Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX) Q3 2022 Earnings Conference Call October 31, 2022 11:00 AM ET
Company Participants
Juan Fonseca – Director, Investor Relations
Paco Camacho – Chief Corporate Officer
Eugenio Garza – Chief Financial Officer
Jorge Collazo – Coke Investor Relations
Conference Call Participants
Ricardo Alves – Morgan Stanley
Luis Willard – GBM
Hector Maya – Scotia Bank
Alan Alanis – Santander
Alvaro Garcia – BTG Pactual
Antonio Hernandez – Barclays
Rodrigo Alcantara – UBS
Operator
Good day and welcome to the FEMSA’s 3Q 2022 Results Conference Call. [Operator Instructions] I will now hand you over to Juan Fonseca.
Juan Fonseca
Good morning, everyone and welcome to FEMSA’s third quarter 2022 results conference call. Today, we are joined by Paco Camacho, our Chief Corporate Officer and Eugenio Garza, our CFO. As always, we also have Jorge Collazo on the line who leads Coke FEMSA’s Investor Relations team. Today, Paco will begin with some general considerations on our quarterly results and strategy, and then Eugenio will provide more granular comments on the numbers. And after that, we will open the call to Q&A as always. Paco, please go ahead.
Paco Camacho
Thank you, Juan and hello to everyone on the call. We appreciate your participation today. As you can tell from our quarterly results, positive momentum we have seen across our businesses for several quarters now is still going strong. Starting with proximity, OXXO Mexico delivered yet another strong set of numbers, with traffic accelerating its pace of growth on top of a robust ticket expansion that still reflect a resilient consumer environment and the positive performance of some of the key categories. This strong top line performance, combined with a leaner expense structure drove operating leverage, which in turn allowed OXXO to deliver a strong operating income growth.
Beyond OXXO Mexico, we continued to see dynamic growth trends, particularly in Colombia and in our Brazilian joint venture. Furthermore, as you probably saw a few weeks ago, we have finalized the acquisition of Valora. We are already working in tandem with the team in Europe and we will keep you posted on the plans and initiatives there in due course. For its part, OXXO Gas had another strong quarter on the back of increased vehicle mobility and finally, reaching pre-COVID levels as well as strong corporate sales and wholesale activity, which together drove strong volume recovery. On the digital front, we continue to add OXXO Premia and Spin by OXXO customers at an accelerated pace, reaching over 22 million and more than 4 million users respectively.
More importantly, earlier this month, Spin by OXXO received its definitive authorization to operate as a fintech in Mexico. This is a milestone as it will allow us to continue pursuing our ambition to become the preeminent fintech in Mexico as we expand its value proposition to solve more financial needs for its ever-growing user base. Importantly, this would allow Spin to operate Level 3 accounts, significantly raising the peso amount that the user can deposit every month and making the product a better fit for small businesses.
Along these lines and as our digital ecosystem gains critical mass, we are also building the third leg of our digital strategy, the B2B component. That will accelerate the pace at which its small businesses in Mexico adopt digital payments. This will in turn leverage and grow the use cases for Spin and our evolving loyalty platform, thus creating a digital flywheel. For its part, our Shell division delivered stable results that were offset by currency depreciation, mainly in Chile, where our operations are still performing well against a demanding comparison base while facing a challenging macroeconomic environment.
Within logistics and distribution, Envoy Solutions had a standout quarter, with a strong top line organic and inorganic growth in both nominal and stable margins. These figures reflect the full consolidation of our recent acquisition of Sigma Supply, enhancing our capabilities in the packaging vertical and allowing us to make more progress on efficient cross-selling initiatives. And last but not least, at Coca-Cola FEMSA, volumes grew across its territories and help drive double-digit increases at the top and bottom lines.
