Fomento Económico Mexicano, S.A.B. de C.V. (FEMSAUBD) Earnings Call Transcript

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 on a moment. You have the opportunity to ask questions at the end of the presentation. To do so, please use the raise and 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 -- so Antonio Fernandez Garza, FEMSA's CEO; Martin Arias, our CFO; and Panel Ortiz, who heads the Investor Relations team at Coca-Cola FEMSA. The plan is for Cosan tone to open the conversation with some high-level comments on the quarter's performance and trends, zooming in on OXXO Mexico's results; followed by Martin, who will provide more granular details on the results across our business units. Finally, we will open the call for your questions. Antonio, please go ahead.

Thank you, Juan. Good morning, everyone. The third quarter was a strong one, during which our 2 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 are a 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 2 big engines, Exciting things are happening across all other business units. In particular, during the quarter, we saw Para sustaining its pace of store base-based expansion and improving its maturation curve while OXXO LATAM continued to deliver promising results across South America with Colombia leading the charge. However, this morning, I would like to focus my remarks on Opto Mexico by covering 2 topics. First, the continued recovery in sales and traffic, which gained further traction during the third quarter and second, OXXO's profitability, including how we are balancing the different levers of our value proposition and the strategic framework and operating discipline that are helping us to address the challenges we face. After that, Martin will elaborate on the developments at other business units in his remarks. Let me begin with sales and traffic. On our last call and in many of our conversations with you since then, our 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 1 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 or data suggests it explains only part of the results. More importantly, the performance reflects a solid response from our customers to the strategy we described on our last call. putting the customer at the center of everything we do at OXXO and executing against our 4 strategic pillars of impulse, food service, daily and replenishment and beyond trade services. Furthermore, this positive customer response is also translating into market share gains. According to the market data available through August, OXXO continues to gain share against all relevant trade channels in the categories in which we compete. Year-to-date, our market share in the categories in which we compete is now above 2024 levels with most of the gains concentrated in our core impulse categories, precisely where there's 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 costs per day. For its part, daily and replenishment is at a very early stage of testing, but its initial results are already modestly accretive to traffic together with services, which is also growing in traffic terms we see meaningful opportunities as we continue to develop all these categories. We are still fine-tuning our approach and there is room to further refine our value proposition across the different strategic pillars. We continue to test and learn from many initiatives, including structured price experiments across categories in selected regions, revamping our stores' coffee area and value proposition and testing [ a Canasta ] 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 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, also Mexico's gross margin would have declined in line with a 70 basis point contraction of the second quarter of 2026. In addition to this timing of commercial income issue, the gross margin result reflects the mix effect 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 Opus relevance as a commercial channel for our supplier partners rather than trading gross margin for market share. In absolute terms, gross profit grew 7.4%. Operating income grew 5.8% during the quarter and operating margin contracted by 40 basis points. This includes an impact of approximately 20 basis points from the closing of 140 older underperforming stores. Excluding these closures, operating income would have grown 8%. The closures are part of a broader pruning exercise involving approximately 250 stores and we expect a similar impact in the fourth quarter as we complete the process. While this measure affects near-term results, we believe it is healthy to periodically review our store base and prioritize the long-term profitability of the business. The quarter's results also reflect the team's focus on operating discipline, which has been just as relevant as the commercial strategy. In the context of increasing wages, well above inflation and the upcoming labor reform relating to the reduced work rate, expense efficiency continues to be a central part of how we run OXXO and we are in a permanent effort to find new ways to optimize spending. Summing up, I believe the third quarter is a good example of how our strategy is meant to work -- we 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 pull 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. The Total revenues increased 9.8% year-over-year, while operating income grew 9.9%, reflecting a solid performance at OXXO Mexico and Coca-Cola FEMSA and also reflecting the benefits of our cost containment and restructuring initiatives, partially offset by the bad debt provisioning in Colombia, the effect of the above-trend store closures at OXXO Mexico that 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 MXN 10.6 billion, representing an increase of 81%. This was mainly explained by the operating income performance I just described as well as by 1 and under demanding comparison base, which included a MXN 3.1 