part of the results.

More importantly, the performance reflects a solid response from our customers to the strategy we described on our last call: putting the customer at the center of everything we do at OXXO and executing against our four strategic pillars of impulse, food service, daily and replenishment, and beyond trade services. Furthermore, this positive customer response is also translating into market share gains.

According to the market data available through August, OXXO continues to gain share against all relevant trade channels in the categories in which we compete. Year-to-date, our market share in the categories in which we compete is now above 2024 levels, with most of the gains concentrated in our core impulse categories, precisely where these adjustments have advanced the most.

Far, this is a promising performance. Beyond the impulse occasions, food service is another area where we have seen progress, with traffic growing at a low double-digit rate, driven mainly by coffee.

This has been the result of improved execution across our stores and tactical pricing, which helps us drive incremental cups per day. For its part, daily and replenishment is at a very early stage of testing, but its initial results are already modestly accretive to traffic.

Together with services, which is also growing in traffic terms, we see meaningful opportunities as we continue to develop all these categories. We are still fine-tuning our approach, and there is room to further refine our value proposition across the different strategic pillars.

We continue to test and learn from many initiatives, including structured price experiments across categories in selected regions, revamping our stores' coffee area and value proposition, and testing the canasta OXXO, our offer of everyday essentials at accessible price points, among others. These experiments are focused on gaining a better understanding of the right mix of assortment, price, and promotions to accelerate traffic and sales.

In those cases where we have adjusted the price-packaging architecture, we monitor very carefully whether the resulting increase in volume is enough to offset the margin impact from the price reduction or switch from higher price points to lower price point SKUs. We know that not every test will work, but this process will allow us to scale only those that prove their overall positive value contribution.

Now, let me turn to profitability. We manage our value proposition from an integral perspective.

This includes price, gross margin, assortment, and in-store execution, including promotions and commercial income, all of which play an important role in enhancing value for our customers. Behind these levers are changes in our price and packaging architecture and in our overall mix, as well as in the commercial income we generate working with our supplier partners, which is quite dynamic.

What we were able to achieve this quarter is a better balance across all these levers to drive traffic while protecting our profitability. While the reported gross margin contracted by 120 basis points, this contraction reflects in part a demanding comparison base, as the third quarter of 2025 included a particularly high concentration of commercial income.

Normalizing for this effect, OXXO Mexico's gross margin would have declined in line with the 70 basis point contraction of the second quarter of 2026. In addition to this timing of commercial income issue, the gross margin result reflects the mix effects coming from affordability initiatives being offset by higher commercial income and by solid growth in higher-margin services.

This is an important point, as it shows that we are managing our affordability strategy in a rational and disciplined way, always leveraging OXXO's relevance as a commercial channel for our supplier partners, rather than trading gross margin for market share. In absolute terms, gross profit grew 7.4%.

Operating income grew 5.8% during the quarter, and operating margin contracted by 40 basis points. This includes an impact of approximately 20 basis points from the closing of 140 older, underperforming stores.

Excluding these closures, operating income would have grown 8%. The closures are part of a broader pruning exercise involving approximately 250 stores, and we expect a similar impact in the fourth quarter as we complete the process.

While this measure affects near-term results, we believe it is healthy to periodically review our store base and prioritize the long-term profitability of the business. The quarter's results also reflect the team's focus on operating discipline, which has been just as relevant as the commercial strategy.

In the context of increasing wages well above inflation and the upcoming labor reform relating to the reduced workweek, expense efficiency continues to be a central part of how we run OXXO, and we are in a permanent effort to find new ways to optimize spending. Summing up, I believe the third quarter is a good example of how our strategy is meant to work.

We balanced the different levers of our value proposition to bring incremental traffic to our stores, and we translated that volume into growth in gross profit and, ultimately, in operating income in absolute terms. That is, in essence, the algorithm behind our strategy, and it is how we manage the business, with a focus on growing the absolute profit pool over time.

Having said that, we are not complacent. The consumer environment in Mexico remains soft, and our comparison base will gradually become more demanding as we move forward.

We are confident that we have the right strategy, the right team, and a clear view of the levers at our disposal to keep executing and delivering on that strategy. With that, let me turn it over to Martín to go over the numbers in more detail.

Thank you.

Thank you, José Antonio. Good morning, everyone, and thank you for joining us today.

Let me begin with FEMSA's consolidated financial results for the third quarter of 2026. Total revenues increased 9.8% year-over-year, while operating income grew 9.9%, reflecting a solid performance at OXXO Mexico and Coca-Cola FEMSA, and also reflecting the benefits of our cost containment and restructuring initiatives, partially offset by the bad debt provisioning in Colombia, the effect of the above-trend store closures at OXXO Mexico that José Antonio just described, and the consolidation of losses at OXXO Brasil.

On a comparable, currency-neutral basis, total revenues and operating income grew 9.4% and 13.4%, respectively. Net consolidated income amounted to 10.6 billion pesos, representing an increase of 81%.

This was mainly explained by the operating income performance I just described, as well as by, one, an under-demanding comparison base, which included a 3.1 billion peso loss from discontinued operations last year, reflecting the divestiture of FEMSA's logistics operations; and two, a non-cash foreign exchange gain of 1.1 billion pesos, compared to a 1.2 billion peso loss in the comparable quarter, mainly reflecting a non-cash gain from the valuation of our investment in Imperial Brands and the net effect of foreign exchange rate movements on FEMSA's US dollar-denominated cash and debt positions. These were partially offset by three items: one, a decrease in interest income, mainly driven by lower cash balances and interest rates; two, a 312 million peso loss from other financial income, mainly reflecting a loss on financial instruments at Coca-Cola FEMSA Brazil; and three, a higher income tax provision of 5.1 billion compared to 3.8 billion in the third quarter 2025 due to our improved results.

