Q3 2020 Coca-Cola Femsa SAB de CV Earnings Call
[music].
Good morning, everyone and welcome to Coca Cola FEMSA third quarter 2020 conference call.
<unk> conference is being recorded and all participants are in a listen only mode.
At the request of the company, we will open the conference up for questions and answers after.
The presentation.
During this conference call management may discuss certain forward looking statements.
Concerning Coca Cola <unk> future performance and should be considered a good faith estimates made by the company. These.
These forward looking statements reflect management's expectations and are based on upon currently available data.
Actual results are subject to future events, and uncertainties, which kinda truly impact the company's actual before that.
At this time I will now turn the conference over to Mr. Johnston.
Coca Cola FEMSA <unk> Chief Executive Officer. Please go ahead Sir.
Thank you and good morning, everyone.
Thank you for joining us today to discuss <unk> third quarter results.
We appreciate your interest in our company and I Hope you and your loved ones car sales.
With me today are custom built spots or.
Our Chief Financial Officer.
Yes, well the strategic planning director.
Yes.
<unk> Investor Relations.
The pace of a complex operating environment.
Hi, I'm encouraged by the sequential recovery and overall improving trends we saw during the third quarter.
This positive momentum is driven mainly by gradual increases in consumer mobility.
Yeah, no so far come back strategies, and the resiliency of our business.
Although operating environments remain volatile.
Pay some shape of the recovery is still difficult to predict.
Outlook is cautiously optimistic.
Notably for consolidated volumes improved from a double digit decline in April so low single digit growth in September.
The first month consolidate you bought and you wrote since the start of the pandemic.
Our key priorities have played an important role in bolstering our union.
Good luck to the safety and well being of our employees.
Another outstanding value and service to our cousins concern that some clients.
Electronics <unk> supporting our communities.
Ensure prudent use of cash and strengthening our balance sheet.
Accelerating the rollout of our transformational initiatives.
These terrorists position us to emerge a stronger clinical thumps up once the pandemic itself.
On our call today.
I will briefly review our third quarter results and provide you with an operating loved it.
Well they give you more color nonstrategic part of their priorities to drive growth.
For what purpose.
Importantly, I will discuss the significant strides you got married to achieve our ambitious 2020 sustainability targets.
Yes.
Finally, I will turn the call over to constant do you want to give you the results of each division.
Expound on recent green bond because of those systems first <unk> Green bond issued.
[laughter].
Moving on to discuss our quarterly results.
As was the case you had third quarter treat platinum team following a favorable decision from the Brazilian tax authorities Coca Cola FEMSA I've been told to reclaim tax payments made in prior years in Brazil.
This resulted in an extraordinary positive in fact for the quarter.
Huggins 70 million best.
On our operating results income as compared to the previous year.
As as I summarize our quarterly results I would refer to its actually made it another extraordinary effects.
Our consolidated volumes declined 1% that's sequential improvement from the 7.2% decline during the second quarter.
Britain was driven mainly by the strong performance of the show in Guatemala.
A couple of winds up in Milwaukee.
In addition, we saw sequential improvements in both Argentina and Central America while.
While Colombia, and Mexico were relatively stable as compared to the second quarter.
In Mexico, the pace of recovery proceeding more slowly during the quarter than initially expected.
Mainly due to the relatively cautious consumer reduce stability and one third the weather.
However across most of our markets client reopenings accelerated and drove improved performance across categories channels and presentations.
For example, while the traditional trade has remained relatively resilient the modern trade show improved from double digit declines in the second quarter to low single digit declines in September.
Importantly.
In Mexico, we see headwinds for upcoming recovery are you still are below the levels of reopens entropic, but we have had.
That we had in other regions.
We are hoping to try to go you have seen another leading countries.
With regards to our categories, we continue to see performance from our sparkling beverage category.
For.
For example, our Brazilian operation sparkling brands grew 8% driven by 5% growth in brand Coca Cola.
Double digit sales growth.
Well, it's not flavored sparkling beverage portfolio.
Volumes of brand Coca Cola also doing central Mark a year ago.
While remaining flat in Argentina, reflecting consume a strong preference for this iconic brand.
As a result of affordability and diversity about books when.
Combined with our relentless focus on execution, we're gaining market share across the non alcoholic ready to drink states and each of our territories, except Argentina.
This growth is consistent with our strategy that strategy that focus on winning during a challenging targets in order to sell during the fourth coming recovery.
Moving them onto our topline our total revenues declined 4% impacted mainly by unfavorable currency translation and price mix headwinds.
These effects were partially offset by pricing and revenue management initiatives and Jean Marc.
It is worth noting that by removing currency translation effects on the top line would have remained flat underscoring the significant currency headwinds a company that's during this quarter.
Importantly, despite a decline in revenues our operating income increased 1.5%.
Driven mainly by declining GDP costs favorable currency hedging actually there's no operated outstanding ability to generate savings and efficiencies.
These factors were partially offset by unfavorable price mix affects the depreciation or most of our operating costs just as my parents are the year's loss.
Higher concentrate costs.
Remark removing currency translation effects, our operating income would have increased a solid 7% for the quarter.
As was the case during the second quarter, our mitigation actions and favorable raw material costs enabled us to Pops up close to 3 billion passage of COVID-19 related headwinds effectively mitigating bought at 90% for the girls simple.
Thanks to these actions in a complex environment, our operating cash flow margin expanded 90 by 90 basis points to 21.6%.
Finally, our controlling net income increased 38.8% decreased 58.8% year over year driven by extraordinary other non operating expenses impacted mainly by the sales of the study a suit in Panama and an impairment and probably all the noncarbonated beverage joint venture in Brazil.
By normalizing, our controlling that income or earnings per share would have increased 6.2%.
Reflecting a positive underlying operating departments.
One of our key strengths is the mutually beneficial business relationship that we enjoy with the Coca Cola company.
Despite short term volatility remain focused on blogs and on drug into system problem.
Accordingly.
Sitting long term investments and profitability levels that are beneficial to both the Coca Cola company ourselves.
We have agreed to an increase in the cost of concentrate for sparkling beverages in Mexico, but the one year period, which began in July 20 Twond.