billion loss from discontinued operations last year, reflecting the divestiture of FEMSA's logistics operations; and two, a noncash foreign exchange gain of COP 1.1 billion compared to a ARS 1.2 billion loss in the comparable quarter, mainly reflecting a noncash 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 3 items: one, a decrease in net interest income, mainly driven by lower cash balances and interest rates; two, a MXN 312 million 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 OXXO Mexico brief as Jose Antonio has already covered the quarter in detail. Total revenues grew 10.3% and 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 our annual target remains at the net 1,000 store level for the next year and beyond. The Americas & Mobility segment delivered total revenues of MXN 29.5 billion, increasing 18.1% or 10.9% on a comparable and currency-neutral basis. Excluding the impact of consolidating Akin Brazil, the segment's top line benefited from a solid performance at OXXO Gas driven by healthy volume growth and a strong performance across OXXO-LATAM, especially in Colombia, where we continue to see encouraging 4-well dynamics with mature store traffic growing at a high single-digit pace during the quarter. For its part, OXXO Basil 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 9 months of that year, which had a disproportionate positive impact on the net -- on the margin for that quarter. Americas and mobility, excluding OXXO Gas, was reported together with OXXO 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 expansion at OXXO Colombia and Peru, partially offset by a negative mix effect in OXXO Chile. Gross margin for the fuel operations decreased 50 basis points to 11.6%, reflecting the voluntary fuel price commitments at OXXO partially offset by solid fuel margins in OXXO USA. Operating income was ARS 170 million with an operating margin of 0.6% and representing a decrease of 76% and 29.9% on a comparable basis, excluding currency translation effects and the operating losses from the consolidation of OXXO Brazil. The operating margin reflects narrowing losses across OXXO LATAM, excluding Brazil, offset by the impact of the fuel price commitments in Mexico. Our operations in Europe reported total revenues of MXN 14.1 billion, 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 for 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 our operating income. However, as a mechanical effect of this change, gross margin was impacted by MXN 232 million in the third quarter. Gross profit decreased by 10.8%, and 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 MXN 531 million, a decrease of 24.8% and 17.5% on a comparable basis with an operating margin of 3.8%. And this mainly reflects the gross margin decrease I just described and the soft performance of Valora's B2B business in the U.S.A., driven by lower sales volume combined with increased production costs and expenses. Forex part, the Health Division delivered total revenues of MXN 22.9 billion, growing 7% year-over-year or 3.4% on a currency-neutral basis. Local currency same-store sales were positive in Colombia, Ecuador and in Mexico, where the business continues to stabilize while Chile same-store sales decreased slightly, reflecting a more competitive environment. It was the case -- 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 MXN 621 million, 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 net 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, and 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 Columbia's health care system, during the quarter, we reported an additional noncash credit risk provision of approximately COP 430 million. 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 MXN 319 million, a decrease of 63.2%, a decrease of 63.8% on a comparable basis with an operating margin up 1.4%. And excluding this noncash 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. Mana delivered another quarter of strong growth with same-store sales up 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 Bajio a sign that the Bota 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 onetime benefit for 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. allowed Gola 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 MXN 9.4 billion in CapEx, representing approximately 4% of total revenues and a decrease of 28.3% and 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 MXN 41 billion in ordinary and extraordinary dividends expected for the cycle from March of 2016 to March of 2027. And of which we have distributed MXN 30 billion to date, roughly 2/3 of the committed amount. The remaining COP 11 billion are expected to be distributed early next year. Regarding leverage. Our net debt-to-EBITDA ratio, excluding Coca-Cola-FEMSA, stood at 1.19x at the end of the quarter compared of 15x 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 1.3x. Our leverage objective of approximately 2x net debt to adjusted EBITDA ex scope 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 OXXO Mexico. We remain mindful of a soft consumer environment in Mexico, recent volatility in Brazil and a comparison base that will gradually become more demanding but we are confident in our strategy and 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're going to open it up for question and answers. [Operator Instructions] Our first question comes from Henrique Brustolin with Bradesco BBI.

Jose Antonio, Martin. Mine is about the traffic recovery in OXXO Mexico, right? Traffic has been recovering now for 2 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 into categories which is interesting, right, considering the soft consumer environment overall in Mexico. So the question is, how do you see the elements of OXXO's value proposition relative to the other retail channels that are allowing you to capture this much share over the recent quarters.