The effective income tax rate was 32.5% in the third quarter. As our effective tax rate is subject to short-term volatility, driven by a series of factors discussed in the last quarter's call.

Turning to our operating results, I will keep my comments on OXXO Mexico brief, as José Antonio has already covered the quarter in detail. Total revenues grew 10.3%, operating income grew 5.8%, and operating margin contracted by 40 basis points.

After normalizing for the impact of the above-trend store closures that José Antonio described, operating income increased 8% and operating margin contracted 20 basis points. In terms of year-to-date expansion, we have added 734 stores and closed 272 stores in Mexico, for a net increase of 462 new stores.

While this means we will probably come up a bit short of our annual run rate of 1,000 net new stores this year, this is an exception, and our annual target remains at the net 1,000-store level for next year and beyond. The Americas and Mobility segment delivered total revenues of 29.5 billion pesos, increasing 18.1% or 10.9% on a comparable and currency-neutral basis.

Excluding the impact of consolidating OXXO Brasil, the segment's top line benefited from a solid performance at OXXO Gas, driven by healthy volume growth, and a strong performance across OXXO LatAm, especially in Colombia, where we continue to see encouraging four-wall dynamics, with mature store traffic growing at a high single-digit pace during the quarter. For its part, OXXO Brasil continued to deliver encouraging performance, with same-store sales increasing 5.1% on a currency-neutral basis.

Regarding merchandise gross margin, during the third quarter of 2025, we reclassified certain expenses from cost of sales to expenses for the first nine months of that year, which had a disproportionate positive impact on the margin for that quarter. Americas and Mobility, excluding OXXO Gas, was reported together with OXXO Mexico back then, the impact was small for that segment.

The objective of these reclassifications was to improve our disclosure by aligning the classification of costs and expenses across our retail businesses and to make the results of each of these operations as comparable as possible. This was similar, although for different reasons, to what we have done in the Europe and Health divisions.

There is no impact on operating income, and we do not expect this to affect in future quarters, as the entire effect of this reclassification was performed during that period. Given that change, during the third quarter of this year, the gross margin of merchandise decreased approximately 620 basis points to 33.5% of revenues.

On the same accounting presentation basis, which is excluding the effect of this reclassification, gross margin for merchandise expanded by 10 basis points, reflecting solid gross margin expansions at OXXO Colombia and Peru, partially offset by a negative mix effect in OXXO Chile. Gross margin for the fuel operations decreased 50 basis points to 11.6%, reflecting the voluntary fuel price commitments at OXXO Gas, partially offset by solid fuel margins in OXXO USA.

Operating income was 170 million pesos, with an operating margin of 0.6%, representing a decrease of 76% and of 29.9% on a comparable basis, excluding currency translation effects and the operating losses from the consolidation of OXXO Brasil. The operating margin reflects narrowing losses across OXXO LatAm, excluding Brazil, offset by the impact of the fuel price commitments in Mexico.

Our operations in Europe reported total revenues of 14.1 billion pesos, down 5.2% year-over-year, but up 4% on a currency-neutral basis, reflecting solid performance in Swiss retail, partially offset by weaker results in German retail and food service, where train route closures and extreme weather affected traffic, particularly at train stations. This was offset by weak performance at Valora's B2B business in the US, driven by the loss of relevant key accounts.

Regarding Valora's gross profit, as since the first quarter, we have been reclassifying certain distribution expenses from SG&A to cost of goods sold, and that will remain the case for the rest of the year. As I mentioned, this change was made purely for accounting presentation purposes to better align the classification of distribution costs with the nature of the expense, and there is no impact on our operating income.

However, as a mechanical effect of this change, gross margin was impacted by 232 million pesos in the third quarter. Gross profit decreased by 10.8%, with a gross margin of 39.3%.

On the same accounting presentation basis, gross margin contracted by approximately 90 basis points, and gross profit decreased by 7%, driven by lower food and tobacco margins. Operating income was 531 million pesos, a decrease of 24.8% and 17.5% on a comparable basis, with an operating margin of 3.8%.

This mainly reflects the gross margin decrease I just described and the soft performance of Valora's B2B business in the USA, driven by lower sales volume combined with increased production costs and expenses. For its part, the Health division delivered total revenues of 22.9 billion pesos, growing 7% year-over-year or 3.4% on a currency-neutral basis.

Local currency same-store sales were positive in Colombia, Ecuador, and in Mexico, where the business continues to stabilize, while Chile same-store sales decreased slightly, reflecting a more competitive environment. As was the case with Valora, in Health, we are reclassifying certain distribution expenses from SG&A to cost of sales, mechanically reducing gross margin by approximately 621 million pesos and reflecting the proportional shift of these expenses into cost of sales.

Gross profit decreased by 7.4%, with a gross margin of 26%, a contraction of approximately 410 basis points. On the same accounting presentation basis, gross margin in the third quarter contracted by approximately 80 basis points, with gross profit increasing 1.4% in currency-neutral terms, mainly reflecting commercial initiatives to protect our competitive environment in Chile, including our expansion to match that of our competitors, competing with new channels in health and beauty products, developing new categories, and focusing on the needs of chronic patients.

As we discussed on previous calls, as part of our strategy to reduce exposure to the institutional business in Colombia, at the beginning of April, we notified EPS Sanitas, our largest counterparty in this channel by a significant margin, that we would not renew the agreement upon its expiration in September. This has now been extended until the end of October for part of the business.

