Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX) Q1 2024 Earnings Call Transcript

Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX) Q1 2024 Earnings Call Transcript April 26, 2024

Fomento Económico Mexicano, S.A.B. de C.V. misses on earnings expectations. Reported EPS is $0.47 EPS, expectations were $1.61. Fomento Económico Mexicano, S.A.B. de C.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to FEMSA’s First Quarter 2024 Results Conference Call. My name is Melisa and I will be your coordinator for today’s event. [Operator Instructions] I’ll now turn the call over to Juan Fonseca, Head of Investor Relations. Please go ahead.

Juan Fonseca: Good morning everyone. And welcome to FEMSA’s first quarter 2024 results conference call. Today, we are joined by José Antonio Fernández Garza Laguera, CEO of our Proximity and Health Division; Martin Arias, our Incoming CFO, and Jorge Collazo, who Heads Coca-Cola FEMSA’s Investor Relations team. As you know, one of FEMSA’s strategic priorities involves engaging more directly and proactively with our key stakeholders, and that includes providing more opportunities for you, our investors and analysts, to hear from and interact with, the heads of our core business verticals. You already have that possibility with Ian Craig, given the public nature of Coke FEMSA, and we will increasingly work to provide broader access to José and Juan Carlos Guillermety in their roles as heads of the other two core operations, Proximity and Health and Digital respectively.

Therefore, as a first step, the plan is for José to open today’s conversation with his vision for Proximity and Health and the key elements of the strategy to move towards that vision. Going forward, José will produce quarterly calls a year. At a later date, we also plan for Juan Carlos to present his vision for the Digital business, with the expectation that he will also join our calls once or twice a year. After José’s remarks, Martin will provide an update on the business and our quarterly results. Finally, we will open the call for your questions. José, please go ahead.

José Antonio Fernández: Thank you, Juan. Good morning, everyone. It is my great pleasure and privilege to be able to be here today, to begin what I hope will be regular conversations, with all of you. As we move beyond the FEMSA forward transformation, and focus on the future of our company. I relish the chance to help pursue and capture the substantial opportunity for growth and value creation that lie at FEMSA, particularly as we continue to develop and strengthen our leadership in Proximity and Health retail. As many of you know from following us for many years, FEMSA has always had the pursuit of long-term profitable growth, hardwired into everything we do. And we have a clear and focused blueprint, to keep achieving that objective, as we build on FEMSA’s successful track record in Proximity retail.

The comprehensive long-range plan that we will develop, during the past couple of years provide us with a useful roadmap. We aim to accelerate earnings growth at our retail division, relying mainly on organic expansion and on continually adding layers of value for our consumers across formats and across markets. As you all know, OXXO Mexico is a mainstay of FEMSA’s retail operations. For the past 45 years, we have been evolving and improving its value proposition while expanding its footprint, and growing its scale, always focused on understanding more of our customers’ needs and finding new ways to serve them consistently better. As OXXO store economics have improved over time, we have been able to increase our footprint in Mexico, to the current level of more than 1,000 stores, while maintaining and even increasing store productivity.

We have built capabilities to develop consumer insights that in turn, are continuously applied in our segmentation effort. And we are confident that we can keep the current pace of OXXO expansion in Mexico for many years under the current value proposition. In the process, we believe we have become more effective retailers, and this is now allowing us to find promising opportunities, beyond the core OXXO Mexico format. As you know, we are thoughtfully accelerating our organic expansion efforts with OXXO in several markets in South America, having already reached the 500-store mark in Brazil and soon in Colombia. We believe OXXO in South America could, on a combined basis, reach a scale comparable to OXXO Mexico over time. Moving on to other different formats, we are taking advantage of the Mexicans’ consumer increasing appetite for the Proximity discount format with our Bara store.

