Coca-Cola FEMSA Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 10 speakers on the call.

Operator

Good day, and welcome to the Coca Cola FEMSA Second Quarter 2023 Conference Call. Please note this conference is being recorded and for the duration of the call, your line will be on listen only. However, you will have the opportunity to ask questions at the end of the call. I would now like to hand the call over to Jorge Palazzo, Coca Cola FEMSA Investor Relations. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to our conference call to review our Q2 2023 results. I am here with Ian Craig, our Chief Executive Officer and Gerardo Cruz, our Chief Financial Officer. As usual, after prepared remarks, we will open the call up to take your questions. Please keep in mind that this conference call may include forward looking statements concerning Coca Cola FEMSA's future performance and should be considered as good faith estimates made by the company.

Speaker 1

These forward looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties that can materially impact the company's performance. With that, let me hand the call over to our CEO. Please go ahead, Ian.

Speaker 2

Thank you, Jorge, and good morning, everyone. We appreciate you joining us today. Coca Cola FEMSA delivered another set of solid results for the Q2. We continue to demonstrate our positive momentum with solid volume performance resulting from growth across all of our markets. Notably, we continued improving our execution, redoubling our focus on our customers and our consumers and increasing investments to continue supporting our growth.

Speaker 2

The 1st 6 months of the year have also been important for the Coca Cola PEMSA senior leadership team to complete our listening tour and set the strategic priorities of our business going forward. As I have mentioned on our previous calls, as part of this process, We have walked our market, met with key stakeholders and identified the pain points and the many opportunities that are ahead for us. We are convinced that we are very well positioned to accelerate the growth of our core business and become our customers' preferred commercial platform. With that, let's review our consolidated results for the Q2. Our consolidated volumes increased 7% year on year, surpassing 1,000,000,000 unit cases.

Speaker 2

This marks the first time that our company surpassed 1,000,000,000 unit cases in a single quarter. Our volume growth was driven mainly by solid performance in key markets such as Mexico, Brazil and Guatemala. As was the case during the Q1 of the year, these volumes include the integration of Cristal, a bulk order business that we acquired at the end of last year in the Southeast in the region of Mexico. Excluding this integration, consolidated volumes increased 5.2%. Performance across our beverage categories remained strong.

Speaker 2

Parking beverage volumes grew 4%, while our still beverage and bottled water portfolios grew 7% and 18%, respectively. Our consolidated total revenues grew 7.2% to reach MXN 61,400,000,000, driven mainly by volume growth. We achieved this performance despite significant currency translation headwinds driven by the appreciation of the Mexican peso. To give you a sense, excluding currency translation effects, our total revenues increased 16.9%, underscoring how strong our underlying performance is. Our gross profit increased 7.9 percent to reach MXN 27,300,000,000, leading our gross margin to expand 30 basis points.

Speaker 2

This expansion was driven mainly by our top line performance, using PET costs and favorable raw material hedging initiatives. These effects were partially offset by an increase in sugar prices across most of our territories. Our operating income increased 11.9 percent reaching ARS 8,600,000,000 and our operating margin expanded 50 basis points. Our positive top line, favorable mix effect and non cash operating foreign exchange gain related to the appreciation of the Mexican peso drove this growth. Finally, our EBITDA for the quarter increased 7.8 percent, and reached MXN11.4 billion, resulting in an EBITDA margin of 18.6%.

Speaker 2

Our top line growth and cost efficiencies drove this performance, which was partially offset by increases in operating expenses such as labor, marketing and maintenance. I will now move on to expand on key highlights during the first half of the year. In Mexico, Our solid performance included record volumes during the months of May June, a resilient consumer environment, Our focus in execution and favorable weather conditions supported this growth. Importantly, all of our beverage categories are growing, driven mainly by brand Coca Cola and our personal water category. We are driving portfolio innovation as well with 2 recent launches in the flavored sparkling category, Del Valle Piz, a low carbonation sparkling orangeade and lemonade and Fresca Fusion, combining grapefruit and lime with a salty touch that makes it ideal for mixing.

Speaker 2

Notably, our non caloric portfolio led by Coca Cola Sin Azuca grew a solid 14.3% versus the previous year. We also continue to see double digit growth in the modern trade channel, outperforming what remains a resilient traditional trade. Finally, digitalization in Mexico continues evolving with Junto's Plus, our digital B2B omnichannel plus. As a result of this rollout, 30% of the orders in the traditional trade are now digital. In Brazil, our volumes continue growing at a solid pace, driven by growth across all of our categories and channels.

Speaker 2

Aligned with our priorities, we continue accelerating our noncadalupe portfolio with Coca Cola, Tejasuka growing 32% versus the previous year. In categories such as energy and water, we continue consolidating our market leadership by strengthening our portfolio with new flavors. Finally, With Powerade, our sports drink volume is also growing in the double digits versus the previous year. On the digital front, Brazil continues increasing its Juntos and recorded. We now reached 237,000 active monthly purchasers, notably 60% of our orders in the traditional trade channels are digital in Brazil.

