Q3 2021 Coca-Cola Femsa SAB de CV Earnings Call
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Excuse me, ladies and gentlemen, thank you for your patience and holding the conference will begin momentarily. Please remain on the line I can thank you for your patience and holding the conference will begin momentarily. Please remain on the line.
Hello.
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Good morning, everyone and welcome to the Coca Cola FEMSA third quarter 2021 conference call.
Today's conference is being recorded an all participants are in a listen only mode.
At the request of the company, we will open the conference for questions and answers after the presentation.
This conference call management May discuss certain forward looking statements concerning Coca Cola fences future performance and should be considered as a good faith estimate made by the company. These forward looking statements reflect management's expectations and are based on current available data.
Actual results are subject to future events, and uncertainties, which can materially impact the companys actual performance at this time I would like to now turn the conference over to Mr. John Santa Maria Coca Cola FEMSA, Chief Executive Officer. Please go ahead, Mr. Santa Maria.
Good morning, everyone welcome to our third quarter 2021 earnings Conference call.
As always we appreciate your joining us today and we thank you for your continued interest in Coca Cola FEMSA.
I'm joined this morning by Constantino Spas, our Chief Financial Officer.
He also head of Investor Relations.
I was wondering who you know.
Third the strategic planning and capital markets Director since 2019 has now been appointed to finance the finance director of our Mexico operation.
We know we will continue to deliver solid results.
And we wish him great success in his new role throughout his career and Coca Cola FEMSA.
Let me begin by saying that we're pleased to report positive results for the third quarter.
Our performance was marked by strong volume growth and share gains across most of our territories.
Notably with Longbow.
Pricing in our disciplined raw material hedging strategies are enabling us to protect profitability in the face of an unprecedented supply chain and raw material environment that is affecting industries worldwide.
Resilience is especially evident when excluding one time effects as you will be described during the call. This morning.
Yeah.
Additionally.
I want to underscore our company's ability to deliver a significantly accelerated results across all of our strategic funds.
From portfolio management with great results from our affordability initiatives and complements to our beer portfolio in Brazil.
The milestones of sustainable development, such as our successful issuance of our first ever sustainability linked bond in the Mexican market.
Okay.
Today, I will expand on our third quarter results and provide you with an operating update.
I will also take a moment to discuss strategic highlights for our key markets and a general vision of our ambitious our ambitions for next year as we continue to position Coca Cola FEMSA for the next wave of profitable and sustainable growth.
Let me take to your questions Constantino will guide you through our division's performance and will expand on the actions we are taking to navigate a dynamic raw material and supply chain environment.
No.
Well, let's comments on our commitment to wave two water efficiency and overall environment via successful issuance of a sustainability linked bonds.
Moving onto our results for the quarter.
Our consolidated volumes increased five 8% year on year.
And one 5% as compared to the same period of 2019.
Once again, we saw an acceleration of the sequential recovery of most of our markets with many growing compared to our 2019 baseline.
Notably we are seeing a remarkable performance in key markets of Brazil, Colombia, Guatemala and Argentina.
Yes.
As consumers continue to look for more affordability.
Average sort of capabilities in both affordable one way presentations and refillable bottles to adjust key price points, enabling us to gain share across markets and categories.
Example, our sparkling beverage category continues to post solid volumes in both brand Coca Cola and flavors, while I was still beverages beverage and personal water categories continued to post double digit growth across most of our territories.
To give you a sense our sparkling beverage category grew three 6% year on year led by two 7% volume growth in brand Coca Cola and seven 1% growth in flavors.
Accordingly.
2019, our sparkling beverage category grew one 2%.
By growth across most of our territories, partially offset by a decline in Mexico that was mainly driven by challenging weather for most of the quarter.
Are they still beverage and personal water volumes continue to recover at an impressive pace.
This is highlighted by our 24% year on year growth in skills, which are 50% ahead of the same period in 2019.
Volume recovery across channels continued at a faster pace than our previous forecast.
Mainly by the reopening of the on premise channel.
The traditional trade channel continued to show resiliency marked by more than 4% growth year on year, while the modern channels grew 5%.
Notably the on premise channels volume grew more than 30% year on year across our key markets.
With regards to our mix, we continue to see a significant recovery in single serve presentations compared with the previous year and certain markets such as Colombia, and Argentina are already ahead of the single serve mix that they had during 2019.
For the quarter, our consolidated total revenues increased three 4% year on year.
This growth was led by our volume performance, coupled with a responsible pricing and favorable price mix effects.
Partially offset by three main factors first.
Unfavorable currency translation into Mexican vessels.
Okay.
Topline comparison base that included onetime tax effects in Brazil of approximately 1 billion Mexican vessels and third the transition of part of Heineken beer portfolio in Brazil, which led to a decline of approximately 31% and beer revenues for the quarter.
Notably excluding unfavorable currency translation effects are comparable total revenues increased a solid eight 8% for the year on year.
Gross profit increased two 1% a resilient performance driven mainly by favorable raw material hedging strategies and efficiencies across our operations.
We achieved this performance in the face of increased raw material costs and the depreciation most of our operating currencies of some part to the U S dollar.
Additionally, as discussed during our second quarter performance.
Paul we have resumed the recognition of tax credits on concentrates purchased from the mouse free trade zone in Brazil, which also supported our gross margin performance as compared with previous years.
Okay.
Operating income declined 9% versus 2020, however, when normalized for nonrecurring tax effects in Brazil.
