Q4 2020 Coca-Cola Femsa SAB de CV Earnings Call
[music].
Goodbye, everyone and welcome to Coca Cola FEMSA is fourth quarter and full year 'twenty and 'twenty Conference call. As a reminder, today's conference is being recorded and all participants are in 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 FEMSA of 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 company's actual.
And with performance.
At this time I will now turn the conference over to Mr. John Santa Maria Coca Cola FEMSA, Chief Executive Officer. Please go ahead and what's your sense Maria.
Thank you and good morning, everyone.
Thank you for joining us today to discuss our fourth quarter and full year 2020 and results.
And we appreciate your interest and our company and hope you and your families are safe and well.
With me today are Constantino spas, our chief financial Officer.
Molly and strategic planning director and particularly also head of Investor Relations.
I am pleased to report solid operating results and important advances and our strategic priorities.
Our performance as a percentage of our ability to adapt to complex operating environments and drive savings and efficiencies across the entire organization.
During the quarter, we saw overall improving trends leading to the first quarter on a consolidated volume growth since the start of the pond on this.
And was driven mainly by a come back plants, the continuous resiliency of our traditional trade channel and.
And the unmatched affordability of our portfolio.
Addition, and we're able to continue strengthening our competitive position.
And your market share gains across key territories and categories.
Despite the significant challenges posed by COVID-19 and 20.
Tell me tell me it was a year of resilience and june's transformation from Coca Cola FEMSA.
And the rest of the pandemic with operating excellence and also continue to move aggressively on all our strategic and digital plates.
Okay.
During our call today I will briefly review our fourth quarter results.
And comment on our strategies and key priorities for 2021.
And then I'll switch gears to discuss the great news concerning the yesterday's announcement on beer.
And your distribution agreement and Brazil.
Finally, I will turn the call over to Constancia and have to review the results of each division and expand on our capital allocation as you continue to strengthen our solid financial position.
Okay.
Moving on to discuss our results are consolidated volume increased one four per cent.
Well Super event was driven mainly by the continued solid performance and Brazil, Guatemala, which volumes from nine 8% and 12% and respect.
Edition and saw significant sequential recovery across most of our markets, including key territories, such as Mexico, Colombia and Argentina.
And.
Accordingly, we continue to see improved performance and cost and beverage categories and most of our territories on income.
Consolidated basis, our sparkling beverage category consolidated volumes outperformed.
Led by two 3% growth and brand Coca Cola and 2% growth and flavors.
Bulk water grew one nine per cent and are still beverages category category grew four 8% driven mainly by solid growth across our South American Division.
Yeah.
And Mexico, we saw improved trends during the quarter. Despite the strength December locked on Mexico City.
During the year and focus on bolstering our easy to use affordable portfolio reactivate growth.
Consequent Consequently, we're seeing a market recovery as the jumbo packages reached historic levels.
Notably in Brazil, our sparkling beverage volume and screws eight per cent for the second consecutive quarter, driven by 6% growth and brand Coca Cola and.
Double digit growth and flavors.
Likely and beverage volumes also grew and Central America, Colombia and Argentina.
The traditional dry and remained resilient with flat quarterly performance compared with the previous year, while the modern channel and.
On the on premise channel very slight deterioration driven.
Driven mainly by increased restrictions across most territories during the summer.
Moving on to our top line, our total revenues declined five 1% is on pricing.
Pricing and revenue management and machines, we're also mainly by unfavorable currency translation effects.
And price mix headwinds.
Notably excluding currency translation effects, we would have generated comparable top line growth of one nine per cent for the quarter.
And importantly, despite a decline in revenues our operating income increased and saw a 13, 4%.
Driven by a more favorable raw material environment declined B E T costs favorable currency hedging and initiatives and their cost cutting and savings initiatives. These factors were partially offset by unfavorable price and mix effects. The depreciation on most of our operating currencies as compared to the U S. Dollar.
And higher concentrate costs in Mexico.
Currency translation effects on our operating income would have increased.
Slide 21, 9%.
Thanks, So on mitigation actions and favorable raw material costs. We also had approximately $1 5 billion doses of COVID-19 related headwinds at the operating income level.
This means that our countermeasures has effectively mitigated more than 80% of the pond on estimated gross impact for the period.
As a result of these initiatives are consolidated operating cash flow margin expanded by 220 basis points to 24 per cent.
Finally, our controlling net income increased 59, 2% year over year.
Driven mainly by our solid operating results and it's fair to say this increase was achieved and pace of and are really comparable base that are included and extraordinary non operating expense of 948 million doses.
And 2019.
However by normalizing our controlling net income on earnings per share for the quarter would have increased seven 9%, reflecting solid results and a challenging overall environment.
And we've tried to page on 'twenty, and 'twenty and focus on 'twenty and 'twenty. One we are witnessing a fundamental transformation.
Changes I would expect it to take a decade opinion, just 12 to 18 months.
And.
It is clear to us that consumer choices and purchase occasions are evolving EBIT.
Never before.
Jude absolutely. These changes our long term strategy is guided by a clear aspiration and purpose.
Book, the beverage of their preference and our consumers' hands anytime and anywhere.
Plumbing and integrated commercial beverage platform that works seamlessly and and real time.
Yeah.
And on our last conference call I outlined four strategic priorities to achieve this aspiration.
First.
Buildup portfolio per every occasion, secondly, enable and overall digital transformation transformation.
And share business sustainability.
And for Us and foster a collaborative culture and I'd like to add that we remain optimistic to try and capitalize on inorganic opportunities.
Entities.
Now let me share a couple of examples of how we are delivering on these strategic priorities.
And Mexico, we are building and the affordable portfolio for every occasion, two boats will be true on the Boston and one way presentations and we will.
Sparkling beverage category and continuing to rollout our two five liter returnable universal.
And which is already enabling us to capture share of sales and the flavored sparkling beverage category.
During 2020 are we channel portfolio it was growing.