Given the continued uncertainty in Colombia's healthcare system, during the quarter, we recorded an additional non-cash credit risk provision of approximately 430 million pesos. That said, we maintain a constructive view on the outlook for our retail health business in Colombia, and we will continue to actively manage this exposure, remain disciplined in our capital allocation, and keep the market informed of any relevant developments.

Operating income reached 319 million pesos, a decrease of 63.2% and a decrease of 63.8% on a comparable basis, with an operating margin of 1.4%. Excluding this non-cash credit risk provision, operating income reached 749 million, a 14% decrease, driven mainly by Chile, where we saw profitability pressured by initiatives to maintain our market position in a highly competitive environment, partially offset by solid growth in Colombia retail and Ecuador.

Mexico continued stabilizing its operation, reducing its losses significantly versus last year. Bara delivered another quarter of strong growth, with same-store sales up 10.3% and 112 net new stores, sustaining the rapid expansion pace of the second quarter.

We are encouraged by our newer store cohorts, which are maturing faster than our legacy stores in the Bajío, a sign that the Bara concept continues to evolve favorably and is earning an increasingly positive response from customers. Coca-Cola FEMSA delivered revenue growth of 10.9% and an increase in operating income of 15.4%, which included a one-time benefit from an insurance claim, without which the operating income would have grown 7.4%.

In Mexico, volumes performed well, reflecting the resiliency of the business even after the effect of the excise tax increase, which allowed Coca-Cola FEMSA to strengthen its overall pricing, supported by agile and disciplined commercial execution. South America delivered another strong quarter, with robust volume growth in Colombia and Brazil, translating into double-digit operating income growth.

As always, we encourage you to listen to their earnings call hosted last Monday. Before closing, let me briefly update you on capital allocation.

During the third quarter, we deployed 9.4 billion pesos in CapEx, representing approximately 4% of total revenues, and a decrease of 28.3% compared with last year, primarily driven by lower capital expenditures at Coca-Cola FEMSA, driven by a demanding comparison base last year, when they invested to expand their capacity to fit volume demand in key markets. Given the expected impact of the excise tax in Mexico, Coca-Cola FEMSA was able to delay certain CapEx this year.

With respect to shareholder returns, during the quarter, we announced a new share buyback program. This is incremental to the approximately 41 billion pesos in ordinary and extraordinary dividends expected for the cycle from March of 2026 to March of 2027, of which we have distributed 30 billion pesos to date, roughly two-thirds of the committed amount.

The remaining 11 billion pesos are expected to be distributed early next year. Regarding leverage, our net debt to EBITDA ratio, excluding Coca-Cola FEMSA, stood at 1.19 times at the end of the quarter, compared with 1.15 times in the prior quarter.

On October 15, we paid the third installment of our 2026 ordinary and extraordinary dividend. Adjusting our quarter-end cash balances for this payment, net of the dividends received from Coca-Cola FEMSA on October 13, our pro forma net debt to EBITDA ratio, excluding Coca-Cola FEMSA, would have been approximately 1.3 times.

Our leverage objective of approximately 2 times net debt to adjusted EBITDA ex-KOF remains unchanged. The buyback we announced this quarter, together with our dividend program, reflects our commitment to continue allocating capital and moving forward our stated objective in a disciplined manner, while preserving the flexibility to fund our organic growth and to pursue potential opportunities that meet our return thresholds.

As we look ahead to the final quarter of the year, we are encouraged by the momentum across most of our business units, and particularly by the consistency of the recovery at OXXO Mexico. We remain mindful of a soft consumer environment in Mexico, recent volatility in Brazil, and a comparison base that will gradually become more demanding, but we are confident in our strategy and in the levers at our disposal, and we look forward to sharing more details about our plans for 2027 on our next call.

Before we open the call for your questions, a reminder to please limit yourself to one question at a time, as has become our practice. With that, we are ready to open the call.

Operator, please go ahead.

Hello, José Antonio, Martín, Juan. Thank you for taking my question.

Mine is about the traffic recovery in OXXO Mexico, right? Traffic has been recovering now for two consecutive quarters, and there are several initiatives, right, that you are implementing, but most of the improvement, based on your initial remarks, appears to be coming from the core impulse categories, which is interesting, right, considering the soft consumer environment overall in Mexico.

The question is, how do you see the elements of OXXO's value proposition relative to the other retail channels that are allowing you to capture this much share over the recent quarters?

Hola, Henrique. Thank you for your question.

It's hard for me to talk about other retailers. I think it's obvious that some of them are maybe underperforming, but we are very much focused in what we need to do.

It's true that by far the biggest high-traffic growth has come from where what we do good, we become much better at doing, especially with adding some value assortment presentations into our core categories, given energy drinks, soft drinks, beer, cigarettes, etc. To be honest, we are seeing a very good, positive traffic growth across geographic regions.

All of our regions grew traffic on the third quarter, which is a very positive sign. Not all of them at the same rate, but all of them grew.

That tells you that I think we had either very favorable weather throughout the country or we are doing or becoming better at our job. Then, in the other four in the other three strategic pillars, we are seeing also traffic growth.

It's just being driven much more by impulse. We are seeing traffic growth in services, financial and non-financial.

We're seeing traffic growth in food service, mainly driven by coffee. We are seeing some traffic growth, although not yet same-store sales growth, but we do see traffic growth in what we call essentials or daily replenishment.