Excluding $620 million for the third quarter of 2021, and $1 6 billion from the same period of the period of 2020, our operating income increased a solid six 3%.
Operating cash flow declined seven 5% year over year, which when normalized for the previous mentioned effects increased by two 8%.
Finally, our controlling net income increased 38, 8% to reach $3 4 billion buses driven mainly by a decrease in other non operating expenses related to the last year last year's sale of the dairy joint venture in Panama stay a suit and impairments recognized during the same period.
2020.
Ill provide some additional color on the operating environment and strategies, we are implementing across key territories.
In Mexico, we faced challenging weather conditions characterized by increased rainfall and lower average temperatures for a significant part of the quarter.
Additionally, as COVID-19 cases start to increase during July and August key region of the country, such as Mexico City, reintroduce restrictions to mobility and hours of operation at certain points of sale.
As I understand analyze these measures are we are encouraged that our continuous decrease in cases enabled Mexico city and other key regions of the country to ease restrictions as of October 18th.
And transition to a green light according to the epidemiology vehicle traffic light in Mexico.
Importantly in the face of this dynamic environment, we continue to focus on our consumer centric approach and our ability to provide affordability to our consumers.
As a result key regions in Mexico that faced milder weather conditions during the quarter such as the South East, we're able to increase volumes five 6% year on year and are reaching our 2019 baseline numbers.
Notably we continued to invest significantly on our strategic priorities for example, with regard to our portfolio, the new formula and visual identity of Coca Cola Sin, a sukkah grew double digit rates.
Yeah.
Also our focus on increasing the coverage of our universal refillable bottles, which provides substantial affordability to our consumers.
<unk> continues to provide shares share gains.
Yes.
Our execution scores continue improving mainly in the traditional and off premise channels, especially after such a long locked down from last year.
With regards to our B to B, what's up order taking platform in Mexico, we expect to reach approximately 270000 clients by the end of the year.
The result of this feature in Mexico exceeded expectations as compared with January client acceptance has increased by 13%, reaching a very encouraging 93%.
Average tickets for these clients has increased 18%.
Our home delivery routes in Mexico have reemerged as complementary channels and continue to grow significantly we now operate home delivery and all of our operating units in Mexico with over 500000 clients registered and we continue reinforcing this growing value proposition by taking credit card payments.
Almost in all territories.
As a result of these initiatives, we believe that the headwinds that affected our Mexico operation during the third quarter our transition right.
Moving onto Brazil, our volume in the quarter increased seven 1% year on year.
This performance is underscored by the by share gains, mainly driven by the sparkling juice and energy categories.
Although it's a quarter that marks the transition of Heineken and Amstel brands to the Heineken distribution network. We continued the rollout of Tiger and we included Brian brand is inbound and our distribution network.
I am sorry to say that together with Heineken and Coca Cola Company, we have completed the transition without major disruptions to our clients and consumers.
At the same time, we wasted no time evaluating and executing additional options to further complement our beer portfolio.
First in August we announced the acquisition of Brazilian craft beer brand that is soft colleagues together with the Coca Cola Andina.
In September we announced a distribution agreement to distribute <unk> portfolio together with the Coca Cola system in Brazil.
Importantly, Brazil.
Brazil continues to lead the rollout of our Whatsapp B to B platform.
We have increased the effectiveness and the relevance to for our clients. We are bringing more clients on board and they are purchasing more items, while increasing consumer satisfaction metrics.
As a result, we have set up close to 300000 clients and already 30% of our total orders in the country are digital up from 20% in December 2012.
I think Colombia.
This market posted a solid 26, 8% year on year volume growth.
Remarkably this is 12% ahead of our volumes in 2019.
Growth is driven by the overall macro recovery.
Coupled with a portfolio of initiatives and the reopening of the on premise channel.
During the third quarter, we surpassed the number of active clients, we enjoyed before the pandemic.
Our successful affordability initiatives such as the launch of our Universal bottle grew 19% versus the previous year.
The Universal bottle has allowed us to gain up to two points of share of sales.
Notably our <unk> Omnichannel solutions in Colombia already represent more than 5% of sales for the country.
We have many opportunities to sustain our growth and as a result, our volume has continued to grow double digits since 2018.
Pharma was supported by outstanding execution.
Share gains and increases in the number of active consumers.
Although we continued developing a winning consumer centric portfolio.
Enabled by Omnichannel execution and expanded cooler coverage.
I wanted to highlight our performance in Argentina.
A complex environment the execution of our strategic plans has enabled us to regain momentum.
For the quarter, our volumes increased 15, 9%.
Seven 9% higher than in 2019.
It is also encouraging that restrictions have eased as of October one now alloy, allowing for 100% capacity in restaurants.
Capacity of massive events.
And the gradual reopening of borders.
Additionally, our portfolio initiatives in the country are enabling us to gain share.
But in high growth categories, such as energy drinks Monster is now positioned as category leader with double digit growth.
Our focus on revenue management has enabled us to grow our top line driven mainly by favorable package mix.
With regards to profitability, our topline growth and the mitigation actions. We undertook during 2020 are driving an encouraging recovery in profitability.
Going forward, despite a still volatile a scenario we are confident that our resilient business model and the actions we are taking within the position.
They will position Argentina for sustained long term recovery.
We are a company that we have clear strategic priorities to achieve our targets for the year at.
At the same time, we are ensuring the necessity necessary investments behind our capabilities in order to ensure our long term growth and transformation adopting to the needs in context of each of our markets.
Finally, I want to share some thoughts on our vision for 2022 and beyond.