After many iterations and years of fine-tuning its value proposition, Bara is showing that it has the right unique economics and is ready for an accelerated rollout. We are also ramping up the development and deployment of other promising adjacent Proximity formats, such as coffee drive-throughs with our joint venture. Beyond Latin America, we also continue to advance with the Valora platform in Europe, where despite high inflation last year and general macro headwinds, we are building on improving momentum and focusing on driving all three business platforms, our retail, food service, and our B2B business. While we will pursue and capture these opportunities mainly through organic expansion, we believe entering the United States could open a new and compelling avenue for growth, value creation for FEMSA.

Leveraging our capabilities or closeness to a U.S. market and a broad recognition of the OXXO brand among demographics. This initiative may require a moderately-sized inorganic component to achieve certain scale up front, focus on border, or near-border states, and on assets with certain characteristics that would serve as a launching pad, for an OXXO U.S. value proposition among other possibilities. We still have work to do as we fine-tune our potential entry model, always with a clear objective of long-term value creation for FEMSA. However, we know this topic is top of mind for the market, so we will keep you posted as we continue to develop our strategy. Beyond the various opportunities across the Proximity spectrum, we also continue to make progress in our Health operations, where we are increasingly being able to leverage our multi-country platform and scale to optimize purchasing, pricing, supply chain, and several other aspects of the business.

However, we continue to operate in distinct, diversified, and sometimes challenging macro operating and commercial environments, something we’re quite familiar with in our neck of the woods. In certain markets, our Health division is currently navigating complex, competitive, and regulatory environments. But in every case, we’re taking clear steps to address the challenges by adjusting and evolving our operating approach. To put all our retail opportunities into perspective, I can share with you that today, if we consider all formats and all markets, we’re opening more than six stores per calendar day, or a new store every four hours on average. By the end of the five-year period covered by our current long-range plan, to the extent that we have further proven and improved the economics, of our various formats in various countries, we could eventually increase that pace by up to 50%.

These plans are certainly ambitious, and while ultimately dependent on improving the economics of certain formats in certain countries, we believe they are achievable. On the topic of growth and investment, I would like to highlight a couple of points. First, although these plans will require considerable CapEx in the coming years, the organic and modular growth inherent in our business model puts us in a good position, to capture high returns. Second, these investment plans are reviewed rigorously on an annual basis, thus as we advance on each one of these organic growth initiatives, we may find that some opportunities become more compelling over time, and some fall short of expectations. And we will adjust our CapEx accordingly. Therefore, I have asked our team to relentlessly focus on unit economics, cash flow generation, and achieving ROIC levels above our cost of capital, to drive and guide our growth decisions.

Finally, we should talk about the digital opportunities that exist in and around our retail platforms, and which complement and expand the opportunities being developed by our digital division. As you know, I had the chance to take a short break from our Proximity business to help launch FEMSA’s digital efforts a few years ago. And it is very rewarding to see how the Spin ecosystem continues to thrive, and develop by leaps and bounds, always leveraging the physical store network, multi-capability for our customers, our suppliers, our partners, and ultimately our company. To take one example, less than three years after launching the Spin Premia loyalty platform, already more than a third of OXXO Mexico’s revenues are associated with the program, meaning that on average, we have access to more than 4 million tickets every day that allow us to begin building compelling, and valuable data sets.

And as we get closer to the point where we can begin moving, from a pure customer acquisition mode into more of a monetization phase, we are developing new data-driven initiatives. For example, OXXO has proactively invested in using AI, to capitalize on the breadth and depth of this data. The density of our store network, and the frequency of customer visits, provide us with a unique perspective of Mexican consumer behaviors and trends. Over the last year, OXXO has materially evolved its algorithms, IT systems, and data science capabilities, to offer better and more effective assortment, pricing, and promotions, and to efficiently staff each store according to its unique transaction pattern. These AI-driven improvements are being rolled out across our store network in Mexico, resulting in measurable increases in profitability as well as improved customer satisfaction.

