Q3 2019 Earnings Call
Good morning, everyone and welcome to the Coca Cola FEMSA third quarter 2019 Conference call. As a reminder, today's conference is being recorded an all participants are in listen only mode.
Other questions. The company they will open the conference Dr. questions and answers after the presentation. During this conference call management may discuss certain forward looking statements concerning Coca Cola FEMSA future performance and should be considered as good faith estimates made by the company. These forward looking statements reflect management's expectations and are based upon currently available data.
Actual results are subject to future events, and uncertainties, which can materially impact the companys actual performance.
This time I would now like to turn the conference over to Mr., John Santa Maria Coca Cola FEMSA, Chief Executive Officer. Please go ahead Sir.
Thank you.
Good morning, everyone. Thank you for joining us to discuss our third quarter results.
Great. Thank you know sponsored Chief financial Officer money out of your lot cost through our Investor Relations director or also here with us today.
I'm encouraged by the positive operating performance delivered for the third quarter.
Across our territories, we continue to successfully deploy strategies across diverse funds to capitalize on potential of our industry.
Our Mexico Central America Division continued to deliver solid top and bottom line growth, while our ability to drive cost and expense efficiencies coupled with a more stable raw material environment resulted in margin expansion to the division.
In South America, we continue to focus on affordability strong execution at the point of sale and cost and expense can cost controls to navigate dynamic and buttons.
I understand your pets turnaround of our Brazilian operation, which continues to post solid volume performance as it builds on two years ago continues built.
Importantly, this growth is leading the market.
It is leading to market share gains in all key categories.
As disclosed in our earnings release issued earlier this morning.
Coca Cola FEMSA has been entitled to reclaim tax payments made in prior years in Brazil.
Following a favorable decisions on the Brazilian taxes will afford.
This is having an extraordinary effects on our third quarter results.
First of its actually made if another extraordinary.
Summarizing our results for the quarter.
Oh topline growth jumped 23%. This growth was driven mainly by volume growth in Brazil Central America stable volume performance in Mexico, and improving price mix trends across our core mark.
On the other hand, our topline performance was affected by unfavorable translation effects, but most of our operating currencies in South America has translated into much than pencils and the challenging macro environment in Argentina.
[noise] by normalizing our total revenues by approximately 1.1 billion pesticides extraordinary.
Extraordinary although operating governments are reported top line would have increased 7.8%.
Operating income increased 21.4 person.
Our operating income growth was driven by the positive momentum of our topline results.
More stable sweetener and on the claims EG calls.
Operating expenses and different operating expense efficiencies in the spring effects of taxes reclaim in Brazil.
All these effects were partially offset by higher concentrates also much though the reduction of tax credits on concentrate purchased from someone else free trade zone in Brazil.
The depreciation most of our operating companies in South America applied to our U.S dollar denominated raw material costs.
And then structuring seven cents for 367 million Bucks is related to the implementation or fuel for growth efficiency program.
By normalizing operating income stream to extraordinary net effect of talking in Brazil, and restructuring severance is.
Operating income would have increased 8%, reflecting our positive underlying property performance.
Our operating cash flow.
18.6% year over year.
Excluding the effects PC described our normalized operating cash flow would have increased 9.5%.
Consequently, our call enjoying net income increased by more than 23% earnings per share of 24, stuffs Mexican sense equivalent to.
1.92 vessels, a burden for Calix unit.
Normalized health enjoying net income would have increased by more than 6%.
As we discussed during our second quarter conference call. We started rolling out our local growth program, which consists of instead of ambitious productivity and efficiency initiatives aimed at becoming a leaner more agile Coca Cola FEMSA.
During the third quarter, you started implementing the first wave of initiatives in Brazil.
And successfully continue with the implementation in Mexico, Colombia and corporate offices.
This resulted in restructuring Severances for 367, new vessels during the quarter and approximately 1 billion, especially as year to date.
Moreover, we have already Thompson.
The Functionalization accused support wasn't enough supply chain and human resources.
Were taking significant steps to develop new ways of working close organization.
Next steps for this program include the did they get Digitization of losses and deployment of our shared service strategies, John look forward invaluable gentry.
We're confident that these initiatives will strengthen organization eliminate redundancies streamlines, our cost base and importantly, free up resources to support our future business World.
Let me shift gears to discuss the strategies implemented in our markets.
Well Coca Cola FEMSA transformation, we have deployed strategies are enabling us to capture significant market opportunities drive operational efficiencies and generate cultural change across our business.
These initiatives are a testament to Coca Cola FEMSA entrepreneurial spirit.
And its capability to capture a long term growth opportunities, while successfully navigating short term volatile going up.
For instance, our portfolio.
Portfolio, our innovation revenue management finishes initiatives continue to generate positive results as we focus on affordability and buffalo growth across our markets.
In Mexico, we are expanding affordability and immediate consumption driven by reinforce entry pack strategy.
Our recent launch of a 235 ml returnable glass bottle at the Magic price 0.5 vessels is an important breakthrough to offer affordability for consumers.
Early results of this launch are very encouraging and we intend to leverage on these learnings to successfully extended to more charges.
Our multi stored affordability.
We're also looked rolling out our successful three liter refillable ppt to more territories in Mexico.
Driven by these initiatives and our focus on execution at the point of sale price mix in Mexico is accelerating its recovery and trend.
In addition, we remain encouraged by our consumers reception to Coca Cola coffee.