Yes.
On how COVID-19 has reshaped consumer preferences worldwide.
Fostering a substantial reconfiguration of the share of wallet.
Brown Trust and brand trust across different consumer categories at the same time, new consumption occasions have emerged and more and more consumers are changing the way they shop with.
With this in mind the company is making technological investments to digitize their best customers and consumer interactions with a new standard of excellence for retailers and brands.
Otherwise transformation.
Oka Cola FEMSA is reshaping and adapting to thrive in this new environment.
We have strengthened our relationship with our partners worked hand in hand, with the Coca Cola company to align our five year strategic growth plans and continue building, a winning consumer centric portfolio, while exploring multi carrier opportunities across our markets.
As.
This local clearing releases previous earnings releases, we continue to rollout pilot programs to test the distribution of our complementary categories, such as leading spirit brands other alcoholic beverages, and leading consumer products in certain markets.
This is consistent with the enhancement of our cooperation framework announced last July with the Coca Cola Company.
Reflecting on our vision for Coca Cola FEMSA and the actions we are taking I am confident that we are building the right set of capabilities to continue positioning our company for long term growth and value creation for many years to come.
With that I will now hand, the call over to Constantino.
Thank you John and thank you all for joining us on today's earnings call.
I will now expand on our division third quarter highlights.
In Mexico, our volume remained flat year on year, while our revenues increased 7%.
Our successful pricing initiatives and a favorable price mix environment, partially offset by tough weather conditions and mobility restrictions faced during this quarter.
In Central America, our operations delivered a very strong volume performance our volumes increased double digits in all of our markets and this particular region, notably.
This division delivered double digit growth as compared to the same period of 2019.
On the pricing side.
Our average price was impacted by the negative currency translation effects over central American currencies into Mexican pesos.
As a result.
<unk> revenues increased seven 3% in the Mexico, and Central American Division and two 1% as compared to the same period of 2019.
On the profitability front.
Or gross profit margin for the division remained virtually flat.
Our successful raw material hedging strategies were partially offset by the effects of decrease in commodity prices and higher concentrate costs in Mexico as compared to the same quarter of 2020.
We will definitely continue to protect our profitability by maintaining a disciplined hedging strategy and implementing savings and efficiencies.
Moving on to the expenses during this quarter, we continued to see a normalization of certain operating expenses, such as marketing labor and maintenance as a result of an increase in mobility and the gradual normalization of our operations. It is very important to highlight the fact that we are maintaining a high profit base in Mexico and central.
America as compared to our 2019 baseline.
Looking at our operating income.
Increased four 1% and expanded 30 basis points when compared to 2019.
Going forward, we will continue to focus on protecting our margins by leveraging efficiencies and hedging strategies.
To offset the dynamic supply chain and raw material environment, we're all facing.
If we move on to South America, we're encouraged by another quarter of very strong volume performance Division delivered 11, 7% volume growth.
Compared to 2020, and a $12 seven increase as compared to our 2019 baseline.
As John mentioned this quarter, we saw remarkable performances in Argentina, and Colombia, driven by increased mobility, coupled with share gains in these markets. Our revenue marketing revenue management initiatives prudent pricing and volume growth in the division were partially offset by unfavorable.
Currency headwinds.
Moreover, our quarterly revenues were impacted by the partial transition of.
Yes.
Finally as also John previously described we must consider it a one time effect and their comparison base to pay an entitlement to reclaim tax payments in Brazil for approximately 1 billion Mexican pesos.
Our topline decreased slightly by one 9%. However, if we exclude the currency translation effects, our topline would have increased eight 1% during this quarter.
On the profitability front or gross profit in South America decreased five 6%, representing a margin contraction of 160 basis points. This decrease was driven mainly by the depreciation of our currency as compared to the U S dollar and increase in freight and sugar costs and the effects of.
Were partial beer transition.
These effects were partially offset by the resumption of tax credits on concentrate purchased from the <unk> free trade zone in Brazil.
Our operating income for the division decreased 26%.
By normalizing the extraordinary tax effects in Brazil as we previously described our operating income increased more than 35% year on year.
Although tax environments are very dynamic as it had been the case for Brazil for the last couple of years at this point in time, we do not anticipate that this could lead to additional volatility to our P&L.
Let me provide you with an update on our raw material hedging strategies.
In Mexico, we have hedged all of our P. T needs for the remainder of the year and we have hedged 45%.
Of our 2022 needs at prices slightly above the one.
We're currently paying.
Notably for the remainder of 2021, we have also hedged around 75% over our aluminum needs in Mexico and more than 90% in Brazil.
On the sugar front in Brazil, we have covered approximately 70% over sugar needs for the year and more than 40% for 2022 at very attractive prices.
All in all we remain confident that these strategies will continue to mitigate treasure to our profitability for the fourth quarter as we move into 2022.
I will now expanded our financial results, which reflect our initiatives to strengthen your balance sheet and financial position.
Our comprehensive financial results recorded a decrease as compared to previous year, driven mainly by a foreign exchange gain.
Net debt exposure in U S dollars was positively impacted by the depreciation of the Mexican peso and the Brazilian real.
In addition, we recorded lower interest expenses, driven mainly by the payment of short term financing incurring during the first quarter of 2020.
The payment at maturity of a Mexican peso denominated bonds.
Now, let me expand on the successful issuance of a sustainability linked bond in the Mexican market.
Consistent with our financial discipline, our strong credit profile and commitment to sustainability.