And key to this growth was are the two points on it.
<unk> grew 14% year over year.
Additionally, we are expanding affordability and the Walmart segment, let's say sitting on the successful launches of one five to two five and $2 seven and five liter presentations all at key price points.
We're achieving all of this as we improve our competitive position and hydration nutrition and energy categories through our three tiered portfolio strategy book.
We're also on everything and overall digital transformation by increasing our presence and digital channels on home delivery routes, which are growing double digits and while we have identified significant opportunities.
During 'twenty 'twenty, one you expect to increase the number of home delivery routes in Mexico by approximately 70% to reach 185000 new households.
Now switching gears to Brazil. This country was a testing ground for our omni channel digital strategy.
During 2020 day aggressively rolled out on artificial intelligence and intelligence checkbox enabled what's up feature.
Which allowed us to take orders from our clients 24 seven.
Through this platform and we sold more than 55 million unit cases from April to December and.
Growing from approximately 600000 unit cases per month to almost 6 million.
And it continues to grow.
Additionally, 2021 will bring a year per pound transformation on two important fronts first.
The reorganization and consolidation of our beer portfolio and secondly, the continuing evolution of this operation is a leader within Coca Cola FEMSA for our <unk> on <unk>.
Line two offline platform.
Importantly, we made significant progress and to ensure business sustainability and.
Thanks to all of our efforts, we have achieved key sustainability goals and a lot of our year and habits.
It goes ahead of year and <unk>.
Additionally, we are very proud to announce that we are the only Mexico based beverage company to be included and the S&P global sustainability, 'twenty and 'twenty one year book due to our positive results and give some peak global corporate sustainability assessment, which evaluates the environment, social and economic and corporate governance of more than 7000 companies.
Worldwide.
This recognition and motivates us to continue working on all aspects of the style of sustainability and ensuring our commitment to the overall ecosystem and communities, where we operate as a fundamental part of our corporate strategy.
Furthermore, with respect to our fourth strategic priority, we're building, our customer and consumer focused culture.
Founded on operating excellence, agile decision, making and owner's mentality and a people first mindset.
Driven by these core values and we're changing our ways of working and reinforcing the behaviors and SSH and mark and emerge stronger and leaner and more on John Company and.
Powered to achieve our purpose and vision.
Finally, we're continuously looking to capitalize and organic opportunities to continue growing on top of the company, while maintaining a conservative approach to capital allocation.
By carefully selecting strategic opportunities a lot of fairly value and represent a strategic fit.
Book.
Moving on to our recently announced beer distribution agreement and Brazil.
As part of our key strategic priorities together with the Coca Cola system, we successfully redesigned our distribution partnerships with Heineken.
This represents a win win for the Coca Cola system, Heineken, and most importantly, our customers and consumers and Brazil, who will benefit from a wide array of options.
As part of this new agreement, which is expected to become effective.
Effective mid 2021.
The parties there'll be on a smooth transition of the Heineken and absolute lands to Heineken Brazil's distribution.
And the Coca Cola system will continue to sell the price lobbying and Sylvia balance and will complement this portfolio with the premium ice inbound Brad and and interesting pipeline of another true international brands from the Heineken portfolio.
Which will be announced in due course.
In particular this agreement allows class II first strength, that's portfolio with solid premium mainstream and economy brands from behind it and portfolio.
And secondly, alignment central and provide flexibility and Coca Cola system will be able to produce and distribute other beers and alcoholic beverages and subject to certain mutually agreed upon terms and prudent and they are women.
And thirdly chapter distribution synergies with the system, allowing for stronger economics.
Subject to the customary regulatory approvals, we have agreed to initial channel until December 31, 2026 with him and automatically meal for another five years term subject to terms of the agreement.
The redesign of the successful distribution partnership with heightened and most important your realignment of interest combined with our capabilities to develop the market maker.
And make us confident that we will continue growing and developing the beer segment in Brazil.
As we have successfully done in the past billing a portfolio premium mainstream and value bids.
In summary, and against the backdrop of a complex dynamic environment, we're encouraged by our resilience.
On operating trends and our People's unwavering devotion and the pace of on versa.
Guided by our shared purpose of compression on number of anytime anywhere.
We're taking the right steps to emerge a stronger company, creating T on industry growth and value creation for years to come.
With that and we will not.
And over the call to Constantino spas.
Okay.
Thank you John and thank you all for joining us on on today's earnings call I will now expand on our division's highlights for the fourth quarter.
Starting with Mexico and.
And Mexico, our top line decreased 2% driven mainly by unfavorable price mix effects and a $2 nine volume declines and.
These effects were partially offset by pricing and revenue management initiatives.
And we're able to expand our operating margin by a solid 650 basis points, and Mexico, driven mainly by cost and expense efficiencies and savings and importantly, our multi serve returnable presentations have continued to grow double digits.
And our single serve one way presentations, so should have shown some sequential recovery throughout the quarter.
Moreover, we saw on accelerated volume performance and both the energy drink and bulk water segments.
About 2021, we expect a sequential recovery trend to continue while we leverage on the important learnings that we've had from this historical prices.
We're pretty confident that we will be able to continue to protect their margins to deliver positive results.
Moving down to Central America, our volume increased one 3% driven mainly by a double digit volume increase from our operations and Guatemala, which continued to deliver very solid performance, which were partially offset by volume declines and Panama, Panama as a market.
That has been hit very hard by the pandemic and its consequences on the on the.
Pricing from our revenue management initiatives, coupled with the positive currency translation effects from a central American currencies into Mexican pesos or drove top line growth of four 4% and Central America.
As a result.
Our combined revenues decreased four 7% and the Mexico and Central America and Division.
Despite the effects of COVID-19 on our volumes and Mexico together with you on favorable price mix effects and the depreciation of the Mexican peso, our operating margin for the division expanded 260 basis points, while the operating cash flow margin expanded by 420 basis points. This.