Summing up, we have our work cut out for us. We will drive our top line, by increasingly expanding our store base and satisfying with excellence, the needs of our customers. We will drive our bottom line, by constantly seeking efficiency and effectiveness, as we evolve our operating models, and we will carefully pursue acquisitions where appropriate, to increase our scale and drive the virtual circle that flows from it. We will keep you appraised of our progress, and we will also drill down on some of the opportunities discussed today, not only in future calls like this one, but through a more proactive stance, where we generate recurring dialogue with the investment community. We are excited about the opportunities ahead and the clear path we’re taking to capture them.

I am fortunate to be surrounded by the best team in the business and to be part of an organization bound together, by a strong and unique culture of collaboration and permanent cross-learning. I look forward to continuing our discussions with you going forward, and I will now turn the call over to Martin to talk about FEMSA’s first quarter results.

Martin Arias: Thank you, José, and good morning, everyone. I’m happy to be with you today to talk about this remarkable company that, I have had the pleasure of calling home in one capacity or another for 25 years. As José just described, this is an exciting time to be a part of this team, as we pursue compelling and unique opportunities at every one of our three core business verticals. The first message I want you to take from me is this. The mandate I have received from our CEO and Board of Directors, is to continue executing the capital allocation strategy that, was announced as part of FEMSA Forward, steering the finances of the company towards the leverage goal of two times net debt to EBITDA, excluding Coca-Cola FEMSA, which we expect to reach by the end of 2026.

As of the end of the first quarter, that ratio stood at 0.24 times, compared to 0.1 times at the end of 2023. To meet this mandate, our CEO has asked me to focus on disciplined, organic, and inorganic capital deployment, as well as to continue to monitor additional opportunities to return capital to shareholders. Prior to reviewing our quarterly results, I would like to provide you with an update on the FEMSA Forward initiatives relating to returning capital to shareholders, some thoughts on capital deployment generally. As you know, we have been active on the share buyback front, and during the first quarter, we launched an accelerated share repurchase, or ASR program, through a financial intermediary. Through that program, we were buying back $400 million worth of FEMSA shares.

Before the ASR was launched, we had also bought back approximately 73 million shares in the quarter. In addition, earlier in the year, we received shareholder approval, to pay an extraordinary dividend of approximately $600 million during this year, the first installment of which was paid last week on April 18. This means we are in the process of returning nearly $1.1 billion to shareholders during 2024, in addition to our ordinary dividend, which was itself increased by 20%, representing a total of approximately $800 million at current exchange rates. To the deployment of CapEx, which is also a main component of our allocation strategy, we seek to prioritize this allocation, to its core organic growth initiatives that offer the highest potential for long-term value creation.

In the first quarter, our CapEx reached MXN7.4 billion, representing 5.3% of total revenue and 45.1% growth over the comparable period of last year, reflecting in part the accelerated expansion at Proximity, as well as increased investments in production, and distribution capacity at cost. Through these organic investments, we aim to enhance our competitive position and maximize returns for our shareholders, while preserving a strong financial foundation. In the event that these organic investments are not producing the expected returns, we reassure you that we will re-evaluate the levels of CapEx. Let’s turn now to FEMSA’s consolidated quarterly results. Total revenues increased 11.3% and EBITDA rose 14.4%, compared to the first quarter of 2023, reflecting strong growth at Proximity and Coca-Cola FEMSA.

Net consolidated income decreased 88.3% to MXN5.9 billion, mainly explained by a challenging comparative base in the first quarter of 2023, which included a gain of MXN40.6 billion from the reclassification of investment in Heineken to discontinued operations, and also reflects an increase in the net financial expenses line, reflecting a wine-tang gain from the repurchase of our debt in the first quarter of 2023. Excluding these effects, net consolidated income would have remained flat year-over-year. Moving on to discuss the results of our operations, Proximity Americas delivered quite a strong set of numbers in the first quarter. The year-over-year growth was solid, but it looks even better when we consider the tough comparison base they faced, after a banner quarter in 2023.