As a system, that's coming just to continue strengthening our portfolio.
Capitalize on attractive consumption occasions in categories, such as the recent launch in the <unk> and to continue not cooperating through the implementation of marketing commercial strategies that ensure our business is long term growth.
We expect that these initiatives, coupled with our ability to drive efficiency and productivity.
Continued to offset the effects of this increase as well as the case during the quarter [noise].
[noise] you can do to leverage our strategy driven by our vision and mission, especially well anytime and anywhere always finding the most efficient and sustainable way to put our consumers preferred beverage in their hands.
To this end, we must become an integrated commercial beverage platform that works seamlessly in real time to live our four strategic priorities. They got a transformational go.
First build uptake we're talking about for every occasion second enabling overall digital transformation third ensure business sustainability.
Sure.
Foster pick collaborative culture.
Okay.
With regards to our portfolio, we have set the main drivers to further consolidate our leadership position in the beverage industry.
Affordability remains a significant growth engine for our sparkling beverage category.
Additionally, we must address new constrained locations and preferences with its national innovation continue to capture market share in emerging categories, such as hydration nutrition and energy.
As well as our recent incursion into alcoholic ready to drink.
As consumers restrict their behavior.
Assumption at home and she put simply leisure with what <unk> they continue to evolve.
Creating attractive opportunities for packaging innovations such as single serve multi packs and returnable presentations as well as tremendous opportunity to beat you extend our home delivery routes, which are growing double digits currently.
The power of innovation and portfolio extensions to the justified by the successful launch of the pachinko sparkling mineral water in Mexico City.
Looking at an impressive pace Stifel Chico complements our portfolio has a superb goodness.
In energy drinks segment.
We have successfully launched private or a value brand from the monster family that it's helpful. And then just energy portfolio across channels. This.
Despite having launched in the middle of the pandemic this attractive often it's allowing us to gain share the attractive emerging category.
Moreover, the Coca Cola system has taken its first steps into the alcoholic ready to drink states and the region by launching it up but you call hard sensors across selected cities in Mexico and Brazil.
Other territories are expected to losses pretty nimble operating before year end and doing 2021.
We are excited for the growth potential that this new category, but that's just.
Importantly, we continue to reduce complexity and drive agility by reducing the number of states to go through all the prioritization of growth and profitability welcome.
While consolidating a local brands under global and regional brands Uh Huh.
Thanks.
For instance, we have reduced by close to 20% the number of students in markets, such as Colombia and Argentina.
[noise], our second strategic priority is to drive an overall digital transformation in order to fulfill our vision of becoming a fully digital digital interconnect with the kind of job and flexible part.
On our second quarter conference call.
Standard on part of the strategy, our omni channel capabilities. However.
However, our vision goes further but further by deploying capabilities not only for older Kids and solutions because future, but also evolving our routes to market and logistics models, while scaling and optimizing each of them as prostitutes dropped throughout through automation.
This transformation is going out a tremendous speed to give you a sense and just one quote the number of daily orders, we are taking through what's up itself triple now reaching more than 13000 per day.
Oh, good strategic driver is ensuring business sustainability with this in mind I would like to update you on our endeavors to achieve our ambitious 2020 sustainability goals before your.
First we have significantly improved our water use racial the leader of deleverage reduced to 1.5.
A benchmark in the industry.
Second we have increased our use of recycled PBT from 20.5% for the third quarter of 2019.
29% at the end of this quarter exceeding our 2020 targets of 25%.
Finally, an impressive 82% of our energy use in a bottling facilities come from clean energy sources, a net increase of 16% over the 71% achieved at the end of 2019.
Importantly, our sustainability goals are aligned with our financial objectives. For example, and packaging we expect to take you through a light weighting initiatives and our label Standardization project, which focused on optimizing the use of raw materials.
As we build upon our sustainability performance. They expect more news on the achievement of our 20, twond sustainability goals and our new commitments in the coming months.
In summary, despite what is still a complicated environment and not only encouraged by our resiliency in underlying operating trends, but also very proud of the tremendous dedication from all the Coca Cola FEMSA employees.
I have a very clear agenda ahead of us and I'm confident that we are taking the right steps to strengthen our portfolio.
He doesn't digital platforms and continue driving our sustainability strategy, creating key avenues for growth and value creation for years to come.
With that I will now hand over the call to constantly.
Thank you John and thank you all for joining us on todays earnings call.
I will now expand on our divisions highlights for the third quarter.
Starting with Mexico.
This market or top line decreased 6.7% driven by volume declines and unfavorable price mix.
Effects were partially offset by revenue that the initiatives.
<unk> and.
Emphasizing the relevance of our affordability pillars, all multi serve returnable presentations continue to grow double digits. While we also see an accelerated performance grants such as Coca Cola zero sugar and bill, but she goes far getting better water.
As we enter the final stretch of the year reinforcing or come back glad that Mexico to government until portfolio proposition.
Improve our service levels through technology, and new capabilities, particularly digital capabilities that we are in good shape.
Although the organization.
In Central America, or volume declined 2.9%.
Mainly by volume declines in Panama.
All the very stringent gold at 19 containment measures that regimented in that market.
These factors were partially offset by the continued volume growth although operation in Guatemala.
The pricing probably recognize that the initiatives coupled with the positive currency, but inflation effect from the central American currencies, and that's again, perhaps just partially mitigated a favorable price mix effects.
Results or top line decreased 4.8% in the Mexico and Central American Division.
However, despite the effects of profit 19, the concentrate cost increases and the depreciation of the Mexican vessel operating margin target Division expanded 170 basis points, while operating cash flow margin expanded by 200 basis points.
This increase was driven mainly by declining P.B. costs currency hedging initiatives and her team's outstanding job generating operating expense efficiencies and savings coupled with very solid results from a fuel for growth efficiency program that was implemented during 2000 <unk>.
Moving to our South American Division, a low single digit volume growth was driven mainly by a solid 6.5% volume built in Brazil.
This particular territory, we observed rapid improvements in consumer sentiment together with reduced markdowns and favorable weather.