Speaker 2

In Guatemala, we continue seeing an impressive performance. Our volumes have consistently grown in the double digits, driven by our focus on the fundamentals of the business. For instance, During the first half of the year, we've added more than 9,000 clients and installed more than 13,000 coolers. All these as we continue to leverage and our portfolio's affordability and superior execution to continue gaining share across all of our beverage categories. Additionally, aligned with our strategic pillar to remove infrastructure bottlenecks and to satisfy our Guatemalan consumers' growing demand, We are installing a new One Way ET line this year as well as new returnable bottling lines during the Q1 of 2024.

Speaker 2

Finally, I want to comment on Colombia. After our historic volumes here in 2022, a tougher Nonetheless, despite this challenging environment, we are outperforming the industry as we strengthen our competitive position by gaining share in the sparkling, personal water and non carbonated categories. As I previously mentioned, our first half results are in line with our plans and we are encouraged to enter the second half of the year with positive momentum. Our teams across all of our operations are well equipped to continue accelerating across all of our strategic objectives, delivering on the growth strategy that we have set as an organization. Speaking of our team and our talent, I want to take the opportunity to comment on our culture, a topic that is very dear to me.

Speaker 2

As I previously shared with you, one of our 6 strategic corridors focuses on strengthening our customer centric culture. This is critical to be our customers' preferred commercial platform. Aligned with this priority, we are identifying opportunities 2, I, better understand our customers' needs 2, improve customers' experience and 3, empower our organization towards a more customer oriented culture. We are convinced that by measuring the right KPIs as well as empowering and aligning our organizations toward these objectives, We will continue improving our customer centricity, which is a common feature of high growth organizations. Finally, I want to take a moment to recognize our team in Argentina.

Speaker 2

Last week, Coca Cola Fence Argentina was awarded by The Coca Cola Company with Zaccander Corp. For 2022. Zaccander Corp, named after H. Zaccander, founder of The Coca Cola Company and The person who granted the 1st Coca Cola franchise is an important award given to a bottler in recognition for its excellence in execution, and will be recorded in the future. Congratulations to the Coca Cola FEMSA Argentina team Working together as one single team with our colleagues from The Coca Cola Company in Argentina have made this recognition possible.

Speaker 2

In summary, we are confident that we are on the right track to achieve our objectives for 2023 as we continue winning in the market and progressing on our key strategic priorities across our operations. With that, I will hand the call over to Jerry to expand on each division's results as well as progress on our saving initiatives. Thank you, Ian, and good morning, everyone. Expanding our division's results for the quarter. In Mexico and Central America, volumes increased 8.9%, maintaining the solid pace of the Q1.

Speaker 2

Growth across all of our territories in the division drove this performance. Excluding the integration of Cristal's bulk water business, Our volume in the division increased 6%. Revenues in Mexico and Central America increased 13.4 percent driven by our volume growth and revenue management initiatives. These effects were partially offset by the unfavorable translation and will be recorded from most Central American currencies and to Mexican pesos. Our gross profit increased 13%, Resulting in a gross margin of 47.7 percent, a compression of 10 basis points year on year.

Speaker 2

This is a sequential improvement from the Q1 of the year. Top line growth, raw material hedging initiatives and the appreciation of the Mexican peso helped to partially offset cost of goods sold pressure. Operating income growth for the division accelerated by 13.7%. This resulted in a slight margin expansion of 10 basis points, driven mainly by our top line performance coupled with a non cash operating foreign Change gains related to the appreciation of the Mexican fish. Finally, our EBITDA grew 9.2% With margin declining 80 basis points due to an increase in operating expenses mainly related to labor, marketing and maintenance.

Speaker 2

Moving on to South America division, volumes increased 3.8% in line with the pace of the first quarter. Low to mid single digit growth in Brazil and double digit growth in Uruguay primarily drove this performance. Our revenue for the South America division declined 2.2% as unfavorable currency translation effects Including currency translation effects, our comparable total revenues in South America increased a solid 20.3% during the quarter. Gross profit in South America declined 1.6% mainly due to a currency translation effect resulting in a 20 basis point margin This expansion was driven mainly by volume growth, hedging initiatives and favorable mix. These effects were mainly offset by increases in raw materials costs such as sweeteners and the depreciation of the Colombian and the Argentine peso.

Speaker 2

Operating income for the division increased 6.6% and operating margin expanded 80 basis at the same time as compared to the previous year. As was the case during the Q1 of the year, our positive top line coupled with Tight expense control across our operations more than offset higher fixed costs and expenses. Finally, EBITDA in South America increased 4.4%, resulting in an EBITDA margin expansion of 90 basis points. Moving on to our financial results, the quarterly comprehensive financing results recorded a significant increase as compared to the previous year. This is explained mainly by an unfavorable comparison base that included a one off market value gain in financial instruments of MXN355 1,000,000 recorded during the Q2 of last year.