Ola, Enrique, thank you for your question. So it's hard for me to talk about other retailers. I think it's obvious that some of them are maybe underperforming, but what -- we are very much focused on what we need to do. And it's true that, by far, the biggest high traffic growth has come from where what we do good, we become much better at doing -- especially we're adding some value assortment presentations into our core categories, given energy drinks, soft drinks, beer, cigarettes, et cetera. But to be honest, we are seeing a very good positive traffic growth across geographic regions. So all of our regions are grow 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 overhead whether throughout the country or we are doing -- or becoming better at our jobs. And then 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 nonfinancial. 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 the 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're growing more than the rest 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 OXXO for their daily needs for their weekend parties, et cetera. So very encouraging figures for us. We hope the Mexico consumer sentiment begins to improve.

The next question comes from Ben Theurer with Barclays.

Jose Antonio, Martin, Juan. Just maybe picking up on that first question, Henri could just add 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 able the acceleration here in traffic growth. But if you put these things aside shorter term and you think on medium term, where do you see the opportunities and the structural traffic opportunities for you guys in OXXO Mexico, in particular, once you've cleaned up the asset base, done the pruning, you have your stores, you have the services and so on. What is the normalized traffic assumption you would target for internally and what we should basically think about it going forward?

Thank you, Ben. I wish I had a crystal ball to tell you where we're going to be in terms of traffic. Obviously, we are not yet satisfied with our results, even though we are encouraged by seeing progress on all of our initiatives and our levers. We are not satisfied. We think we can do much more. I'm hopeful that what's going to help us and carry us forward in the next few months is that some of our initiatives in food service are going to get better, bolder our execution is getting better at understanding what really drives coffee traffic and other food items. We are hopeful, although still very early. Stages of our Canasta OXXO proposal. And we are still seeing some traffic -- interesting traffic drives from our financial services and nonfinancial cash out, et cetera. We're still very cautious on giving you a guidance on next year. It's going to be a tough year. I think we've got favorable weather this year. We may expect a rainier and colder fourth quarter. October, although it's coming is looking like it's going to be positive on traffic, did experience much more rain than September nationally. So we are cautious that the consumer remains very cautious and looking for affordability. That should help us on our Bara proposal, and it should help us in some of our initiatives in OXXO. But I think we should remain cautious and also planning for the worst in terms of maintaining our operating costs as lean as possible. That's my read so far for the rest of the year.

Yes. I think I would just add, Ben, this is Juan. The way I think about it is the impulse part of it in some ways, it's like the path of least resistance. It's where we are already very good, and it was really more about improving certain things and kind of getting back to the top of our game, but that's more immediate and that's why we're beginning to see it already. If you think about some of the other pillars, especially if I think about food service, and I think about the daily replenishment opportunity, I mean, those could be driving incremental traffic for a while -- and by that, I mean, years, if we succeed in either of those, those could be very material in the medium term, right? So we're still testing different menus. We're still beginning to tinker with the daily opportunity. But I guess in chronologically, it was always going to be impulse first and then the others materializing, I would say, from next year forward. So at least as you think about modeling, that's how I would think about it. there.

The next question comes from Lucas Mussi with Morgan Stanley.

Jose Antonio, Martin, Juan. Still on OXXO, same-store sales and the new initiatives regarding the value proposition. I wanted to go back a little bit on the food service and the replenishment part of it on your commentary is Jose Antonio. Just wanted to better understand what is the goal? What is it that you are targeting over the medium to long term in terms of how you're thinking about an OXXO store, let's call it, 5 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 foodservice initiative replenishment, although you could argue it is a lower profitability category. Are you seeing that driving a significant amount of volumes over the medium to long term. Just thinking about how would you envision the OXXO store 5 years from now in terms of the breakdown in your portfolio between the food service, the still 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, Lucas. It's a good question. Look, we obviously are inspired by many of the things we see developing in foodservice 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 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 auctions, et cetera. We see that our relevance in the impulse categories and in the everyday lives of the Mexican consumer, this serves a better percentage of that in the food service. I hope that we can triple our percentage of food service dependency in OXXO like we already have demonstrated in markets that are much more similar in consumer trends like Peru, Chile and Colombia, where our numbers are almost tripled in terms of the percentage that we sell with several -- 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 our -- of the Mexican consumer and that excites us. In terms of daily replenishment, we are -- I think we have 2 big levers to pull. One is obvious to give very low prices and low per gram prices and also load 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 second 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 Dejana. And I also think that is going to be obviously much more traffic accretive than that margin accretive, but it's going to -- it's -- we're becoming more and more relevant in the lives of the Mexican consumer, and that is how we see it. It's hard for me to give you a number. What I do think see an evolution of the store that becomes much more savory in terms of food service options and gives peace of mind for your daily replenishment needs in weekly assortment, et cetera. And we have a lot to copy or learn or from other retailers in the U.S., but also from what we are seeing in Mexico with some of the discount players that we can leverage our footprint.

