Hello and welcome to the FEMSA third quarter 2026 conference call. My name is Caroline and I will be your moderator for today's event. Please note that this conference is being recorded. For the duration of the call, all participants will be in listen-only mode. You will have the opportunity to ask questions at the end of the presentation. To do so, please use the raise hand feature in Zoom and we will open your line. If you experience any technical issues during the call, please use the chat function to request assistance. I would now like to hand the call over to Mr. Juan Fonseca, Investor Relations Director at FEMSA. Please go ahead.

Good morning, everyone. Welcome to FEMSA's third quarter 2026 results conference call. Today, we are joined by Jose Antonio Fernandez Garza, FEMSA CEO, Martin Arias, our CFO, and Pamela Ortiz, who heads the investor relations team at Correctora FEMSA. The plan is for Jose Antonio to open the conversation with some high-level comments on the quarter's performance and trends, zooming in on Ops of Mexico's results, followed by Martin, who will provide more granular details on the results across our business units. Finally, we will open the call for your questions. Antonio Picoet.

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 Vara sustaining its pace of store-based expansion and improving its maturation curve, while OXO-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 OXO-México by covering two topics. First, the continued recovery in sales and traffic, which gained further traction during the third quarter. And second, OXO'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, Martin will elaborate on the developments at other business units in his remarks. Let me begin with sales and traffic. On our last poll, 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 OXO 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, OXO 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. So 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 accreted 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 store's 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, Oxo 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 mixed 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 offshore 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, an 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 OXO, 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 balance 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. But 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 the strategy. And with that, let me turn it over to Martin to go over the numbers in more detail.

Thank you. Thank you, Jose 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 México 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 México that Jose 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 Brady and the net effect of foreign exchange rate movements on FEMSA's U.S. 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 pesos 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 of 2025 due to our improved results. The effective income tax rate was 32.5% in the third quarter. As you know, 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 AXO Mexico brief, as Jose 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. But after normalizing for the impact of the above trend store closures that Jose 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 the next year and beyond. The Americas in 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 OXO Brazil, the segment's top line benefited from a solid performance at OXO Gas driven by healthy volume growth and a strong performance across OXO 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, OXO 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 Oxo Gas, was reported together with Oxo Mexico back then, so 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 OXO Colombia and Peru, partially offset by a negative mixed effect in OXO Chile. Gross margin for the fuel operations decreased 50 basis points to 11.6%, reflecting the voluntary fuel price commitments at OXO Gas, partially offset by solid fuel margins in OXO USA. Operating income was 170 million pesos with an operating margin of 0.6%, representing a decrease of 76% and 29.9% on a comparable basis, excluding currency translation effects and the operating losses from the consolidation of OXO Brazil. The operating margin reflects narrowing losses across Auxilio 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, were 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 U.S., driven by the loss of relevant key accounts. Regarding Valora's gross profit, as you know, since the first quarter, we have been reclassifying certain distribution expenses from SG&A to cost of goods sales, 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 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's 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 the 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. Mbara delivered another quarter of strong growth with same-store sales of 10.3% and 112 new 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 Bajio, a sign that the Mbara 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. Chalak 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 2006 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 two times net debt to adjusted EBITDA ex-coff remains unchanged. The buyback we announced this quarter, together with our dividend program, reflects our commitment to continued 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 OXO 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. And with that, we are ready to open the call. Operator, please go ahead.

At this time, we are going to open it up for questions and answers. If you have a question, please click on Raise Hand for audio questions or write it down in the Q&A section for reading questions. Please remember that your company's name should be visible for your questions to be taken. Please limit yourself to one question at a time, and if you have a second question, please get back on the queue. We do ask that when you pose your questions that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. Our first question comes from Henrique Brustolin with Bradesco BBI.