Before I turn the call over to Eugenio, let me take a moment to comment on a couple of more strategic points. First, as you are not aware, a couple of weeks ago, we announced the retirement of John Santa Maria as CEO of Coca-Cola FEMSA and Alfonso Garza as CEO of FEMSA Strategic Businesses effective December 31. John and Alfonso have been key members of FEMSA senior leadership team for decades and they have been instrumental in making FEMSA the thriving enterprise it is today. We take this opportunity to again thank them and recognize their tremendous contributions to the FEMSA success story. As you know, Ian Craig will become Coke’s FEMSA CEO and Constantino Spas will become CEO of the Strategic Businesses unit on January 1. We look forward to the exciting future Ian and Constantino will help us build.
Finally, let me talk briefly about our strategic planning review currently underway. As Daniel mentioned during our last call, this process involves significant analysis to help us define the strategies to achieve our ambitious long-term value creation objectives but also how best to work towards eliminating the valuation gap that exists between our share price and the true value of our business. In recent months, this topic has been top of mind for investors prompting questions and speculation in the market about where we maybe in the process, potential outcomes, etcetera.
Therefore and given the relevance of the subject, we want to use this call to make a clear statement. The process is ongoing. The analysis being done is broad and thorough and we do not expect to comment further on distribute on the risk or the resulting speculation on this call or in other interactions with the market until we are ready to provide a relevant update. Our target date for such is concerned with our fourth quarter and full year 2022 results in late February 2023. Rest assured that we have also heard the investors’ community desire for greater transparency and more simplicity loud and clear. We are taking these topics and others into account in our efforts.
And with that, let me turn the call over to Eugenio.
Eugenio Garza
Thank you, Paco and good morning to everyone on the line. Beginning with FEMSA’s consolidated quarterly numbers, total revenues during the third quarter increased 20.5%, while income from operations increased 13.8% compared to the third quarter of 2021. On an organic basis, total revenues increased 15.4% and income from operations increased 10.1%. FEMSA’s net income decreased 17.3% and reached MXN13.2 billion, reflecting higher income from operations, a decrease in net interest expense and a non-cash operating – sorry, non-cash foreign exchange gain. This was offset by a decrease in our participation in associates results, which mainly reflect the results of our investment in Heineken and a MXN1.9 billion negative swing in other non-operating expenses, which reflect the demanding comparison base that included the dividends received during the third quarter of last year from our investment in Jetro Restaurant Depot.
Moving on to discuss our operations and beginning with proximity, we added 231 units during the third quarter to reach 902 net new stores for the last 12 months. This includes 120 stores from our OK Market acquisition in Chile that we began consolidating during the second quarter. In Mexico, we are still a little behind pace for our target of 800 net additions, but the debt pace keeps ramping up. The pipeline is looking good for the next 12 months and the productivity of our new stores continues to materially exceed that of previous new store cohorts.
OXXO same-store sales were up 17.5% for the third quarter, driven by an increase of 11.9% in average customer ticket and a notable 4.9% growth in traffic. This reflects a pickup in the recovery pace of mobility and the gathering consumption location that has continued to perform at a very strong level. When compared to the third quarter of 2019, same-store sales increased 15.5%.
Gross margin contracted 110 basis points to reach 40.2%, reflecting a phasing out of commercial income activity as some of our key suppliers defer commercial and marketing activities in anticipation of the FIFA World Cup and the December holiday season. We should also mention the effect that OXXO Premia, our loyalty program is beginning to have on the income statement. Given its meteoric growth, it is already having a positive impact on the top line, but it’s also affecting the gross margin line as we take a very conservative approach to accounting for point redemption. The two effects almost cancel each other out at this stage. But as the program grows and evolves, we are working on several strategies that will allow us to monetize the program further in the medium-term.
Income from operations increased 23.5%, while operating margin increased 30 basis points compared to the same period of 2021 to reach 9.4%, another record for a comparable quarter, driven by a structurally leaner expense structure and the resulting operating leverage. At OXXO Gas, revenues increased 33.6% and same-station sales grew 25.1% relative to the third quarter of 2021 as vehicle mobility continued to improve, finally, recovering the pre-pandemic levels. Volumes were further aided by a robust pickup in corporate and wholesale activity. During the third quarter, gross margin was 12.8%, while operating margin reached 5%, reflecting tight expense control and improved operating leverage.