Very encouraging what we're seeing. We would much rather be in an industry with a much stronger consumer sentiment, everyone growing and we growing more than the rest is our better place to be.

We are very and very much encouraged by our market share gains and how we are seeing a much more enthusiastic consumer coming into OXXO for their daily needs, for their weekend parties, etc. Very encouraging figures for us.

We hope that Mexico consumer sentiment begins to improve.

Very clear. Thank you very much.

Thank you, Henrique.

Good morning, José Antonio. Juan, good morning, buen día, Juan Antonio, Martín, Juan.

Thanks for taking my question. Just maybe picking up on that first question Henrique just had, and thinking a little bit forward as we've seen all these changes.

As we think with the improvements that you're doing, assortment, etc., but then also the asset pruning, clearly, we're still at a, call it, relatively easy base of comparison, hence obviously with the acceleration here in traffic growth. If you put these things aside shorter term, and you think more medium term, where do you see the opportunities and the structural traffic opportunities for you guys in OXXO Mexico in particular, once you've cleaned up the asset base, done the pruning, you have your stores, you have the services, and so on?

What is a normalized traffic assumption you would target for internally, and what we should basically think about it going forward?

Thank you, Ben. I wish I had a crystal ball to tell you where we're going to be in terms of traffic.

Obviously, we are not yet satisfied with our results, even though we are encouraged by seeing progress on all of our initiatives and our levers. We are not satisfied.

We think we can do much more. I'm hopeful that what's going to help us and carry us forward in the next few months is that some of our initiatives in food service are going to get better, bolder.

Our execution is getting better at understanding what really drives coffee traffic and other food items. We are hopeful, although on still very early stages of our canasta OXXO proposal, and we're still seeing some interesting traffic drives from our financial services and non-financial, cash out, etc.

We're still very cautious on giving you a guidance on next year. It's going to be a tough year.

I think we've had favorable weather this year. We may expect a rainier and colder fourth quarter.

October, although is looking like it's going to be positive on traffic, did experience much more rain than September nationally. We are cautious.

The consumer remains very cautious and looking for affordability. That should help us on our Bara proposal, and it should help us in some of our initiatives in OXXO.

I think we should remain cautious and also planning for the worst in terms of maintaining our operating costs as lean as possible. That's my read so far for the rest of the year.

I think I would just add, hey, Ben, this is Juan. The way I think about it is the impulse part of it, in some ways, it's like the path of least resistance.

It's where we were already very good, and it was really more about improving certain things and kind of getting back to the top of our game. That's more immediate, and that's why we're beginning to see it already.

If you think about some of the other pillars, especially if I think about food service and I think about the daily replenishment opportunity, those could be driving incremental traffic for a while. By that, I mean years.

If we succeed in either of those, those could be very material in the medium term, right? We're still testing different menus, we're still beginning to tinker with the daily opportunity.

I guess chronologically, it was always going to be impulse first, and then the others materializing, I would say, from next year forward. At least as you think about modeling, that's how I would think about it.

Thank you very much, and congrats on the results.

Thank you, Ben.

José Antonio, Martín, Juan. Thank you for taking my question.

Still on OXXO same-store sales and the new initiatives regarding the value proposition, I wanted to go back a little bit on the food service and the replenishment part of it on your commentaries, José Antonio. Just wanted to better understand what is the goal, what is it that you are targeting over the medium to long term in terms of how you're thinking about an OXXO store, let's call it five years from now?

Are you aiming at something closer to what a traditional convenience store looks like in the US with more food service? Are you targeting a better margin coming from the food service initiative?

Replenishment, although you could argue it is a lower profitability category, are you seeing that driving a significant amount of volumes over the medium to long term? Just thinking about how would you envision the OXXO store five years from now in terms of the breakdown in your portfolio between the food service, the still on initial stages replenishment, and also the impulse category, which is your core today?

Just trying to get a little bit more perspective on that. Thank you.

Thank you, Lucas. It's a good question.

Look, we obviously are inspired by many of the things we see developing in food service in the US. I think the convenience store industry is doing a tremendous job in certain regions and certain players.

Obviously, the Mexico consumer is very different. We still believe in our food service approach.

We have a long way to go just by comparing ourselves with other offerings within Mexico and what the Mexican consumer is seeking in their everyday, quick morning breakfast ritual, in their snacking options, etc. We see that our relevance in the impulse categories and in the everyday lives of the Mexican consumer deserves a better percentage of that in the food service.

I hope that we can triple our percentage of food service dependence in OXXO like we already have demonstrated in markets that are much more similar in consumer trends like Peru, Chile, and Colombia, where our numbers are almost triple in terms of the percentage that we sell, with similar same-store sales revenue per store. I am encouraging and getting the team rallying behind an ambition of tripling our percentage of food service.

That would be huge, and it's margin-accretive, and we will become much more relevant than we already are for the lives of the Mexican consumer, and that excites us. In terms of daily replenishment, I think we have two big levers to pull.

One is obvious: to give a very low prices and low per-gram prices and low disbursement options and SKUs for our consumers. To be frank, we already give them a huge advantage that many of the players that compete in that space do not give, which is we save them time.

We're everywhere, and people are sick and tired of going to the big box retailer to buy their big basket items. We have an advantage to serve them there.

We are seeing an opportunity there to save them money, save them time, give them peace of mind. We're very encouraged by the very early testing that we're seeing in some of the stores that we are tinkering in Chihuahua and Tijuana.

I also think that is going to be obviously much more traffic-accretive than margin-accretive. We're becoming more and more relevant in the lives of the Mexican consumer, and that is how we see it.