Hello, Jose Antonio Martin Rua. 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 categories. which is interesting right considering the the soft consumer environment overall in Mexico so the the question is how do you see you know the the element of oxo's value proposition relative to the other retail channels uh that are allowing you to capture this much share over the the recent quarters hola enrique thank you for your question

And so 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. And it's true that by far the biggest high traffic growth has come from What we do good, we become much better at doing, especially with adding some value assortment Presentations into our core categories, even energy drinks, soft drinks, beer, cigarettes, etc. But to be honest, we are seeing a very good positive traffic growth across geographic regions. So 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. And that tells you that I think we had either very favorable weather throughout the country or we are becoming better at our job. In the other three strategic pillars, we are seeing also traffic growth. It's just being driven much more by impulse. But we are seeing traffic growth in services, financial and non-financial. We're seeing traffic growth in food service, mainly driven by coffee. And 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. So very encouraging what we're seeing. We would much rather be in an industry with a much stronger consumer sentiment, so everyone should be... Everyone growing and we growing more than the rest. This is our better place to be. But we are very much encouraged by our market share gains and how we are seeing a much more enthusiastic consumer coming into OXO for their daily needs, for their weekend parties, etc. So very encouraging figures for us. We hope the Mexico consumer sentiment begins to improve.

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

The next question comes from Ben Therer with Barclays.

Good morning, Juan. Good morning, Wendy. 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. So as we think with the improvements that you're doing, assortment, et cetera, 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. But if you put these things aside shorter term and you think more medium term, where do you see the... and the structural traffic opportunities for you guys in OXO 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 Alfonso Garza Garza-Laguera, Jose Antonio Vicente Fernandez Carbajal, Juan Fonseca Garza-Laguera, Jose Antonio Vicente Fernandez We're still very cautious on giving you 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 it's coming early, Jose Antonio Vicente Fernandez Carbajal, Juan Fonseca Garza Garza-Laguera, Jose Antonio Vicente Fernandez Carbajal, Juan Fonseca Garza-Laguera, Thank you very much. That's my read so far for the rest of the year.

Yeah, I think I would just add, Ben, this is Juan. You know, 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, you know, we're already very good and it was really more about Jose Antonio Vicente Fernandez Garza-Laguera, Jose Antonio Vicente Fernandez Garza-Laguera, Thank you very much. The next question comes from Lucas Mussi with Morgan Stanley.

Jose Antonio, Martin, Juan, thank you for taking my question. Still on OXO, Team Star 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, Jose Antonio. Just wanted to better understand what is the goal? What is it that you're targeting? Over the medium to long term, in terms of how you're thinking about an OXO 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 U.S. 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 target? 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, Luca. It's a good question. Look, we obviously are inspired by many of the things we see developing in food service in the U.S. I think the convenience store industry is doing a tremendous job in certain regions and certain players. But obviously the Mexico consumer is very different. We still believe that 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 dependency in Oxford 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. So I foresee, I am encouraging and getting the team rallying behind an ambition of tripling our percentage of food service and that would be huge and it's margin accretive and it will become much more relevant for the lives, 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, we are, I think we have two big levers to pull. One is obvious to give very low prices and low per gram prices and also low disbursement options and SKUs for our consumers. But 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. And we have an advantage to serve them there. And we are seeing an opportunity there to save them money, save them time, save them, 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. And I also think that is going to be obviously much more traffic accretive than ever. Alfonso Garza Garza-Laguera, Jose Antonio Vicente Fernandez Garza-Laguera, Jose Antonio Vicente Fernandez 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, Jose Antonio.

The next question comes from Tiago Bortolucci with Goldman Sachs.

Good morning, everyone. Congrats on the results and thanks for the space to ask questions. I'd like to continue in Oaxaca, 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? And this has been a trend throughout the year. I know, and I think it was like two conference calls ago, We commented about the restructuring on headcount 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 SG&A going forward, particularly in this 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 work week. So 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 percentage point per percentage point. But 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. Thank you. Thank you. Thank you. 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. And you can just leave the inventories and 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? 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. But 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, Tiago. It's helpful. Thank you very much, guys.

The next question comes from Alejandro Fuchs with Itaú BBA.