Additionally, a year why delivered positive volumes, while Argentina.
Which has been one of the most challenging operating the bearable solves that problem offense up during the year I started to stabilize.
These emerging trends were partially offset by volume declines in Colombia, a country that has continued to implement social besins badger's very strict drop downs for most of the of the quarter.
I Love the case for our Mexico, and Central American Division, our pricing initiatives were offset mainly by currency headwinds.
Did that help.
Wait on favorable price mix effects that toward taught by a decline of 3% in South America. It.
Including extraordinary other operating revenues related to entitlement to regain that's pretty much in Brazil.
Excluding currency translation effects or top line would have increased 10.7% during this quarter.
Despite a profitability had waste such as our decision to temporarily suspend tax brackets and concentrated in Brazil.
Combined with unfavorable price mix dynamics and the currency headwinds we explained though before we were able to expand the gross margin into the vision by 20 basis points.
I will now its standalone financial results, which reflect or initiatives to strengthen our balance sheet and financial position.
Our interest expense recorded a reduction as compared to the previous year, driven mainly by our liability management initiatives, including debt payments and the tender offer and make whole all the 22.3 U.S. dollar dog.
These effects were partially offset by additional short term debt that was incurred mainly in Mexico pet sales.
During the first quarter of the year to reinforce their cash position in the face of up and down.
As part of our comprehensive playing I should result.
We recorded a foreign exchange loss of 135 million barrels as compared to a gain of 38 million pets is where the year earlier period.
This loss was driven mainly by the appreciation of the Mexican peso during the quarter, the pipes or dollar denominated cash position.
Well, let me answer that never successful Green bond issuance, which was completed during the quarter.
Consistent with our financial discipline, and strong credit profile and the commitment to sustainability repriced or first ever Green bond and the international capital markets.
That's it that's all part of the Gulf. They all $705 million all principal amount of notes due 2030 to what's driving that U.S. Treasury, plus 120 basis points and had a coupon of 1.85%.
Just like that yet because the largest ever green bond for the Latin American Corporation and received a very broad participation from investment grade dedicated investors.
Turning Coca Cola FEMSA financial discipline strong credit profile and a long term commitment to sustainability.
We expect this body will enable us to achieve our environmental targets in areas such as climate action.
Water stewardship on a circular economy.
Well you additional details all the or use of the proceeds into alignment with the United Nations Sustainable development goals, you can find a copy of the Green Bond framework auto websites you should it's a threefold lucky lucky to get out.
Finally, I want to underscore Coca Cola, FEMSA strength, and resiliency reflected strong balance sheet.
As of September Thirtyth, Twentytwenty or net debt EBITDA ratio closed at 1.05 times, while our cash position is more than 58 billion pets.
Notably we have a very disciplined approach to capital allocation been very clear priorities number one is to reinvest constantly and the <unk> in the business number.
Number two to remain opposed to mystic about potential M&A.
The two entities that are value accretive for our company.
And another important priority for us and dividends in line with that.
Under the second installment of the dividend will be paid on November 3rd Twentytwenty would that 37% increase versus previous years given it.
Overall solid cash flow generation and balance sheet or approved for the Companys resilience and the outcome of the very prudent financial discipline.
Right around the expectation that the second quarter.
The most that bucket, Bob laid up in bed and decide to recovery, but we're seeing today. We remain confident that just don't serve other profile will enable us to continue a path towards a long term objectives.
Thank you very much and with that I will hand, the call back to John for his final remarks.
Thank you Konstantinos.
Against that backdrop, the complex and dynamic environment.
We have continued to effectively execute underperform our strategy.
We are encouraged to carry on navigating the road to recovery.
Our third quarter results and trends strengthened our ambition to achieve our vision of refreshing the world anytime everywhere.
Thank you for your continued support.
Operator, I would like to open the call for questions.
Thank you.
I'd like to ask a question. Please press star one on your telephone keypad.
Yeah.
Feature and function turned off to allow your signal to reach and whatnot.
We would like for everyone to have an opportunity to ask the question.
He's asking about passing question Sir.
Okay.
Sorry, one last thing you.
We can go ahead and take our first question from Ben.
Clay.
Yeah, good morning or good.
Good morning, John constantly you know first of all congratulations on the results.
My one question would.
Maybe if you could elaborate a little more on the dynamics throughout the quarter and what you're seeing into the fourth quarter in Mexico and the differences between the traditional channel and the modern channel and how that recovery is turnkey playing out just to get a little bit of send itself. What is he did not too.
Get you back into into public release flattish to positive territory on the volume side in Mexico.
Sure. Thanks.
Uh huh.
Obviously, what we're seeing is doing during the quarter, we saw a better.
July.
A downfall in August because of weather and not.
In Mexico, and then in their rebound in September.
And that's all that combined however, gay this means during September gave us a full month of growth. The first month of growth. We've added since the beginning of the pandemic.
Sequentially, what we're seeing going forward in October as you know the continued improving upon that and so we're very encouraged to see that more and more markets are driving starting to go positive.
In terms of <unk> performance by channel.
We're seeing out there.
Consolidated comp.
He is a traditional trade.
Starting to pick up and go positive for a student who Oh August September period.
In modern trade bouncing back during September.
From what was double digit declines a mid teen declines during June July August. So it's both you know encouraging for the traditional on trade and for the modern trade like once the concerning factors is still you know.
No not concerning but it's just slow factor that's recovering.
Is the on premise channel in Mexico, the traditional on premise channels in Mexico, where we still see north of 660000 accounts closed and although they've been gaining little by little and all of.
That that bought opening has been slow compared to the rest of the channels.
Packages I would say that our multi serve that could just continue to bloom.
We continue to grow at a high single digit rates and what's encouraging as well as single serve packages first starting to have less deep of a decline as to what was compared to during June July and August. So sequentially. You know the traditional trade channel is doing better on premise channels opening up.
Supermarket channels are going back to normal.
And what is very encouraging is also to see single serve starting to have less decline.
Or sequentially from month to month.
And like I said October seems to be doing a lot better than September. So we're seeing sequential declines point sequential improvement as.