Speaker 2

In addition, during the quarter, we recognized a foreign Change loss of MXN437 1,000,000, driven by the appreciation of the Mexican peso as applied to our U. S. Dollar cash position and the lower gain in hyperinflationary subsidiaries. These effects were partially offset by a decrease in our net interest mainly because of an increase in interest income that was driven by higher interest rates. Finally, Our controlling net income increased 6.5 percent to reach MXN4.9 billion, resulting in earnings per share of MXN0.29.

Speaker 2

It is important to note that our controlling net income for the 1st 6 months of the year increased 17.3%, underscoring our positive underlying operations performance in the face of significant currency translation headwinds. Finally, as part of our initiatives to generate savings and efficiency, at the beginning of the year, we shared with you a target of more than $60,000,000 in Savings to be driven by our supply chain team. We are encouraged by our progress year to date as we have achieved savings of more than $35,000,000 during the first half of the year, driven mainly by initiatives to reduce our cost to make and our cost to serve, which exceeded our expectations for the first half of the year. We are confident in our team's ability to continue generating significant savings and efficiencies as we enter the second half of the year. With that, operator, we are ready to open the call for questions.

Operator

Thank you. The first question today comes from Ricardo Alves of Morgan Stanley.

Speaker 3

Hello, gentlemen. Thanks so much for the call. I had a question on the competitive backdrop in Mexico. On an ex Cristal basis, I believe your volume is up 5% or so in the quarter. How do you think that that's comparing to the industry in Mexico?

Speaker 3

Do you think it's Fair to say you're gaining back some share here already, in this first half of the year. And perhaps on that point, if you can expand a little bit, Perhaps on your commercial approach depending on the channel or packs, whatever color you can give on how you're dealing with competition in Mexico that would be helpful. My second question, typically and obviously we tend to focus on the bigger markets, but when you take Guatemala, The other Central America region, Colombia together starts to build up and particularly in Central America, the growth has been pretty impressive. So just wondering if you can talk a little bit about that. I missed the early remarks you made, you guys made, but More interested particularly in what you're doing in Guatemala and maybe more important what is the prospect for this market?

Speaker 3

What Coke FEMSA can do to further develop The market and then in Colombia, whatever color you can give, if this is a market where you see big prospects for growth as well. So a little bit outside of the Brazil and for questions. Thank you so much, gentlemen.

Speaker 2

Hello, Ricardo. How are you? Thanks for the question. In Mexico, Just a little background, we have been in an environment where we have had about 5 years of a deterioration with deteriorating competitive position. As I stated when we started at the beginning of the year that we needed to stabilize that and start to A new trajectory, a growth trajectory.

Speaker 2

We've been able to accomplish that. So we've stabilized our competitive position. There's a lot that we're doing. I don't think it's healthy to go into the specifics. But in general, it revolves around multi serve one way PAX where we're working with a better OBPPC, more focused and targeted and also there is work to be done on certain pricing strategies between channels.

Speaker 2

The brand is so strong. Our multipacks are there. Our flavors are there. And So far, with very targeted adjustments that we're doing, it's responding very quickly. So I think The news on Mexico on the competitive position front is very positive.

Speaker 2

We would stabilize that. By year end, we expect a slight gain. And that's the trajectory that we're going to look into maintain. When you look at Guatemala, Guatemala is a jewel for us as well as the rest of Central America. They are highly profitable market.

Speaker 2

And in the case of Guatemala, I think I mentioned before, this is a 17,000,000 Population country of 17,000,000 to 18,000,000, where our per caps are around 207. It's growing double digits. There is no reason that in the medium term we cannot take per caps up to $250,000,000 We have enough of differential in share where there's share to capture as well as organic volume. So the story there has been fantastic. We've grown shares almost 8 points in the last 5 years.

Speaker 2

So our margins keep expanding as well as our return on investment capital. And it's a nice little Secret has varied within the very large Coca Cola FEMSA numbers, but now it's already the 3rd largest country in terms of profits for us and it should continue gaining in importance. I don't know if that covers the points, Ricardo. Colombia, if I may And Ricardo, we as Ian mentioned during the call, we are Performing on top of a record volume year, which was 2022, basically in line a little bit above last year even considering the slowdown in macroeconomic activity in the country. We do expect some headwinds at the end of the year with coming into effect of the sugar Added beverage tax that will come into effect in November, but we certainly continue to be very bullish on the prospects of growth in Colombia going forward.

Speaker 2

We are operating basically at maximum capacity in both manufacturing and distribution capacity and we are investing importantly for the following years to build up on that capacity because we certainly think That those 2 are the biggest engines for growth going forward, Colombia and Guatemala.

Speaker 3

Very helpful caller. Appreciate the time.

Speaker 2

Thank you, Carlos.

Operator

And the next question comes from Thiago Bertolucci of Goldman Sachs.

Speaker 4

Yes. Hey, good morning, everyone. Thanks for the call and for taking the questions. I'd like to double click, follow me up on Ricardo's question on Mexico, right? When I tried to break down The top line drivers are seeing strong volumes, but a slight sequential price deceleration, right?