Moving on to FEMSA’s health operations, during the third quarter, we expanded our drugstore count by 84 net additions to reach a total of 3,971 units across our territories at the end of September and 431 total net new stores for the last 12 months. This represents an acceleration in our growth rate driven mainly by Mexico and Colombia and puts us in a good position to meet our target for 2022 of more than 400 new drugstores. Revenues increased 1.1%, while same-store sales decreased by an average of 3%. However, it is important to note that on a currency-neutral basis grew 13.5% and same-store sales increased 6.3%, a solid performance across our operations even as the comparison base becomes a more demanding one, particularly in Chile.
Gross margin decreased 50 basis points in the quarter, mostly reflecting a negative mix effect that reflects the strong growth of our operations in Colombia, partially offset by improved efficiency and a more effective collaboration and execution with key supplier partners in Mexico. As a result, operating margin contracted 20 basis points as tight expense control across our territories was not enough to fully offset the impact of the lower gross margin.
Regarding our logistics and distribution business, revenues increased 70.3% relative to the third quarter of 2021, reflecting the steady pace of acquisitions made in 12 months by Envoy Solutions. On an organic basis, total revenues increased 14.6%, reflecting strong performance across Envoy Solutions segments, especially in the retail and facility supply segments, coupled with good demand dynamics in our operations in Latin America. Operating margin contracted 10 basis points, reflecting higher cost of labor and transportation in certain markets.
Finally, moving on to Coca-Cola FEMSA, volumes grew 8.4%, with all markets contributing to the growth. Revenues increased 18.2% and gross profit grew 3% despite supply chain disruptions and cost pressures on certain raw materials. Operating income increased 13.3%, reflecting solid top line and favorable raw material hedging strategies, coupled with operating expense efficiencies. All in all, Coke FEMSA delivered a strong set of results amid a very challenging cost environment. You can listen to the webcast of the quarterly call that took place last week.
Before wrapping up, I would also like to anticipate to you that in the spirit of greater transparency and disclosure that Paco alluded to in his remarks and given the steep growth trajectory of Envoy Solutions, we will begin reporting its results on a standalone basis, separate from the Latin America Logistics business starting in the first quarter of 2023. Furthermore, as mentioned during the process of acquiring Valora, we will be presenting its results separately in our releases beginning with this fourth quarter.
Finally, we are also working on additional enhancements to our disclosure that should reduce the complexity of measuring the performance of our business units and investments. We are hopeful that despite making our financials a little bit longer to go through, they will provide a better picture of the true value being created by our teams.
And with that, let us open the line up for questions. Operator, please?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And we will take our first question from Ricardo Alves with Morgan Stanley.
Ricardo Alves
Hi, everyone. Thanks so much for the call. Another set of good numbers operationally speaking, EBITDA generation, considering the commentary that Paco made recent discussions with investors, how are you now thinking about shareholder return? I mean any update on dividends and buybacks, eventually, the extraordinary dividends and so forth? That’s my first very quick question. The second one, when you are thinking about your geographic diversification, I know that you cannot talk about the strategic review itself, as you said in the remarks. But when you are thinking about one of your pillars of geographic diversification, what’s your aspiration as of now? For example, considering that you just achieved part of that with the Valora transaction in Europe and it seems that the growth going forward at Valora seems to be more focused locally in Germany as opposed to aggressive expansion abroad or more M&A. Just wondering if that’s the right way to think about it or what can you share on your geographic expansion pillar, considering FEMSA’s strategic long-term view? I appreciate the time. Thank you.
Eugenio Garza
Sure. If you want, I’ll start with the first one. Again, the strategic review encompasses all of the different levers that we believe are available to us to unlock the value of the operation. So yes, all of the tools that you mentioned are being taken into account. Having said that, at this point, we’re not ready, as Paco mentioned, to comment on which ones we will use, but we are certain that there is a lot of value that we can unlock from our operations by using those and other tools. And then Paco, you want to go through the geographic diversification question?
Paco Camacho
Yes. Thank you, Ricardo, for your question. And again, when it comes to geographic diversification, it has to do with the – our intent to better manage the risk of our geographic portfolio. And I guess that the best way to answer your question is to say that we feel very comfortable with the geographies we are competing in right now. And we don’t expect to be expanding that number of geographies we’re in for the time being.