This increase was driven mainly by declining P. D costs successful currency hedging initiatives and our ability to drive savings and operating expense efficiencies. Additionally, and at the same period.
Previous year, we have included restructuring and severance payments related to our fuel for growth and efficiency pro Rep, which allowed us to face the pandemic as a leaner much agile much more agile organization, which was very beneficial and the like of the hardship of debt pandemic.
Move on to our South American Division are 665 volume growth was driven mainly by solid seven eight volume growth in Brazil.
And then outstanding volume increase of 11, 6% and Argentina, where volume and in Colombia and sequentially improve through you know throw.
The period in addition to our ability to position strategic categories, such as energy drinks to continue gaining market share and on the other hand or and affordability initiatives to drive volume growth. These positive trends were driven mainly by favorable weather.
Improvements and consumer sentiment and government and.
These encouraging trends were partially offset by a slight decrease in order y.
As was the case for Mexico, and Central American Division, our pricing and pricing initiatives were offset mainly by currency headwinds driven primarily by and 18, 3% unfavorable translation effect from the Brazilian real.
These headwinds coupled with price mix effects that are top line decline of 10% and South America.
However, if you exclude the currency translation effect on top line would have increased six 5% during the quarter.
Quite the volume recovery and the South American division or gross margin contracted by 280 basis points, mainly driven by unfavorable price mix dynamics and currency headwinds across our operations.
I will now expand on our financial results, which reflects our initiatives to strengthen our very strong balance sheet and financial position.
Our interest expense recorded a reduction as compared to the previous year, driven mainly by our liability management initiatives and <unk>.
<unk> debt prepayments, partially offset by additional short term debt that we incurred and mainly in Mexico and vessels during the first quarter of the year to reinforce our cash cash position and the face of the <unk>.
On known elements of the pandemic at that point in time. This reduction was partially offset by a decline and interest income as compared to the previous year driving flat performance and our interest expense net year on year as part of a comprehensive financial result, we recorded a foreign exchange loss.
Loss of 346, Mexican vessels, driven mainly by the appreciation of the Mexican peso as applied to our dollar denominated cash position.
Finally, I would want to underscore a coca Cola FEMSA strength and resiliency reflected and are very strong balance sheet as of December 31, 'twenty and 'twenty, our net debt to EBITDA ratio close to 113 times compared to 134 times in 2019.
While our cash position at the end of the year. It was more than 43 billion Mexican pesos. Additionally in November we paid the second installment over dividend.
37% increase versus previous years dividend.
Finally, I would like to say that I'm very proud of our team and the way that we have been able to emerge stronger from one of the most challenging years and history, where solid balance sheet, coupled with our ability to improve margins on a consolidated basis for the full year are approved that were taking the right steps to overcome difficult environments.
I am confident that we are on the right path to continue to deliver positive results for our stakeholders.
And with that I will hand to book call back to John for his final remarks, and then we will take some some questions. Thank you very much for your time today John.
Yes.
And I tell you against.
Against the backdrop of and <unk>.
Streaming complex year.
We continue to execute and deliver on our strategic priorities and our fourth quarter and full year results show, a positive trajectory and unwavering commitment to achieving our vision of refreshing and the world anytime anywhere.
As we move ahead, one of our key strength is our mutually beneficial business relationship with the Coca Cola Company.
Working together not only reacted rapidly enforcement pandemic, but also remain focused on driving the system and our company and solar.
Thank you for your continued trust and support and Coca Cola FEMSA, operator, I would like to open up the call for questions.
Alright, if he would like to ask a question you may signal by pressing star one on your telephone keypad.
Ctrip Com, please make sure your mute function.
And your signal to reach our equipment, we ask that you limit your questions to answer.
Your line.
And on.
And that is star one to ask a question and.
And we'll pause for just a moment.
The first question is from Philippe.
With Scotia Bank.
Thank you good morning, John if there's something else that's on.
Congrats on the on signing a new deal.
Couple of questions on my side.
The relationship with high Tech and obviously you know it was tough over the last few years right lot of lawsuits going back and forth and.
And trying to leave the system very abruptly.
So finally, you struck and your deal, but and what remains out for.
The relationship after a few years now going back and forth and based on how much has it suffered really and then my second question is on on the five year option optional renewal class I.
Thank you know based on the on the messages that were sent to the mark to market. It seems fairly evident behind it and wants to migrate to the current system. Eventually so should we assume that the intention.
From damage to avoid the renewal on five years, and it's more of and Optionality.
And in case things are not going well and mature and distribution system on it I mean should we assume that this is really five years instead of 10 and thank you.
And I'm going to take that John.
And you are allowed to sure sure perfect day I believe you. Thank you very much for your questions.
I'm going to start from from.
From your last from your last question, it's a definite no I mean as we have a.
As shown on the press release. This is a deal that has a five year automatic renewal clause into it so.
We should see it as a minimum of a 10 year deal and not as a five year deal. That's that's pretty straight straightforward and <unk> and and John can complement on that and but he has also was part of the deal structuring and can also provide some color on.
On the relationship side.
And my point of view for leap is that at all and all business relations. There are times that are difficult and then there are times, where interests and context and situations aligned.
And we would not find the deal between such a complex system and such a L.
Intertwined set.
It's all stakeholders.
Our relationship amongst the relationship amongst us was not very positive that would allow for this type of deal to be designed and implemented so that relationship is a very professional relationship between two very successful.
Entities, the Coca Cola system with its multiple stakeholders and Heineken and we have designed and agreements and a and now.
I would say a distribution system that will be extremely beneficial for both parts and that will provide for a platform for growth from both Heineken and Coca Cola system going forward, so and any anything else and my point of view is just mere speculation and and.
And I would.
I would prefer to focus on all the benefits and all these details of the deal rather than speculation and.
Around <unk>.
Emotions and and things that are not really.
Factual.
And that's the case I don't know John if you want to from provide more color or my peers.