As we go forward.
I'm very encouraged by that.
Okay perfect that was very good just one quick follow up on the commentary so basically what we seeing seeing on the transaction side, which obviously was still a high teens or negative during during quarter that is something you would also expect slow due to improved because of the commentary.
Sure just need around the single serve packages at the reopening correct.
Absolutely, yes, so as you see that the traditional trade on premise the trial start leveling out.
And people start moving having higher mobility levels in general yeah.
Start seeing more convenience packaging, even worse than the sort of packaging.
Being transacted.
Perfect perfect. Thank you very much congrats.
You're welcome banking.
Okay.
Wanted to ask a question. Thank you find your question has been answered your neighbor move yourself from the queue.
Pressing star two please.
We can go ahead and take our next question from.
Hi, Steve.
<unk> <unk>.
Please go ahead.
Hi, John Thanks for the call My question I have several questions, but I'll keep it for one.
On on coach restructuring I think that's probably a pretty important to address sort of what are your implications.
You know what are the implications for <unk> specifically.
That's sort of larger more network model, what do you think some of the benefits or maybe some some disadvantages love to hear thank you.
Sure. Thank <unk> yeah.
I.
Ah coax restructuring is something that is extremely positive.
For us and for the system as a whole.
One other thing that it does is it starts streamlining the organization.
And making it much more agile in terms of decision, making and they are both.
Both.
Taking a eliminating browns that are not performing and.
And also bringing new brands to the market.
And as a as a as an example, I would say is double Chico hard seltzer.
That is something that we collaborate collaborated on as a system.
And from conception to time to market.
We took three months to get it out which is something extraordinary quick for any company, let alone the Coca Cola company. So.
So I see the organizations, one having a lot more jody too.
Secondly, it's going to have a lot more we're going to have a lot more capability to drive innovation given the speed of implementation this requires or would result.
Third we're going to start seeing you know much fear or verticals and categories.
ER as it will be coming down from Atlanta, you know with a specific strain.
Strategy in mind.
And it will be clear that that strategy to get implemented at the market level. So there's.
The good those are the goods the bags more I think you know you're going to have a little less.
Say in terms of what.
What can get tweaked and what from what could treat that at the operating level at the country level that will give you both on the.
On the.
Kao side as well as the cost side so.
So you know there's going to be less customization for quarter four markets.
But I think what we're going to be betting on is the bigger boulder brands initiatives, taking out a lot of the smaller brands that are not adding much to our system other than complexity.
And so I think the focus of the Coca Cola company is to continue to grow.
And having straight.
Yes, very clear agenda for the categories.
That's a wonderful I truly think that it's an exciting time for the system and Ah with that.
I think we can do a lot more a lot faster.
On a constant do you care to.
Comment on the platform services piece.
Yeah, I think that apart from that lets say the trunk line focus John was mentioning there's also a huge opportunity.
In terms of the backend processes that we have throughout the system I spoke about offense that we have been working very very.
Resolutely into expanding and enhancing.
Our shared services, that's it's volatile, but there is clearly a there is a clear opportunity to collaborate with the Coca Cola company and across the country across all other participants in the Coca Cola system in the in batch runs and at the same time. There was also a huge opportunity.
In data sharing across the Coca Cola company and ourselves in order to generate a much more robust analytics.
Capability in order to have a much better and much more informed decision making across the countries. So overall I think it's a it's a holistic benefit.
For the system, but all the other commercial capabilities not only of the portfolio piece of innovation speed to market such as the Chico's John mentioned, but also on the backend side, where we have a long ways to go at all where both companies actually all the system has been working very adequately and in getting that much better.
In that particular type of process. So there's there's definitely a huge benefits year to continue to collaborate more into enhancer.
Capabilities to drive much more efficiency across the system that they're very very positive well it might contribute.
Great. Thank you.
Oh go ahead and take our next question from Marcellus <unk> with credit Suisse.
Please go ahead.
Hi, Jon Michael.
Thank you for taking my question I have two quick questions here the first one.
I'm not sure in college football to concentrate.
I could you elaborate a little bit more I couldn't hear you well you mentioned that you've agreed not.
Yes.
This fact in July.
It would be helpful. Just elaborate.
On this topic.
My second question is really <unk>.
Brazil.
Just one question.
Yes exactly.
Right.
Thanks Art.
Sure enough time.
Think about the company.
Tax collection Greenhill was off next year and that's.
That's the thinking.
The thing that you are expecting for next year operation. Thank you very much.
Sure I can take that thank you for your question and.
In the case of the other concentrates of increase as John mentioned during the call. We had a concentrate increase this this.
This quarter deep the concentrate increase is in line.
The previous adjustments, so it's manageable and though we do you expect to continue to expand margins during 2020 up to protect them during 2020 one.
So to give you an idea of the different dynamics that are you know there there were ongoing within the company. So to give you a sense, we expect savings in Mexico. During the full year 2020 to reach a broader approximately about a $180 million, which much more than fully offset the increased switch.
In line with previous increases and and it's part of our cooperation framework.
But of the three year increase that we've entered before beat the future increases like the ones that we had dogs dependable that's been profitable levels that are beneficial to both in the long term.
You know our concentrate conversations on a long term approach. So we continue to work together with the Coca Cola company to navigate a short term disruptions, but also position ourselves for a bunch of growth.
I have been doing 2020. So it's it's part of how the system works, we should not be extreme be you know over thinking these price increases since incidents has always been and will continue to be a part of that relationship going forward. So all in all it's a it's an increase in line with previous adjustments, we believe its food.
Be manageable and I could but a demonstration of that is the fact that we were able to expand their margins are.
During during Twentytwenty.
Indicates all of Brazil.
[music].
You know we continue to take a very conservative approach on that yet.
That's great, but but we continuously evaluate the situation you mentioned there has been recent developments in the markets, but at the same time, we take a much more conservative profile when it comes to.
You know to the tax issue.
Issues in Brazil, as you know and I'll tell you. It is still you know convenience to be conservative, but as we've said in the past.
That's like the one you mentioned by might change your point of view and we have never been out slow bytes, all other credits and dynamic matters in Brazil.