Which we are gradually expanding across territories and channels importantly, as part of our intent to drive continuous innovation in our portfolio, we successfully launched Coca Cola energy during the quarter.
Moreover, in the hydration category, where our focus on profitable growth by increasing availability and optimizing our discounts.
Importantly, we are very encouraged to announce that we'll be launching took what you could very soon which is an excellent 50 complement our primo water portfolio.
Just want should be prior to the end of this year.
Shifting to Central America, we achieved volume growth, mainly driven by strong performance in one of them all in Costa Rica, as we continue leveraging our returnable presentations and improving execution at the point of sale.
For example, what I'm all we are leveraging on our two liter returnable.
Do you bought him and on innovation, we launched our Orange AIDS eliminate the they'll buy and no.
Moving onto Brazil, we continue to revamp our portfolio by leveraging on innovation and affordability important levers to maximize value for our consumers.
Nrcs used fourth quarter, we're offering additional entry pack options with single serve Coca Cola US you know sukuk funds.
So what I'm not.
In addition, we're extending our successful dual and multi pack strategy, which increases our competitiveness in flavors by leveraging on the power of brand Coca Cola.
Finally, we continue extending our juice portfolios.
As we are launching does volume veggies.
Premium juice offering that combines fruit and vegetables without adding it sugar in a convenient and premium glass packaging.
[noise] underscoring our capabilities to adapt to a challenging environments in Argentina, we are implementing strategies to remain close to our consumers despite declining disposable incomes.
An example is our 220 ml many can place that 30 best.
Which is rapidly becoming important single serve affordable option for Argentinean can serve consumers.
To give you a sense.
This package represents more than 50% of our single serve transactions already.
Also.
We have launched one lever Coca Cola returnable.
And magic price points and are leveraging that package that same bottle and the unique bottle two flavors in sport and penta and local that CMS Luca.
So we're becoming much more affordable for the consumer.
When you have a better packaging line up.
After a complicated started the year you're encouraged by Columbia's outlooks are restructuring initiatives are going according to plan as you continue to focus on profitability of our portfolio.
Importantly, we will begin to in implementing a set of initiatives increased coverage and availability in order to turn on their Colombian operation.
Well take a moment to provide you with an update on the sustainability initiatives.
Other expressed in the past sustainability is one of the foundations on which the bill we build our corporate strategy.
Sure. This matter you are honored to be concluded as part of our Dow Jones sustainability emerging market index as you only Latin American beverage companies to be included for seven consecutive years.
This is a reflection of our commitment to continuous progress in our sustainability metrics.
To name a few examples.
Hi, I like the following metrics for the consolidated Coca Cola FEMSA.
First the significant improvement in water use ratio for linear a beverage produced.
Well 1.5.
No 1.59 leaders by the end of 2018 to 1.54 leaders at the end of the third quarter in 2019.
Second an increase in our use of recycle PBT from 20.8% at the end of 2018% to 23.5% at the end of third quarter of this year.
Mexico are used to recycle PT goes up to 30%.
Finally, an impressive 68% of our energy use manufacturing facilities comes from clean energy sources, a net increase of 18% over the 50% cheap at the end of 2018.
This positions us.
To deliver on our 2020 sustainability goals.
So we outlined several years ago.
As part of the strategic vision for our company, we're taking steps to further unified organization under a single vision, making sure our teams work as a cohesive unit and sharing best practices among our operations.
Our flexibility to evolve is key as we continue strengthening our winning portfolio.
Sounds form operating models and lead a cultural evolution.
With these initiatives, we are positioning our company as a result discipline and committed business platform to capitalize on future value creation opportunities.
With that I would like to hand over to conversation to constantly.
Thank you John but thank you all for your interest in Coca Cola FEMSA to begin with I would like to mention better in an earnings release issued earlier today, you will find certain information presented as comparable to the metric to describe where business performance, excluding certain effects that affects the comparability of our third quarter results.
I will refer to this metric on in the upcoming section.
To summarize our consolidated third quarter results or sales volume increased 0.3% to more than 842 million unit cases would or transactions growing 1.3%.
Were comparable sales volume grew 1.4% wouldn't comparable transactions growing 2.1%.
While revenue, we grew 10.3% with a comparable revenues growing 11.6% or gross profit increased 7.1% or comparable gross profit increased 7.6%.
Our operating income grew 21.4% while the culprit.
Operating income grew 22.8%.
Finally, we're operating cash flow increased 18.6% why we're comfortable operating cash flow increased 21.2%.
Excluding the adoption, although fire rest 16 leases were operating cash flow margin would've been 20.4%.
30 basis points less than or reported operating cash flow margin for the quarter.
As John described these results being good the extraordinary effects of reclaim taxes in Brazil, and extraordinary restructuring severances.
Now I'll briefly discuss each of our operations highlights for the quarter.
In Mexico, we continue to both strong topline growth of 8.2%.
Driven by healthy pricing.
Combined with the optimization of discounts and promotions to boosted by our advanced analytics NRG m. capabilities.
Despite uncertain be using Mexico's overall consumer landscape or quarterly volume performance was stable showing encouraging recovery in our operations price mix trend.
This underscores both the resiliency over business and the effectiveness over portfolio strategies, as well as or superior execution capabilities.
In Central America, as we build on the first full quarter over our acquired territories and what amount of we continue to report solid top line growth.
This increase was driven mainly by the solid volume growth in Costa Rica, and what their mother.
Within both both of our existing recently acquired territories as well as pricing initiatives across our markets.
Overall.