Oh, yeah, so aren't you going on right Yeah, I just wanted to.
Thank you very clear so the thirties.
This is not an option, it's as we said and somehow somebody and you up for either of the parties. So definitely on the decades of where you see this year and this is more of a 10 year deal and a five year deal.
Fantastic.
Clear.
Sorry.
And I just wanted to come back to take on something that I'm, saying I think this deal is a very good deal for both companies I mean, when you start putting in place a dual distribution system and a market like Brazil that allows for increased.
Brand availability and liquid availability and consumer.
Satisfaction and array on and more powerful portfolio I think that's the first thing and it becomes a very consumer centric. Secondly, we are excited that we're gonna have and not only some base brands with us, but some international brands coming on board and throughout the rest of the time period three and.
Brands that we've agreed to with.
I and again, but also the strategic flexibility and to develop a portfolio that allows us to have a.
And grounded in other types of beers and tank.
And to be able to produce and distribute right on so I think what we found was and alignment of interests okay debt.
We haven't been able to find before and obviously this is going to be a new page and our relationship with Hynix and yes, we did come up with some tough times, but I do think it has the ability and what we are doing this with the utmost enthusiasm.
And to be able to integrate and marketplace. So if we didn't think that way we would have not done it either on our site or on their side.
So I think it's going to be a win win per book.
Well fantastic clarity on on that John and concentrating on and what's your stock.
That price scenario for all the college, it's definitely a win win and definitely very goodness, we just tend to focus on the south side, a little bit on the on the wholesale book can be on any deal, but that's definitely a great deal maybe a short follow up on Argentina.
Very unexpected fantastic performance and not just from you but from.
From a host of consumer companies out that we were not expecting and from what I could read not that many people were expecting a great quarter and Argentina.
And then any color you can give us there about why that's happened and that's the consumer and I don't know pre stocking ahead of higher inflation. This year, when schoolhouses released or.
Or what's happening why why is Argentina, and doing so well and what was generally perceived as a very tough macro crisis.
And in our case.
Go ahead, John go ahead, Yeah, and I think there's two things.
People that they're driving those results.
First of all you're seeing now.
And opening and more mobility or the consumer in Argentina, and I'll, let you had in previous quarters. So I was on months came by there is more and more like no relaxation of restrictions. So that obviously helps solve the economy Secondly, youre.
Youre seeing the economy begin to rebound and debt.
From where it was and thirdly and I.
Our case, what we have done is really put to put our revenue growth management and segmentation practices and Ikea and be able to look at.
And with laser focused on out there and.
And hitting the right price points promotional packages and different segments and consumers and customers.
And that we have done during the third and we'd really be foundry and the fourth quarters on a constant theme and you want to add to that.
No I think thats it on and we've had.
John mentioned, we had good weather.
And I think that.
And our particular case, our execution has improved and predominantly we're implementing or digital platforms and and on and all of the reactivation of the channels has been positive and unexpected.
And it happened so quickly and the light of the pandemic. So when you add all those variables together, we're seeing a very good recovery in Argentina, and we expect that our revenues will continue to be no impact.
Impacted on one side from the price controls, but there might be from potential ballroom upside and.
And the first quarter given the line the positive trend and we're seeing right now so I think it's all in all and a difficult context, they a positive outlook for us and Argentina.
Okay.
Fantastic. Thanks, Thanks for your guidance for the card income.
Glad you got on the deal.
Thank you.
All right once again that is star one to ask a question and if you find your question has been answered you may remove yourself from the queue by pressing star to the next question is from Lucas Ferreira with JP Morgan.
Hi, gentlemen.
Sorry to come back to the to adhere to the deal once again anything that's the topic off the day, but another question that I had areas.
If you can tell us how much does on the.
And the brands, you're now distributing and account for the volumes you are distributing before.
And other words.
Much.
<unk> by non heavy heinie can especially Heineken and the non standard deal.
And what's your plan to replace that volume.
And doing some on some other alcohol <unk>.
Do you already have.
<unk> four four new beer brands and.
And in your portfolio are you and negotiating with other companies apart from these international brands by by Heineken, and how to think about the kind of food feeling this and I'd say volume.
And going forward.
And your other question I have is regarding your your costs. So I think there was a very interesting highlight of this quarter, but six we're seeing costs of raw materials overall and breathing and significantly.
When do you expect those to start to being sort of a headwind junior class. So if you can remind us of your hedging and hedging positions and and win.
And we should start to see a higher cost pressure and your plans to offset those thank you.
Thank you Luca.
I'll tackle that and then also once more.
John can provide some more color on on behind it can deal with it.
And that's required.
As you all know we don't disclose the revenues or.
Volume and in the case of our partnership with with high and again, so and the light of the question. What I would say is that we expect that the beer revenues during 2021 could decline approximately 40% year on year as we adjusted our portfolio right, there's going to be a true interests.
Transition and this and this case and our EBITDA margin across South America could be pressured by approximately 100 basis points by the previous year, which is equivalent to 50 basis points at a consolidated level now.
We don't lose with this deal I think that is very important to highlight this is a long term play so theres evidently a dent in our revenues and the first year merely due to the fact of the transition of the brand, but as John highlighted.
First of all.
There are very solid plans and you should be.
We're very prepared for it for a set of very good news going forward and the next few months. There is a very solid plan with heidrick and not only to reinforce the current portfolio that we were starting off with but also by the launch of at least three international brands and the Heidrick and portfolio.
And again before they're very broad internationally and Theres still.
Interesting space for different plays within the Heineken portfolio. So we should not see the current portfolio as a static one but there is a very interesting planned with the hydrogen company to continue to leverage on our commercial capabilities with a customer centric mindset in our case.
And with a consumer centric mindset and the case of Heineken to develop a stronger portfolio very quickly and enhance what we're starting off with the same time. It is also very important to highlight that we have very unique setup with the flexibility of adding other international brewer.