Also, same-store sales increased 9.7% in the first quarter, driven by an increase of 7.3% in the average customer ticket and 2.2% growth in traffic. Certainly, we had the small advantage of an extra day in February, as well as the full impact of Holy Week that tends to help the average ticket, but these are strong numbers nonetheless. This growth reflects multiple initiatives implemented relating to revenue management, as well as the results of our loyalty program that are driving increased visits and purchases, by our most loyal customers. Gross margins expanded 170 basis points to reach 42%, the highest ever for a first quarter, which is normally the weakest of the year, reflecting strong trends in commercial income, a positive contribution from financial services, our growing revenue management initiatives, and strong performance from gathering related categories such as soft drinks, beer, and snacks.

Income from operations increased 11.5%, while the operating margin contracted 20 basis points to 7.1%, reflecting higher labor expenses and faster store growth across markets, including those in LatAm, that are still diluted margins as they ramp up their scale, obviously all mitigated by effective expense containment. On the store expansion front, OXXO also posted strong numbers, adding 495 net new stores during the quarter, which includes 356 FICO [ph] and 139 stores in South America. This figure for South America incorporates 71 openings by Grupo Nós in Brazil, where OXXO has already surpassed the 500 store mark. Historically, the first quarter has been laggard in terms of store expansion, catching up during the second half. This year, the Proximity team did a great job of making sure that we hit the ground running, as compared to the expansion of 254 stores in the first quarter of 2023.

Moving on to Proximity Europe, total revenues grew 12.6% in local currency, translating to an 8.2% increase in pesos. This growth was driven by strong performance of the Swiss convenience business and good momentum in the B2B pretzel business, partially offset by lower demand in transportation hub stores affected by extended labor strikes in Germany. Gross profit grew 11% in pesos, while gross margin expanded by 100 basis points to reach 43.2%. At the operating income line, Valora posted extraordinary growth, but we know that the B2B business had an outsized contribution to gains in the quarter’s profitability, at growth rates that would not necessarily be replicable going forward. Shifting focus to the Health division and following up on José’s comments a few minutes ago on the challenges we currently face, total revenues contracted slightly by 2.3% and same-store sales remained flat in Mexican pesos.

This was driven by an ongoing disruption within the institutional business in Colombia, and a challenging competitive environment in Mexico, as well as a tough comparison in Chile. These disappointing trends in the top line translated into weak operating results for the quarter, as operating income fell 40% in pesos and operating margins contracted, by 210 basis points to reach 3.3%. As you might imagine, we are focused on the situation at the Health division. We have a highly skilled team running that operation, and they are rapidly adjusting their country-specific strategies to mitigate, and eventually revert these negative trends. For example, we are accelerating the retail component of our Colombia business, changing our mix to a more profitable, less structurally vulnerable operation.

In Mexico, we are making important adjustments to our consumer value proposition, following templates used in Ecuador and Chile. We will keep you posted on the evolution of these strategies. Moving on to OXXO gas. Same-station sales increased 6.9% and total revenues increased by 13.9%, reflecting solid trends in our institutional sales. During the quarter, gross margin reached 11.6% and operating margin was 3.5%, reflecting lower profitability from our institutional business, partially offset by operational efficiencies and strict expense control. Turning to Digital FEMSA, we continue to make progress during the quarter. The number of active users for Spin by OXXO reached 7.4 million or 77.9% growth year-on-year, demonstrating steady trends in consumer adoption, while also experiencing increased transactions per user.

For its part, our Spin Premia loyalty program has also experienced good growth of 71.3% year-on-year, reaching 21.7 million active users. Notably, approximately 35% of OXXO Mexico sales are now linked to Spin Premia, as are 40% of the sales of OXXO gas, strengthening the foundation for our data gathering and utilization capabilities. As we continue to prioritize the acquisition of higher potential users, we are also making strides in the evolution of our digital operations into an ecosystem that is focused and geared to deliver maximum value to our users, while driving sustainable growth and profitability for FEMSA. From a financial perspective, we spent close to $50 million during the development and expansion of our Digital ecosystem during the quarter.