We're happy to say that we priced our first ever sustainability linked bond in the Mexican market for 94 billion patches.
These bonds are priced in two trenches.
$6 9 billion peso is at a fixed rate due in seven years and $2 4 billion pesos at a variable rate due in five years. This transaction also represented the first ever sustainability linked bond issuance for the Mexican market and has received broad participation from investment grade dedicated investors confirm.
Coca Cola FEMSA financial discipline and focus on sustainability as.
As part of this transaction were publicly committing to achieve a water use ratio of 136 liters of water used per liter of beverage produced by 2024.
Water use ratio of 126 by 2026.
Our water use ratio is 149 liters, a benchmark of water efficiency for the Coca Cola system.
For additional details on our use of the proceeds of commitments related to this transaction you can find a copy of our sustainability linked bond framework on our website and a copy of a second party opinion provided by sustained miletich, who confirmed that our ambitious targets are aligned with sustainable bonds.
Finally, I want to underscore at Coca Cola FEMSA with financial strength, which is once again reflected in our strong balance sheet and solid cash flow generation.
As of September 32021 for a net debt to EBITDA ratio below one times.
<unk> to 113 times at the end of 2020.
While we closed the quarter with a cash position of more than 50 billion Mexican pesos.
Additionally, highlighting the strength of our cash flow generation and our confidence in Coca Cola FEMSA solid financial position on November 3rd we will pay the second installment of the 2020 dividend.
The amount of zero point 63 pesos per share for a total cash distribution of approximately $5 3 billion.
With regards to Capex, we will continue to take a very disciplined approach to capital allocation.
Our cash control tower methodology to ensure that we maintain solid cash flow generation for the remainder of the year.
Very encouraged by our achievements during this quarter and very proud to continue making history in terms of our sustainable financing.
Confident that these efforts will not only have a positive environmental impact, but also bolster the environmental commitments across our industry.
As always we will continue to focus on driving growth, while continuing to create social and economic value.
Part of our company and with that I will now hand, the call back to John for his final remarks. Thank you very much for today's space chimps and listening to our call. Thank you.
Thank you Constantino.
<unk>.
In closing I am encouraged by what the future holds for Coca Cola FEMSA, we have the right strategy talent and culture, and we continue to deliver accelerated results across all of our strategic fronts. As we described during today's call.
Although our market environments remain dynamic our ultimate goal is as clear as ever deliver sustainable long term growth and shareholder value for many years to come.
Thank you for your continued interest trust and support.
And for joining us today, operator, I would like you to open the calls for questions now.
Thank you have you like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
The interest of time, we ask you please limit yourself to one question.
Dan You May press Star one to ask a question.
Last question comes from Felipe <unk> with Scotiabank.
Thank you good morning, Dawn on something on Tmall. Thanks for Thanks for question and congrats on the results are very well towards that sit on the Brazil impact.
Just on my side.
Distribution agreement just wondering it seems that in the comments about the distribution agreements in the release, you mentioned, Mexico and Panama.
And the list of countries, where you are now testing distribution pilots.
So I just was wondering if you could give us a little more detail about what pilots you're conducting in those two countries.
Also I saw.
Mention of consumer product brands, which I thought was a little a little strange I would've thought you would've mentioned beverages, maybe it's.
Referring to non beverage products I just wanted to confirm that.
It just popped into my mind the dollars within the country.
You want me to take that Danielle.
Sure Hey, Felipe. Thank you so much for your questions.
Yes.
Let me try to frame this.
I mean first of all what we're doing across different geographies beyond Brazil, everything started with Brazil, where we've had legacy dishes.
Beer and <unk>.
You all know the story right and where we're at today, but.
As we as we mentioned you know.
A couple of months ago, our cooperation framework with Coca Cola.
Is now enhancing our ability to focus on a multi category strategy and in line with that.
Conjunction and an agreement with the Coca Cola Company, we're running pilot programs that will enable us to assess and learn from new shopper and consumption occasions, and gathering necessary insights to strengthen our value proposition for retailers and consumers in the future so with that in mind.
This is allowing US this has allowed us to start thinking about our value proposition with a true customer centric approach and I know that sounds a lot of like a cliche, but in our case.
Leaving that.
To its full extent so we're looking at our value proposition from the customer backwards and that in and how does that add to that.
To us and to our consumers right with that in mind.
We're looking at categories that are.
Adjacent to our value proposition, but theyre also going beyond beverages. So to confirm your question that is a 100% accurate.
We're going in some of these pilots, we're starting to that value proposition that includes not only beverages.
So for example in Mexico.
We're running a pilot program in the city of wherever that right now you can go check.
To distribute the portfolio.
One of them.
Leading and very significant alcoholic brand companies.
With.
With an agreement with them.
We decided not to disclose it right now at a pilot level.
But it's it's out there.
Point of sale are currently being served by us.
This portfolio and we believe that this will allow us to serve new consumption occasions, and boost Coca Cola FEMSA sales with a combined execution in a focused way portfolio that serves the traditional beyond premise and the home delivery channels.
On the other hand in another region in Mexico.
We're beginning a pilot program with one of the worlds, leading <unk> company. It has.
Anywhere from household products to personal care products that we believe will enable us to share to serve new shopper occasions, and strengthens this one stop shop value proposition for the traditional trade. So that for example in Mexico very recent and we're moving along those lines.
With a lot of optimism in terms of what results we can get.
From that in the case of Panama, where we.
We started working with one of the leading beer companies in the world.
And we're at where we're already running a pilot.