Juan Fonseca
If I could add, Ricardo, this is Juan. Just to back of comment, and this is because of questions we’ve been receiving from investors in the last many weeks and months. Regarding – given that Valora happened a couple of years after Envoy, and Envoy, strategy itself always involved a lot of M&A, right? We stated from the beginning when we started building Envoy that is required creating this national platform and that it would necessarily imply a fair amount of acquisitions. The strategy for Valora is very different. And that’s really the point I want to make right now. Valora, we are in the markets that we are in. We talked a little bit about Germany and of course, there are growth opportunities that we see there. But the strategy for Valora is very different from the strategy for Envoy. And again, I say this because there are investors that have been thinking, well, maybe some sit is going to be as acquisitive in Europe as they have been with Envoy and that’s not correct. The two strategies from the get-go are very different. Thank you.
Operator
And moving on, we will go to Luis Willard with GBM.
Luis Willard
Hi, guys. Good morning. Thanks for taking the question. So I want to talk about Spin. Now that it’s received its authorization and we see the numbers accelerate strongly in the third quarter. You talked about this Paco in your remarks, but can you tell us a bit more about your priorities in terms of product development and the commercial offering for Spin? And another question would be on the same line. Are we set to see a more active FEMSA division in terms of use of capital in the future after this authorization. Thank you.
Eugenio Garza
Sure. If I want – I’ll start. I mean, as you know, the number of users have been growing significantly just based on the power of the acquiring platform that the OXXO stores are able to give Spin and the U.S. is right now, although, obviously, high value added, they are still quite limited. With the new authorization, there is two things that we’re seeing. One is now we’re able to have dollar accounts for physical persons in Mexico, so we can get into the remittances market, I think a lot more closely. And then also, we were able to open up three accounts, Level 3 accounts in Mexico, which allow for higher deposit and higher average balances. And we can tailor that product for the B2B customer. So you’ll start to see us get more aggressive into the B2B space. And in that way, close the loop between the consumer and the merchant so that we can try to develop an overall payment strategy that together with the loyalty program and other the perks that we can offer through OXXO will be a powerful combination. And we think that this powerful combination will be able to better serve both types of customers. And on the product side, again, once we get a more stable user base and with its authorization, we will start to get as well into other products such as personal loans, working capital loans for small businesses. So definitely, we will see some more use of capital being put to use, I think, not necessarily aggressively, but with a lot of, we think, bank for the buck in terms of the returns that we’re able to get from monetizing the current customer base. Paco?
Paco Camacho
And I guess that, Luis, what I will add is that as we do all that, that Eugenio described, it is true that, as you can imagine, we – as we accelerate the acquisition of users in both the spin and our loyalty program, we get to know them better. So you should expect that also the value proposition will continue to be sharpened constantly so that we meet consumer needs better in what we have today. So that’s something that you should also expect coming from our digital platforms.
Luis Willard
That’s very clear. Just if I may, a quick follow-up. I mean the remittances and the level 3 accounts are like plain play, right? We don’t need to do much development in terms of the architecture. Perhaps the B2B needs a bit more time for it to be up and running. Is that correct?
Paco Camacho
Yes. Yes, not necessarily plug and play, but clearly, those two offerings are, I think, much sooner in the pipeline than the full development of the B2B platform, yes.
Luis Willard
Alright. Thank you, Paco Camacho.
Paco Camacho
Thanks, Luis. Gracious.
Operator
And next, we will go to Hector Maya with Scotia Bank.
Hector Maya
Hi, thank you for taking the questions. We saw a recent interview essential that there is a 10 million user target for Spin by ‘23. And we believe that considering the current user base of around €4 million, you would have to achieve about 30% more monthly in the users vessel that you are reducing now. So on that, we would like to know what to see the initiatives or investments we are planning to make to floor monthly new users, possibly above the 400,000 mark. If there is a time line for an emerging OXXO Premia to Spin to accelerate even more the number of users or how aggressively would you be pushing spending mom-and-pops to cough and you have a target on that or some numbers that you could share? Thank you.
