Q3 2022 Coca-Cola Femsa SAB de CV Earnings Call
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Ladies and gentlemen, you're currently on hold for Coca Cola FEMSA third quarter training training to conference call. At this time, we are assembling today's audience and plan to be underway. Shortly we appreciate your patience and please remain on the line. Thank you.
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Good morning, everyone and welcome to the Coca Cola FEMSA has put quite a 'twenty 'twenty conference call. As a reminder, today's conference is being recorded and all participants are on listen only mode. At the request of the company, we will open the conference up.
A question and answer after the presentation.
During this conference call management May discuss certain forward looking statements concerning Coca Cola FEMSA <unk> future performance and should be considered as good faith estimates made by the company.
This forward looking statements reflect management's expectations and are based on currently available data.
Actual results are subject to future events, and uncertainties, which can materially impact the company's actual performance at this time I will now turn the conference over to Mr. John Santa Maria Coca Cola FEMSA as Chief Executive Officer. Please go ahead, Mr. Santa Maria.
Thank you very much.
Good morning, everyone.
Thank you for joining us today to discuss Coca Cola FEMSA third quarter 2020 results.
With me on the call today are coming from Peanuts faults are cheaper natural walk us through the bulk of Kobe also investor relations.
It is a very important moment park.
We are operating with momentum.
Accelerated our digitalization and cultural transformation, and we continue making substantial progress towards our key long term strategic objectives.
For the quarter.
Despite the uncertain and volatile environment affecting the industry worldwide.
Our business delivered solid volume growth.
With double digit growth in our revenue.
Income and earnings per share.
Our strong momentum as underscored by the consistently healthy volume performance across all our territories.
While we continued to substantially mitigate margin pressures, mainly driven by increased input costs.
Notably our operating margin.
The basis points when adjusting for extraordinary one time effects Lucky bag.
Sure.
Additionally, we continued leveraging the strength of our college cooperation framework with the Coca Cola Company.
Operating with improved alignment and definitely in the market.
Lora revenue stream.
Insignificant.
The rollout of our digital strategy.
Okay.
Okay.
Yeah.
During the call today.
I'll review these blocks are this quarter.
One reflect on the highlights.
Transformation in our business.
It was about five years.
Transformation is enabling us to capture opportunity today.
Ideally positioned to continue capturing the many opportunities.
In front of us for many years ago.
Before our Q&A session Gunflint, Gino will walk you through our divisions coupons.
Hello.
You highlight the sustainable pronounced.
Continuing making history.
Just want give me the first company in Wisconsin.
Funeral sector in the Americas.
The first one the Coca Cola system.
The absolute price social bond underscoring a profound commitment to our community.
Let's begin with review of our consolidated results.
Our consolidated volume for the quarter grew eight 4% year on year.
And 7% on a comparable basis.
Growth was driven mainly by solid volume growth in Mexico, Brazil, Colombia and Uruguay.
Coupled with double digit volume growth in Argentina, where the model for most of our territories in Central America.
Rob is being driven by all of our categories. Our core sparkling beverage category grew 7% driven by six 3% growth in brand Coca Cola and nine 8% growth in flavors. Additionally.
Wellington personal water beverage categories grew 15%.
96% respectively.
Good day all.
All of our territories volume, alright, very little pre pandemic levels evident.
With strong growth across our franchise territories.
Indeed, when compared to the third quarter of 2019, our consolidated comparable volumes ease up a solid 12%.
Okay.
Okay.
Driven by our affordability capabilities and relentless point of sale execution.
Execution, we continue gaining share across markets and categories.
Execute to win.
And the way in the away from home and at home consumption occasions.
Several marketing initiatives that enable us to provide our consumers with unmatched affordable.
That's been the case throughout the year.
Inflationary pressures.
Continuing leveraging initiatives like single serve Mexico.
We remain on track to reach our ambitious single serve mix for the year with more than 65% of our borrowings from consumer staples and fish.
On the innovation from once again highlights the success of Coca Cola zero sugar across all of our churches.