Speaker 4

Appreciation, the impact on remittances, and how your overall price strategy should behave In a context where your cost inflation is materially decelerating? This is the first question. And the second one, I guess, is a more long term strategic update on what are the sources of synergies that you are identifying and might be able to explore under this new SAMSA forward Backdrop and joint effort to try to execute and monetize the to be in the capillarity that both platforms might have with the traditional trade. Those are the questions. Thanks.

Speaker 2

Thank you, Thiago. I think the first point, if I remember correctly, was Top line on Mexico and how that is going so far. So right now, our volumes in Mexico are growing around 8%. If you take out the bulk order business, it's 5% growth. So far so good.

Speaker 2

We don't see any slowdown at all. Volumes are strong. I think we're going into an election year. There's a lot of inflows coming in from Mexico as a whole due to the near shoring. So we're very positive on Mexico.

Speaker 2

So I don't For see any de acceleration or pressure on the top line, on the contrary, I think the way we've managed To set the new competitive landscape and strategy, our top line and volumes should continue along this pace barring any Unforeseen climate or our sense of it, but so far so good and that seems to be going along nicely. In terms of the synergies with PEMSA forward, like I told you before in another call, There are 2 very concrete cases where we are collaborating. And it's the case of the JunTos Plus platform in Mexico, where we are tying in working to tie in FEMSA or SPIN on FinTech Solutions. So in the payments front, we will be rolling out that as a feature for our trade partners, Injuntos Plus and also in the loyalty plan. Spin Prem has a very large and robust loyalty plan.

Speaker 2

What we aim to do is when we roll out the App4 version for Mexico in the end of the Q4, Our loyalty plan will have a link to the spin loyalty plan, the spin player loyalty plan. So that only makes it more attractive both for us and for the steam plant, which it's very simple. The points will be exchangeable not only for products that we manage, both of The Coca Cola Company and of our 3rd party portfolio, but also Interchangeable for Skin Premier Rewards, which have a much wider catalog. So it just gives us a lot of added value for our trade clients. That's basically the 2 large areas or where the largest impact that we have right now, Thiago.

Speaker 2

I don't know, Jerry, did I cover all points,

Speaker 5

yes. That's clear.

Speaker 4

Thank you very much. Thank you very much, Jens.

Operator

Thank you. The next question comes from Sergio Mazzonoto of Citigroup.

Speaker 6

Yes. Hi, good morning. Thank you for taking my question. Ian mentioned Just now on the Juntos Plus, and you also on your prepared remarks about Improving customer experience, there is some nice uptick on the traditional trade adopting the JunTos Plus. Can you give us some anecdotes on how they have improved their experience with you through this platform?

Speaker 6

That's my first question. And the second one is on Argentina, having won the Canada Cup, very impressive. And Can you share what do you think were the aspects of your team's performance in Argentina that was most And recognized by The Coca Cola Company. Given that they operate in Argentina, they have particular challenges. And if there are any best practices that you can transfer into Brazil or Mexico.

Speaker 6

Thanks.

Speaker 2

Thank you, Sergio. I think on the first question on Eutos Plus, What we're seeing is and this I think applies in general to well established platform fees. When the client has time on his hand, He has the possibility of ordering more items. So for us, what is happening is when we are allowing the client to place an order in the time and channel of their choosing. They are no longer hampered to take the order only when the pre seller As you know, our Juntos Plus model is omnichannel.

Speaker 2

That's a big difference to our main competitors. What that means is we have kept the pre seller visit. And on top of that, we offer the order on the app or WhatsApp chatbot. So whenever the client enter via WhatsApp chatbot or our app, They're usually doing that when they have a specific need that wasn't met at the pre seller visit and or when they have more time on their front. So it ends up that our items per store on those orders are larger.

Speaker 2

So what we see is An uptick for us when they're ordering online and an increase on average frequency. So they're able to manage You know their working capital in a better way. And since we have either flexible deliveries in Brazil, which is next day delivery Basically across 70% of our territory or where we have a lot of delivery frequencies such as in Mexico, It's an uptick for them to be able to plan and take their order when they have a time. So we're seeing very positive results on that front and steadily More and more of the orders are coming in digitally, sir. And in regards to Argentina, The candor COP recognized 3 aspects that stood out in Argentina.

Speaker 2

And this is, As you know, Argentina is always a book of context. However, they managed to ensure growth and consumption occasions. So First of all, we have very high growth on the core, high growth on single serve, Good plans on segmentations and returnables, the growth of Women in Leadership, Coke, No Sugar. There were several aspects. So it's not only execution, Well, there are several minor points such as or not minor points, several special points such as single serve, Coke no sugar, Women in leadership that stood out, female talent and inclusion, customer centricity that stood out and all of those practices We share in the commercial forums across Coca Cola FEMSA.

Speaker 2

So as you know, we have a new position that reports to me that's the Chief Growth Officer, and they create communities or forums across Coca Cola FEMSA's commercial and marketing team where these initiatives are shared. So We were very happy and proud for the Argentina team to be recognized with this call. It's the first time Anyone from Latin America has been recognized with this worldwide award from Coca Cola.