Paco Camacho
Yes. Thank you, Hector, for your question. So let me provide some perspective on how the whole acquisition – user acquisition is going because, in fact, we feel very comfortable with the user acquisition trend for Spin. And actually, to your point on the number of users we are aiming to have active in the midterm. The – really, the trick is to, on one hand, as you said, continue with the strong acquisition rate. But at the same time, we also need to encourage our user or registered users to be more active in the platform. So there is a component of that, that will increase the percentage of users that register and then they keep active in the platform.
And that has to do with a number of things. First, how friendly the platform is, second, the type of services you provide and third, of course, the type of education that you put out there for consumers to truly understand the capabilities of the platform. So I think that when you look at the rate of active versus register that we have today, we should expect that, that ratio will increase in the future, and that’s our aim. I don’t know, if Eugenio wants to add.
Eugenio Garza
Sure. The only thing I would add is that, as you know, there are network effects associated with these kinds of products, and we’re starting just to tip of the iceberg with regards to the geographic plan-out. So I think certain of the use cases like peer-to-peer, whatever have more value than more users that are on the platform. So we would expect some sort of, I mean, writing of the exponential curve in the shorter time. And that’s how I think we are comfortable that we will get to that $10 million user target that [indiscernible] was talking about.
Paco Camacho
And Hector, I think that the second part of your question was related to the relationship between Spin and our loyalty program. And I mean, clearly, there is a relationship because at the end of the day, we will look at this as a digital ecosystem in which things are connected. So indeed, I mean, we should expect that moving forward, part of the B2B component of our ecosystem will have to do with how we can actually allow the small traditional stores to use the team and be part of our loyalty program on a business-to-business component. And then also on the other side, when you look at our loyalty program and Spin when now when you open an Spin account, you are also part of the loyalty program. So I mean, there is this synergy component, synergistic component that, as we move forward, will be stronger and consumers will be actually better off because they will have more services at their disposal as part of the platform.
Eugenio Garza
And just finally, the partnership with KOF obviously on a norms length basis, but that I think will allow, hopefully, to have, I mean, current customers use the Spin platform in a preferential way that will allow the synergies that Paco was talking about in terms of customer acquisition cost on the B2B space to be a very powerful combination for both parties.
Hector Maya
Excellent.
Operator
And moving on, we will go to Alan Alanis with Santander.
Alan Alanis
Hi, good morning. Thank you so much for taking my question. I have two questions. One of them is – I guess the answer is it’s going to sound like very obvious to you, but I think it’s for investors to listen to it. And we can do a recap of what triggered the strategic review. I know it makes total sense not to speak about what the potential outcomes, but it might be good to remind investors how do you define the situation or how do you define the problem? And that would be the first request, if I may. And the second one has to do with this move towards B2B in Spin. And I guess, there is going to be a lot of questions around this in terms of not only the architecture, the like a question was asked before, but also in terms of the scope and the timing and then why not having just applied for a full banking license. But I guess the specific question for this call would be when are you going to start attracting business as small in mid-business midsized businesses to open Spin accounts? Can they do it right now? What’s going to be the approach and what’s going to be the scope and timing of moving from a platform that was understood. I think for many of us, there was a platform for consumers, basically, a fin-tech for consumers now in terms of moving to a fin-tech for small and midsized companies in Mexico. Thank you.
Eugenio Garza
Sure. If I want – I’ll take the first question, and then Paco, maybe you can address the second one. I mean, as you know, I mean, Daniel Rodriguez term started in January, and this was his priority number one, to both strategic review, both bottom up as well as top-down of all of the portfolio of FEMSA and have a longer-term view with regards to capital allocation going forward. So that’s really what triggered it. In the meantime, the market turned a little bit south and then our portfolio start to get more complex, we start to see the disconnect between the stock price and the and what we believe is to be the underlying value of the businesses. And that’s why I think the urgency to come to a conclusion from the market, at least, and we’re hearing that ladder and clear. But to be clear, the trigger of the strategic review was Daniel’s desire to have a full-blown plan to present to the Board and obviously to you as shareholders as to what his priorities from a capital allocation would be going forward. And the timing is still, I mean, he said he was going to do it during this year. We’re sticking to that time frame as originally stated. I think there is just the market dislocation in terms of price that’s putting a little bit more of a sense of urgency. But again, we’re taking our time. We’re comfortable that each one of the businesses has spectacular optionalities and spectacular plants to be able to create a tremendous amount of value. And then from a top-down perspective, that we have the levers available to unlock the value that’s already there and also crystallize the value that we can create in the future.