It's an important growth driver increased 17, 1% versus the previous year.
Continued leveraging of consistent value proposition with safran innovation and customer experience.
As a result of our topline initiatives together with a resilient consumer environment. Our consolidated total revenues increased 18, 2% and.
In 19, 3% on a comparable basis.
Our solid volume pricing initiatives and revenue growth management capabilities drove this growth.
Notably we achieved with solid top line performance. Despite the decline in beer revenue, resulting from the transition Heineken beer portfolio in Brazil, and an unfavorable currency translation effects in Mexico in Brussels.
From the devaluation of the Colombian from part D.
Importantly.
This marked the last quarter that we will cycle.
Politically unfavorable Blair Crump transition from Brazil.
Moving on our gross profit increased 16, 4% and our gross margin contracted 70 basis points.
Our pricing initiatives revenue growth management, and favorable raw materials hedging strategies continue to.
Largely mitigate higher PPG and sweetener stripping costs.
Yeah.
Our operating income increased 13, 3% year on year, leading to an operating margin contraction of 60 basis points.
However.
By normalizing the onetime effects recognized in Brazil during the previous year, our operating income margin expanded by 70 basis points.
Our resiliency and our team's ability to double down on expense efficiencies.
On a comparable basis, excluding M&A and currency translation effects operating income increased 13, 1%.
Finally.
Operating cash flow margin.
Pardon.
Our operating cash flow for the quarter increased 14% year over year, resulting.
Resulting in operating cash flow margin of 18, 6%.
As we have done on previous calls let me provide you with an update on the buildup in rollout of boss Omnichannel multi category digital commercial platform.
In Mexico, we added another 70000 monthly active coaches.
Reaching approximately 360000.
George.
In other words, 52% of our total client base in Mexico, the Mac that monthly buyer.
In Brazil, we now have more than 19190, 5000 marketing digital bias, which is close to 65% of our total client base.
Colombia, we continue accelerating with close to 70%.
Costa Rica, Panama, we reached approximately 25%.
In summary.
Validating level, we have.
Added more than 115000 active monthly users.
To reach 760000 customers.
Digital government September amounted to more than $110 million, meaning you've got approximately 11% of our total revenues are coming from digital sources.
Yeah.
Consistent with our vision and are aligned with our enhanced cooperation framework with the Coca Cola company.
Continue exploring new revenue streams and strategic partners.
We are encouraged that this week Coca Cola FEMSA and Heineken began the pilot program in the North Sea.
So hopefully that block.
This pilot games to prove the distribution and selling capabilities at Coca Cola FEMSA to strengthen our defense products.
Presence in the traditional trade channel, enabling more customers and consumers who are broader.
While it's always pretty proud customer convention and satisfaction at the center of everything we do.
As part of this pilot program Coca Cola FEMSA will include products from Huntington portfolio.
In the traditional channel portfolio in the region targeting clients.
And serviced by heightened promotional team.
We expect that these pilot programs will allow us to obtain the necessary in guns and energized to continue advancing towards the potential strategic alliance in the future.
So this is the beginning of a pilot test for the details will be provided in due course.
Now I would like to switch gears and reflect on the significant business transformation with like Cola FEMSA has experienced over the past five years.
Since 2017, we're focused on driving top line growth.
We feel this growth by leveraging our industry, leading capabilities and value accretive acquisitions, and Brazil, Guatemala and Uruguay.
At the same time, we focused on increasing profitability and driving efficiencies throughout our organization.
We deployed a set of initiatives, including local growth efficiency program.
Strength in Coca Cola, FEMSA, and new ways of working and streaming streamlining our cost base.
This ultimately supports our strategic priorities, resulting from continuing as return on invested capital.
Over the past six years eight kpis that is now in the double digits.
The results have been driven by a profound cultural transformation based on our DNA, an obsessive focus on our clients and consumers.
Operational excellence, putting people first.
And almost on top of it and being able to take agile decisions.
Our achievements materialized during the social political conflicts that became more challenging throughout the region.