Speaker 6

Great. Thanks for that color.

Speaker 2

Thank you, Sergio.

Operator

The next question comes from Fernando Alvera of Bank of America.

Speaker 7

Hi, good morning. Thanks for

Speaker 4

taking my questions.

Speaker 5

My first question is starting on

Speaker 7

a consolidated basis. Regarding the $1,000,000,000

Speaker 4

in digital sales that you and reached in the first half of the year.

Speaker 7

If you can comment breakdown by country and where you see the main opportunities? And my second question is related to Mexico, if you can share your thoughts of how They are performing the different pilot projects that you are doing in

Speaker 4

the traditional channel as well as in the DTC and DTC platforms. Thank you.

Speaker 1

Hello, Fer. It's Jorge here. On your first question regarding The sales on the digital revenues. Basically, what we have seen there Fernando is to reach to those €1,000,000,000 sales, We've seen a high level of growth coming from Mexico. So Mexico, to give you a little bit of the sense of the breakdown, Basically represents about $360,000,000 out of those €1,000,000,000 in sales, but that's a Very rapid increase.

Speaker 1

Mexico has been increasing as we have been speaking before, very fast in the rollout of Junfos Plus. And there is a very similar number coming out of Brazil, approximately EUR 370,000,000 in digital sales coming from Brazil. The rest, Fernando, is split between the rest of the countries. We have Colombia catching up as well with around €30,000,000 and the rest is split between the rest of the countries. But as you can see, most of this is coming from the level of growth Because

Speaker 2

of the rollout of Juntos Plus that we're having with Mexico and Brazil. Yes. And this has been the big Focus on 2 large markets, that's where we're focusing on for the Version 4 and then the rest of LATAM. So I think for us next year, the rest of LATAM will be a nice upside for our Junto's cost platform and we want to concentrate the rest of this year and I would say the Q1 of next year on both Mexico and Brazil, which are the biggest countries for us so far.

Speaker 4

And regarding your pilot targets in Mexico?

Speaker 1

Sorry, sorry, I think the line is breaking up a little bit, so we couldn't hear the second question. Can you repeat, please?

Speaker 7

Sure. If you can share your thoughts of how they are performing the different pilot projects that you are implementing in medical and in the commercial

Speaker 4

channel as well as in the B2C and B2C platform.

Speaker 2

So far so good, Fernando. We're adding more partners every day. I think Brazil, we're around 14 partners. I don't remember the amount that we have in Mexico so far, but in Mexico, our footprint is so much larger than any other competitive A platform that I know we're signing off the largest player well ahead of our competition. So we're very positive on that.

Speaker 2

As you know, I have mentioned that for these offerings to be of scale, we will need at least 5 to 6 years for this to be around 5% of revenue. As we're growing our core business year over year, we expect to be in growth mode. It's always a challenge for this to become relevant. So in Brazil, this gets to around almost 2% of revenues because we're growing as well. In Mexico, we're going to be hitting 1% of revenue.

Speaker 2

So they're still small, but these are when you look at that multi category, It's doubling its size every year, just that we're growing the base business as well. So you guys need to have on patience until we reach that ambition that we have to get to 5% of our revenues At the rate that we're growing our core business, even though this is accelerating as well, it's going to take its time.

Operator

Great. Thank you so much for

Speaker 5

the color.

Operator

Thank you. Our next question comes from Alan Alamos of Santander.

Speaker 5

Thank you very much and congratulations on the results Ian, Gerard, Jorge. A couple of questions. One of them is regarding the lower price of the commodities, the sugar, aluminum and so forth and strength of the peso. Could you expand a bit more in terms of how much hedges are you expanding your hedges beyond what you usually do And how much you have already taken advantage of this global prices of commodities and the strength particularly on the Mexican peso? That would be the first question.

Speaker 5

And the second question is regarding Argentina. Could you remind us what exchange rate do you use On the consolidation of Argentina into your balance sheet and if you see any risk there given the depreciation of the Argentine peso as we have seen in the last year. So 2 very different questions. Thank you so much.

Speaker 2

Hi, Alan. Thank you very much for your questions. Regarding commodities, for 2023, we are with a very healthy hedging position on PET basically across all of our operations. And we're starting to build a little bit of position of hedging PET for next year. We are expecting a benign outlook for PET and aluminum.

Speaker 2

So we're being careful to stay within the low end of the range of our hedging objective, But starting to see good opportunities to build a little bit more on those positions. On sweeteners, we're basically hedged for HFCS in Mexico, which is an important component of our sweetener expense. Sugar, there's a few alternatives that we have, but in Brazil, we also have a good position as well as in Uruguay. Basically for 2023, we're a little bit above 50%. Our sugar needs hedged in 2023 in both countries.

Speaker 2

That's a little bit on the actual commodity price Hedging on the FX front, we have certainly seen a good opportunity in the peso to build up hedging positions. We're basically hedged at 80% of our dollar requirements in And being a little bit more careful to start to build positions for 2024. Regarding your question of the range that we are able to hedge, we continue to look At a 12 month rolling period for hedging on both commodity prices and FX related to cost of goods sold. So we haven't changed that and we do not expect to change that in the near future. FX hedging for other operations, Brazil, Colombia and Uruguay.