Ours or local brewers or even our own beers within the terms of the agreement that we have set with heidrick, and which will provide us with a very flexible and strong platform going forward that will.
Will allow us to have and interesting growth strategy and <unk>.
That particular and that particular market. So when you look at that and you complement that with other alcoholic beverage plays as the.
Pilots that were running with Dr. Joe and some parts of Brazil.
Very positive so far you can see that we are converting our portfolio.
And through a very customer centric, one, allowing for a broad set of alternatives for both customers and consumers and on the other hand with the non.
Our flexibility to become and integrated beverage player and this particular market and.
And that's on that and now we also need to understand that our primary focus is to continue to grow our non alcoholic beverage portfolio with the Coca Cola company, which is our core business and which is a I would say a blessing to have such a powerful portfolio and a set of alternatives.
Oh for the Brazilian and consumer all and all I think that it's a it's a very good deal win win for everyone with a lot of flexibility and very unique and it's and its nature.
On the I don't know if you have any other questions around that and if that was enough where John do you want to provide more color. If now we move on to our hedging strategy and costs.
And I'll look at so I would just say that given the flexibility of this deal provides no yard and we are speaking with other other brewers.
And whether international and local and obviously, we'll be moving pause on that and as well, but always thinking that there is two primary purposes to our being in Brazil from first and foremost SR growth Coca Cola Bronx and check.
And secondly is to grow the whole pie in terms of beer. So those are the two keys for success for us and Brazil at this point okay.
Thanks, and I have all day.
So.
Yeah.
On the cost side Lukas just to remind you that too.
20% of our Cogs are and U S dollars.
You always have a very conservative approach in terms of the FX exposure, we have hedged the majority over dollar needs across the different markets are.
And this year I think we're very very.
Recipe and taken advantage of the decrease in prices and some commodities to establish very attractive hedges for 2021.
And Mexico, we have hedged 50, almost 50% over USD Cogs at around 23 per.
And as per dollar.
But we have hedged around 98% over P D needs and Mexico at prices that are you on.
And 5% below from what we paid last year and Brazil. For example, sugar, we are hedged to 57% over sugar needs and practices that are approximately 12% lower than what we paid in 2020 and were seeing a positive momentum in terms of raw materials, especially be if he prices across our territories. So we.
We expect all all and all the expected raw materials will be pretty controlled during 2021.
Which if we combine that with our ability to continue to extract inefficiencies out of our system will allow us. We believe we will allow us to maintain margins throughout the year.
And I don't know if that answers your question.
Okay.
That's great gentlemen, thank you very much.
Alright, Thank you Lucas.
All right it looks like the next question from Antonio Hernandez with Barclays.
Hi, Good morning, gentlemen, thanks for all of them on Golar can result, my question is regarding your rollout of simple Chico are sales here could you give and it'll be the.
And even though if that's how it has evolved and compared some of your and Michelle expectations. Thanks.
Okay.
Sure Anthony.
I think we've seen a and unimpressive initial reaction from consumers on and I would say the highlights on Brazil, and Costa Rica, we have been focused on the premium positioning and execution of the product. It is important to highlight that this is a very different product offering in terms of its liquid.
Configuration, and the value proposition to the consumers and in the case of Latin America, Latin America, and alcoholic ready to drink has been a market of I would say.
Most of the spirit and mother brand endorsed.
Product offerings with a very sweet.
The product.
Formulation. This is a lighter product less sweet and pretty different to do what the customer hasn't been good consumer is made of custom and the region. So sampling has been part of it and continues to be and will continue to be and important part of the strategy.
And then I would say that that's from a consumer standpoint, however in the case of Mexico, we're seeing a much more competitive market than what you expected, we have seen brewers and through the market very quickly with different offerings and some other international and local players on beyond premise limitation and I was also been a challenge.
As the most.
Most of the on premise has been on their lockdowns and restricted traffic and and <unk>.
That is part of the competitive landscape, where we launched.
To recap we have launched in selected cities in Mexico, and Brazil. So Thats also a very different approach to what we normally do on the Coca Cola system, when we launch and <unk> right and we're doing the city approach instead of a nationwide rollout and the initial stages and.
And Brazil, we started in and Sao Paolo and Mexico, we are already and Mexico City, Acapulco and Puebla.
Costa Rica, we've launched and San Jose and coming very soon we will be launching and Colombia, Argentina and and why.
So you know it's it's it's an interesting experiment, we must say that the Coca Cola system, all overall and Coca Cola FEMSA is learning as we rollout and.
And gathering learnings on the alcoholic beverage sector, which is different from the from the non alcoholic sector, but on and off very positive very enthusiastic.
And and I think that this is the first step into a very robust design of portfolio going forward.
Okay.
It takes all of them from there.
Any color on what mistakes.
Sorry.
Alright, well go ahead and take the next question from Alvaro Garcia with BTG.
Hi, good morning, and get them and thank you for the call.
I have two questions. Both on how you can deal and congrats on the deal.
On the first question and it's been some time since we can sort of.
And that SKU openly about given the arbitration, it's really been since 2017 and hasn't gotten a lot of color on.
The difference beer makes for you on that.
Truck.
And my question more specifically and from a client standpoint.
What are the types of accounts that heidrick, and and and still get to <unk>.
Relative to the accounts that debt via portfolio you cut.
Get to and and sort of from a digital standpoint, what are some of the benefits that a complete portfolio gives you relative.
Relative to only having subjects. That's my first question.
Yeah.
And I'm going to.
I mean, what I mean.
And it's clear there's going to be two separate distribution networks right and.
And our case, we call on approximately 450000 customers throughout Brazil, we don't foresee and changes and the and the and the custom.
Customer footprint that we have today and our route to market will will will have zero all durations due to this to this new deal as we said before.
And the core portfolio that we're keeping is it portfolio with high penetration and high coverage on that.
It allows us to have a high drop sizes and the case of beer and on top of that we will start to add interesting plays and different segments. As we have mentioned both on the Heineken portfolio with some international additional internet and interesting international brands and with the flexibility to incorporate other brewers and.