We remain very encouraged by the solid performance over Mexico in Central American Division.
Our topline growth and expense control strategies continue to enable operating income to grow ahead of all revenues.
In the face of all the headwinds from the increase in concentrate cost in Mexico the extraordinary severances.
<unk> 207 million pencils, and an operating foreign exchange loss.
Our South American Division topline results continued to be driven mainly by our brazils strong volume growth of 5.6%.
She was mainly offset by a challenging environment in Argentina.
As a result or divisions volume grew 0.4% for the quarter, while our transactions grew 3.6% thanks to refocus on affordability and single serve presentations across all over markets.
We continue to get encouraging signs of recovery in Brazil.
For example, the market for powder juices, showing a mid single digit decline compared to the previous year.
There's a clear signs that consumers are graduate lead trading.
Well performance is positive we continue to roll out strategic initiatives that enable us to continue capturing value in Brazil, while we streamline or cost strengthen or supply chain capabilities and digitizer end to end processes.
In Colombia, although volumes to grind, 0.8% for the quarter, we're very optimistic about the future of this uptick operation.
So the then we're optimizing or mix by leveraging our affordable single serve strategy and we're continuing to drive savings and efficiencies to protect their profitability.
In Argentina, although we started seeing early signs of stabilization at the end of the second quarter.
We were environment has worsened due to increased inflation and currency devaluation.
Under this scenario, we have renewed her efforts to offer affordable solutions to connect with our consumers will we continue to efficiently control costs and expenses to protect your profitability.
You know why.
Most recently.
Acquired operation, we're building on the first quarter of a fully comparable year over year results or volume decline, 0.8% for the third quarter with pricing aligned with inflation.
Opportunities, you know to why or extending.
Importantly, we have been able to successfully integrate this territory, while capturing important synergies, resulting in an improved profitability for the operation.
In summary, our.
Or South American Division top line grew 13.6% driven by Brazil, excluding extraordinary effects were normalized stopped might result for the division would have increased more than 7%.
During this quarter or reported operating cash flow increased 34.2%, resulting in an operating cash flow margin of 20.2%, which is a 310 basis point margin expansion boosted by previously mentioned extraordinary effects.
Consistent with previous quarters, our divisions main profitability headwinds were.
A topline decline in Argentina.
The depreciation of the average exchange rate, but most of our operating currencies, mainly the Argentine vessel.
Like two or U.S. dollar denominated raw material costs.
Hi, good concentrate cost in Brazil related to the reduction of tax credits on cost in food and the restructuring severance is up 160 million Mexican passes in Argentina, Brazil and Colombia.
Excluding the net extraordinary effects of reclaim taxes and extraordinary severances or normalized operating cash flow would have increased close to 3% leading to an operating cash flow margin contraction of approximately 80 basis point. It is very important to highlight that are operations were able to mitigate margin pressures. Thanks.
Were favorable sweetener prices operating expense efficiencies into profitability improvements driven by the synergies captured anyway.
With regard to store financial results.
Our financing expenses net recorded a reduction of 9%, resulting from a decline in interest expense.
In addition, we recorded a foreign exchange game as or cash exposure in us dollars was positively impacted by the depreciation of the Mexican vessels during this quarter.
These effects were partially offset by a loss in market value of financial instruments recorded during the quarter.
Consistent with our financial discipline, we proactively extending the life of close to 500 million us dollars of bank loans from 20 to 21 to after 2024.
As a result, we managed to extend the average life or death from 6.5 to 7.1 years without affecting the average cost of debt, which including the effects of debt swapped to Brazil every eyes and Mexican vessels is 8.1%.
Importantly, we reinforced the strength of our balance sheet as or net leverage ratio ended the third quarter at one point 17 times.
During the third quarter, we reported income tax as a percentage of income before taxes over 25.9%.
Compared with 31.4% last year.
This decrease was driven mainly by the increasing the relative weight of Mexico's profits inner consolidated results, which has a lower tax rate coupled with certain tax efficiencies across our operations.
And with that ill now hand, the call back to John for his final remarks and comp. Thank you.
Thank you can 20 [noise].
As we approach the final stretch of the year I am encouraged by our progress and solid underlying operating performance.
We remain on track to deliver on our strategy by one winning in the market via portfolio innovation affordability technology, and our characteristics superior execution at the point of sale.
To continuous optimization across our value chain to deliver savings mitigate volatility and enable a leaner more agile organization to better serve arcos consumers and customers.
And three a renewed commitment to creating value through disciplined capital allocation.
Thank you for your interest in our earnings call.
Have you continue to trust and support of the company.
Operator, I would like to open up the call for questions.
Thank you if you'd like to ask a question.
Pressing star one on your telephone keypad.
MS Speakerphone. Please make sure your mute function is turned off till now your signal to reach our equipment.
I wanted to ask a question.
We will now take our first question from Luca.
With Goldman Sachs. Please go ahead.
Hi, Good morning, Thanks for taking my question I want to start with maybe.
Mexico, Firstly, if you can share.
Thoughts about the the full word.
Volume performances.
And my company resilience pricing head of inflation.
It seems to be holding up quite well and I was hoping you could put that into context. So maybe some of the views that we've been hearing.
On the on the outlook for the Mexican consumers that have been somewhat more.
Concerning so anything that you can share on how you see the market going forward and what type of.
Trends youre.
We're seeing at the consumer level would be useful and then secondly on Brazil.