Thank you, operator. Thank you for the space for questions and congratulations on the results. Regarding expanding growth of the business, and I think also your initial remarks about... 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? Yeah, sorry, is this better? Yes, it looks better. Okay, thank you.

No, my question is on growth. It seems that, you know, I think you alluded, Jose 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. Well, VADA continues to grow and open stores at a very fast pace. So I wanted to see if maybe, if anything has changed in terms of priorities, will VADA be maybe a little bit higher on the list, maybe relative to OXO Brazil? And I wanted to see if anything has changed on how you see maybe the growth of OXO 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 increased the productivity or what we call the batting average of our stores. We started our expansion maybe a little bit late than what we usually do in other years. That compounded with a pruning of stores, but we remain committed to opening A thousand stores minus the closings of these years 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 about a thousand net new stores for the foreseeable future in OXXO Mexico. For Oxxo International, we have 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 you know that's a number that you have to monitor carefully, because if you overstimulate the quality The production factory of stores with incentives, you can get bad quality outcomes. So you really have to measure very well how you expand and make sure you're developing processes and capabilities. And that takes time. But Colombia is ready for acceleration. Brazil is still not there. And we've been very upfront. We see the opportunity in Brazil tremendous. I think it's hugely opportunity that we can achieve. We're very excited. For the São Paulo region, we're confident that it will grow, but 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, and so as we learn to navigate those operational constraints, we are being much more careful. Thank you very much. That gives me to the Vara question. With Vara, 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 and with still a lot of depth Jose Antonio Vicente Fernandez Garza-Laguera, Jose Antonio Vicente Fernandez Garza-Laguera, Jose Antonio Vicente Fernandez Thank you very much. Jose Antonio Vicente Fernandez Garza-Laguera, Jose Antonio Vicente Fernandez Garza-Laguera, Jose Antonio Vicente Fernandez The next question comes from Isabela Lomas with UBS.

Hi, good morning, Antonio, Martin, Juan. Thank you for taking my question. We'd like to get a view on capital allocation. So if you could mention how do you see opportunities to divest on core assets sales now? What about M&A, for instance? What's your appetite? And let's be honest, how should you 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 Martin 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, first conference call of the year. When we have visibility about our budgets, the final year results, cash flow generation during the year, but it is pretty clear By the end of this year, first quarter of next year, we won't have reached our two times net debt to EBITDA target. I suspect we will be somewhere in the 1.5, 1.6 net debt to EBITDA. So we will have some flexibility and then we'll have to decide whether that flexibility is returned in terms of, again, some sort of extraordinary dividend or additional buybacks. And we will be announcing that in February, March. But 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 now less than a few months ago. I don't know if that answers your question.

I was just going to add, I mean, in terms of the kind of M&A versus shareholder remuneration, I mean, 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 U.S. as a place where there are some assets, some of which we've looked at, but we're being very, very disciplined. Thank you so much.

The next question comes from Bobby Ford with Bank of America.

Hey, good morning, everyone. Jose, can you talk a little bit about the magnitude and timeline of logistics investments you need to win in Mexican grocery, right? And how should we think about, you know, the assortment and the price points needed to build principality in the category versus the canasta oxo that's being tested today? And then you're also accelerating some growth in cafeño, and I want to get a sense of how you're thinking about cafeño.

So 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 is very granular and it varies greatly from a type of SKU, a lot of training and capabilities Thank you very much. Presentations that currently are not available. 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 customers. So that requires a lot from our commercial guys and ladies to really develop this offering In our stores. But once we have that, it's very easy to develop the store. It's not a lot of SKUs, frankly, and it's not a lot of price changes. Inventory is easy. So 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 eye or the focus for many years and we're coming back and we're very excited for the results, but it's not going to be so heavily in terms of capability building. And 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 We are way above what we were selling in coffee per store last year, but way below our potential and below our target. So we have a long way to go. And our other business, which is growing relevance, but still is tiny, we operate about 300 coffee drive stores. They're gaining, 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 gonna keep opening coffee drives.