All of them.
I was just successfully and lack of the baked goods environment. We are focused on foreclosed to strengthen our core business.
First of all.
<unk> and revenue management.
Well, it's our territories, we have made substantial progress.
Reduced in Europe , probably formula.
Well.
This next has increased an impressive 57, 1%.
As compared to 2017.
At the same time, our refillable bottles volume increased 17, 7% versus 2017 supported by the successful rollout of the universal bottle.
Okay.
Second.
Route to market and focus on improving execution in the pump itself.
Resulting not only the increased cooler coverage and share gains, but also in Coca Cola FEMSA beans continue consistently recognized.
It's execution capabilities for example.
I want them all out team.
The war for the last three consecutive years.
The Coca Cola system Excellence.
And has been recognized.
Basketball in 2021.
Choices score institution score improvements and consistency.
Third people and culture.
And then the key to achieve our organization transformation, we have significantly advanced our diversity and inclusion.
An increase of 4% from the mix of women in the company and an increase of 6% from the mix of women in leadership position as compared to 2019.
As such the level, reaching 26%.
While we are not where you want to be you have taken.
<unk> taken decisive steps in the right direction.
Additionally, our organization likes above the industry benchmark for employee by employee engagement.
With outstanding commitments from our teams who organizations until the objectives.
Poor relentless focus on business efficiencies such as supply chain reinvention.
Contributed to our solid results over the past few years, we have generated close to $230 million in savings.
Which is more than 50% ahead of our original target for the period.
These workers have been fundamental to Coca Cola FEMSA is positive momentum for us.
As we continue to strive to accelerate transformation to achieve our vision of becoming the world's preferred and most sustainable commercial ecosystem.
In order to achieve this vision, we set a clear transformational path.
All of this stuff.
First we transformed into a digitalized, Boston adopting technology and digital capabilities across our value chain.
Okay.
We are now becoming an omnichannel and multi category player.
With a clear ambition of becoming a cool commercial ecosystem into the future.
I am confident that we are implementing the right initiatives to achieve our short term objectives.
We approach the end of the year.
We have clear objectives, and the capabilities to achieve our long term ambitions.
With that I'll hand over the call to something that's expound on the divisional results.
Thank you John and good morning, everyone.
In Mexico, our volumes increased a solid eight 7%, while our total revenues increased 17, 5% driven by strong volumes and Oliver channels, particularly in the modern trade coupled with our pricing initiatives revenue growth management and a favorable price mix.
In Central America, our operations continued to deliver strong results with double digit volume growth.
17, 6% revenue growth remarkably.
<unk> continued to show significant volume growth, even when considering a high comparable base side.
As a result, our quarterly revenues increased a solid 17, 5% in Mexico and Central American Division.
On the profitability front, our gross profit increased 11, 6%.
Which resulted in a gross profit margin of 46, 9%.
Representing a margin decrease of 250 basis points.
Compared to the third quarter of 2021.
This contraction was driven mainly by increases in commodity prices, which were partially mitigated by our revenue management and raw material hedging strategies.
As in previous quarters, we were able to partially mitigate gross margin pressure by implementing savings and efficiencies in our SG&A.
Which enabled us to increase our operating income by 18, 6% and to expand our operating margin by 20 basis points in the Mexico and Central American region.
While we continue to see macroeconomic volatility as we approach year end, we expect to carry on protecting profitability through revenue growth management and focus on driving expense efficiencies.
Our operating cash flow margin for the quarter was 21, 2%, which represents an expansion of 10 basis points in the Mexico and Central American Division.
Now moving on to South America.
This division delivered seven 1% volume growth.
Compared to the same period of 2021.
This increase was driven mainly by a 12, 1% volume growth in Argentina, a $7 two increase in Brazil, which includes the consolidation of CVI.
And the volume growth in Colombia and otherwise.
Despite facing tough weather conditions in Brazil.
We're able to deliver enough.
Okay.
I think we lost three months.
Yes.
Reconnect him operator.
Yes, just bear with me a moment.