My question I guess, it seems that the business Trulia turned the corner in north of the category is growing quite consistently and that seems to differ from what we hear from other staples segments. So it's good really shed maybe what you think of change.
In Brazil, both for the casualty of your business.
To drive into explain this type of consistent performance I guess, what we're not seeing across other categories. This consistency.
A lot of fourth start whereas in soft drinks. It seems that there is a there is a bit of what they see a bit of its stride.
Which is encouraging so anything you can share on that won't be as far as well.
I do go this has caused some people.
Start answering and then also giving up back to John .
In summary bar in Mexico, we lower all see a steady and very resilient Mexican business I mean that is clear, but there are uncertainties and a slowing growth rate economically.
Throughout the year. However, we believe that our affordability strategy and our execution capabilities I've been able to offset these negative.
Macroeconomic trends during the third quarter as we mentioned we saw sequential improvement in volume performance, if we compare.
You H one of this this year.
And and our offer offering of portfolio a line of art art.
Right.
Pack price architecture has truly affected.
Orienting our efforts as I said on affordability, which is really driving or consumer rate base growth.
If we look at.
Our initiatives just to mention.
A few results that can give you a little bit of texture of the effect of our portfolio strategy and execution strategies on we see that for example book I called out original grew 1% versus last year, our Coca Cola original single serve on one wade's grew 2.4%.
And if we looked at a multi serve refill levels, we grew 9.1% versus previous year. So this can give you got an idea how effective our on.
Architecture in pricing and asking you in the ability to execute properly.
Distressed deals at the right point of sale for the right. Okay agent for the right consumer.
Allow us to offset some of the macroeconomic headwinds.
Headwinds that we have we continued to focus on improving execution Thats one of Coca Cola offensive obsession.
And that is backed up by our analytical kept the capabilities that we have been investing seriously the past and increasing our shelf space and colder space. I mean, we're also very focused on doing the fundamentals of the business day over day, which allows us to offset these be pad.
Indicates in Brazil.
Necessarily a difference as we said we are continually growing strongly.
We're cycling through years of continuous growth and these improving trends are basically you'd be outcome of a relentless point of sale execution focus once more affordability strategies, which have allowed us to gain market share across all categories. We highlighted we have we have record share label.
Levels and call us or told that category is 7.4% versus last year and are single serve is growing double digits. So once more.
I think that despite the fact that we are facing volatility across many markets. The focus on operational excellence and investing in the right capabilities for the frontline.
I've been able to allow us to offset the headwinds that we have in the market I know John if you want to.
Comment little more on this I think Luca.
One other things that we have to highlight again is.
Coca Cola FEMSA as ability and it's characterized in these two markets to be able to really run a segment that portfolio.
Carbonated soft drinks or never any type of.
Beverage.
I think when we started talking about the five vessel magic price points in Mexico that is a very unique bottle.
So we're very very very good.
Sizing question and the execution capability that we have in Mexico allows us to make this incremental without losing any of the glass. So the capital investment that we're putting in there to capture that price point and incremental.
Consumption occasion is built on around analytics.
And also reflected our infrastructure and our manufacturing supply chain flexibility. So I think that's one thing in Mexico, and they were seeing and rolling all over and with that we'll be rolling out more.
All of these type of packet portfolio.
Strategies in Mexico, which addresses what is it a.
Hard I would say a hard but a can.
Hey, steady if not sideways consumer environment, but I think were better equipped than those to be able to go out there in address it as assist.
And then Brazil, but we're seeing as a recovery of D. C. D E class consumers that continue to come back into the marketplace and really drive consumption. So that's very encouraging for us and that trend continues but more importantly, okay. We're gaining share in all categories. So the execution that we have.
In Brazil.
Whether it be carbonated soft drinks.
Colors, and flavors juices and Nectars.
The team and waters are all coming up with share gain share of sales gain.
Year to date and the trend is very positive.
I just think queue. Thank you very much further context for the onset maybe I am pleased to the other thing you I guess you already answered but.
Would it be fair to say that.
The competitive advantage of the of the system, both in Mexico, and Brazil. Some semi always is widening O I I in other ways it'll get it is it's a competitive environments.
You know.
Struck me to catch up with some of this some of this initiative and cannot be that you're putting in place.
Did you feel more confident about that.
Yes.
I think this has been a build up let me give give you a let me put back.
One of the is not something has happened over the last six months, it's happened over the last four or five years, where we haven't jointly focused on developing trends in all countries jointly developing capability in our route to market on around analytics and our supply chain.
If you look at.
In Brazil in terms of distribution.
A distribution capabilities that we have over there with artificial intelligence.
Predict routing I mean, the capabilities that we are developing and cross fertilize in between all our country or countries.
Is growing at an accelerated pace. So I think your observation is absolutely correct.
With that we have increased capability in competitive edge.
With that we also see a coca Cola something that continues to be addressing innovation.
Got it coffee cocoa energy coming out with new lines in non carbonated products being able to roll with.
A product that is as successful as typical Chico is adding to both the combination what the buffer and the company has to show for continued and expanded growth as we go forward.
Thank you. Thank you again.
[noise] you find that your question have been answered you may remember yourself from the Q by pressing star to once again, if you'd like to ask a question star one.
Next question.
Of course with Scotia Bank. Please go ahead.
Yes, good morning, John Constantine on team a congrats on the results and thank you for the space for questions look already asked a little bit of what else can ask about Mexico, Brazil, but let me go deeper and a couple of points that you already touched on but the first one is on the waves of innovation.