Program there with.
Distribution and shelves and.
And Panama, two which we believe it's very complementary.
And the way, we address the market and it solidifies our route to market as well as bring to life. This.
Value proposition focused on.
The customer.
Summer centric approach and and in Brazil, we have enhanced our portfolio, we already have confectionery, we face quite well.
And some of our channels and we're also adding new alcoholic beverages beyond the agile project that we have with extensive extensively tested in Brazil, and we are expanding into other regions and we're adding also other.
Consumer goods.
Physicians into this into this process. So its very exciting its very dynamic. We believe that these pilots will will scale up quite fast and then we will be able to provide for more visibility and information on them and we remain extremely focused this is.
A.
Significant change and shift in the way Coca Cola FEMSA has addressed the market it levers up.
Our ability to serve with our phenomenal frequency and penetration in the market and it's a win win for many years.
Many players in the value chain the customer the consumer ourselves.
Coca Cola company and our potential partners.
And I hope that addresses your question pretty good and more than welcome to host anymore. Any of you and then in our region. So you can see them by.
Thank you. Our next question comes from Isabella <unk> with Bank of America.
Thank you. Thank you for the call good morning, everyone.
I have two questions first of all when we look at margins in South America.
Can you give us a little bit of more color.
Country.
Where you saw more pressure.
Where you saw some some countries eventually outperforming and how your.
Forecasting we're expecting 2022, considering that eventually have a tougher consumption environment in some countries.
Can we think about profitability.
For South America.
And that would be my first question and second question.
Regarding our debt.
The beer sales I understand that that transition is completed our rights in Brazil.
And how you're seeing the pickup of the brands that you left did you are left in the portfolio and the ramp up of off Tiger and eventually.
Other brands that you guys are rolling out.
Yeah.
Thank you so much for your question.
Margins in South America.
As we mentioned if you exclude the extraordinary tax effect, our EBITDA margin would have expanded approximately 140 basis points to reach 14% EBITDA. This would be a 50 bring 15.
EBIT that growth year on year.
So to give you more color. This is explained by the following effects, we had better volumes across the division overall.
Two particular markets in South America that are recovering price mix.
Argentina, and Colombia are performing very well. So these are markets that despite the dip.
Difficult conditions, they face very differently. They have been recovering their price makes them that has had a positive effect.
And their margins favorable raw material hedges as we mentioned we've been doing quite a quite a good job I think so far at hedging our raw materials and on the other hand, despite that extraordinary tax effect, we have the reception of tax credits in Brazil right. So that's one element that explains the effects in south <unk>.
Erica for the margins. In addition, as you mentioned and we'll elaborate more on that.
In addition of our beer portfolio.
Initiate it right and that has a negative impact on margins in the short term as you are letting go of a premium set of brand Heineken and am still you're maintaining economy brands that have lower margin structurally and you're incorporating.
Hello.
Hello.
Hello.
Maybe the call dropped.
I'm on the call.
Wanted to just complete loose.
Hello.
Hello, John.
I'm on the call here I think I'm something is back on line as well.
Yes, I'm back online I'm very sorry for some reason I got cut off technical difficulties.
Okay.
Okay, I think I think we're all back online.
Okay. So as I was saying we had a we had and sorry for that.
The real difficulty he got cut off from the mine.
We're transitioning to beer portfolio and that has a negative impact in the short term as I mentioned, we're letting go to premium brands with healthy and high margin keeping economy brand better lower margin structurally and adding new.
Products into your your your lineup that are.
Very positive and margin, but they're very low in volume at the beginning.
So that effect impacts the margin. We're also seeing increases in track and sugar costs in Brazil, and Colombia, and evidently and this applies to most of our markets the normalization of marketing labor and maintenance expenses in our operations is picking up right. So in 2020 a company. This size you take a look.
Lot of measures for cost containment.
Some of them roll over and you start seeing it.
You have to start letting go of some of them and a normalization of that also has an impact when you look at it versus 'twenty 'twenty.
So that in my opinion is.
The explanation for margins, it's a mixed situation, but we believe that once the tax effects.
Our out of the base once the transition into our portfolio is full effect and the newer brands that are we're very optimistic about them start to gain traction.
And the hedging strategies that will put in place will be able to protect our margins and in some markets like Colombia, I could I could even say that 2022 should be a year of hi.
High probability of margin expansion. So I don't know if that addresses your question and once again I'm sorry for the interruption.
<unk> I think the other thing just to add to what your second part of the question was about how it would be ourselves.
First of all we're very very pleased on how the portfolio is developing having the high premium craft in there without a self policing, which is an extraordinary liquid is doing wonderfully.
And the launch of Tiger is also according to expectations is doing well and eisenbach Ah is we're gaining distribution levels well above historic levels. So I think overall you know how we are developing our beer portfolio in Brazil is doing well.
How we configure the portfolio in terms of structure of Super premium premium and core as an economy.
As is developing correctly and.
And the volumes are coming in the distribution levels are coming so.
We're pleased to see the performance of how things are.
Develop.
Thank you. Our next question comes from Marcella Recchia with credit Suisse.
Hi, John Hi, Constantino. Thank you for taking my question I have two questions on my side first one on Brazil. Once again, you delivered a very solid volume performance this quarter.
But your purion gain on their side reported a decline in south to drink filings. So it would be very interesting to hear from you.
Thoughts on what could mainly explain this gap in how you were seeing the demand outlook going forward in the country.