This is in line with previous quarters and below-budget projections. Of note are the multiple insights that Juan Carlos Guillermety has brought to the business, which have allowed us to contain costs and focus our efforts on those initiatives, with the greatest potential. Finally, Coca-Cola FEMSA posted another set of remarkable results in the first quarter, with double-digit growth in revenues and EBITDA against significant foreign exchange headwinds, supported by volume growth across most of their markets, as well as revenue growth management initiatives. Congratulations to the Coke FEMSA team and the Coca-Cola Company for such a strong quarter. You can listen to a replay of their quarterly call, which took place last Wednesday. Coming up, FEMSA’s first quarter results show that our two largest business platforms, OXXO and Coca-Cola FEMSA, remain operating at a very high level, generating great results by refining their tools and business models to go after an extended runway of opportunities.

While we continue to nurture newer, smaller business units to get them ready for faster growth, and we tend to the few elements of the FEMSA platform that need some immediate adjustment. As José had mentioned at the outset, we look forward to a permanent open dialogue with you, as we continue writing FEMSA’s next chapter. And with that, let’s open up the call for questions. Operator, please.

See also 20 Countries with the Largest Urban Population in the World and 13 Best Reddit Stocks to Buy Now.

Q&A Session

Operator: Thank you very much. [Operator Instructions] Our first question is from Carlos Laboy with HSBC. Please go ahead.

Carlos Laboy: Yes, good morning, everyone. I’ll say thank you so much for joining some of these calls and offering your insights. It’s really, I’m sure, going to be super helpful. Taking a broader look, perhaps even beyond OXXO as well and digital, at the different FEMSA businesses, what parts of the business are you perhaps most excited about? You covered a lot of ground. You talked a lot of things, about a lot of things. But what are you most excited about?

José Antonio Fernández: Carlos. Thank you for that question. So obviously, we have a lot of challenges and outstanding opportunities. I would say I’m quite excited, first and foremost, about all of our opportunities in Mexico. I think OXXO, the value proposition enhancements, the development in food, and just with all the data analytics that we’re pursuing, I think those growth ahead for OXXO Mexico. And I see, and I’m beginning to get very excited about our opportunity with discount retailing. I wish that was still much more under the radar, but I still see a lot of opportunity for growth for this time retailing in Mexico. I’m very excited about our South America expansion, particularly Brazil. I really think Brazil, if we can get it right, we can be – as big as OXXO Mexico.

It’s not bigger. It’ll take us a few years, but I’m really excited about the opportunity. We have tremendous partners, and we have a tremendous team in place that keeps me really excited. And then I would say, I mean, it’s again with food, but the food service component that I see that, I’m learning from Europe that we’re seeing. We have tremendous assets there that if we can eventually make them grow organically, could be a source of growth that will surprise us. So those are my most interesting things. Obviously, I’m carefully looking at the U.S., but being very cautious as to when and where, to get into that playing field.

Carlos Laboy: That’s helpful. Thank you so much.

José Antonio Fernández: Thank you, Carlos.

Operator: Thank you. Our next question is from Thiago Bortoluci with Goldman Sachs. Please go ahead.

Thiago Bortoluci: Yes. Good morning, everyone. Congrats on the results, and thanks for taking questions. On the numbers, right, could you please help us understanding the dynamics within your corporate expenses line? I’m calling the balancing, right, between consolidated results and the business only systems. You had a huge expense in the fourth quarter. I think you were diving for something close to MXN1 billion per quarter going forward in expense, and it seems in the quarter you had a huge reversion, right? So if you could, we could welcome you walk us through explaining what’s happening there and what is the underlying basis we should expect going forward, is number one. And if I may, a second one. This is on OXXO, particularly in Mexico, right?

You reported very good same-store sales, tech comps, particularly in traffic. You grew 220 basis points in a quarter that the calendar might have with more than two positive benefits for you, right? So the question is, what is the underlying traffic level that you’re seeing? And more importantly, going forward, how do you think about same-store sales having one of your peers just reporting and commenting on the team’s growth for the year? Thank you very much.