Through national and domestic Brewers as well as the possibility of developing our own our own brands. So in that case.
We believe that the combination over and the portfolio and the beer portfolio and we will have is more than enough to continue serving our our current distribution network that we have and the set of customers that and car on the other side on the digital side.
All of these brands go directly to all of our digital initiatives, we have seen very positive effects of the ability of customers to order anytime anywhere on our brands. It is some interesting insight is that when customers.
And to order outside of their normal operating hours they tend to actually increase the set of skus that they normally order on a on a on a reseller call that's an interesting insight because it.
Reflection of the way that all of us as consumers are interacting with digital applications and digital order taking.
And our possibilities and we are not an exception and that case. So that also allows us to on.
Not only execute and segment better our our portfolio offering but also allow us for a much deeper on our product offering and.
And leveraging on the digital capabilities that we have so that's that's on our site and the case of high and again it is up to them and.
And so your question, but from a from the Coca Cola FEMSA perspective that is what we are foreseeing in the implementation of the distribution agreement. John Mcphee is I don't know if you would like to grow on more color on that one.
No to argue with you and Dino.
And we do see.
And the journey of future and almost a day.
And your portfolio to attend and all the premium mainstream and value segments.
Order to reach all of our customers.
And we agree with you.
And just one other thing I think what Youre seeing is gonna be and in house choice for consumers and Brazil, which is always good and is going to create a whole set of different dynamics and you know as the <unk>.
These selections come forward the platforms that we have in place are going to be that much more leverage and you know each one of the points of sale. Each one of the customers is going to have that much more choice and choices is always good.
And I think the other thing to that.
To be considered all of those it's not only about beer okay.
Do you believe will also go out and put in.
The seltzer pieces and low grade alcohol is also and this and we'll be putting those on the trucking and they basically also leveraging that and that's a different blocks of sales. So you know there's explosion on.
And brands as well as different type of beverages on a low grade alcohol and it's also going to make it a and very important play. So I think what you can expect is a very dynamic very very change and footprint in Brazil, that's going to make it very interesting and exciting from a competitive set.
Okay.
That's very helpful color and just one quick follow up.
Just to clarify the 40% drop.
You mentioned earlier, a constant theme and the 100 basis points given that the agreement.
It takes place midway through the year does that only consider half of the year or debt or would that be the equivalent of a full year impact.
And once this deal takes place.
That's a full year impact.
And then.
And considering that we're starting on it.
For the second semester and here.
Perfect Awesome. Thank you very much yeah.
And just to clarify on debt consider that.
And as we've said many times, where we're planning from the allowances so lots of the year.
Incorporates ice and bonds.
But also it's waiting on them and you know just.
Yeah.
So the 40%, let's just let's say basically takes into account the gross impact of this initial portfolio, but it doesn't take into account any potential initial launches is that fair to say.
It does it does but it's again, it's all happening and in second half of the year or.
And then on we don't have exact.
Exact dates without it doesn't debt.
And it's a it's a process that has to take hold.
I would say on about it and that's a conservative figure.
Yep.
Okay.
Thank you very much.
Yeah.
Alright, perfect. We will go ahead and take our next question from the line of Marcellus and <unk> with credit Suisse.
Please go ahead.
Hi, John when I come from Tina. Thank you for taking my questions. So changing topic from Adobe to Mexico I have a question on on the margin evolution. So basically you closed at 2020 was from them that margin per multiyear high level and largely driven by grade and Opex reduction so my.
And if so how can we think about the sustainability of this margin level growth.
And <unk> had some puts and Hawaii.
And the evolution of Opex.
And so as that as well and.
And second question would be and she can give us a trading update on how you are seeing are.
Operating trend and yesterday.
Helpful. Thank you very much.
Sure. Thank you much better and I'll tackle the first one.
The main drivers of margin expansion and in Mexico.
I bet you a few and we strongly believe that we can sustain the margins in 2021, that's our that's our focus and our commitment is to protect margin. So all in all as I mentioned, we saw very favorable raw material environment. During the last months and the P. P prices have been decreasing and we.
We leveraged our very successful hedging strategy well into 2021 on the other hand, the combination of our fuel for growth program that we started way before the pandemic debt and continues to be part of our of our process internally and the fan.
Their teams have done and impressive job and implementing cost and expense efficiencies pri.
Primarily and maintenance labor and freight.
And it makes us believe that those efficiencies are sustainable and the future and will be part of or margin structure. Additionally, as I said, we took advantage of other decrease seen prices of raw materials during the last year and hedged most of them correctly P and L.
Luminal, our hedge at prices that are.
As I mentioned, our 5% to 10% below.
What we paid in 2020.
And at the same time remember and I want to highlight that during the last year, we had a restructuring program with severance payments related to the fuel for growth efficiency program. So all in all when you put all of this together, we believe we'll be able to protect our margins during 2021 and and Mexico.
That would be our our base case.
Going forward I don't know if that answers your question.
Yeah.
A couple of things.
And then just a couple of things and then when.
And you start looking at what the price and mix effect has been this year.
Thinking about consolidated for the year its about $9 3 billion book.
So that's something that we overcame over and over the period the last 12 months.
And most of that came out of <unk>.
And that's control and what have you, but as constantino. So this is something we've been preparing for ironically for the last you know 24 months and just to give you a flavor for the snow on our fuel for growth.
And on a project, we had supply chain reinvention as part of this and.
Over the three year period over the last few years, we've had over $160 million worth and savings there.
On our organization piece, you got about $85 million worth of savings and.
Coupled with with US, we see that savings and our way of working going forward and sustainable and our margins are sustainable because we have been redefining the way Coca Cola FEMSA.
And obviously, we have different initiatives.
So.
Teams have done a great job and responding to the emergency and the pandemic, but.
So we do see going forward as channels come back.
And to use and increase our price mix.