Speaker 2

We have a little bit Very close to 50% of our dollar requirements hedged for 2023 and also as well as in Mexico starting to build position for the first Half of twenty twenty four in line with that 12 month rolling period. Going into your second question for Argentina results, We continue using the official exchange rate to consolidate Argentina. The number or the exchange rate that we used for the consolidating of this The order was $256,700,000 We really don't have any other alternatives because we have to comply with the official exchange rate for purposes of consolidating that business. We understand that a portion of the economy transacts at the parallel exchange rate, but most of our business, the raw materials that we require as well as the Capital assets that we require for our business are still done at the official exchange rate. So we understand that this represents a source of uncertainty, but that's the exchange rate that we have to use to consolidate that business.

Speaker 5

That was a very personal and very comprehensive answer. I really appreciate it. Thank you so much.

Operator

Thank you, Alan. The next question today comes from Antonio Fernandez of Barclays.

Speaker 5

Hi, good morning. Thanks for taking my questions. Good question on the results. My first question regarding Pricing going forward and all the elasticities that you've been seeing in Mexico. And just a quick follow-up on the for the Q1's penetration in terms of customers.

Speaker 5

Thanks.

Speaker 2

Thank you, Antonio. First on your first Question regarding pricing. We as we talked about in the previous few calls, We're trying to focus on sustainable growth in basically in all our territories and specifically in Mexico as Ian mentioned during the script of the call. Echo, as Ian mentioned during the script of the call, we have been facing Share pressure in the past few years. So we're trying to stop that share erosion and recover competitiveness in our portfolio.

Speaker 2

We understand that our main objective and the way that we will continue to improve Performance and return of our businesses through growth and I want to underscore the word sustainable growth. And in that sense, what we're looking at for the foreseeable future is to price Basically in line at least in line with inflation, trying to recover that competitiveness and we've seen Very good data points in these 1st 6 months of the year regarding the performance of the share of our products. And the second question was on Huntos. Yes. I think when you talk about Junto Plus, You look at it in percentage of orders, about a third of our orders are coming through Junto Plus.

Speaker 2

When you look at that in revenues, as you know this offering goes towards the traditional trade, it's around 16% of our Total revenue. But when you look at traditional trade revenues, Antonio, it's almost a quarter of our revenues of the traditional trade. And We do like a zoom in on Brazil, which is the country that's first started with this platform. It's already 60% of traditional trade volumes. So I think the penetration is encouraging.

Speaker 2

Like I mentioned, Brazil started with this, but Mexico is accelerating fast. And next year, we should have an uptick in the ex rest of LatAm market. So, so far so good with just Plus in terms of both the penetration and the partners that we are signing up.

Speaker 5

Perfect. Thanks for the color. Have a nice day.

Operator

The next question comes from Lewis Willard of GBM.

Speaker 8

Hi guys, good morning and thanks for taking my question. So first of all, congratulations on your win of the And my question is on the digital revenues. I apologize if this feels repetitive. So as they accelerate and they seem to be doing so nicely, my question is at this point are you seeing any material difference In unit economics from a digital purchase versus a physical one or a traditional one. And more importantly, if you're seeing those difference already being reflected in your P and L on more importantly on the returns of your business?

Speaker 8

That will be my question. Thank you.

Speaker 2

Hi, Luis. Thank you for the comment on the calendar. Like I mentioned, The unit the driver for us is not a cheaper cost to serve. Although as you intuitively are pointing out in your question, It is depending on the market, on the labor cost of the different markets, it can be all the way an average of 20% less cost to serve in the when it comes to the order entry. So sorry, a 20%, so 80% less cost of service.

Speaker 2

So it's a big difference. However, this has not been our driver list. What we're trying to do is be a higher growth company. So we are intent on keeping the omni channel model. We're not reducing our feed on the street.

Speaker 2

The role of the pre seller changes as far as the more penetration and orders are taken online, Then we're freeing up these pre sellers to do more of the execution, the introduction of new products and launches, The bringing in of new partners and we want to we think it's a big advantage to us how we look in the point of sale versus our competition. And that stems from the fact that we are omnichannel because the digital portion of our platform allows us to bring in more business. Like I said, it's higher IPS. It's at a lower cost. But really when it comes to execution at the point of sale, having that relationship and still makes a lot of difference.

Speaker 2

And for new product introductions as well, the new launches, entering into different categories, Developing co channels, it makes a lot of difference having those specialized structures and our pre sellers. So We're not seeing a difference in the cost to serve because of that. We're maintaining the omni channel structure. And like I mentioned, in terms of revenues, since it's still in the incipient stages, it's around 16% of total revenue. So it hasn't made that big of an impact so far, but we measured those digital revenues and you can see a larger ticket.

Speaker 2

So in those digital revenues, when you compare them to the traditional or salesman control Point of sale, when we look at those control points, we do have an uptick. So a portion of that, which is not irrelevant, is incremental for us when you do those analysis.