Well, obviously introduced a lot of new products. So coke coffee has already been.
On the market for a few months in Mexico, and now I know, it's going in Colombia to run for a little bedding, you're introducing it didnt in other markets. So I want to ask you. How that's going on also energy I know, it's probably a little too early to defer salts, but you've also introduce out one so any comments that you can share and how that's gaining traction and ISO light.
Other innovation that you guys had talked about initially and I I haven't heard a lot about it recently, so he could touch and I'm dose to bring innovations.
If I could follow up a little bit on the cross fertilization attack that you guys touched on.
You guys.
I've done incredible advances, but it seems that the approach has been a little different across countries right. So in Mexico, you're a little more focused on the sales side of the business, while you're a little more focus and the logistics side of things on on Brazil, and W are starting to cross fertilize out across regions. So I wanted to see if you could give us an idea of where each region.
In terms of that cross fertilization process. Thank you.
Oh, Thank you for lead though this is coffeyville on innovation well, let me comment Oh, Coca Cola coffee is doing extremely well and actually slightly above our expectations, which we're very.
Very aggressive just to give you an idea of how its you know gaining traction on the consumer.
70% of consumers have tried Coca Cola coffee remain as frequent consumers, which is significantly higher versus any other average launch that we've had in the past, which is around the 40% to 50% off 40% to 50% Mark. So this gives you an idea of the potential that this this.
Oh, Yes extension has.
We're starting to outperform even some of our.
Other non sugar.
Variance in Auxel for example, we're starting to actually beat the amount of product that we sell we focus to know sugar corporate what I've seen us we've gotten in also which has been the initial platform for launch in the market and and so far extremely positive results for Coca Cola.
The coffee so that's on on that particular, one but on an innovation overall as we've mentioned in this call any previous ones. We've been focusing on two areas of innovation one of them is around continuing to refine a rescue lineup.
As we mentioned this new all launched in in Mexico, with the 235 ml a single serve returnable glass bottle.
I had five paso's has been.
Performing extremely well I will to make that too though to your question around knowledge transfer, which also was.
By by John .
Just for the interesting piece of information decided they you know this is a launch that we.
Brought in from our experience about can be older days in the Philippines, where we had to address some significant.
Headwinds enough you know went in consumer disposable income and traditional trade. So we brought back into Mexico, and it's starting to perform a phenomenally well as well as expansions in our multi serve.
Lineup in returnables across the markets and and across flavors. So that's one area of innovation just doing the basics around or portfolio home architecture regarding packs and then on the other hand, not only on on carbonated soft drinks like Coca Cola coffee and and Coca Cola energy, but we recently launched.
We've also been.
Andre dynamic will be interesting launches.
NCB categories.
We launched.
A brand called need.
A on a new line up of although juices in Brazil, all the way from value to premium to premium brands, we launched each leap day, which is a great addition for portfolio. Indeed, I would say, though the enhanced hydration category, it's growing 40% overall target in the modern trade.
We again, we've also launched some other brands across or been Vijay category.
Art alloy launch I'll do that would be brand is twice performing twice as better as we expected on on our own or.
Our targets. So we're doing this across across different markets through impeccable execution and leveraging on our analytical capabilities. So innovation is one one element that we're focusing jointly with the Coca Cola company.
As a means of developing a competitive advantage and in the market I Hope. This answers. Your question, let me just add to that little bit because you asked about we share.
Capabilities I Didnt, it's that's important because you don't understand there were just let me ask other architected Coca Cola FEMSA, because we'll be out at the central offices are centers of excellence.
For a series of functions, but yes.
The operating functions, our human and our commercial.
And then we have another one which is supply chain.
So with that we have best is that they're charged with that's best practice creation and sharing.
And obviously developing capabilities and what we're doing is experimenting and pulling together the models our joint model, but looking at proof of concepts at different places because if we.
It all proof of concept than one one country.
We would probably unfocused view.
The operation from day to day, so in Brazil, we have been more focused on distribution.
And distribution systems.
E Commerce.
And we'll probably ahead of the pack in terms of route to market.
And how we go to market and different sales and selling and delivery systems.
In Mexico, However, due to the same time, they're going out there and looking at supply chain logistics planning integrated logistics planning with J.D.A., which you will have subsequently.
Advanced analytics for commercial.
And also we're looking at distributor models in Mexico and out to be able to go out there and applied a different different areas. So as we come to success in different areas the functional tests of our corporate.
Excellent drivers across the models and we're looking for end to end capability in each one of the functions that is one of the primary reasons why we functionalized the country as a company to be able to leverage these learnings put them into end to end processes and then matched the tools accordingly.
That's a that's very helpful. Thanks, a lot guys.
Well now take our next question.
With JP Morgan. Please go ahead.
Okay.
Hi, gentlemen, thanks for the time my question is regarding cost outlook for next year.
You can update does online how do you look at your cost base evolving into 2020.
Especially with this volatility of currencies into regions, where are you guys are.
And then a tight to this point about pricing antiviral mean for for pricing to mean market steady wires, especially talking about Mexico and Brazil.
If you see opportunities of doing some adjustments to prices to compensate for these cost pressures eventually, especially I guess in Brazil in the issue of.
Thanks.
Or you could compensate that by by mix in some sense of how we think about the margin trends for for 2020. Thank you.
[noise] Lucas zone.
Just to give you got to an idea on what we're thinking about next year indicates so Mexico overall, we feel more favorable outlook on raw materials.