It's hard for me to give you a number, but I do see an evolution of the store that becomes much more savory in terms of food service options and gives peace of mind for your daily replenishment needs in weekly assortment, etc. We have a lot to copy or learn from other retailers in the US, but also from what we are seeing in Mexico with some of the discount players that we can leverage our footprint.

Hope it's helpful.

Very helpful indeed. Thank you, José Antonio.

Guys, good morning, everyone. Congrats on the results, and thanks for the space to ask questions.

I would like to continue in OXXO Mexico, but now targeting more the SG&A line, where I think you delivered remarkable results in this quarter. Obviously, we understand the pressures on the gross margin, the adjustments on the underlying basis, but it seems that adjusting for the calendar of commercial income, SG&A has more than compensated the lower gross margin, right?

This has been a trend throughout the year. I know, and I think it was two conference calls ago, we commented about the restructuring on head count and the corporate structure, merging Health and Proximity.

I would just like to understand how much of this is already being captured in the numbers in the third quarter, and how should we think about the SG&A going forward, particularly in the scenario that you mentioned that labor could be more of a concern next year? Thank you very much.

Generally, I do think that we've captured a significant portion by this point of some of the initiatives around the corporate overhead and operating overhead that we had. Maybe there's one, maximum two quarters of tailwinds there to continue to see flowing through.

Remember, we also did an important restructuring at the Proximity and Health division, with significant savings there that were collapsed together with our FEMSA corporate teams. Next year, the government has announced a 13% increase in minimum wage, accompanied by a reduction in the workweek, you will certainly see the effects of that in our selling expenses.

Again, because we pay higher than the minimum wage, the reality is not all of that gets translated exactly a percentage point per percentage point. You will continue to see labor expenses as a percentage of revenues increase probably more in the short term as we continue to focus on our affordability initiatives.

However, again, we are constantly reviewing operating model, how we can bring technology to bear at the store to make our colleagues in the store more efficient, and all the initiatives around dynamic shifts, use of technology, continue to be implemented. Just the other day, I was sending Carlos Arroyo some pictures they sent me of a robot that measures the inventory in the shelves.

You can just leave the inventory the shelves going through, giving you quick data. When that will become economically and technologically viable in Mexico, I can't really tell you.

Can we have small robots doing part of the cleaning inside the store? Now you can, since we're leaving the stores open 24 hours, maybe we can dedicate an hour or two of that time to running this with robots while the person who's in the store is doing other things in the store.

The pressure will continue. This is a stated policy of the government, and we will need to react as all retailers and all consumer companies, we will need to react accordingly, finding the balance between those costs and ticket.

Thank you, Thiago.

It's helpful. Thank you very much, guys.

Thank you, Operator. Martín, Juan, Pamela, thank you for the space for questions, and congratulations on the results.

I had one very quick [unclear] regarding expansion and growth of the business. It seemed, and I think also you alluded in your initial remarks, about OXXO Mexico...

Hola, Alejandro. We're listening to you a little bit broken up.

Can you either get closer to the microphone or...

Every third word. We don't hear every third word.

Can you try again?

Sorry. Is this better?

Yes, it looks better.

Okay. Thank you.

No, my question is on growth. It seems that, I think you alluded, José Antonio, to OXXO in Mexico growing a little bit slower this year, right, because of the closings, but outside of Mexico, I would say also a little bit slower than in the past, while Bara continues to grow and open stores at a very fast pace.

I wanted to see if maybe if anything has changed in terms of priorities. Will Bara be maybe a little bit higher on the list, maybe relative to OXXO Brasil?

Wanted to see if anything has changed on how you see maybe the growth of OXXO outside of Mexico. Thank you.

No, good question, Alejandro. Thank you.

Look, I think there's different things explaining each of these seemingly looking slowdowns. On the Mexico side, I think we had a calendar delay as we made sure we increase the productivity or what we call the batting average of our stores.

We started our expansion maybe a little bit late that what we usually do in other years. That compounded with a pruning of stores.

We remain committed to opening a thousand stores minus the closings of this year, and looking forward, as we are seeing the evolution of the maturation of our new stores, and as we see them bringing significant profit and paying their cost of capital significantly, we remain committed to opening net about a thousand net new stores for the foreseeable future in OXXO Mexico. For OXXO International, we are incredibly excited for Colombia.

I think Colombia is already where we need it to be, and we need to accelerate expansion as much as we can possibly do without damaging the quality of the stores, which that's a number that you have to be monitor carefully, because if you overstimulate the production factory of stores with incentives, you can get bad quality outcome. You really have to measure very well how you expand and make sure you're developing processes and capabilities, and that takes time.

Colombia is ready for acceleration. Brasil is still not there, and we've been very upfront.

We see the opportunity in Brazil tremendous. I think it's huge the opportunity that we can achieve.

We're very excited for the São Paulo region, and we're confident that it will grow. We still need to take into account, as all the other retailers in Brazil, that we're going to have a 40-hour workweek with two days off.

As we learn to navigate those operational constraints, we are being much more prudent in how we expand. We're still planning to expand about a store a week or more, maybe 70 stores next year for Brazil, net new stores.

That gives me to the Bara question. With Bara, we are very happy with the maturity of the stores and the expansion in the north of Mexico.

We're seeing an evolution that's very positive. With still a lot of depth in value propositions to increase, we're still needing to simplify some of the portfolio.

We still need to cover certain categories that Bara does not that some of our competitors cover. We are very excited by the enthusiastic attitude that we see in our consumer going into a Bara.