Yes. Thank.
Thank you all for waiting what we reconnect constant thing.
Pricing and volume growth were partially offset by unfavorable currency translation effects and the transition of our beer bump on something.
Yes.
You were off air for about two minutes three months.
Yes, I'm sorry.
So if you can even go back to two.
South America did issue I think we can take it from there and give us.
There aren't really ready to go.
Technical Glitch Ambac.
Yes.
If we move on to South America, The division delivered seven 1% volume growth as compared to the same period of 2021.
This decrease was driven mainly by 12, 1% volume growth in Argentina.
A seven 2% increase in Brazil, which includes the consolidation of CDI.
Volume growth in Colombia, and otherwise.
A spike facing tough weather conditions in Brazil, we were able to deliver another quarter of volume growth driven by resilient consumer to be back.
On a comparable basis, excluding volumes of CDI in Brazil volume in both division would have increased four 4%.
Our revenues for the Division grew at 19, 1% as our revenue management initiatives pricing and volume growth were partially offset by unfavorable currency translation effects and the transition of our beer portfolio in Brazil.
If we exclude currency translation and M&A effects, our topline would have increased a solid 21, 9% during the quarter.
On the profitability front, our gross profit in South America increased 25, 2%.
Spanning our margins by 200 basis points. This increase was driven mainly by the operating leverage resulting from volume growth favorable price mix effects and raw material hedging strategies.
These effects were partially offset by increases in raw material costs.
Our operating income for the division increased two 9%, while our operating income margin contracted 150 basis points as compared to the third quarter of 2021, driven mainly by a tough comparable baseline related to nonrecurring tax effects in Brazil for 600 <unk>.
2 million Mexican peso is recorded at the operating income level during the third quarter of 2021.
These effects were partially offset by higher gross profit and an increase in operating leverage resulting from volume growth and expense efficiencies.
Finally, our operating cash flow in South America increased by six 1%, resulting in an operating cash flow margin contraction of 190 basis points.
If we normalize by the onetime effects I previously mentioned, our operating cash flow margin further division increased 130 basis points year on year.
Now, let me expand on the successful issuance of our social and sustainability bonds in the Mexican market.
Consistent with our financial discipline, and strong credit profile and commitment to sustainability.
Social and sustainability bonds for a total amount of 6 billion Mexican pesos.
This issuance represents the first social bonds in the consumer sector in the Americas and the first social bonds of the Coca Cola system.
Furthermore, we became the first company in the consumer sector in Mexico to price sustainability bonds.
This transaction was completed in two tranches. The first tranche was priced at a fixed rate of 995%.
And we all know plus <unk>, 30% for an amount of $5 5 billion Mexican vessels due in seven years.
Net proceeds of these bonds of this bond will be used to finance.
To finance illegible social projects. The second tranche was priced at a variable rate of <unk>, 0.0% to 5% for an amount of 500 million Mexican vessels due in four years. The net proceeds of this bond will be used to finance eligible sustainability projects.
For additional details on our use of the proceeds and commitments related to this transaction you can find a copy of our sustainability bonds framework on our website and a copy of the second party opinion provided by S&P, who confirmed that our ambitious targets are aligned with sustainable bond principles.
Finally, I want to underscore our focus on maintaining a disciplined financial position and our commitment with shareholder return.
Our strong balance sheet and solid cash flow generation allows us to as of September 32022, our net debt to EBITDA ratio of closing at 0.8 times with a cash position of more than 39 billion Mexican vessels, even before the proceeds from the social and sustainable bond.
As I previously mentioned.
Additionally on November three we'll pay the second installment of the ordinary dividend declared last March to complete a total cash distribution to our shareholders that exceeds 11 billion Mexican vessels during 2022.
With that I will turn the call back to John for his final remarks. Thank you.
Great.
Yeah.
In light of our recent management succession announcements.
I want to say that I am extremely privileged for the opportunity to serve and lead.
So cola FEMSA as CEO for the past nine years.
And building World class bonding company for over the last one seven years of my career.