Sugar, we see it bone overall very stable in a much more normalized P.D. costs.
Indicates that Brazil, we have very good hedges in place at attractive levels. So.
Fair amount of her needs for next year on.
ER covered and.
And and at the same time, when we talk about pricing as you have seen we haven't we have the history of leveraging on our capabilities to Bryce.
In line with inflation.
Try not to affect the on the volume based on the consumer base that we continued to be our expectation to price in line or above slightly above inflation, depending on each from over 10 market dynamics that we have.
And overall, although we don't disclose on margins by by country.
We see we foresee stable margins across our.
Our business into different markets and focusing on driving profitable growth.
In an adverse environment overall with a lot of volatility, which will not change in the upcoming 12 months. So that's what machine and we expect do you know continued to work on our efficiencies across the system in order to offset partially any headwinds that we might.
Come from overall.
Perfect and then my second question I know, it's maybe a more difficult one but have you been done we're getting closer to the end of the year. I guess you guys expected to have some solution on the arbitrage process with the Heineken I haven't seen any update so far just wanted to kind of you could brings in terms of.
Hopefully more comfortable you are you finding the kind of solution for for dad or.
In some sense the transition.
Contracts and the resolution to this situation.
Yeah, we have no updates on so far I mean does matter expectation is that we will continue to think that we're going to have a resolution before the year end. So it would be the upcoming calling gates.
As as we previously have discussed we have an obligation to keep confidentiality although process. So we can comment on.
On this topic very limited, where we can say about it.
But we as of this moment, we continue to distribute Heineken products business as usual in Brazil, and doing a hell of a job as we've been doing further for the last few years.
On that portfolio. So we continue to focus on what we know how to do well every day.
Regarding in Brazil, you know just connecting adding a little more color through your two previous question I think the headwinds in Brazil are more tax related that raw material related and that is something that I guess all the industry is facing at this time in that in that particular marketing something we need to continue to watch and continued to focus on.
Efficiency programs in over in order to offset any of that.
Any of that going forward in the next though in the upcoming you.
I'll just add to that Brazilian tax.
We've been extremely conservative.
Extremely conservatism our position.
And in this year and going forward and our blotting.
And although there may be some some.
Different.
Signals in the marketplace, but I would suggest is given where Brazil those.
As for you guys to assumed to be conservative as well.
Thank you gentlemen, especially on the IPO.
Exactly.
Thank you very much.
<unk>.
Once again.
Good question, it's Darren.
So from the Q.
Well now take our next question.
GBM. Please go ahead.
Hi, good morning, everyone and thanks for the for the space regarding Mexico and in all the noise surrounding that book tax increase I noted that initiative you didn't make it in Congress, but I Wonder if you could comment on your general perception, you're writing a lot, but they said that that's increasing at some point doing that administration and also.
I think that new labeling initiative, what effect would you expect from this initiative and.
Let's start off a actions are you taking internally to mitigate a up what they sell them. Thank you.
Sure.
Let me go.
Let me start off with the potential tax increases going forward.
And and I think what we have for certain right. Now is the fact that we have a.
Inflation adjustment.
Yep stocks or about the it's about 7% increase in the upside and if you translate that into required wall required pricing. It's about one point the required pricing to offset that and we fully anticipate.
Well to do that in Mexico.
As early as January and so we're not going to go out there and have that weve into.
Economics.
Okay, and an expectation I think generally speaking.
In Mexico as things go forward increased revenues as a whole.
An important piece for the government to work on.
And we do expect probably towards the end of 2020 larger fiscal discussion in Mexico to happen.
And obviously.
Our industry is going to be part of that.
Well that works out is still highly uncertain.
And and I would think that.
Right now the only thing with US assumption to have is to continue to look at the ups as a as adjusted by inflation.
In terms of the labeling going forward.
The labeling that is being proposed in Mexico <unk>, Let me just separate the two issues. There is a general health law in Mexico.
That has been approved by both the chamber of of definitely agenda.
Uh huh.
Under Senators, which gives a brought out like what.
Labeling should contain okay and there is <unk>.
But there is no regulatory.
There is no regular regulatory and technical norms yet established.
The norms, whereas the health. The law was passed we have a 60 working day period to be able to consult with the.
<unk>.
And also with.
Our economy secretaries to be able to.
Got it was that they call up cost with the whole you got to be able to add or delete. Okay. What is in that in that are in that in the regulatory package now the regulation and the signage that is being put forth is very like Chile was inspired by that your land model warning signs.
Okay, and although the profile the nutritional profile is different than being proposed in Mexico.
We have to go back to what the Chilean experience has been and the Joanne experience for labeling.
One where it did affect volumes in the short term, maybe a low single digits for the first two three years four years.
However, one other things that was also a byproduct is the fact that Coca Cola and Coca Cola.
What was reformulated aggressively and also tip above inflation pricing and the system profit group.
Double digits, the more impacted products in Chile.
Where are those that such as yogurt cereals et cetera.
We're not necessarily perceive that I have a higher sugar in the past and that came out they have double digit declines so I think.
If the nutrition.
Helps to understand the consumer of the consumers now what would what he is getting into what is buying Mexico were all for that.
And what we'd also like to stress on this is the fact that we've got experiences with his label where.
It has given us the incentive to reformulate aggressively.
To be able to bring down.
The number of warning signs and also yield to bring down the level of any potential tax involved.
That's helpful.
Yeah, that's very clear thank you very much.
Our next question Antonio Gonzalez with Credit Suisse. Please go ahead.