The repeat customer is there, and they're beginning to see more and more all of their fulfillment needs for their house satisfied. We still need to add some value proposition.

That's why we're not so worried about same-store sale expansion for Bara. We see that as a marathon.

We need to keep getting the stores better and better to supply the needs of our customers. As those value propositions get added into the store, we hope we're going to see several iterations and years of same-store sale expansion in Bara.

We're much more focused in accelerating expansion, and we plan to even open more stores next year than what we are opening this year. We promised a store a day, and we're going to probably overdeliver on that, we're happy with that.

Super clear, José Antonio. Thank you.

Thank you.

Hi, good morning, José Antonio, Martín, Juan. Thank you for taking my question.

We would like to get a view on capital allocation. If you could mention how do you see opportunities to divest non-core assets/sales now?

What about M&A, for instance? What's your appetite?

Last but not least, how should we think about dividends? How do you see overall shareholders' returns evolving from now on?

Kind of get your thoughts on all these aspects of capital allocation here. Thanks.

Thank you, Isabella. I'll let Martín answer this one.

Thank you for your question. Again, we tend to try to focus any announcements about what the next stage of capital allocation to do it in our conference call, the first conference call of the year, when we have visibility about our budgets, the final year results, cash flow generation during the year.

It is pretty clear by the end of this year, first quarter next year, we won't have reached our 2 times net debt to EBITDA target. I suspect we will be somewhere in the 1.5, 1.6 net debt to EBITDA, we will have some flexibility.

Then we'll have to decide whether that flexibility is returned in terms of, again, some sort of extraordinary dividend or additional buybacks. We will be announcing that in February, March.

Clearly, there will be some space that we have available to us to announce an extraordinary dividend and, again, be opportunistic with regards to buybacks, and saving a little bit of gunpowder in case we see a good opportunity to buy our own shares, like we did less than a few months ago. I don't know if that answers your question.

I was just going to add, in terms of the kind of M&A versus shareholder remuneration, as everybody knows, we've talked in the past about how in the vast majority of our markets, our growth is really organic. There's not really assets to acquire in Mexico or in Brazil or in Colombia.

We've talked about the US as a place where there are some assets, some of which we've looked at, but obviously we're being very, very disciplined in terms of valuation and expected returns. That we continue to kind of reserve that flexibility, but if you notice, Martín didn't mention M&A, and that should tell you a thing or two about where our minds are.

Yeah.

That's pretty clear. Thank you.

Thank you very much, so much.

Thank you, Isabella.

Hey, good morning, everyone. José, can you talk a little bit about the magnitude and timeline of logistics investments you need to win in Mexican grocery, right?

How should we think about the assortment and the price points needed to build principality in the category versus the canasta OXXO that's being tested today? Then you're also accelerating some growth in Caffenio, and I wanted to get a sense of how you're thinking about Caffenio.

In terms of investments in capabilities or CapEx or even training, that's much more heavy towards our food service capabilities. That comes with investment from our supplier source that it's very granular, and it varies greatly from type of SKU, a lot of training and capability building in our stores, and in the middle of that, we need cold storage distribution, cold capabilities, so that requires much more investment.

In terms of our canasta OXXO, most of our investment is in a lot of discussions with our supplier partners to target presentations that currently are not available, or many are, but we still need to develop a lot of them with our supplier partners that match the gram that our customer demands, the price per gram that our customer demands, the type of packaging that is convenient to carry for our customer. That requires a lot from our commercial guys and ladies to really develop this offering in our stores.

Once we have that, it's very easy to develop the store, and it's not a lot of SKUs, frankly, and it's not a lot of price changes, inventory is easy. There's not a lot of capability building to develop them.

We've done it before with los Básicos del Ahorro. I think we lost the focus for many years, and we're coming back, and we're very excited for the results.

It's not going to be so heavily in terms of capability building. Caffenio, we have two businesses with Caffenio: the Caffenio infrastructure that powers our stores, and we're seeing tremendous growth in terms of not only coffee offering, but cappuccinos and all these mixes.

We see huge potential to increase our offering. We are way above what we were selling in coffee per store last year, but way below our potential and below our target, we have a long way to go.

Our other business, which is growing relevance, but still is tiny, is we operate about 300 coffee drive stores. They're becoming almost like a cult following wherever we open.

We see big, long lines, and we see huge potential. We compete against guys that have to pay a lot of franchise fees, and we are very happy with that competition, and we're going to keep opening coffee drives.

Just a compliment on Caffenio, we were able to buy out our our partner in that business that had accompanied us for many, many, many years, and was a great partner. That has given us the opportunity, now that we're own 100%, to find significant amount of efficiencies around overhead.

Number two, align much better the two organizations of Caffenio and OXXO. For example, now we've give them incentives on the basis of a completely combined P&L.

Everybody, both at Caffenio and the OXXO, responds for all the total cups sold, for the price of the coffee that we buy, the maintenance of the machines, and that I think has added a whole new discipline to the business. Then in the Caffenio drives, it is really a source of very good and interesting innovation.

They're a much smaller business, much more sort of almost venture capital-like in the way they test and try out new things. The other day, they had a pistachio-flavored frappe.

I was, to be honest, it was selling, and it was selling very well. That their ability to move, and so I think it will also be a source for very interesting innovation to take things to OXXO Mexico and to take things to South America around everything related to coffee, beverages, and even some food, because they do have a very interesting food service offering.

No,

very helpful. Thank you so much.

Thank you. Thank you, Bob.

Hola, Álvaro.

Hey, José. How are you?