And the second question on my side is basically on your solid balance sheets. You mentioned that you are with a net debt to EBITDA ratio below one time. So it would also be very good to hear from you what are your capital deployment priorities. If you would be considering distributing.
Extraordinary dividends or even retro chase a chance. Thank you very much.
Okay.
Thank you Sundar.
Well.
I'll take this one and I'll have John complement with it solves pump.
While we can't we can talk on behalf of them. So I can't give you our perspective.
What's driving that consistent volume growth in Brazil first of all we have been gaining market share across categories, including record levels in sparkling and energy drinks right. So.
Sure.
O'neill, our decisions on portfolio gearing, our portfolio towards affordability with initiatives such as multi packs that how your penetration of returnable and the huge effort that we're putting behind understanding shopper habits with digital.
With heavy digital presence in catering or value proposition there.
Has allowed us by etcetera rating the rollout of these digital capabilities.
To continue to grow on the other hand, John mentioned that we you know on our digital fronts, we have more than 200000 customers using what we call our <unk> plus platform, which is.
Centered at this point in time in a whatsapp for business platform and this represents.
60%, almost 50% of our total customer base in Brazil, but we are managing over 15000 orders in one day and that's growing.
Each week and that's equivalent to two increasing in a traditional model over 200 resellers in terms of order entry.
So when you look at the conjunction of those.
Good tools that we have put in the market.
Focus and the consistency, which I think is very important this is not.
You know something that happens overnight, we have been doing it for a few years now and we're able to navigate the.
The pandemic quite well I think in Brazil in the move up in volume are there as you mentioned.
So the consistency is also an important element that continues should drive volume growth I don't know John if you want to add something else.
Thanks for the question.
I think a lot of it has to do in terms of our performance in Brazil is the fact that we are.
Our coming across with a very high value proposition for our customers.
And what Constantino just spoke about in terms of digital.
Order, taking capability build what's up.
Our the number of items being sold per store and as we complement the portfolio of what the consumer customer is looking for from a multi category perspective, we're getting enhanced ordering per customer per store. So so I think that is a very large key to what's going on.
And so that combined with a multi packaging strategy that we have for both single serve and multi multi serve I think is really whats distinguishing our Brazil portfolio.
Performance right now.
The other thing is where we are today is really getting to the point of all time shut in there where you have it all timeshare is in Brazil.
You know I can't really speak to that.
But I think that's what's driving our performance there.
And on the balance sheet side.
Hum.
Our intent is to continue to expand our geographic footprint okay.
Like what conversations with the Coca Cola company.
To define determined.
The logical expansion strategy is for Coca Cola FEMSA.
No no no.
Sounds for the system.
While we bring the most value for the entire.
For both companies. So our intent is not to go out at this point okay.
And then go out and deliver an extraordinary dividend.
Oh no.
These business.
Apple reinvestment opportunity.
Many initiatives and then we look for continued inorganic growth.
That's very clear thank you guys.
And to complement John I mean in these conversations and in line with the framework collaboration framework that we have mentioned these.
These inorganic opportunities should not only be interpreted only.
Link system and expanding our geographical footprint.
We're also looking at capabilities.
Capabilities that can enhance our value proposition for example in houseware enhanced digital capabilities going forward and we're looking at very different.
Possibilities in terms of inorganic expansion in deploying our capital.
No.
The way that we're looking at the business right now.
It's quite different that we used to.
And with that in mind.
Redefining the inorganic growth path as John mentioned in conjunction with the Coca Cola Company I think he got cut off a little bit.
So thank you for your question.
Very clear thank you both.
Thank you. Our next question comes from Helen <unk> with.
Since Andrew.
Thank you and good morning, everyone. Thanks for taking my question and congratulations on the results. Let me follow up on the previous question. I mean, you have to put $5 billion of cash Youre under one times net debt to EBITDA. So that means youre firing power equally of over $6 billion without losing your investment grade.
Geographical expansion, but you also mentioned a new capability East coast.
What is the likelihood.
What is the likelihood that you deployed capital.
In a large way considering the car repower or would you prefer to go into excuse me is so small.
Incursions into all of this all of these projects that would be my first question.
Do you want to take that down.
Hi, Alan how are you.
Hey, Doug.
Listen I think if you think about where we're going on this framework and the long as industry, new renewed relationship rehab of the Coca Cola Company.
What we're doing is finding it first.
There is a way of looking at the consumer or in the <unk>.
Customer that allows us to become more customer centric. So as we go forward and open up to a multi category approach.
All of our markets Okay.
There is opportunities to think about.
Acquisitions that are not only Coca Cola brand.
Territories, but also those companies that could actually add value to a multi category platform that we're building together okay.
So that's the first part secondly.
Our preference would be to continue to expand and significant.
Significant expansion of our territory, Okay to make a difference for Coca Cola FEMSA piece okay.
This system.
Okay, and secondary acquisitions to enhance value with other categories as we continue to learn about these businesses okay.
We go forward to be able to bolt them into the system.
I think it's too early to tell that we'd go out there and make a major acquisition is something that we particularly don't know about you guys, especially were just opening ourselves up to multi category.
And I think the third piece, if you think about Alan as you know as we build out our digital capabilities.
We would need to also probably entertain the thought of joining partnering our federated with other people to be able to build this capability. So it would be not too far fetched to think about.
Investments in Tech partners that would allow us to complement our <unk> platforms and that's what we're heading.
Well I can continue further I mean, you are really looking at the business in a different way.
I think Richard and congratulations for the last question really quickly I mean.