And I mean tax that was it was all very dynamic. So so we may use these tax credits in the future, but filled up for it for the time being will be conservative and in terms of them out there.
I think it's understandable, but we don't show mounts, but definitely a change in our approach would be positive.
For our business in Brazil, and it will have a positive impact you know well you know the results, but I hope that answers your question.
That's a little bit or point to be in these two particular topics.
And they get very very helpful.
Thank you very good selection.
Okay. We'll go ahead and take our next question is from the Leap you close with Scotia Bank.
Please go ahead.
Yes, good morning, Goncalo something about thanks for taking my question, maybe if I can do a follow up on the concentrate pricing crews, maybe if you could give us a little bit of the rationale behind the increase especially in the context of the timing right very tough time and what caused that.
And especially in Mexico, you know a lot of attention from the government towards labeling bombing sales to minors a lot of moves on the profit is already very active on restrictions on freedom bad. So maybe if you could if you could talk a little bit about the contracts are doing with them this timing because.
Cost increases were not done every year and sometimes we had half a decade or more without include sales and and it seems that this is probably an appropriate time for for a break off from the Coca Cola company and and obviously increases is not a great time for them to street and maybe as a follow up I mentioned a market.
Chairs or what you're doing very well into additionally, they they do very well to do signs up for you guys. Maybe you can give us an idea of how you expect to come out of this size, especially in the context of affordability and the penetration you're getting there. Thank you.
Sure.
Oh, Yeah, I as I said before Felipe good but the relationship we have with the Coca Cola Company has a has a long term view there are conversations plans and strategies that have a longer you know horizon flattening.
And thinking.
Then just one year, it's clear that we've had a very complex either.
2020, as you mentioned, but it is you know it is it is very important but you know we understand the concentrate price increases. It you know part of how the system works with the once more I don't think we should over.
Overemphasize. This are they you know as an issue that could signal relationship issues or anything like that I mean, we we have a blinded to the Coca Cola company, we have a five year view on things and and once more I've got.
They mentioned it is when when you put it into the context of bogo older Libors that'd be held within the business. All the work that we're doing good portfolio would rather new management all the efficiency programs that we've had in inside of the organization of the fuel for growth initiative.
We initiated in 2019, and we continue as we have shown to identify and a work on cost containment and efficiency measures within the organization.
We believe it's it's manageable it's part of the way.
Oh, we conducted this is with the Coca Cola company in it and we don't see any big deal issue on the timing of this particular concentrate increase now having said that while you mentioned there are clear.
Regulatory and also I would say macroeconomic conditions that.
But we need to monitor going forward and in line with that we will have the discussions sensical discussions that we all the time with the Coca Cola company regarding potential future one concentrated increases so I think it once more it's part of the of the of the business and it's part of the way we you know the.
We have a relationship or difficult to look up and set up well for many for many years.
In terms in terms of market share we they.
We have to grow market share.
Basically in all of our markets.
And mostly and they've all of our categories, where at least on the on the core categories roughly I would say that the all these young market, where we have seen a flattish performance all that comfortable tracking system basis, even Argentina. However, there's also been in Argentina, very particular and the.
Issues in terms of of market share tracking.
In in Argentina, because of all the restrictions of locked down so we see other sources.
Such is a modern trade scadding data, we're seeing also a and increase in Argentina, which is extremely encouraging so all in all in all of the GL cord or geography.
And it our core categories. We're seeing we're seeing important increases, particularly had been in Brazil. We continue to have increases in all of our categories. I think with the exception of kids, which is abide or category in Brazil. So I think that this is a demonstration of the effectiveness of our route to market.
Kids as you mentioned, our core or core competence.
May is our ability to execute I'm very well in the traditional trade.
ER market developer and and in that regard we have seen that under dire circumstances like the ones, we're facing that advantage plates to our sales are now in.
In a very solid at that and at the same time all the digital capability work that you have been doing for a long time not all most of the results of the COVID-19.
You know and triggering emergency digital capability process has been a bit of that as a part of a long term strategy view long term transformation process, we kicked off two years ago and organization, we have seen the power and the effect of digitizing our well too.
Markets and our route to market capabilities, such as wouldn't Oh, John mentioned, which is that our order taking processors and customer relationship all digital customer relationship are tools that we have and good momentum in Brazil.
Our grown exponentially and based on that experience, we're starting to leverage those capabilities across other geographies. So weak that we foresee that 18 month period, we will be able to deploy that across most of our core markets, where it makes sense and that will continue to enhance our value proposition to the bus.
We believe that that will continue to have an effect on market share I don't know John if you want to compliment yes. This particular fairly.
Philippe I I was just like that a couple of things you know we're seeing share gains.
Across all categories across all countries, the exception doing probably Argentina as mentioned like on something.
And I'd like to point out one one frac that we continued to gain share in affordability affordable site.
We have we're unique in that sense and most in most of our countries that we are only once in the Returnables segment.
It is highly highly affordable versus one way packages.
And that is the the packages Levered right now where are we going to what this and why do I think this is sustainable and even enhance CIBIL because.
Lumpier, our returnable packaging, we will be using the universal model, where we can put in not.
Not only was saying more flavor isn't the same model, but also different categories into the same bucket. So that we can expand category penetration versus the returnable package strategy.
We will be putting in much more capacity into the marketplace now or next year and various of our markets. So we'll be putting in a lot of different lines to be able to increase our capacity to maintain the growth in that strategy and so therefore I do think it is it sustainable and I do think that you know as the consumers are.
Or coming out of the cold that situation hurdles, we will be there for them and we'll be offering them. The value propositions that are they required be other since in house capability in a in returnable packaging formats.
That's out there that's great color. Thank you.
Mhm.
All right well go ahead and take our next question from Alan.
<unk>. Please go ahead.
Thank you good day, everyone Dunkels or do you know what <unk> and <unk>.
As you probably saw our well.
Congratulations on the result, very clear pretty impressive slot revenues and mid to high single digits. Even then it gets rolled in this environment with market share gains that deserves a congrats so my questions are more related to a different topic that are nonoperational more then specifically.