Paco Camacho
And Alan, thank you for your question because actually, it’s an important point regarding the second part of your question, which is the B2B component of the digital platform. And I would like just to go back a bit when we started working on our digital business. Because at the time, we said, alright, we are going to focus on three main verticals. We said there is fintech with the Spin wallet. There is the loyalty program. And then we said there is the B2B component, which is primarily also enabling the traditional trade. That was the focus we have. And that continues the case. So of course, we started because we had already a platform for both in OXXO Premia and Spin by OXXO working on the first two verticals of this strategy and the results of that, they are going extremely well. But certainly, as we have reached this level of performance in these first two verticals, we start thinking that in order to close the loop and to have a complete flywheel, we, of course, need to deliver on the B2B component. Because at the end of the day, part of the mission that we have is to enable both consumers and small trade on the financial side, giving them access to services and to, I would say, financial elements on their daily life that they cannot do. And as we have been doing that with the Spin, we have identified – obviously, we suspected that, but there are a number of cohorts that interact with our products in a different manner. There is, of course, the regular consumer, the one that goes and they need to shop and they need to put money in their card and they need to use their wallet, the way – the very basic way was designed to function. But there are other cohorts of, for example, people that have small businesses that use their wallet in a different way to pay their suppliers or receive payments from their customers. And obviously, when we started the Spin wallet, we knew that, that was going to happen. But now we have significantly more data in terms of how those cohorts are behaving and what type of services they need moving forward. And receiving the full fintech license will allow us to increase the type of services that we can give them, including things as simple as the amount of money they can actually put in the card. So, that’s on the wallet side. Now, if you move that part of the services that these cohorts need towards the B2B and we talk about the small traditional trade, I mean these type of businesses also need these type of services. But if you will, they will need it in a little bit more sophisticated way because, obviously, they have inventories to manage. They have larger suppliers to deal with. They have more customers to serve. So, evidently, there are some parts of the first two verticals that, as I said, the wallet, but also the loyalty program that will serve them well for these additional needs that they have. But clearly, we will need to develop others that are more specifically targeted for these type of businesses. So, again, this is an evolution. We are moving fast, but at the same time, it’s very important that we understand fully what each of the cohorts need and that we construct something that is going to be, I would say, comprehensive and that leverages on each of the strengths of the vertical that we are developing. So, that’s what I would say regarding the second part of your question.
Alan Alanis
That’s really helpful Paco. Go ahead.
Eugenio Garza
Yes. To be clear, Alan, we are at this point, not considering a banking license. We are dipping our toe in the water with the fintech license. We think we can learn a lot about the use cases and whether or not it’s going to be worthwhile for us. If this scales, clearly, that’s going to be one alternative we will need to look at. But for now, we are just testing this out. And let me just emphasize what Paco just told you. I think this is a unique case in the development of financial – digital financial systems across the world, where you have, I mean the power of a distribution network to B2B customers like Coca-Cola FEMSA. And on the other hand, the ubiquitousness of OXXO and its relationship to the consumer that can allow for a very strong combination to really create this full-fledged payment ecosystem coupled with the loyalty program and coupled with the multi-category opportunities to increase wallet share in the B2B space through Mundet and otherwise with a partnership with OXXO that I think will allow this to become I mean a tremendous ecosystem that really we have not seen in other places in the world.
Alan Alanis
Yes. No, it makes a lot of sense potentially. And last question, would you use the brand, I mean, OXXO Spin also for the B2B or there will be a different brand for this B2B platform?