Contribution will also be spending more.
And so it's not something that's just going on for example, bottom line, but margins are going to be sustainable.
And on the trading trading update and I would say that I mean.
You all know each day.
The last last month of the year was a year of reserve resurgence and you know and and the pandemic effects with a lot of lockdowns that.
That somehow.
You know also also affected January and most of our operations, but and in February we're seeing a sequential recovery and.
And at a much more positive outlook. So I would say January really affected February and improving significantly and we were we were lucky enough not to have so much of the effects of the of the low temperatures that we saw in the northern part of Mexico. So from the central to this.
South it was better and better weather and then in the north and that is on that is positive for us in this case, so all in all a little bit better and in February and then the January.
Got it that's very helpful. Thank you very much John.
Thank you you're welcome.
Oh, right and we will go.
Go ahead and take our next question from the line of.
<unk> excuse me and toward Alero.
D M.
Hi, Good morning, everyone. Thanks for taking my question and congrats again on the on the new agreement.
I know that you are now you are not allowed to luke's with deep and alcoholic alternative to read into day to day Red trucks. So so my question would be weighted those hard liquor.
And in terms of priorities in this process to find the options.
And if they again absent or would you rather and look for similar agreements and.
And and the second one giving a break per day to day agreement.
And I've seen periods sequential improvement but.
And I feel volumes remain open on the Brexit and so I know it isn't that I need you to answer your question by talking specifically about Mexico. When would you expect to go back to prep and then meet volume rebels and why did your base case and how you. Thank.
Thank you.
Thank you and me again.
Sure it's definitely as part of the total beverage strategy that we have in place and Brazil as we have mentioned in the past. We're currently running some interesting pilots with the agile portfolio of spirits on our Red truck for a particular channels and particulars on <unk>.
<unk> in Brazil, with great success, and with a lot of learnings and we foresee expanding that to other to other regions. Because the results have been very very positive and so the answer is definitely yes, it's part of a total beverage on strategy and a developmental portfolio.
The trick here or the art is to be able to configure the proper portfolio offering for the right set of channels and customers right. So spirits behave.
And a slightly different way and beer and definitely non alcoholic beverages and used to be you need to be extremely smart and the way you set up your portfolio and in order to be efficient and effective which as you know a principal for Coca Cola FEMSA as beverage platform and it's what I call E squared right. So it's.
<unk> and effective at the same time. So the answer is yes, and we're learning a lot and we will hopefully expand more of this going forward.
And and Yeah. John go ahead. Please.
No I think I think.
And as we start thinking about the Mexican volumes.
We'd like to do and what our objective is that you regained and Mexican volume levels of 2019 and by the end of this year, So young and have a very aggressive plan in place, but we're looking at yes coming in with a probably the most difficult quarter of the first quarter and then we started to take growth from there and of the year.
And we have an enormous amount of of.
And initiatives.
Well a lot of it and based on affordability as I spoke about.
Continuous rollout and increased capacity on long way returnable bottles and double day at all and you've got we have a lot of.
Initiatives to deal with the increasing our household penetration and home routes.
And we're looking at increasing our capability there by 30% and a channel that is growing about 30%.
Whole structure restructuring issue on the route to market for local before and areas and.
Touching on all the.
On areas rural areas, and which is giving us a lot more benefits not only economic but also on volume. So we think we have an aggressive plan in place and our objective is to come back to 2019 volumes in 'twenty and 'twenty one.
That's very useful thank you both.
Oh, right and we will take our next question from the line of John King with UBS.
Please go ahead.
Hi, good morning.
My question on it back that up with you know and <unk>.
U S hard Seltzer has a clear price point advantage to our ready to drink spirits based cocktails due to the differential and excise taxes applied applied beer versus distilled spirits and our spirits based cocktails with that said.
And how are you seeing a price point strategy evolving for couple of Chico relative to argue day cocktails.
And Latin American markets.
Thank you Sean for the question and.
The case of Latin America, what the route that we have before.
Defined with the Coca Cola Company is.
Not linking ourselves to the price points or dynamics of the current alcoholic ready to drink offering but more looking into the sources of volume on beer occasions and in that regard we have set a pricing strategy that's pretty much in line depends on it depends on the market and on the <unk>.
<unk> and its particular market, but it's more focused on premium brands and premium beers, rather than alcoholic ready to drinks. We believe that there is an interesting source of volume there that there is and.
And that we resolve some consumer pain points and.
And some of the beer, okay, Jens and the possibility of positioning topo Chico and those segments has a much more upside than looking at currently.
Alcoholic ready to drink premix cocktails on that we have and Latin America. So that's where we're set and mines and Thats where were focusing on and as I mentioned before it's a it's at.
I'd say its long journey, because you need to.
Establish a very different liquid profile and a very different value proposition and much more refreshing I would say easier to drink.
And with some very positive.
Consumer condo patients and the product configuration that and then some of the current alcoholic ready to drinks.
Debt, we have and the market at least in my opinion, so that's where we're focusing on ourselves and into different markets I don't know if that answers range yes.
That was taken sort of a beer.
Aligning with beer pricing.
Premium beer pricing and things that makes sense I appreciate it. Thank you very much.
Thank you Sean.
Alright, once again that is star one if you would like to ask a question.
And our next question will be from the line of Hector Maya.
Santander.
Please go ahead.
Hi, Thank you very much for taking the questions.
A few comments on and you'll deal with Heineken and if I and.
Steve correctly, you mentioned about developing your own alcohol and Brian So.
The only per beer and what he would only be for the Brazil portfolio and what are you being on PTC partnership with Coca Cola and just to confirm if I heard correctly and.
And now what.
The only debate.
Actually happening and the short term and then.
I had a couple of follow ups. Thank you.
John Thank you Hector.
Yeah. It's a great question for clarification. So once more this is a deal that added score has the Heineken portfolio and as we mentioned and I want to reiterate that we have very interesting plans with high and again in order to continue to rollout new bra.