I wanted to give a special recognition and thanks.
And thanks, all of our programs for employees.
We are confronted many challenges together, but more importantly, we have achieved great milestones and for all of that we should all be very proud.
Additionally, I am tremendously grateful for the work that had been able to share with the colleagues of the Coca Cola company.
Samsung throughout this entire journey.
Been a privilege working hand in hand, with such amazing professionals.
Finally.
Also thankful for their continued support feedback and interactions that I've had with you.
Community over all these years.
As I previously mentioned.
Convinced that our company is better positioned than ever to capture the many opportunities that are in front of us.
I am very pleased that you and Craig our current CEO of Coca Cola FEMSA, Brazil has been appointed by our board of directors as my successor to carry out as Chief Executive Officer.
As of January one 2023.
Ian.
Even leader with 20 year career within FEMSA Cola Cola FEMSA.
And then outstanding track record that includes senior corporate positions as well as successful business Journal turnarounds in Argentina and Brazil.
Ian is the natural successor to leave the company. He brings positive content you need to leverage up the strategy and accelerate towards the goals, we have set out the organization.
Confidence in the bright future that lies ahead for both firms under his leadership.
Finally, I want to thank and congratulate Constantino spas.
Our CFO .
There have been fundamental to our company's transformation journey.
Has been guided by Samsung to become Chief Executive Officer of Femto strategic businesses as over the next year, succeeding Alfonzo Blackstone, who is retiring after a highly successful 37 year career at Johnson.
I wish both Ian and transplant team a great success in their new appointments transplanting.
Thank you John after five years at Coca Cola FEMSA in four years as Chief Financial Officer, I will conclude my career at cancer as Chief Executive Officer of <unk> strategic businesses.
Working at Coca Cola FEMSA has been a privilege nothing less.
I've worked with an extremely talented team and witnessed the company's profound transformation throughout these years and I am confident that we have set and the right executives and we have positioned the company together for a remarkable success.
I also want to thank you Jon publicly for your leadership and dedication to this company over the years you have been a true leader in shape and Coca Cola FEMSA and three amazing company than it is today.
Beyond grateful to John My team and all my other fellow.
Members of Coca Cola FEMSA, all the employees of this.
The company further contributions as we have worked together to transform this company.
And thank you all for your continued trust and support and for joining us today for the call.
And with that operator wed like to open the call for questions. Thank you.
Thank you Mr. Constantino, ladies and gentlemen, as a reminder, if you would like to ask a question I'll make a contribution in todays call. Please press Taiwan unanswered.
To withdraw your question. Please press tattoo will pause just for a moment to allow everyone an opportunity to signal for questions.
We will now go with our first question from Alan <unk> from Santander.
Please go ahead your line is open.
Thank you so much Brian and good morning, everyone I'll first of all congratulations to both of you. Congratulations John I mean, you will be dearly missed congratulation closer to you know very well.
More.
Let me take advantage that this is.
The last time, we were going to be talking about more vertical to make more of a strategic question rather than the quarter end.
You could describe.
What do you see I mean, you see the loss in the Coca Cola FEMSA operations, the Coke system.
What do you think will be the biggest change is that.
Cough is facing in the next three and five years and what would be your advice for Ian.
In the operating front and as well in the relationship with the Coca Cola Company, which by the way also reported pretty impressive results. This morning, let's let's leave it at that.
Alan can you just.
Clarify your question one more time.
Sure sure.
The question is I mean, what do you think are the biggest challenges that galapagos.
Galapagos is pacing in the next three years.
How do you see the evolution and the relationship with the Coca Cola Company.
In recent years and going forward.
The relationship with the Coca Cola Company is extremely important for both for the stock price and for the overdue for the driver of the stock breakthrough.
Profit split within the system.
Sure I think.
The challenge is rehab.
<unk> addressed that all those strategies that we put in place for <unk>.
First one is to continue to digitalize, our company profoundly and across all our territories and.
And we are very clear about how we're going to do that.
And roll it out.