In May the first one the second one has to do with alcoholic categories.
Today, it's kind of a symbolic day I guess, because you lost the number one.
Acting as the largest cobalt there in the <unk> the worldwide with Coca Cola European Partners close can go debt position Obama to a.
$6.6 billion or you just realize you're up 40% of that amount and got some glad that you were you were very disciplined there we would have been a very dilutive and my question has to do precisely with devaluation in your view global you'll get system I mean it seems.
B, if acquiring I'm appeal of more than twice, the EBITDA multiple that which youre trading and even much more than that on that Pete any basis.
What what are your views in terms of what's happening of houses vis vis sort of action effect if at all.
Your your your strategic thinking in terms of the long term I know purpose you know emphasize this avianca higher dividends and you already increased dividend pretty substantially but I would like to hear your views in your reaction Oh that transaction and ER and the discrepancy between such a radical discrepancy in terms of.
Multiples that you're seeing a called the coke system worldwide I'll be the first quick.
Okay. So do you want to take a crack at that I have no idea.
Oh sure I mean no.
You know, where we want before we are here to discuss [laughter], where did it go up because you're gonna fences <unk> third quarter results right just to those.
Got it so I wouldn't I would love to spend more time about them, but having an opinion on somebody else how however.
We believe that based on the information that was provided yesterday by other companies.
I think it's an interesting transaction and we reaffirmed believers that if there is value to be captured the within the consolidation of the system. That's a good thing.
Portfolio into graphical diversification.
As well as we've all been you have a better capabilities and scale across the system are always so sometime in the something but it's positive in our view that we have we are a demonstration of that but overall I don't know that part Bob.
Longer split the history of Coca Cola FEMSA, but about you know more than 26 years. This company has been able to develop.
State of the art capabilities in emerging markets across different regions not only in Latin America, but also in the Philippines would I believe we did a phenomenal job in terms of developing capabilities. So scale is definitely I mean, they are all that dismissed you know change.
Good point of view definitely definitely box I mean, we were committed to our M&A strategy.
Which is very disciplined we always have we have emphasized that in <unk>.
The last profit publications with you, all but a real booking opportunities but.
Has to make sense strategically and the price has to be rights.
Relative to a lot of value over the shareholders scale for the sake of scale or you know geographical expansion for the sake of geographical expansion, it's not something that we have in our in our strategy and but we definitely need to be but there is a dynamic and volatile environment right now and <unk>.
Were extremely well prepared not only from a balance sheet perspective, but once more on a capability perspective too to add value whenever that make sense to the company. So we continue to screen I mean, but definitely we continue to screen opportunities across the world but necessary.
Oh, Yeah, Latin America, but for the time being we have not seen anything that makes a strategic and financial sense to our business and our shareholders. So if that is the case, we stay put did not lead you know we we act upon it so I don't know John if you want to follow up on that how long how.
How are you good because you have been doing.
Yes.
I I guess, that's the first thing I would say is okay. You know in terms of the ranking the largest is not necessary commensurate with the best Okay. So.
No I know you'd be would that comment and.
I think the second thing is you know in terms of valuations you know it really depends on where we're where you're buying and what what are the perspective is of no.
Stability volatility in currencies as opposed to you know and the ability to go out there and grow.
I currently think that you know solidly think that or we are in Latin America undervalued.
Particularly because of <unk>, meaning the outlook for Latin America, well that that would be the way people I've been looking at Latin America.
One thing we can do to go out there and just prove them is not grow faster and I think we're doing that relative basis now with the games ensure that we're having as soon as we shared with them as soon as the markets come back we should be absolutely growing faster than the market. So I think you know you know those are two things to think about.
And I do believe that you're going to see as we go forward, we're going to see further consolidation opportunities why I didn't first you know the system is gravitating to larger players that larger well funded capitalize and probably the public players.
And secondly, the cost of sales in the business given the cost of maintaining yourself digital who runs the whole digital transformation of your company is enormous you know so I think those have continued to go invest in that there is a drive those capabilities its constantino side.
On those that can actually bridge into a digital company in the future well be successful and that has nothing to do necessarily with size that has to do with capability and a you know once we have that you can and I think were going pretty fast towards you know, but I think we're in different margins trending going forward.
To be able to go out bring leverage up and further acquisitions. So I think we're we're in a very conservative situation right now because you know we are as you know we are maintaining you know a lot of cash on our balance sheet goes to maintain our liquidity position and second we take advantage of anything that does come up that is opportunistic.
Within the reasonable you know with what we would consider it a reasonable price for supervalu to prove up probably to deliver it.
That's what I could comment on that no that's very useful to hurry up and the corporate came as part of its very fair. It's more of a strategic question rather than on the quarter and I really really appreciate both doctors because they're very useful one last quick follow up more operational.
And I have to do with alcoholic beverages. I mean, you saw obviously you know better than off what happened in Chile and in the <unk> and all the pilots that you're you're correct that you're doing in Brazil by delivering spirits and beer what are the different scenarios and what are the economics of the input.
Okay, I think about the future of the Coke system in Latin America, specifically, Coca Cola FEMSA venturing into into into the alcoholic category and what are the probability of you distributing beer in other places besides Brazil and Argentina.
Sure. Good question listen I am very excited about the fact that the Coca Cola company has decided to start and involving itself and low grade and low grade Alcoholics, it's an extraordinarily high.
Hi growth market and the margins on those products are higher than the Coca Cola products.
Which is really what you want to go and so therefore, no any growth in those categories are bringing incremental value almost immediately and obviously, we're going to be fine with a lot of competition from a lot of different players in the marketplace, but we think we have a month is strong. So some have not missed a strong brands to be able to capital.
Lives. This in the next two years now and the other thing to home is I wouldn't say that DAPL Chico saucers approves the first and only on the phone and just thinking that's right I think there's many other products to come and won't be needing vector of growth is something that excites me because it is a new market new definition from the profit.
The company has to where they play and therefore, how they plays an important so I think that's really important and secondly, when you talk about being able to do.
Beer in other markets I think more and more of the Coca Cola company and the bottlers are realizing that there's no none of the synergies that could be developed.