Just a compliment on Calpeño. We were able to buy out our partner in that business that had accompanied us for many, many, many years and was a great partner. But that has given us the opportunity now that we own 100%. To find significant amount of efficiencies around overhead. Number two, align much better the two organizations of Café Nilo and OXO. So, for example, now we give them incentives on the basis of a completely combined P&L. So everybody for the Caffeineo and the OXO responds for all the total cups sold, for the price of the coffee that we buy, the maintenance of the machines. That, I think, has added a whole new discipline to the business. And then in the Caffeineo 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. To be honest, it was selling and it was selling very well. And so that their ability to move. And so I think it will also be a source for very interesting innovation. The next question comes from Alvaro Garcia with BTG Pactual. Hello Alvaro.

Hey, Jose. How are you? Martin, Juan. Thanks for the space for questions. I think we've indirectly spoken about the gross margin investment in the context of also traffic, but we haven't really spoken about it directly. So my question's on gross margin specifically, and I appreciate the commentary on the tough comp on commercial income and sort of the 70 basis point run rate of investment, but you know, On things that you can control, I guess the questions would be, you know, how do you feel about leaning in even further into next year? And it would be very helpful to get some color on sort of breaking down that 70 basis points. You know, how much is coffee? How much is affordability in other categories? So 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 know that people don't... I've repeated this in various forums. We don't manage the business for gross margin. We manage the business for even. And it's a little bit trial and error. In other words, if... What I can give you the assurance is we are relentless in measuring when we initiate affordability initiatives to clearly identify what is the total margin break-even point. So what do we have to gain in terms of traffic and volume to compensate for any adjustments that we make, either pricing or to price package architecture? And there have been instances where the math didn't work out, so we took it back. Number two, we're changing the nature of the relationship, commercial negotiation relationship we have with our suppliers. It used to be significantly more driven by shelf space and, you know, whatever SKU they were, quote unquote, trying to push in any given order. And now we've added a new layer, very focused on what is the value proposition of the consumer and We will not be 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. And you know what? The suppliers, I haven't been surprised. I thought that this was going to create greater tension with suppliers. But the suppliers are also seeing it themselves. They're not particularly interested also in having a slow moving SKU because they know eventually we just won't be buying and we won't be growing. So 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 OXO 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 and attractive offers made to the consumer, which obviously in a 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. So 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. But trust me, at the end of the day, we are very focused on growing our operating income Yeah, that's great. That's awesome. Yeah, thank you very much.

Thank you, Alvaro.

The next question comes from Carlos Laboy with HSBC.

Hello, Carlos.

Carlos, you can open your microphone now, please. Sorry about that.

Thank you very much. Jose Martin, we all know how disciplined you are in terms of avoiding or wanting to avoid dilutive deals. But if we can put that aside just for a moment, when you think about growth opportunities in the highly fragmented U.S. 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? And I'm asking because these are very underdeveloped markets. They're so highly fragmented still. And yet the skill sets that you're building, growing and the capabilities that you have that fit into these markets look attractive.

Thank you, Carlos. Obviously, we deliver, give a lot of thought and vigorous debate in our 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 U.S. or develop markets like Europe. And 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 your Swiss retail has been tremendous. Jose Antonio Vicente Fernandez Garza Garza-Laguera, Jose Antonio Vicente Fernandez Garza-Laguera, And frankly, if you get out the gas part of the business where we probably bring the less what we're seeing in our stores in West Texas where we converted it into Oxxo and we developed the food service of the Mex-Mex with Doña Tota, we're seeing very interesting results and we see a lot of upfront investment from Arca or Coca-Cola, from Red Bull from the Tabaco Guys. And so we're very encouraged by what we are being able to develop. Now, that has to be carried into attractive multiples to acquire. And frankly, we haven't been able to find opportunity. We've looked at very interesting things in Europe that have gone to other and other players that have been more willing to pay more and we've seen the same thing happen in the US. So 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.