Hi, Good morning, Thank you for and taking my question and just building on the previews and quick Undrawn influence on you know what's left the following it obviously.
The innovation on the transformational changes in your route the marketing in Mexico has been quite impressive.
But when do you understand the board films and we can argue that they'd be ancelotti trite for for at least a few years now.
On pricing cuts going see simply being ahead of inflation right. So.
To get your Big picture thoughts John perhaps on you know do you think that the price equation. It should change everything and that's probably isn't going to be too far on how do you reconcile right. They they need to increase prices because of inflation beat because of stocks is change it seemed to concentrate to mechanism.
Yeah.
First and there's a number of Fox doors, and but I just wanted to get your big picture thoughts on on on whether you know board you'll need to low.
In spite or they are getting a transformational changes in the later on in the market that you implement.
Mhm.
Yeah, I think first I'd like to reiterate the fact that Coca Cola original continues to grow in Mexico.
Okay, and we were able to grow single serve in Mexico by 2.4% or multi serve business by 9%.
And a week I continue to see opportunities to grow no.
Each larger consumer basins in Mexico, and connecting with consumers of genes and moms and yeah, I think I think.
I I continue to see.
Growth in the category now that being said.
As we go forward, we're going to I agree that the leverage more of the CNS took up.
Strategy and start shifting consumers away from sugar into the the seen US we've got category.
For two reasons one is for tax reasons.
And secondly is also because of economics.
It is more profitable to have the pace, yes, we've got a package then it is the hub in sugar package and also just given all the social Russia and the goal of regulatory pressure, it's going to be something that we're going to achieve over the next.
In the short term I wouldn't put a telling table to it but without the move to a lesser based beverages. So the combination of the two I won't go allow us to sustained margin and also the fact that we're looking at continued focus on single serve transaction or hours to maintain pricing or their rate pricing the rate elements.
In a in.
Mix equation.
Overall, we're going to tick above inflation pricing at least for the next year.
And I.
I think we're going to force and accelerate our.
Our efforts to be able to go towards lower or no sugar in a very short term.
You want to though I would say and Bunia would have to John's comment regarding.
Our returnable capacity and capability I think that's that its key I think better under eight stressed oh consumer environment with lower you know there's nowhere growth overall in the in the macro economics on the transition in the mix within our portfolio from.
One way one way packages into a deeper and deeper returnable base is something that it is in the making right now it's it's not something that happens overnight. If you understand due to the investments that are required into the build up of the returnable packaging base that you need to have.
But overall I would say that Theres no one.
In this system that is more capable of leveraging returnable capabilities. On then Coca Cola FEMSA that is something that we're working very strongly on in Mexico and eight in it is.
Working phenomenally well for us I mean, the growth that John mentioned on the Coca Cola brand is overall.
But we're seeing where we deployed our returnable packaging base.
We see we see important upticks in volumes across across different geographies within Mexico, where we're launching so that is one key pillar over strategy to sustain and even grow volume in the next few years, where they would have very.
Very stressful environment on on our consumers. So I think that is something that you will have to watch and you will see how we perform under that particular pillar and coming back to where the Constantino said, hey, it's very important understand their returnables or an incredibly.
Important piece of our strategy and it gives us the ability to stretch our pricing fields.
Okay and stretch or margin potential.
And.
Nobody else has a possibility.
In Latin America.
Thanks.
At least in our territory.
So the Columbia.
Thank you.
Well now take our next question from Carlos.
HSBC.
Yes, good morning, everyone.
Jump in India. The Red truck has a lot of restrictions legacy restrictions from Atlanta, yet <unk> technology is changing the sort of things you can do to be much closer to your clients to be more effective with your clients.
Well, what sort of changes in in your route to market model around what you put on your truck you think can change to help your client service model or two to boost your returns.
Well first I think you know the first thing to question Carlos is the fact of where do you use the red truck and where do you does not use of the truck and I'll give you. An example, what we're working on in Mexico.
In Mexico.
We're looking at going out there and changing our route to market.
And significantly increasing the level of distributors within our market mix.
The about 18, 20% more than what we had right now and that is tremendously more cost effective for us.
It's more related to territories in areas.
To be able to go out there and get these savings secondly, we're starting to experiment.
In certain markets with low chairing a weather categories.
In Brazil, we're starting to look at.
Alcoholics.
As a way of saying whether that can decrease our cost to serve.
We're looking at that also another in other countries as well.
There's also the issue.
At the end of cost seven loadings are big deal.
And.
The technology that we have right now in place.
In Brazil is something that we were looking at being able to the predictive about the.
Routing system bring down our cost.
Oh, the advance notice is true that consume about into the customer of when.
That.
When the ship into the rising so we can get even better in terms of delivery and more effective in the routes and that has given us a lot of savings in market as well as we're rolling out in Brazil.
And I think the third thing also is the level of different applications, we have for selling.
We are clearly going on a path and results probably the first place really habit.
Of be Omnichannel, okay, probably towards the end of next year. So we will have a comp will have a set of different routes to market to build the sell through either what's up.
Or going out there in doing this via your else.
Yeah, the suite of of perhaps that we have for both selling and delivered our selling to get very powerful.
Thank you John one one follow up on plastic model on refillable bottles.
<unk> pasta crisis, we got.
You see yourselves marketing harder the qlogic on merits of your refillable bottles going forward and what.
What are the constraints to not doing that.
I didn't quite catch the last part you sure.
Do you expect to be selling.