As I said on the call. There is probably about 750000 monthly average monthly users on our digital base.
And you can probably you got.
That scale and think through that next year, we'll probably be doubling that okay.
So I think our digital strategies continue to be deep profound and accelerating.
I think along with that comes a willingness to start working with different partners.
That will give us a that that relevance at the point of sale.
And obviously in conjunction with the Coca Cola Company.
And that's going to be a challenge because obviously when you work with some of your partners there.
We're gonna have operating.
Operating issues.
Two basically iron.
We have done this in the pilots everywhere, we've gone we've seen tremendous volume uplift for all our partners and so I think we're in the right place with the right strategy.
And third I think just.
<unk> two <unk>.
Average up on innovation.
And you can try the Coca Cola company.
We've seen that happening more towards the alcoholic ready to drink sector with everything that we're coming out with some proper Chico hard sell throughs.
Jack and Coke to disrupt.
<unk> strengths. So I think we have a very big large area of opportunity that we have to learn from and continue to move forward.
Hey, Martin or anything else, it's just about going out and making sure that we're arena in Boston.
And the business.
To be able to capture all these opportunities.
And I think Alan one thing that you have seen in Coca Cola FEMSA.
Under this new long term relationship model that we have with coke.
Capital.
Capital investments have nearly doubled over the last two years.
Probably going to be around that level for the Mexico.
And the foreseeable next two years because demand is growing so strongly.
Going forward.
We have the right strategies in place.
Digitalization strategy, we have the right partner relationship earnings just to going to be a very strong operating focus from here on out for <unk> continued to do this.
That's very clear.
It makes it makes a lot of them can be thank you so much John congratulations.
Vessel.
The release and Constantino best of luck over there and really being brought to the company without those.
Those are a strong company with very strong cash.
Capital.
Balance sheet so.
Congratulations best of luck.
Thank you.
Thank you very much.
Thank you.
Well now take our next question from Marci <unk> from Credit Suisse. Please go ahead. Your line is open.
Hi, John Constantino first of all congratulations as well for both a few for all achievements that cough and wish you all the best going forward.
I have two questions very quickly. The first one is in Mexico, basically you were able to more than offset a 250 beat the gross margin compression because of higher input costs.
Can you just give us a little bit of more color what were the drivers that led to such amount of savings in opex and how sustainable. They are going forward. This is my first question and secondly.
If you can elaborate a little bit more about the partnership with Heineken Mexico.
I understand you are the first ball Clark to distribute theory, Mexico.
How are you planning to deal with the license requirements to sell alcoholic beverage in the traditional channel for example, and also if you have any views.
How incremental this partnership can become in terms of volumes and synergies. Thank you so much.
Thank you Marcella on the on the margins in Mexico.
Oh, yes.
Definitely gross margins were first of all we're very treasured mainly by the higher PDP and sweetener costs.
Fortunately, our hedging initiatives and price mix continue to mitigate this effect. So one key element for cost containment and margin protection is revenue growth management, which is a disciplined very.
Disciplined practice within the within Coca Cola FEMSA that will continue to be there and our hedging initiatives that follow a process. We have been quite assertive with these hedging strategies up to now I believe that if we continue following the process that will continue to provide.
For positive impact in our margin protection than on the SG&A side, our team in Mexico has been able to double down inefficiencies in our notes.
Standing way mainly generating.
Efficiencies from marketing expense by doing better.
Execution.
Much more optimal and optimization of the marketing expense initiatives labor cost savings such as professional services travel expenses et cetera, and we then got achieving this while facing increases in freight and maintenance cost on the <unk>.
<unk> side, a lot of work to despite increases in freight and maintenance in our very important element is our supply chain. Reinvention. This has also helped to significantly reduce our cost to make enter cost to serve on a consolidated level, we have saved approximately 935 million.
Vessels year to date. So this has been also key to protect the profitability of the business.
Having said all that we are confident that our teams ability to continue to double down on these efficiencies.
And continue to protect their margins for the remaining of the year 2022, and well into 2023, considering that we will face enormous volatility and pressure on 2023. So I hope that provides a little bit of color on.