It is more opening or that factor in a different markets, you know and and so you know.
I think the areas. This is something that I have synergies to it and we continue to do some experimentation with yashi on Brazil, but it is also doing very well and.
So you know it's yeah I think you know as we stepped forward we have tremendous avenues for growth both in our core businesses you know sparkling art.
And they are NCB business.
It continues to have enormous upside potential.
And we can deliver that anybody going into <unk>.
I think what is affordable packaging returnable packaging strategies, and that's going to really give the consumer a much more alternatives and affordable price.
<unk> ability to get into low grade alcoholic beverages is is is so it's you know just to give their system. It's it's impressive plus you have brand extensions like an office there and the fourth pieces, what I would consider it you know avenues for growth that we leverage our system further in terms of distribution expenses and also allow us.
The <unk> market, making the market, making competence, we have to grow you know both beer brands or an alcoholic.
Alcoholic or spirits brands, so no I think.
Oh for the year, what you're seeing over the year year and a half what you're seeing in the redefinition of where to play and I didn't know and that's exciting for the growth of our company.
Yeah, and very aligned with the Coca Cola Company. Then you clearly have a lot of competitive advantage. It summed up front and as you said I mean to be because the revenue and margin accretive. So congratulations for the results. Thank you so much for the answers and stay safe. Thank you.
Thanks, John.
Oh, well go ahead and take our next question from Isabel.
Huh seminar with Bank of America. Please go ahead.
Thank you good morning, everyone. Thank you for for the question I have two questions first if you could elaborate on on Mexico, how you're seeing the labeling and factoring in a high performance or volumes or or mix or if at this point since it's been only a.
<unk>, it's hard to tell.
And the second question is on South America.
We understand that there is some gradual improvements right armed volumes and also on margins, but how are used to perform at a.
In the coming quarters, Oh toward that division specifically.
Yeah, I, assuming that that that certain mobility of restrictions will remain in place and attach or how can we think about profitability.
In North America. Thank you.
Sure.
Let me take the labeling piece first I think the labeling is something that has.
Come into effect the first of October and on you have 90% of our packages in compliance with that and we're working with the government to find the solution to put those labels on the returnable package was as you know we have to go through all the glass float to be able to do that so we're working with them to find extensions of Oh, we labeling.
New labeling requirements, but we are fully compliant with are there any kind of those compliant with the new labeling requirements limited 151 for Mexico Bank.
I think when you think about the impact of this you know there's a lot of talk about it.
But we have not seen any impact really on the sales of our category.
Uh huh.
It's it's hasn't been noticeable at all and I think you know what we're doing is putting better consumer information in front of consumers, but you have in effect, where everybody is coming out with the vehicles. So the effect of a particular category or a particular product gets diluted in the mass of.
I'll labels are being no and you didn't want to go around shelf. So this is something you know that so far has been.
Minimum or no minimal effect on our Oh no alone so far.
In South America and.
I think it's really interesting to see how things are coming but there's always just you know doing great girls. So they continue to grow expect actually end up and they have you know not only volume momentum should gain momentum across all categories.
Your life is starting to come back pretty strong for US Argentina is starting to come back for US now we're starting to see year over year over the last September and bumping into this month, we're starting to see volume books. The problem with Argentina is not so much volume growth the price restrictions that we have from a price controls have been put on by the guy.
So you know, but at least we're seeing our franchise and our consumers hanging on to our franchise.
Via returnable packaging and I think it's interesting that the Argentina standing back and although they do have social mobility issues. They are having no. We are seeing a good a good rebound from a segment that strategy, we put in place during the beginning of the year.
The big the big turnaround for US is in Colombia, we are starting to see Colombia start come out sequentially.
From a from a difficult third quarter, you know a snake emit an average quarter for for you probably saw mid single digits, Hi, <unk> Hi.
Hi.
High single digit declines.
But they're growing every every month.
ER versus that so we're seeing a turn around in the Colombian situation and that is very encouraging. So I think overall you know in South America is doing very well and should continue to do very well in the fourth quarter based.
That's very clear thank you.
Mm.
All right, we'll take our next question from Carlos Laboy with eight F. B C. Please go ahead.
Yes, Hello, everyone.
For instance, you know given that you have this long term plan.
So can you give us some more color.
On.
First the scope of the increase but really most importantly, as you look out over the next two to three years are we done with these adjustments are we likely to see more of these concentrate adjustments. They are are they likely to be very minor.
What what can you tell us about the long term outlook.
And then on the operating side.
John if you could expand on recyclables and.
And the potential we could see.
Single serve packages right I know the cobot, it's it's obviously hard uninterrupted and the universal bottle and a lot of these measures are art art art.
Multi serve initiatives, but did you guys see a surge of innovation coming through on single serves over the next couple three years.
So I'll I'll take the first question gotten as a I think that we could expect.
Similar increase to the water this year into next year are they as they arise and going forward it and all these market conditions.
Do not change significantly or do not deteriorate significantly.
So we have you know potential regulatory headwinds and you know the next couple of years of the need to take into consideration we need to understand how the macroeconomic conditions going forward, the develop and and in line with those I would say those two big issues.
We could you know, we we will plan with the Coca Cola company, a potential increasing concentrates or or Bob but feel they were seeing it. So if there is that there might be one next year and if there is one next year there might be an impact similar to the London.
Today I'd set that's as as we mentioned we have a series of.
Containment cost containment measures and efficiency measures on one hand and they'll be.
You know, we continued to improve and enhance our value proposition across the portfolio and at the same time rather dramatically.
Would allow us to make the data.
Like Weve done this year.
And and in line with what we've done this year in terms of compensating for that that increase I would say that would be if any what I would but I would think could occur in 20 in 2020 them.
Yeah.
And it's <unk> Yeah constant then I think it all is going to depend on you know what your outlook is there for the economy and macro sorry. So you know I think would be.
You know, we're very collaborative on that front and you know that we're walking into a tax situation in Mexico that may not happen. Okay. So it's going to be a very fluid situation could've been something as a I mean, the Carlos is going to something appointed up.