Consumers harder on the it's logical merits of refillable bottles, my there any constraints to <unk> to not doing that.
No. There's nothing has changed enough doing that and get us apart.
For the messaging that we'll be getting out.
The other thing to the talked about is that we are start for looking at expanding our recycling capability.
Both collection and recycling of resin in Mexico, and Brazil, and other countries, but then they'll units than Brazil.
So it's not only a one legged stool, it's an area has to do with the likes of of being able to come back and.
A copy outcomes.
Collect lefkowitz collect plastics recycle them into.
Virgin process, we're looking to do this and the target to be 50% within the next four or five years.
And by 2023.
And then the ecological piece of Returnable glass is also in place as we expand all our capability throughout Mexico, we're looking at incremental capacity there to be putting the ground over the next couple of years as well to be able to leverage out even further.
The marketing piece I think is something that we're looking up and it's more in terms of refillable as we usable.
So the that.
Good.
The messaging for the consumer refillable, but it's over usable package of Coca Cola to be filled with the Coca Cola products.
And and or other brands, we have a large strategy in place, we're starting to roll out which is a unique bottle.
Reversal bottle, we're testing that in Mexico, we're testing that we're rolling that out in Argentina.
And with that unique bottle.
Universal Bala.
We can put in.
Coca Cola.
We can put in flavors and we can put in and other non covenants okay.
Such as the value of fruit to build to use that packaging container become more efficient more effective and more as a logical and we're testing that in Florida, although different markets and if successful will be rolling it out for the next couple of years.
Thank you.
We'll now take our next question from.
Yeah with BTG. Please go ahead.
Hi, Good morning, Thanks for the call my questions on results in South America Lisa.
You mentioned the release there was some restructuring expenses.
We saw a a positive 363 million.
Other operating other operative expense I was just curious as to what was going on in Atlanta. Thank you.
[noise] no.
Yeah, but what you're seeing there is the extraordinary effect of income due to a tax litigation.
But we won on the Brazil authorities its.
Let's say, it's a it's a nonrecurring effect and that is something that we have included in our results for the quarter. So that's that's the effect that you're looking at.
Which is significant which is significant for the quarter.
So just to be clear late last Fridays.
In the press release, you mentioned that that's included in your and your revenue line item and your EBIT line item. So that that there's a portion of that that's also included in the other operating expenses as well.
Yes, Sir.
Perfect. Okay. Thank you and I'm, assuming that offsets some of these restructuring expenses.
And I like them laid out of specifically okay perfect. Thank you very much Oh.
Oh, thank Steve.
Once again.
Okay.
So from the Q.
Your next question.
Yeah.
Please go ahead.
Hi, good morning, Thanks for the opportunity I have two questions.
The first one you mentioned beefy abolished the opportunity to explore alcoholics. How have you seen you know some of your peers announcing some partnerships in distribution for spirits. For example, so just wondering what fuel holding you from doing some partnerships is it that used to have the relationship with Heineken in Brazil.
And just to understand a what could be the size of there's opportunity to me operations.
And the second question your parent company Fenza.
Has been more vocal in expanding in Brazil, including Inorganically I, just want to understand if there could be any potential synergies within your operation and Fenza such as for example, a true expansion off offenses convenience stores.
Turning to the in the country. Thanks.
Well now go on the on on the alcoholic beverage side.
You know, where we as as John mentioned, we're exploring different different opportunities across geographies as you as you pointed out there is a who's the president in other in other peers in the industry I would say that most notable ones or Google Atlantic and Coca Cola Amatil indicates Australia, where they.
How cool total total beverage portfolio is ranging from alcoholics did on alcoholics and that has proven to be affected in particular situations on some channels and for some occasions. So we're definitely looking at these jointly with the Coca Cola Company.
As as John mentioned, we're already running some pilots with spirits in Brazil in some particular regions there not a nationwide initiatives, yet and we're considering some other.
Initiatives across our geographies as we speak so we're taking it you know we're very we're very disciplined about what we do in Coca Cola FEMSA and we just want to ensure that whatever we do really serves our purpose, which is having the best value propositions to the customers that we serve.
In order to continue growing our core business profitably.
And that's the focus would we have taken so far that's our approach and and as I mentioned, we're currently.
Trialing some of these initiatives across different geographies and we should expect to have news on that in the upcoming home in the upcoming ones.
[noise] around FEMSA I don't know thinking if you want to do you want to make.
There's some kind of synergies.
Listen I, just spoke to say sell more.
And they're convenient stores.
But aside from that I think there maybe some.
Functional or synergies.
I would say not significant and we're not taken in part of your decision.
So.
I don't think that would be an addressable points at this point there.
Yeah.
Not significant.
Okay. Thank you very much.
[noise].
And that is all the time.
Mr Centenary I'd like to turn it back to you for any additional or closing remarks.
Yes. Thank you.
Just one last remark as you have seen in the press release.
Yeah. The elect Astro has been the Investor Relations director since October 2016.
There's going to be taking on new responsibilities in the company.
Logically also has been with the Investor Relations team since 2016 will take over many of you are those.
Position as head of Investor Relations.
And I'd just like to take this opportunity thank muddy idea.
For all the hard work.
And all the great relationships, we use she's establish the view all.
And which part of it well and I'm sure that he will be other the brilliant development.
Going forward and sets a challenging environment does go go with them says.
Thank you very much for attention more interesting Coca Cola FEMSA.
This concludes today's call. Thank you for your participation you may now disconnect.