Martin Arias: Yes, hi. This is Martin. Thank you for your question. As for corporate expenses, I know it is hard to keep track of what’s going on, because that line item reflects a variety of things. It not only includes the corporate expenses, it also includes some of the smaller businesses that have historically been included within other. For example, Bara is there, the results of Bara, the results of digital. Doña Tota is also there. And within our corporate expenses, the number we have always sort of guided to, is more or less $100 million. But it’s hard to get to that number, because there can be movements given the different businesses. Historically, will not be – the historical numbers will not be much of a guide, because the other line used to include Solistica at different times, [Envoy, PTMA.

And so the historical numbers going forward, it should remain stable while those businesses remain there. And so, you should be able to get a little bit more clarity, and we’ll try in future calls to maybe be a little bit more specific, or get back to you with any details.

Juan Carlos Guillermety: As I think on that, Thiago, I mean, obviously, we’re – this is fun. We’re lapping the most, I guess, volatile quarter, right in terms of FEMSA Forward. A year ago, there were a lot of things that were moved around in terms of reclassified to discontinued operations. To Martin’s comment, recently we had made some changes with Solistica, with Envoy. So I think we’re going to – the next couple of quarters are going to, as I expect, trend to what becomes a more predictable number below the line. And of course, we can follow-up offline to try to kind of reconcile our model with yours, but this is really the most – the quarter was the most noisy I think, given what happened a year ago. I mean, I would just add, I think, traffic is getting better and better, but it’s still going to be tough.

The next few months, we have a strong comparison against next year. It was a very good quarter in terms of revenue, and we have some interesting – things, extraordinary things, like in the elections, we have a weekend where it’s a dry weekend. There’s no alcohol sales. We see that could affect us on the first weekend of June. So I think it will be a tough quarter, but I think given all that we are seeing in terms of our analytics and things to drive revenue into the store, we could be okay in traffic.

Martin Arias: And we’ll add to that, I mean, the Spin Premia is helping a lot of them from not being relevant at all. Historically, we’re now 35% of the purchases in the store are being done by people who are showing their premium card, or getting their points digitally. So that is an important driver of strategies to drive traffic.

José Antonio Fernández: Yes, I would just add, Thiago, we almost delivered 10% same-store sales growth on top of 18.5%, or something like that that we did a year ago. We continue to perform above what I would have expected in terms of both the split of traffic and ticket. Obviously, inflation is down to 4%, 4.5%, and our ticket is three points north of that. You’re going to hear us talk a little bit more about revenue management, and José already mentioned some of the ways that we’re using data for that. So, I don’t have a good handle on what the new kind of algorithm will be, for same-store sales, but it’s increasingly looking like we’re going to be at a higher level than we were pre-COVID, right? Two points, two points something of traffic several years after COVID ended and lapping what we were doing a year ago. That’s above trend, and that’s higher than I would have expected. So, anyway, we’ll keep talking, but things are looking quite robust.

Thiago Bortoluci: Oh, this is great. Thank you very much, everyone. And congrats once again.

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

Ricardo Alves: Hi, everyone. Thanks for the call. Martin, nice talking to you. Wish you all the best in the position. I had a question on OXXO top line as well. Appreciate the commentary on same-store sales, but I wanted to discuss new store openings, and if we can go into more details on the strategy around new openings. I mean, over 400 stores in the first quarter was quite remarkable to us. I think that that was one of the biggest surprises that we had. And your same-store sales have been running above expectations, and to the points that were made in the preliminary remarks, it really sounds like we’re getting to a new pace, a new reality of expansion of OXXO across the board. So, I wanted to take advantage of the management here.

If we can talk on a per-country basis, what’s really driving that? I mean, of course, Mexico has been stronger. I’m sure that that’s part of that, but are you stepping up more aggressively in other countries? I heard the comments around Brazil, but I understand that Brazil is not in these numbers of Proximity. So, I mean, it seems that it’s across the board. So, just taking advantage of this call, if we can go into more details on that. And if the impression that we have is kind of valid, that we’re probably talking about a new pace, you know, new targets in the long run, as it pertains to where OXXO could be in Latin America overall. So, more of a strategic question, if I may? Thank you so much.