No let me just get back to what you're saying on the operating side because most of US know portability issues have been on a multi serve returnable. So let me first say that are you know what we're trying to do as a strategy is to maintain.
They.
A very solid portfolio of packages.
An offering to the consumer that have very very pointed price points 20 vessels 25 vessels 15 vessels 18 vessels and what we have done is not only go out there and put out more affordability in terms of multi serve returnable packages, but also adjusted our pricing architecture like launching leader Southern Utah.
Ivan Coca Cola meter 35 in Coca Cola. So you do have that flexibility to do that and we're obviously you know the bourbon managing the the the trading and the options and choices for the consumer making sure that they have got a portable packaging both in returnables in non returnable its Carlos so it's a combination of both.
Now looking at single serve packages now we will be applying the same same.
Universal packaging towards you know 12 ounce and.
I'm happy to proposition that we have in the marketplace as soon as we get the right equipment in place to do so so that's going to be at least a three to four or five year project, but we will be applying that kind of technology and getting consumers that kind of an option to be able to choose not only you know what is currently in the field.
Got us there, but also ensuring that we have oh float.
Bottles that can go up and cross categories in the short term.
To answer your question.
Got it.
Yes. Thank you.
Mm.
Once again, if you would like ask a question. Please press star one well go ahead and take our next question from a gallon Camaro GBM. Please.
Please go ahead.
Good morning, everyone. Thanks for that space for questions not my question would be on the regulatory environment in Mexico, I mean that the industry has been exposed to so much noise is your parents lived there the labeling rules that you know Sanjay because a couple of weeks ago that divided up sales of sugar I think the main nursing what kind of.
That's cool and expressed support of other states do it could potentially giant that they miss it and most recently a very aggressive proposal to increase taxes issue a day from one one point.
Hi.
Well I.
I love that mentioned above as part of the government efforts to do so.
Actually in any creates fun started I know the president has said that we should not expect any create yes.
It is very likely that we will be brought back to that to the table next year. So what would be your your view and he's very bright and no. So what would be your your thoughts.
The recent back to Mike.
A couple of states <unk>.
Sure.
Yes.
Let me.
Try to justice as follows.
There is two laws that were passed at the state level.
Restricted the sales of carbonated soft drinks and processed foods and I would say processed foods or just packages origins as a whole to minors. Okay. Instead of the Boston Waqar. This is not something that is directed solely tied to the soft drink industry, but it was directed towards the food and beverage.
Processed food and beverage industry in Mexico.
And these two.
These two laws were approved there.
What we have been doing and we've been working with both from a state government legislatures in both states executives, we have been working.
Working with them to see how how they plan to implement that and and.
And see how that how we can work with them.
Because at the end of the day, it's the implementation of these movies newsreels are extremely tricky because we cannot not service any account and you cannot stop service in the account.
Nor till they become a liable for anybody that they sell to.
So you know, we're working with them and we're working with the federal government to ensure that Oh, whatever proposition comes out towards this end doesn't turn out to be a you know a state wide initiative that all the time, we are 33 implementations 33 different laws coming through on this so the government has been there.
Any very supportive on it the president has come out and said that he does not favor prohibition okay.
And he was very clear about that after the.
The passing of the first two laws in the states and we're looking to work with not only present local so a little bit and his cabinet, but also that the state governors to be able to go out there and implement this in a manner that could be acceptable overall, so I think as the first thing is you know they were talking to these laws are passed but no but do you believe that.
<unk> mission is the way to go to alter and behaviors in in any fashion categories and I think.
That's a very important point secondly, what we're doing and working with the government bonds understand what a package looks like that includes predicting the lakes persevere should one is obviously a very high level of.
Education, Okay nutritional education.
For children and miners and we're working very closely with the government and the seven cents on a certain.
Areas of the government with that secondly.
We're looking to go out and continue to.
Motivate and activate kids in in in schools, so exercise and and physical activity the second component of that.
And the third piece is continued good formulation and dropping our AR.
Our sugar content, and then Hillary Clinton or beverages, and then we've done about a 11% over the last 10 years, and we're probably going to be doing about another 10% reduction over the next three years. So its a three prong strategy that we're collaborating with one of the government and this is very much on the idea of the of the Executive Committee in next.
And so I think that's really important secondly, I would say on the tax issue. It would appear to me that next year, there would be a not only a tax reform.
For.
That would affect the beverage business. So I think it's going to be an overall tax reform for the entire you know put entire country that will affect them beyond just beverages and go into different categories in different areas. So you know.
Just putting more taxes on the beverage industry is not going to solve their problem. So there's going to be a much larger deeper and comprehensive you know.
<unk> tax reform in Mexico, probably towards the end of next year.
And although we may be impacted I don't think were again of the impact of more more so than you know what we're.
We're seeing now.
I hopefully that will be the case.
Does that all come together.
Like for like.
Mm.
And it appears there are no further questions at this time I'd like to turn the conference back to speakers for any additional closing remarks.
I guess you know one one of the things we did not talk about too much in our in our conversation today was how well we are doing the digital our digital transformation.
As Phil pointed out by constant you know we have come up with a very efficient platform about shop, we're applying it in Brazil were close to 200000 clients and goes up we're starting to roll and tested in Mexico, and we are starting to roll in person in Colombia.
Our objective for next year is going to be 500000 accounts and DRAM to be able to do that but that's a quarter of our accounts on this platform by the end of next year and what we have seen so far is that this is increasing our frequency and our order, taking and our transaction size or drop size.
The point of sales, primarily with smaller clients and got middle and smaller clients. So this is I think something that excites us a lot and obviously search is part of our digitalization strategy that we have with our customers and our consumers.
So with that I think we have a very very strong quarter. We continued to generate positive cash flow, we're starting to see a rebound of our volumes and we're very very optimistic.
Fourth quarter, that's going to be doing sequentially better than the third quarter. This though this autumn of this year.
And thank you for your confidence and interest in Coca Cola FEMSA.
I Hope you and your families are safe and well and as always our team is available to answer any of your remaining questions offline. Thanks a lot.
This concludes today's call. Thank you for your participation you may now disconnect.
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