Martín, Juan, thanks for the space for questions. I think we've indirectly spoken about the gross margin investment in the context of OXXO traffic, but we haven't really spoken about it directly.

My question is on gross margin specifically, and I appreciate the commentary on the tough comp on commercial income and sort of this 70 basis point run rate of investment. On things that you can control, I guess the questions would be how do you feel about leaning in even further into next year?

It would be very helpful to get some color on sort of breaking down that 70 basis points, how much is coffee, how much is affordability in other categories, we can think about that, think about modeling that going forward. Thank you.

I'd have to get back to you to get into the granular detail of by category where we're seeing it. I've repeated this in various forums, we don't manage the business for gross margin.

We manage the business for EBIT, and it's a little bit trial and error. In other words, what I can give you an assurance is we are relentless in measuring when we initiate affordability initiatives to clearly identify what is the total margin breakeven point.

What do we have to gain in terms of traffic and volume to compensate for any adjustments that we make either pricing or packaging price packaging architecture. There have been instances where the math didn't work out, we took it back.

Number two, we're changing the nature of the commercial negotiation relationship we have with our suppliers. It used to be significantly more driven by shelf space and whatever SKU they were, quote, unquote, trying to push in any given quarter.

Now we've added a new layer very focused on what is the value proposition to the consumer. We're more disciplined in not selling shelf space just for the commercial income if we don't have a very strong conviction that this is what our consumer needs and wants.

What? The suppliers, I have been surprised.

I thought this was going to create greater tension with suppliers. The suppliers are also seeing it themselves.

They're not particularly interested also having a slow-moving SKU, because they know eventually we just won't be buying and we won't be growing. Many of the suppliers have adapted very quickly to our concerns.

Therefore, allowing us to put in lower-priced brands in categories that historically they would have never seen OXXO as a natural channel for some of these lower-priced brands. They've agreed to allowing us to remove some of the SKUs and refocusing that space, and therefore allowing us to keep that money on products that our consumer wants and needs and makes us more competitive.

Very focused on innovation with suppliers as being the go-to place where new, interesting products can be launched in a very efficient manner, and where it can provide that sort of wow factor of very, very interesting, attractive offers made to the consumer, which obviously in the traditional trade, it's a little bit harder to do, because it's hundreds of thousands of stores with very differentiated execution, and so on. I would tell you, on the gross margin, we're going to continue to test and try, and sometimes we'll get it right, sometimes we'll get it wrong.

Trust me, at the end of the day, we are very focused on growing our operating income in absolute terms, significant as much above inflation as we can. José said it in the script, if you go back and you take out some of his quotes, it's many different levers that we have to manage at any given time, but we have a lot of them, and we use them all.

That's great. That's awesome.

Thank you very much.

Thank you, Álvaro.

Hola, Carlos.

Sorry about that. Thank you very much.

José, Martín, we all know how disciplined you are in terms of avoiding or wanting to avoid dilutive deals. If we can put that aside just for a moment, when you think about growth opportunities in the highly fragmented US and European c-store markets, what do you think are the biggest attributes that you would bring into this market, and the biggest constraints that you're facing?

Is it really cost of capital and access to capital as constraints, or are there other factors? I'm asking because these are very underdeveloped markets.

They're so highly fragmented still, and yet the skill sets that you're building, keep growing, and the capabilities that you have that fit into these markets look attractive.

Thank you, Carlos. Obviously, we give a lot of thought and vigorous debate in our leadership team and, frankly, in our board about what are the real crux and essence of what we bring to the table when we go into the US or developed markets like Europe.

In Europe, it's lost in the numbers of Valora, but if you look at Swiss retail, what we've been able to extract on value in terms of food service, bread, and all these things out of Valora into our Latin American operations, and then in terms of commercial income and thinking about commercial income into Swiss retail has been tremendous. It frankly pays most of the value that we've been able to bring in and bring out of Valora.

We see a very similar opportunity for North American and frankly, if you get out the gas part of the business, where we probably bring the least, what we're seeing in our stores in West Texas, where we've converted it into OXXO and we developed the food service on the Mex-Mex with Doña Tota, we're seeing very interesting results. We see a lot of upfront investment from Arca or Coca-Cola, from Red Bull, from the tobacco guys.

We're very encouraged by what we are being able to develop. Now, that has to be carried into attractive multiples to acquire.

Frankly, we've looked at very interesting things in Europe that have gone to other players that have been more willing to pay more, and we've seen the same thing happening in the US. Again, that balance of how much do we believe we can bring value, I'm very optimistic that we can, but we still need to be cautious about not overpaying, and we'd rather be seen as overly cautious than as overly reckless.

I think the other part of that has to do with the choice between acquisition and new-to-industry development, right? The organic part of it.

Now, clearly, we haven't really done too much on either of those, but it's also part of the internal discussion of, even as we look at assets, could we accelerate organic growth in a place like Texas, as José was saying?

We are pushing the team to begin developing the NTI opportunity in Texas, where we're seeing favorable demographics in the US. It's still be less than a single-digit expansion for next year.

As their investments north of $5 [million?] or $6 million per store, it's a different animal than what we build in Latin America.

One additional compliment. If we were to find the right asset, again, given the target size of what we're looking for, the reality is, if we had a very strong conviction that it provided us with very special capabilities, particularly around having an NTI value proposition that was particularly well-poised for roll-out, I think we would be willing to be more aggressive at the price that we pay.

The problem is, when you really get to see these assets and you scratch under the surface, you will find that many people who claim to be doing extraordinarily well in the United States, when you strip out goodwill and you look at the value that is being generated by, let's say, the organic operating business, the reality is the returns are not that attractive. Then you're paying for the expectation that what they have not been able to achieve, you will be able to achieve it over time.