<unk> international brands into the Brazilian market that are very successful and other parts of the world and where we jointly believe there is an interesting space.
And different not only different.
And it price segments, but also in the type of product offerings.
And that we were able and we will be able to launch. So that's at the core of the of the deal and of the relationship on top of that.
As we mentioned in the interim and joint press release, we have under the terms of the agreement.
The possibility to incorporate.
Other beers.
International from other Brewers or logo.
One.
Fears and on alcohol on alcohol and low ABV product offerings, and just that stop on Chico and this particular case. So if we take topo Chico that's a reality, it's a it's a Coca Cola company brand and it's already part of our.
Our portfolio in the case of.
International Brewers as John mentioned, we're starting conversations because I'm into Ashford Brewers and understand that this could be a phenomenal platform for them and in Brazil, and as I mentioned and in a previous question. We're also working with some spirit companies to look at high ABV spirit product offerings and.
Our portfolio. So all in all it's a total beverage play with a lot of flexibility, but at its core and once more we have on one hand, our core business, which is the Coca Cola company product and non alcoholic beverages on the other hand and beer a very strong relationship with Heineken and then the possibility of expanding.
The portfolio either by our own plays or with other partners, both international and domestic.
And I hope that clarifies and provides us enough color for.
And for your analysis.
And I think the other thing too soon.
When you start, saying and collaboration with the Coca Cola Company, Yes, everything that we're doing is gonna be and collaboration with the Coca Cola Company.
And especially with the lower ABV.
And so it's just up on Chico and Theres, a lot of room to expand there and even if we do other you know.
And our Tvs with other other other brands.
And we would be with the approval and consent and collaboration with the Coca Cola FEMSA.
And in the last quarter and next year just true also reinforce that this is a Brazilian deal.
Other markets will have other treatments and we're working on different strategies across the region as we normally do in conjunction with the Coca Cola Company.
Okay.
Perfect. Thank you.
Thank you very much and.
And second question would be.
I mean, what are the chances that cough and stuff.
And Mexico.
And do we expect news about this and 2010 and one or what it would be more towards 2022.
It probably weighted there.
Yeah.
Alright.
You know.
The I would say we need to that's part of our forward forward looking strategy and we would not like to focus on that I think that Mexico right. Now has a lot of challenges we have a very strong position right now and in Mexico, with our Coca Cola portfolio and.
And our Hulu and <unk> portfolio, and we have we have a handful right now.
Something comes into and the future will definitely.
Talk about it.
And the and the upcoming calls I don't know John if you want to mention on that.
Thank you know, there's there's a couple of things to build on a like for US. One is that you have a renewed focus by the Coca Cola company and being customer and consumer centric.
And with that you know understanding that bringing more and better.
Availability to customers increases the ability to go out there and put out a broader portfolio of our products.
And also lower the cost to serve.
And we didn't occur and obviously, you're benefiting and public some of the customer and the consumer.
Part of this whole strategy is also looking at different categories. So to say.
What are the load sharing opportunities that are available on each one of those different markets and where it makes sense. So it's market by market okay.
And there's certain categories that are glaring like the one you just mentioned, but I wouldn't say that it's even possible or.
And it's impossible.
Impossible at this point you know for the from Mexico, but I wouldn't make it that debt closer to college and was there something and.
And we're in the exploratory mode, and still something and I pointed out.
Excellent thank you and sorry.
And the last the last question on premises.
And to be given in your line.
On the strategic side.
New deal that you have now with Heineken.
Can you share with us.
Process and selecting a new from could you talk about in other words, how would you be choosing the premium and <unk>.
And Mr wanted to connectivity.
From there.
Oh.
And I'll defer that to my theory.
Yes, part of software and so yeah. So.
We do we do have a plan already.
Just can talk too much about it I would say.
We behind it and we have you know as we said before we have three lounges and and.
And your pet and I expect it and I would say they are they will be mainly on the mainstream and premium segments and.
And they are already discussed with them, but we will have to wait for that.
To provide more details, but definitely I would say, we're very excited about a broader portfolio with them.
And as was mentioned before we also have a flex you really do we with other brewers that we will be exploring.
Excellent. Thank you. Thank you very much thank you.
Thank you Victor.
Alright, and it appears there are no further questions at this time, Mr. Santa Maria I'd like to turn the call back to you for any additional or closing remarks.
Okay.
Thank you.
I would just say that we're tremendously excited about the conclusion of the year.
I think we've made enormous progress.
Our first pillar, which is portfolio.
The restructuring of our agreement and the realignment of our agreement with the from Heineken in Brazil.
Yeah.
It takes away a lot of the murkiness of what the future looks like in Brazil on the outskirts.
And something that says I think you have to think about this and the 10 year deal. We're excited about the partnerships that debt. We can develop obviously the oil and we have with Heineken is fundamental.
Secondly, and I'm very excited about how well we have developed our digital strategy.
The Brazil BD.
And the preeminent market for us and testing.
We are looking at.
At the end of this year, we put 250000 customers on a whatsapp digital platforms.
And at the beginning of this year, we went up and named a chief digital and technology director living and Coca Cola FEMSA reporting to me.
And we have a clear path to digitize them.
Internal functions and processes, but more importantly routes to markets and countries, where we see a sequencing of our events and how we're going to be building on part of that so that's extremely important for us and.
I think at the end is what Constantino said and also very equipment and very.
Active in terms and looking for opportunities for continuous.
Territorial expansion and we have a balance sheet to do that we have the willingness to go and I think we have the relationship with the Coca Cola company to capitalize on and so I think it's a tremendous year.
In terms of a very complex environment.
And I was from enormously big structural changes and fundamental changes and the way we're.
And we're looking at as a company and really excited about work from future brings so thank you again for your interest and Coca Cola FEMSA.
And we'll talk to you and a couple of months.
This concludes today's call. Thank you for your participation you may now disconnect.
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John.
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