I know you've made already comment regarding beer.
In Brazil, I mean, but if you from running the numbers through correctly I mean, you did lose about one third of your volumes in the quarter year over year Heineken.
Heineken reported yesterday, and they said that they had declines in Brazil in the mid teens and Ambev reported this morning, and they're seeing.
High single digit growth in volumes. So how do you see the trajectory in terms of recovering the lost volume of the Heineken brands.
In Brazil going forward in terms of the number of.
Years, I think <unk> mentioned yesterday two to three years would you agree that that's how long it'll take to be back to the level before before you let the Heineken is the optical broad scope.
No I don't think that constantino.
Sure I think two years is a is a prudent.
Horizon violent okay, but.
But at the same time the way that for example that example needs.
Very very small brand today with enormous potential.
Yeah offensively.
Both of the value proposition that has you know the crap.
Architecture in mind and the.
The liquids are great and our distribution capability will definitely.
Drive exponential growth ahead from a very small base.
Alicia.
Big bag.
You've seen we're also looking at expanding capacity for local production in Brazil, So that I can do that.
Can also complement the heineken portfolio and and grow very rapidly and at the same time I can say that we're also having.
Conversations and we have other initiatives in the portfolio.
Portfolio and the pipeline too. So it's early to tell two years would be very prudent.
I think that what we're seeing for example, a nice environment.
Coverage is growing super fast and <unk>.
And that provides us some you know some light on the potential of some of these brands.
Our system ready and in Coca Cola FEMSA, and so two years prudent I would I would try to work.
We will do everything.
To be more aggressive and faster than that.
Yes.
A lot of degrees of freedom in terms of who you can partner with.
The debate on led recovery I mean last comment. This is not a question I'm sure I'm just going to put it out there I think we're gonna look at Heineken departure.
That's a that's a kind of strategic mistake from their side in Brazil, but anyway, that's far more for another conversation congratulations on your results and thank you so much for taking my questions.
Thank you Alan for your questions.
Thank you. Our next question comes from Carlos Laboy with HSBC.
Yes, good morning, everyone.
John I don't know if you covered this a little bit.
A bit earlier.
How do how does fences.
Top management changes impact.
Your ability to address some of the big picture of value creation opportunities that you see.
Specific for Coke FEMSA.
Senior management changes, sometimes bring the opportunity to rethink where to redirect certain opportunities that youre working on.
Mhm mhm. Thanks.
Regardless how are you good good tuck ins.
I think the way I would interpret.
The senior management changes FEMSA, a downsize that no Danielle is bringing continuity to something that has been begun by Eduardo.
And there's a lot of though was a key component.
Ensuring that.
FEMSA and the Coca Cola company.
Come to an agreement on this new joined <unk>.
Development framework that we have and so what I see in the appointment of Danielle as somebody that brings further experience and knowledge of acquisitions okay.
The ability to develop.
Businesses internationally.
M&A.
And has a global perspective.
That the complements exactly the strategy that was being put in place by <unk>. So I think you know you know this.
This is a a a boost to a.
A strategy that we have in place so continued expansion.
Inorganic expansion.
I think we're looking at.
Probably accelerating even further the opportunities we have under this new management team.
Thank you.
Thank you. Our next question comes from Lucas Ferreira with Jpmorgan.
[noise] Hello, everybody. Thanks for the space the last questions.
John.
Regarding the.
Your your strategy of a growing multi category.
Don't you think that the fact of the Coke system.
In sort of a different platform.
Probably upgrading.
Free.
It is a weak point I would say you know for instance, you mentioned some of these multinationals with CPG companies.
Would they have to in order to do sort of a broader countrywide partnership would they have to also partner with all the bottlers.
In order to achieve all the.
Their customers so obviously.
You see some sort of a coordination between the various too to get into the same direction.
In defense or you feel comfortable doing the partnership's yourself.
Can you talk about that aspect of the.
The Coke system and these are multi category strategy and if you have any idea of.
This initial let's say experience he's already contributing.
To actually improve.
Your own say at slide eight this is actually bringing <unk> J cooperation in order to not only just the pure distribution operation each were seeing.
Some of that is actually new.
More satisfied with the whole service you are providing to them.
That's my question and the second question. If I may is more of a whole lot of New Orleans, slashing I think I kind of constantino kind of answered this but your portfolio your portfolio in Brazil today, I guess, it's two months yields that value and mainstream.
Now with that said as all pleased with they say they.
They are leased up and you're bumping up but don't you think you're going to need to reinforce more to green and portfolio it seems different.
Fastest growing portion.
The market. Thank you.
Okay.
Dan do you want to take that one the last one first and I'll build on the other ones.
Sure.
Mentioned before we're in the process of building up the portfolio.
As you know, it's a combination of mainly Heineken brides.
And other other other relevant partners and including all brands like the gates, but its all bodies. The ladder doesn't happen overnight right. So we are we're building the portfolio and we definitely have mapped out what is the ideal portfolio for for a value proposition that definitely includes premium and Super premium brand.
And we're in the process of developing those in conjunction with Heineken in some spaces and with in with other partners.
In other places so yes. The question the answer is definitely we need to bring in a world.
Working on it.
Okay.
Listen good time, and the fact of what you asked about you know the.
The multi category experiences are we selling.
Selling more or we're not selling more <unk>.
First of all the customer satisfaction metrics that we see are are growing and growing across all.
Yes.
Mexico, I'm sorry, the territories that we have already out there with us.