Paco Camacho
Yes. Well, that’s a good question that the teams are working on as we speak. And all I can tell you is that we will have some news on that respect. The teams will have news on that respect very soon.
Alan Alanis
Thank you so much. Appreciate it. Congratulations on the results. Thank you.
Paco Camacho
Thank you.
Operator
And moving on, we will go to Alvaro Garcia with BTG Pactual.
Alvaro Garcia
Hi. Good morning Eugenio and Paco. My question is on Premia, which is obviously growing very fast. And I was just wondering if you could sort of walk through, you mentioned in the release some impact to gross margin on the back of it, but just that trade-off between top line and profitability. And from a strategic standpoint, how you are thinking about that going forward? So, maybe two-part question first, sort of what’s going on in this specific quarter? How is that really impacting gross margin? And two, how are you thinking about sort of increasing the size of your network long-term versus profitability? Thank you very much.
Eugenio Garza
Sure. I will take a crack at it, Alvaro. But I mean clearly, right now, we are reserving 100% of the loyalty points that are being earned. We are putting in strict cost of goods sold. So, that is affecting the gross margin in the short-term. At the end, there will be some breaking. Sorry, I am sorry, I am getting a little bit of an echo. Can you hear me?
Operator
Yes.
Eugenio Garza
Perfect. So, there will be some breakage on those points, and we will fine-tune kind of what we are charging in the income statement going forward. Having said that, the elasticity of the program, and again, the 10 million users and about a 19% to 20% tender at this point, as this grows, I think the elasticity of the traffic coming to the stores from loyalty customers and the average ticket that we are getting from them. Right now, it works out to be a wash between the hit on the income statement from the rewards for loyalty and the excess traffic and excess ticket that we are getting. As this scales, we do expect loyalty to become, I mean a contributor of value to the company, whether we decide to use that value to reinvest in further store business or whether to reinvest in other products, be it digital or not digital is something that we will test out in different user groups and different geographies as we go forward. But the loyalty program in and of itself is intended to be a value generation mechanism for us, not just a program to get more traffic in the stores.
Paco Camacho
Yes. There is some feedback. We apologize for that. But the one thing that I will add to what Eugenio said is that moving forward on a Spartan the loyalty program that is really a coalition program that we are building. It’s that as we add more partners into that program as we add more possibilities for consumers to participate in the program. You can imagine that the amount of that and the amount of knowledge that we will generate will open a lot of possibilities in terms of additional monetization of that program. Obviously, that is work in progress. That is part of the evolution of the local ecosystem. But the momentum that it’s having, as you said, gives us the confidence that moving forward, we will open a number of possibilities for both the services that we will provide for the consumers and also the possibilities of monetization that we will have.
Alvaro Garcia
Great. Many thanks.
Paco Camacho
Thanks Alvaro.
Operator
And next, we will go to Antonio Hernandez with Barclays.
Antonio Hernandez
Hi. Good morning. Thanks for taking the question. My question is regarding Valora, now that you have exposure to Europe and given the current environment, macro adverse backward [ph] environment in the region, what are your expectations there for the short to medium-term? And also, we will talk about the different strategies in also to improve our profitability to improve traffic to different loyalty programs and so on. Everything that you mentioned, do you think that there is maybe a possibility of having some of these capabilities in Europe as well, maybe in the medium to long-term? Thanks.
Paco Camacho
Yes. Let me give a crack at it and then obviously, I mean both – Eugenio can complement. But I mean clearly, as you can in, the management team of Valora has been on top of the development in Europe and the circumstances in terms of inflation, in terms of energy costs, etcetera, that is I guess what is behind your question. The management is taking the necessary measures to protect the business against these headwinds. At the same time, I think that it’s important to remember that a big component of the Valora business is the food billions. And that particular business, that particular segment is very resilient when it comes to economic downturns. So, we are confident that the very senior management that we have in Valora in place. And that as you remember the state from the pre-FEMSA acquisition has the right plans and the right organization to defend our business against this situation. Having said that, as we get more involved in the business, we are obviously providing as much support as we can given the knowledge we have in the emerging markets regarding inflation, regarding volatile environment. So, this is a good transition to the second part of your question. I mean clearly, there is a lot of knowledge that we have developed on how to handle businesses in not so comfortable situations. And obviously, that component is going to be there as we work together with the European team. But second, OXXO, as you said, has developed a strong set of capabilities and know-how in terms of operating stores in a very efficient manner. And you should expect that part of that knowledge and part of that know-how is going to be quickly transferred to Valora so that they can capitalize on these learnings that we have developed over the years.