If you were to ask what I think OXXO can bring to the US, you would be shocked if you look at the NACS numbers of the number of convenience stores in the United States that don't make money inside the store. The number is over 90%.

Yeah.

The people who are making money with a doubt are the ones that have a very high focus on food venience, and everybody else is basically subsidizing the inside store with gasoline. I do think OXXO can bring a lot of innovation around pricing, promotions.

I think we're quickly learning around food, and we will emulate and copy many other players, and we will bring that profit component to the inside store sales, which, to be very honest, today, I think a lot of people haven't managed to figure out.

Thank you.

Thank you, Carlos.

Hola, Luis.

Hola. Thank you so much for the space here.

Just want a quick one on Bara here. If we look at the beginning of the year, your initial outlook for the format was opening close to 200 stores, if my math is not wrong here, and now you are already past this threshold.

I wanted to understand what has changed in the format, how has it evolved to a point that you have been accelerating so fast the format? Is it store maturation, or do you see any other things influencing here?

Thank you.

If I remember correctly, one of you told me if I open a store a day, they would toast with champagne. I don't remember who it was, but I'm expecting my champagne bottles delivered.

Look, obviously, we come from the convenience store, the proximity store side, and we have been learning a lot by looking at others, by visiting operations all over the world, and by bringing talent that have succeeded in this. We have to unlearn a lot of things from OXXO to develop our discount, and that takes a lot of time.

What does not take a lot of time is building stores that pay their cost of capital. We've tailored that.

We have a very good batting average in our stores. They are paying their cost of capital, and we have a very slight standard deviation.

That gives us enough that when you see that even though the stores lack some of the value propositions that you see, as long as you're adding value layers every year, and we're seeing a lot of progress building in our private label infrastructure, building in our supply chain infrastructure, and building in getting out all the SKUs that just bring noise to the system, making a very lean, efficient machine. We are happy with the growth we're seeing in terms of same-store sales.

We like the traffic. Most of that is traffic, even in some of the quarters, it has been negative in terms of ticket.

We are very excited for what's coming for Bara. We have a long way to go.

It's a obviously super competitive market, but it's also a huge, huge market. There's room for a lot of people.

The traditional trade still plays a very significant role, and we see many years of expansion and accelerated expansion. We play a different game in terms of our positioning of what Bara stands for in the consumer than other players, and we plan to keep playing that game and staying relevant to our consumers.

We love the complementarity to OXXO. If you come to Monterrey, you'll see a lot of Baras next to OXXO.

While they both sell beer or both sell tobacco, Bara sells much more toilet paper, house cleaning goods, shampoos, and other things that OXXO does not excel. We love this multiformat evolution, and we are very excited for the future of Bara going forward.

Let me complement there. José, while he was in charge of Proximity, put together a very good team at Bara, a team that, for the first time, was completely outside the company.

Bara used to be a place where very successful executives from OXXO were sent, and the reality is, we realized the chip is a completely different chip. It's a completely different mindset.

The team that's there now, the focus that they have brought to cost, the focus that they have brought to private label, the focus that they have brought to how that operating model works is really amazing. Every other week, somebody brings me a new product that they've developed and are rolling out in private label, in cookies, in ice creams, in potato chips.

You will be surprised some of the things that, over the next few months and years, we will be rolling out that you would have thought would have been unmentionable for FEMSA. Number two, what tends to kill the returns of these businesses and get you into trouble is for how long you have to sustain the operating losses as a store matures.

Even if you haven't reached the point where a mature store within 12, 18, 24 months is making its cost of capital, if it's already breakeven at an EBITDA level, so that at least you're not continuing to fund losses, that gives you a lot more flexibility to roll it out quicker, and then rely on your conviction with regards to new waves of value that you're going to be developing over time, because you're not sustaining enormous amounts of operating losses, which, again, flow through the P&L and you sort of don't see them, but they weigh on the amount of money that you've got to put into the business. In Bara, the speed at which the stores, for example, in Nuevo León ramped up without alcohol licenses, because in the north of Mexico, it can take you 12 months to 18 months to get your licenses—we see that in OXXO as well—we were surprised.

We were very, very surprised how well it was received. That has given us the confidence that we can roll this out, they can get to breakeven very quickly, and then as we roll out the new waves of value, particularly around private label and things of that nature, that we're going to give it a try.

I would just add, Luis, I think, again, the question came up earlier about kind of the different growth rates for the different OXXO in different countries, or Bara, and part of your question touches on the same. We'll give you more granular numbers in the next call in February in terms of some of the things that we expect will happen during the year.

In terms of the opening of stores, I would kind of think about four four data points. OXXO Mexico, if we open 1,000 stores from a base of basically 25,000 stores, that's 4% growth in net new stores.

Think about Brazil. Brazil should be in the high single digits.

Maybe if all goes well, we can crack 10%, but let's think about kind of high single digits for Brazil. Then you go to Colombia, where you will definitely plan to be in the double digits.

Then the fourth one is Bara, where it will not only be in the double digits, but probably north of 30%. Those four give you an idea of either the current scale, in the case of OXXO Mexico, which is already very, very large, but in the case of the other three, where they are in their development curve that gives us the comfort to step on the gas with more conviction.

Then of those three, without question, I think Bara is number one.

Thank you so much, guys. Very comprehensive.

Thanks, everyone. Just as always, make our team available for follow-ups.

Thank you for joining today, and have a great rest of the week.

Thank you, everyone.