In Brazil, particularly and when you start thinking of an indicator that makes a lot of sense for whether this is successful or not is the number of items per store that youre selling.
So when we put this on pump when we start looking at the number of items per store that we're using with their son with active users.
We're settling down 27% more.
Yeah.
Sure.
What is going on with.
The digital platform and a multi category platform put together.
So that's one of the big.
With Allianz.
And assemble a logical is that.
If we give if we change the dilemma from order when I get there to order whenever you want.
We're getting orders in at very late hours.
With a lot more time by retailers to order Mark Coca Cola and also them to go out there and put together a better portfolio of a purchase portfolio for the other items.
So we're seeing some very important numbers on items per store, but we're seeing a lot more adoption of more purchases per store of the entire multi category portfolio. So obviously there is a breakfast circle here that is working okay.
Neighbors, the customer, but also obviously favors what we sell and that's exactly what we're looking for.
And on the system issue with with the rest of the Coca Cola system.
I think a lot of you know when you start looking at the players.
And the fast moving consumer goods World you either go through wholesalers do go through distributors.
And the.
The options that they have to do that is obviously there are plenty and when you start becoming a potential distributor I think you have to earn your way out to the right of becoming a preferred and unique or exclusive distributor.
So I think.
As we go forward Coca Cola FEMSA and other large buffers.
We will continue to lead the way in terms of a multi category. The smaller bottlers are going to have to.
Take on and backfill.
On these brands wherever there is more interest on the brands part to have.
Better distribution in the territories that they have so now I think weaker bottlers as you say, we will have the opportunity to do this.
But I think it's going to be a second step for the system.
Thank you very much.
Thank you again is star one if you like to ask a question. Our next question comes from Antonio Hernandez with Barclays.
Hi, good morning, Thanks for taking my question.
Our volumes in Mexico.
Uh huh.
William and whirlpool cause it to.
Mhm.
And a part of the quarter, but excluding that how are you.
Okay.
I struggled to listen to your question on <unk> could you repeat the question. Please at least in my case it was difficult for me to understand.
Sure.
Sure.
Volume performance in Mexico.
A couple of headwinds such as weather conditions and higher morbidity with two children.
Part of the quarter.
Excluding that how you see both.
<unk> performed one point and then your expectation for heavy mix.
Jorge I am going to take that.
Yes sure sure.
This is Jorge so yeah. As you mentioned then John was highlighting during during his remarks.
The weather was definitely an important factor this quarter actually when you look on a regional basis, the southeast of Mexico that faced each year or milder weather conditions, we did see.
Growth was actually.
Basically flattish versus our 2019 baseline so that's encouraging for what.
For us going forward. So we do expect to see a recovery on that in the fourth quarter and then as we move into 'twenty 'twenty. Two we have been discussing our plans with the Mexico team and they are optimistic we're going to focus on affordability.
We have several initiatives to continue to drive and push affordability to offer value for our consumers for our consumers and.
In Mexico, So we think that volumes.
Should grow.
<unk> 22 and of course that will mean that they will be ahead of our 2019.
Right.
So weather was definitely an important factor.
This quarter I'm sorry.
Okay perfect. Thanks, a lot.
Hello.
Thank you. Our next question comes from Alvaro Garcia with BTG Pactual.
Okay.
Hi, John Constantino Corsica, thanks for the call.
One follow up.
Also on volumes in Mexico, I know the weather was a big factor, but coke sort of mentioned this.
Market share a small market share losses. So if you could just discuss sort of market share dynamics in Mexico. It would be great. Like question. Apart from that is and this came up a couple of times yesterday on the on the Coke call given how tricky the operating environment is hum.
Obviously, particularly on the cost front into next year.
And given this new framework with Coke is it fair maybe to think of any flexibility on concentrate from coke or should we read into that at all or not really thank you.
Alright. Thank.
Thank you for the questions.
First of all I think.
D D.
Relationship we have with a group called the company, who is not something that's going to give you flexibility short term, but it's going to give you a long term certainty.
And I think what youre going to what we have as you know.
The ability and the dialogue and the alignment of understanding what is required short term or not and you know whether it be used to support each other more one way or another so I think no.
Just to answer your question no there wouldn't be any of.
That flexibility, but I do think that if there were any cases, where we need to have additional support from the Coca Cola company for particular programs. They are always open to that so.
I wouldn't read too much into it as you were saying.
And secondly on the dynamics of share in Mexico, I think we have a you know a very competitive marketplace in Mexico city, and a very competitive marketplace in Mexico City.
And.
You know given some delays that we've had on bottles.
Supplier bottles and.
And the availability of bottles and certain machineries, we have not been able to go out there and execute fully.
Our packaging strategies, Okay, and that has led to a slight slight decreases as you say.
It's basically contained to two or three.
Us.
Sites that we understand different dynamics, probably in Mexico city is different than the outside of Mexico City.
We are fully aware of what what were these issues our problem and what you know how to address them in the future.
Great. Thank you very much John.
Okay.
Thank you that is all the time, we have a question today I would like to now turn it back to our presenters for any closing remarks.
Okay.
Well. Thank you for your confidence again and an interest in Coca Cola FEMSA. As stated we are transforming this business into something that is very different than what our bottling barbarism. We understand the capabilities of Tomorrow's bought are very very different than what they were in the past and I think we are.
Making enormous strides to build those capabilities.
All countries in Coca Cola FEMSA.
As always our team is available to answer any of your remaining questions and thank you for your participation today.
Have a good day.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
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Okay.
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Yeah.