Speaker 8

Thank you. I know you just gave me too much credit thinking about costs. I was Looking for ticket and higher orders. Thank you.

Speaker 2

Good day. Thank you, Ulrich.

Operator

The next question comes from Felipe Bucharest of Scotiabank.

Speaker 7

Thanks, operator. Hi, Ian, Gerardo and Tina. Thanks for taking my question. Firstly, maybe on an update on partnerships For Juntos, obviously, your partners in Mexico are pretty defined at this point, it's been Premier. But just wondering If you have made any advancements on talking to partners, for loyalty and payments in the other regions,

Speaker 4

that you can give us

Speaker 7

an update on. Of course, you may not be able to give us an update on the conversation. Just looking for any updates there. And also a question on Argentina.

Speaker 2

Hi, Felipe. In terms of our partnerships on multi category, I think, like I mentioned, Brazil is around 14 partners Mexico, 1, 2, 3, 4, Around 10 partners. These are partners all with contracts aligned. We're entering different categories. Jorge, do So we're happy when this is like we want to have a pure rated portfolio.

Speaker 2

We do not. We are we do

Speaker 7

not Understood on the partners that are jumping on the platform. I was looking more for help you on payments in the other countries and the same as a partner to start the loyalty program in countries outside of Mexico.

Speaker 2

No, I was getting to that Felipe. So on the services front We're spearheading out of Mexico. So the focus is getting that done in Mexico and then we'll be testing that out in the rest of the market. So, no. So far on the service portion, which includes both financial services and loyalty partners, Mexico is spearheading that effort.

Speaker 7

Understood. Very clear. Thank you.

Speaker 2

On the second part of your question regarding Argentina and our exposure there, it's certainly not an easy solution. The operation has been growing very importantly. So the first priority for using our capital generated in Argentina Is to continue to build capacity to make upfront to that very healthy growth that we've been seeing. On the second alternatives, we look for alternatives to invest in assets that we where we can protect our cash to exposure of FX depreciation. And we certainly continue to see or look for opportunities that we can materialize in as our Last position in our excess cash to repatriate assets, but that is much more complex because there is no access to freely to dollars.

Speaker 2

We have a small position of our total cash, about 3% of our consolidated cash is concentrated in Argentina. So it's not a significant impact for the consolidated business, but we certainly focus on looking for alternatives for using that cash.

Operator

Our next question is from Alvaro Garcia of BTG Petrol.

Speaker 9

Hi, gentlemen. Thanks for the call and congrats on results. A couple of questions on my end. First on beer in Brazil, we saw a nice sequential acceleration there. I was just wondering if you can maybe give us some color if that was Heineken Brands or maybe some of the other smaller brands And you've been ramping up there.

Speaker 9

And then my second question is on sort of capital allocation, a follow-up to what we've discussed on past calls in terms of Well, what I sort of consider a suboptimal sort of cash balance and excess sort of cash balance, What's been your thinking there? Is there any update with regard to a potential shift in how you're thinking about your dividends? Any sort of color there would be greatly appreciated. Thank you.

Speaker 1

Hi, Alvaro, it's Jorge here. On your first question regarding beer, Yes, as you mentioned, we saw a sequential improvement as compared with the Q1. And it comes basically from a combination. We have been implementing some plans with Heineken as well together to and we will accelerate the performance of the portfolio. So we have some plans that we have implemented there that are starting to show some results.

Speaker 1

And that is Solpolis as well, not the brand that we have as well. It's accelerating. It's growing. To give you a sense There in the 1st 6 months, growing 30 plus rate as compared versus the previous year. So that's a little bit of what we're seeing in the year.

Speaker 1

Obviously, it takes time. We know that, but the strategy is what we have to Continue improving. We are improving versus the Q1, that's for sure.

Speaker 2

And in terms of capital allocation, We continue to review what's the best structure for us. Like I mentioned, We want to, 1st of all, fund our growth and not look at other opportunities. There doesn't seem to be so far any Relevant inorganic opportunities out there for us. So depending on how this continues to go, we should have and a way to free up this cash. But I wouldn't expect anything in the short term.

Speaker 2

I think that's a decision for next year where we'll be taking that.

Speaker 9

Okay. Just maybe one last follow-up on Coke Sin Azucar. I was wondering if maybe you can walk through, sort of penetration and how well That product is done. Thank you.

Speaker 1

Yes, Salvator. Yes, it's doing very well. Actually on the prepared remarks, Ian mentioned a couple of points regarding Coke 0 Sugar, for example, in Mexico, it's growing double digits year to date. When you look at the mix, it's still on the single digits, But it's growing. No, it's outperforming.

Speaker 1

In the case of Brazil, for example, is outstanding. I would I'll highlight that Ian mentioned also during the prepared remarks 30 plus, 32% if I remember correctly, As compared to the previous year on the 1st 6 months of the year. And there, the mix is now reaching double digits. So It's a great product. Obviously, it's a great brand, and we are executing that and winning in the market.