Antonio Hernandez
Okay. And regarding your organic growth expectations in Europe, have they changed maybe because of the situation, or what do you expect in terms of organic growth maybe for the next couple of quarters next year?
Paco Camacho
Yes. As I highlighted at the beginning of the call, the final part of the acquisition of Valora just happened a few weeks ago. So, now that we are in control of the company, we are working with the team to develop the right budget for the year and for the quarters to come. So, it’s work in progress as in the rest of our businesses.
Antonio Hernandez
Okay, perfect. Thanks.
Paco Camacho
Thank you.
Operator
And moving on, we will go to Rodrigo Alcantara with UBS.
Rodrigo Alcantara
Hi. Good morning Paco and Eugenio. My question regarding on Valora, we got really this a different strategy to the change and add more organic growth than M&A. So, my question to you is, I mean how should we think about the funding of that organic growth? I mean do you think that you can fund that with the operating cash flow of Valora itself, or can you expect some minor disposals of the Heineken stake, if you can comment about that? And the second one, very quickly regarding the Envoy Solutions, should we expect, let’s say, mid-2023 as in 2020 as is a stage when you start the integration of all the assets that you have acquired in the U.S., meaning perhaps some synergies at the G&A level. Those would be my two questions. Thank you.
Paco Camacho
Yes. Thank you, Rodrigo, for the questions. If you want to start with the funding of Valora. I mean, Valora in and of itself is generating, I mean good cash flow and it could fund I mean to a certain its own expansion. And again, it will be organic. In certain cases, it will be I mean new stores. And in certain cases, it will be I mean affiliating existing independent stores in Germany and otherwise, which is highly fragmented. And we expect those to be, I mean highly ROIC accretive from the beginning. So, if there is a need for funding, we will clearly find a way to fund it from other of the FEMSA operations, but we do not expect this to be a major strain on the FEMSA funding structure altogether. And with regards to your question on Envoy Solutions, we are already working on that. We have hired, I mean two senior people to the Envoy management team, basically working 100% in terms of integrating the companies. I mean they are integrating them, I mean coming from a flurry of 26 acquisitions over the past couple of years. So, they are working on the earlier ones and slowly integrating them into a common operating style, a common operating procedure, single supplier platform, etcetera. And most of the synergies that we are finding, and we are already finding more than from an SG&A perspective, are coming just from a purchasing perspective. So equalizing the product capital of getting discounts from suppliers for scale purchases, being able to serve national accounts from a single point of content, etcetera. So, those are where the synergies are coming from. And it is turning. I think most of the acquisitions that, I mean we have been making at maybe low-double digit EBITDA multiples with the synergies, they are turning out to be high-single digit EBITDA acquisition multiples with very high cash flow conversion. So, we are finding those to be, I mean quite accretive in the short-term. And hopefully, you will be able to see that for yourself once we start disclosing those numbers on a standalone basis, first quarter of next year.
Rodrigo Alcantara
Okay. That was very critical and thank you very much. Just on the Valora you said funds from operations right for the organic growth.
Paco Camacho
Yes. Either from Valora itself or slightly with some use of funding from FEMSA, but nothing that will strain our balance sheet by any means.
Rodrigo Alcantara
Sure. Thanks.
Operator
And that does conclude our question-and-answer session. I would like to turn it back to Mr. Fonseca for any additional or closing comments.
End of Q&A
Juan Fonseca
Everyone, thanks for your time today, for your attention. We are always available for follow-ups my team and myself, and have a great week.
Operator
Thank you. And that does conclude today’s call. We would like to thank everyone for their participation. You may now disconnect.
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