And I think the other part of that has to do with, you know, 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 how, you know, even as we look at assets, could we accelerate organic growth in a place like Texas, as José was saying?

and we are going to are pushing the team to begin developing the NTI opportunity in Texas where we're seeing favorable demographics in the U.S. But it's still going to come, you know, it's still less than a single digit expansion for next year. And as you know, their investments north of five or six million dollars per store. So it's a different animal than what we built in Latin America.

And one additional compliment. If we were to find the right asset, again, given the target size of what we're finding, 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 a value proposition, an NTI value proposition that was particularly well poised for rollout. I think we would be willing to be Robert R. Reilly, and many others. That is being generated by, let's just say, the organic operating business. The reality is the returns are not that attractive. So 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 OXO can bring to the U.S., you would be shocked if you look at the next numbers of the number of convenience stores in the United States that don't make money inside the store. I mean, the number is like over 90%. The people who are making money, without a doubt, are the ones that have a very high focus on convenience. and everybody else is basically subsidizing the inside store with gasoline. So I do think Oxford can bring Thank you. Thank you, Carlos.

The next question comes from Luis Felipe with C.D.

Hola, Luis. Hola, thank you so much for the space here. Just want a quick one on barra here. If you 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. So 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.

So if I remember correctly, one of you told me if I open a store today, they would toast with champagne. I don't remember who it was, but I was expecting my champagne bottoms 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 OXO to develop our discount, and that takes a lot of time. But what does not take a lot of time is building stores that pay their cost of capital. And we tailor that. We target it to a very... We have a very small... How do you... Anyway, we have a very good batting average in our stores. They are paying their cost of capital and we have a very slow, slight standard deviation. And so that gives us enough that when you see that even though the stores lag 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 In getting out all the SKUs that just bring noise to the system, making a very lean, efficient machine. And so we are happy with the growth we're seeing in terms of same-store sales. We like the traffic. Most of that is traffic. Jose Antonio Vicente Fernandez Garza Garza-Laguera, Jose Antonio Vicente Fernandez Garza-Laguera, Jose Antonio Vicente Fernandez 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 VARA 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 OXO. We see a lot of, if you come to Monterrey, you'll see a lot of barras next to OXO. And while they both sell beer or both sell tobacco, barra sells much more toilet paper, house cleaning goods, shampoos and other things that OXO does not excel. We love this multi-format evolution and we are very excited for the future of VARA going forward.

Let me compliment there Jose Jose. Well, he was in charge of P&H, put together a very good team at VARA, a team that for the first time was Thank you for joining us. The focus that they have brought to cost, the focus that they have brought to private label, the focus 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 cream. and 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 the store matures. So even if you haven't reached the point A mature store within 12, 18, 24 months is making its cost of capital. If it's already breakeven at an even 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. So Embarra, the speed at which the stores, for example, in Nuevo León Alfonso Garza Garza-Laguera, Jose Antonio Vicente Fernandez Garza-Laguera, Jose Antonio Vicente Fernandez Garza-Laguera, of Waves of Value, particularly around private label and things of that nature that we're going to give it a try.

And I would just add, Luis, I think, again, you know, the question came up earlier about, you know, kind of the different growth rates for the different, you know, Oxfam different countries or Maran. Part of your question touches on the same. So, you know, we'll give you more granular information In the next call in February, in terms of some of the things that we expect will happen during the year, but in terms of the opening of stores, I would kind of think about four data points. Also Mexico, if we open a thousand stores from a base of basically 25,000 stores, that's 4% growth in net new stores. Brazil Brazil should be in the high single digits. Maybe if all goes well, we can crack 10%, but let's think about high single digits for Brazil. Then you go to Colombia, where you will definitely plan to be in the double digits. And then the fourth one is Bada, where it will not only be in the double digits, but probably north of 30%. Those four give you an idea of Thank you so much, guys. Very comprehensive.

This concludes the question and answer section. At this time, I would like to turn the floor back to Mr. Fonseca for any closing remarks.

Thanks, everyone. I mean, just as always, make our team available for follow-ups. And thank you for joining today and have a great rest of the week.

Thank you, everyone.

This thus concludes today's presentation. You may disconnect now and have a nice day.