The next question comes from Thiago Bortoluci with Goldman Sachs.

Congrats on the results and thanks for the questions. I would like to continue in OXXO Mexico, but now targeting more the SG&A line where [ tinker ] 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 2 conference calls ago we commented about the restructuring on head count and the corporate structure, merging health and Proximity. I would just like to understand how much of this is already being captured in the numbers in the third quarter? And how should we think about SG&A going forward, particularly in the scenario that you made that labor could be more of a concern next year?

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 1 maximum 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 MSA corporate teams. Next year, we -- 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 a percentage point per percentage point. But you will continue to see labor expenses as a percentage of revenues, increased probably more in the short term as we continue to focus on our affordability initiatives. However, again, we are constantly reviewing operating model, how we can bring technology to bear in the store to make our colleagues in the store more efficient and all the initiatives around dynamic shifts, use of technology, continue to be implemented. Just the other day, I was sending Carlos Arroyo, some pictures they sent me of a robot that measures the inventory in the shelves -- and you can just leave in terms of shelves going through, giving you quick data. When that will become economically and technologically viable on Mako, I can't really tell you. Can we have small robots doing part of the cleaning inside the store. Now you can -- since we're leaving the stores open 24 hours, maybe we can dedicate an hour or 2 of that time to running this with robots while the person who is 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.

The next question comes from Alejandro Fuchs with Itaú.

Thank you, operator. Martin, Juan come, thank you for a forecast and congratulations on the results. regarding expand growth of the business things in your initial remarks,.

Alejandro, we're listening to you a little bit rebroken up. Can you either get closer to the microphone or...

Every third word we don't hear every third word -- can you try again?

Yes. Sorry, is this better?

Yes, it looks better.

Okay. My question is on growth. It seems that I think you alluded Joanna to OXXO in Mexico growing a little bit slower this year, right, because of the closing -- but outside of Mexico, I would say also a little bit slower than in the past. Well, Bada continues to grow and open stores at a very fast pace. So I want to see if maybe -- do you think this change in the priorities will Barabe maybe a little bit higher on the list, maybe relative to OXXO Brazil and I wanted to see if anything has change on how you see maybe the growth of also outside of Mexico?

No. Good question, Alejandro. Thank you. Look, we are I think there's different things explaining each of these seemingly looking slowdowns. On the Mexico side, we -- I think we had a calendar delay as we make sure we increase 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 1,000 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 net -- about 1,000 net new stores for the foreseeable future in Opto Mexico. For also international, we have -- we are incredibly excited for Colombia. I think Colombia is already where we needed 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 that's a number that we have to be monitored carefully because if you overstimulate 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 it's you are developing processes and capabilities and that takes time. But Colombia is ready for acceleration. But Ace is still not there, and we've been very upfront. We see the opportunity in Brazil tremendous. I think it's huge the opportunity that we can achieve. We're very excited for the Sao Paulo region, and 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 to a 40-hour work week with 2 days of -- and so as we learn to navigate those operational constraints, we are being much more prudent in how we expand. But we're still planning to expand about a store a week or more maybe 70 stores next year for Brazil, net new stores. That gives me to the Bara question. And with Bara, we are very happy with the maturity of the stores and the expansion in the North of Mexico, we're seeing an evolution that's very positive. And with still a lot of debt in value propositions to increase. We're still needing to simplify some of the portfolio. We still need to cover certain categories that Bara does not that some of our competitors cover. But we are very excited by the enthusiastic attitude that we see in our consumer going into Abada. The repeat customer is there. and they're beginning to see more and more all of their fulfillment needs for their house satisfied. But we still need to add some value proposition. So that's why we're not so worried about same-store sales expansion for Bara. We see that as a marathon. We need to keep getting the stores better and better to supply the needs of our customers. And as those value propositions get added into the store, we hope we are going to see several iterations and years of same-store sales expansion in Bar. So we're much more focused in accelerating expansion, and we plan to even open more stores next year than what we are opening this year. We promised a store a day, and we're going to probably over the liver of that. So we're happy with that.

The next question comes from Isabella Lamas with UBS.