Operator: Thank you, Mr. Alves. Do we….

José Antonio Fernández: Thank you, Ricardo. So, a few things. So, we had an extraordinary quarter in growth of store units in Mexico, and we expect in the rest of the year that will normalize. We still plan for 1,000 maybe 1,100 stores opening in OXXO Mexico this year. We are really enjoying the traction that they have cohort of stores are maturing incredibly well, with the value proposition that we have put in place, with assortment and segmentation. We feel more and more confident that our stores are becoming profitable and maturing quite rapidly. But I don’t expect to accelerate that pace in Mexico, other than just maybe trying to accelerate on opening the most stores as early in the year as possible. That always helps us with momentum, and with stores tend to mature more, better the earlier in the year we open them.

We are accelerating in South America, particularly Colombia and Peru. We are hitting a stride, and we see a lot of opportunity. After 15 years in Colombia, I think we now have a value proposition that is a winning value proposition. It’s where our food business is better developed. We have a profitable business in food in Colombia, and we’re very excited about the traction that we’re seeing. We plan on growing in Colombia and Peru, and we still have to – fix some things in Chile after the acquisition of OK Market. I think there are some things to structure and fix before we accelerate growth. But overall, we plan to have several thousand stores in South America, and that’s not counting Brazil. So, yes, I plan to accelerate in South America as well.

Martin Arias: I think on what José just said, obviously the hardest thing that you can do, or what takes you the longest time is to get the value proposition right and to get the four wall economics right. But once you have that, then it really becomes a function of scale and obviously finding the right locations and getting your expansion team and the supply chain. I mean, it’s very systemic, but I think in a couple of countries, as José said, we’re at that point where it’s really from fine-tuning. You never finish fine-tuning the value prop, but moving more to a replication mode of just getting more scale, and then the margins and the royalties begin to look a lot better.

Ricardo Alves: Thank you very much.

Operator: Thank you. Our next question is from Robert Ford with Bank of America. Please go ahead.

Robert Ford: Thank you very much, and good morning, everybody. José, you mentioned your excitement with discount retailing, but you didn’t use the term hard discounting, and I was curious as to why. And then how are you thinking about Bara growth in the context of possible OXXO cannibalization? And then the press release also cites soft drinks as being a driver of Bara in the quarter. What percent of sales at Bara are soft drinks, and how are you tackling the label in the opening price point opportunity in the beverage category at Bara? And I’ll leave it there?

José Antonio Fernández: Okay. Thank you. Thanks for that question. So, yes, that’s a very good point. Obviously, Bara is, I wouldn’t say, and it’s a very good excited, is it already a hard discount retailer? No, I think it’s in the process of getting there. We still have, I mean, our private label, a percentage of total sales is growing every quarter, but it’s still on the high 20s in percentage. But I think as we move forward, we’re assigning a team to grow our private label business, and we see a huge opportunity to keep growing that business. In terms of cannibalization, as you know, Bara has been part of this business for over 20 years or more. But in a true soft discount or discount matter, it’s been over the last five years, and we see a lot of Baras in Guanajuato, in Querétaro, next to OXXO, and they thrive, both of them.

They do, I mean, obviously, there is some cannibalization, but it’s minor. They serve very different demographics. They serve very different purchase decisions. Bara, I think, is much more geared towards, you know, the socioeconomic level that really requires everyday purchases. It is still about 25% of its revenue is convenience, and in that sense, we do sell a lot of soft drinks, but it’s more and more geared towards Premia or, you know, multi-serve options. We do see a lot of growth in beverages, just as we saw in OXXO, a growth in beverage. So I think it has to do a lot, with the competitive dynamics of that sector, and not so much of their cannibalizing also in that segment.