Speaker 1

So I think It's very encouraging to see what we're doing with Coca Cola, Shinasuku across all markets.

Speaker 9

Wonderful. Thank you very much and congrats again.

Speaker 2

Thank you.

Operator

And the final question Today comes from Rodrigo Alcantara of UBS.

Speaker 4

Hi, thanks for taking my question. I have 2 quick ones, one for Ian and another for Jerry. For Ian, well, thank you very much for the comments on the competitive position in Mexico and what's affecting the pricing strategy over there. Maybe if you can replicate those on Brazil. And for the case of Brazil and the pricing strategy there, we saw A slight deceleration in the pricing there in Brazil in real terms and talking about year over year growth rates.

Speaker 4

So just curious of what's driving that what drove that dissimilaration? And my second question would be For Jerry, labor expenses consideration being like a topic more for retail industry, but we have seen like You need more relevance for both our pressuring margins. And so I was just curious here This year, if you can comment to share with us like in basis points, like how much of your margins have Being eroded by increasing labor expenses, if you can comment on that also on the Savings that you mentioned at the beginning of the call, for next year, do you see room for And most savings to come coming from logistics? Those would be my two questions. Thank you very much.

Speaker 1

Thank you, Rodrigo. Yes, on your first question regarding pricing in Brazil, as Ian mentioned during the remarks as well, I think we can definitely see that we're leveraging on the pricing carryover that we have. So we're cycling pricing from last year that was very solid. So we do expect that to moderate. We're seeing inflation across most of our markets normalizing, and we have Initiatives to continue to improve our mix, leveraging revenue growth management, but you can expect that To be at least in line with inflation.

Speaker 1

So partly that reflects on what you're seeing in Brazil. On the other hand, we continue to see on the competitive position that we are gaining share in Brazil. So obviously, also on the margins front, we're seeing easing TET resin costs, so we continue to see space to be able to be more or less aggressive on that front.

Speaker 2

Regarding Rodrigo, your question on margins in Mexico, basically the whole explanation of Margin impact in Mexico is related to fixed costs and expenses and specifically labor It's one of the biggest impacts. I would say that of the total increase in fixed costs and expenses About 20 a little bit above 20% of the impact is related to labor. DME marketing Positioning our brands to recover share in the market is important. And the 3rd, I guess, big component there is IT expense. As Ian was mentioning in a previous question, right now we're investing importantly in digital Capacity and technology, that represents an increase in IT expense, but it's Related to our one of our main pillars, strategic pillars for growth and the way that we're trying to become and is being recorded as a preferred

Speaker 5

B2B platform in our markets.

Speaker 4

That's useful. Thank you very much. Jerry, so for you to expect that for Q4 OpEx growing at the same rates that we have seen in Last quarter, is that a fair assumption, meaning like 20% or something like that?

Speaker 1

Yes, that's a good estimate. It's fair, Rodrigo.

Speaker 2

And regarding your question about savings to Rodrigo, we're very positive in what we've seen and our capacity to realize the savings that we were expecting for the year. Basically these savings have been concentrated in both cost to serve and cost to make, most of them in cost to make with efficiencies in our manufacturing facilities Related to packaging, lightweighting in packaging, freight optimization, also the transformation from resin The model we've seen important savings there. And on cost to serve, we've invested and that provided important savings, operative savings for us.

Speaker 4

Okay, that's very clear. Thank you very much, Jerry. Thank you, Jorge.

Speaker 9

Thank you, Rodrigo.

Operator

And as there are no further questions, I'd like to hand the call over to Gerardo Cruz, CFO for closing our additional remarks.

Speaker 2

Thank you very much for your confidence and interest in Coca Cola FEMSA and for joining us on today's earnings call.

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Key Takeaways

  • Solid volume and revenue growth: Q2 consolidated volumes rose 7% year-on-year (5.2% ex-Cristal) to over 1 billion unit cases for the first time, driving total revenues up 7.2% to MXN 61.4 billion (16.9% ex-FX).
  • Margin expansion: Gross profit increased 7.9% with a 30 bps margin lift, operating income grew 11.9% (+50 bps) and EBITDA rose 7.8% to MXN 11.4 billion (18.6% margin) thanks to strong top-line performance, favorable mix, raw-material hedges and FX gains.
  • Regional highlights: Mexico delivered record volumes and 14.3% noncaloric growth; Brazil saw 32% Coke Zero gains and double-digit sports-drink growth; Guatemala achieved double-digit volume growth via 9,000 new clients and 13,000 coolers; Colombia outperformed peers despite macro headwinds.
  • Digital B2B acceleration: The Juntos Plus omnichannel platform now captures 30% of traditional-trade orders in Mexico and 60% in Brazil, boosting order sizes, frequency and customer efficiency.
  • Supply-chain savings: First-half initiatives delivered over $35 million in cost savings toward a $60 million annual goal through manufacturing efficiencies and cost-to-serve optimizations.
A.I. generated. May contain errors.
Earnings Conference Call
Coca-Cola FEMSA Q2 2023
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