On the margins and then on the.
Pilot program with with Heineken.
First of all and then I'll have John provide more color in his view on this.
This pilot program will definitely allow Coca Cola FEMSA to grow its distribution and selling capacity for high neck and products and the beer category in Mexico.
We've done that in Brazil for many years and we're aiming to strengthen such product presence in the traditional trade channel, allowing more customers in more consumers to have access to a broader portfolio.
As always putting our customer and consumer satisfaction at the center of everything that we do we expect that these pilot programs will.
Will allow us to obtain the necessary learnings and insights to continue advancing towards a potential strategic alliance in the future.
As of now we are beginning these pilot test and evidently further details will be provided in the future. Despite just to give you a more precise information.
We'll start in the state of <unk>, we will assess more potential territories. According to the learnings in the market needs that we identified with this with this initial pilot and the focus as of now in this initial stage is the Coca Cola FEMSA will cover eight.
<unk> customer base that is not currently covered by the ionic and route to market, allowing for an expansion of coverage and increased execution. In these particular regions. John I don't know if you want to add something to my next question.
No I think necessarily.
<unk>.
On the hydrogen piece more than the microscopy.
As we go forward.
We're going to see where it makes sense for both companies.
Where we can add value for Hudson.
And I don't think you can take this solution as being something that is.
Triumph immediately translatable to all countries within Coca Cola FEMSA.
What makes sense and where it makes sense for us and where it makes sense.
Has value for Heineken.
We're having the right dialogues to be able to go out there and.
Learn together.
How we can go out there and maybe down the past buying.
Buying something whether it's <unk> mobile or longer term and more sustainable.
These are very encouraging for stocks you can.
Especially in territories that are difficult.
In the Mexican market.
Sure.
Tour heightened so we'll see if we have the capabilities to go out there and I don't mean to them.
Okay gentlemen, thank you so much very clear.
Thank you Marshall I. Thank you.
We will now take our next question from Felipe You Cross from Scotia Bank. Please go ahead. Your line is open.
Okay.
Congratulations on the recent announcements on our retirement for Don in future endeavors circles have Dana and thanks for the space for questions. Just a couple on my end.
The first one you know what.
Recent reports of marginal downgrading and some of the most discretionary categories in the sector I wanted to ask you about the role of return levels and affordability in the current and upcoming environment. Maybe if you can give us some color on how return levels and other affordability options behaved in prior recessions.
And whether the consumer augmented its focus on return levels and whether you were able to keep the consumer within your price ladder or whether the consumer trade it out of the core portfolio into maybe private label water alternatives.
Just looking to see what kind of reaction you expect from consumers in the upcoming slowdown.
They have their own content.
Yeah.
Oh go ahead John .
You're the expert than you've seen everything in the last 30 years regarding the terminals I can add more color.
Alright.
I think one of the thing.
As we have I think we're better positioned today than we've ever been positioned in the history of qualify that themselves. We have a broad broad set of return levels throughout all of our organizations all our countries and frankly.
Continue on to build it out both on the multi serve in a simple search side and Theres a lot more work to be done, but we're very very very pleased to where we are.
And in an environment that has very high economic volatility very high pressure pillar for our consumers, we basically trade them in and out of different type of value packages somewhat returnable somewhere around par one.
No passengers, but where we're at.
What we're basically doing is pulling together.
Way of pricing and packaging that architecture that allows us to capture.
But consumer at any price point that he has given his pocket.
James in his pocket and stay within the daily rituals.
Britain carbonates offerings.
And I think that's worked towards in the past and when they are confronted with.
The volatility in exchange rate and all of a sudden you have the pressure for increased pricing.
Because the foreign exchange of two commodities.
Cost.
At least we have a lag effect that will last for some time.
Allow us to maintain and give them a larger value as compared to the pricing that they need to take.
Maintain themselves in the franchise and bring us back into the database that we are looking for so I think the value of returnable just run it all there's a sustainability angle to it.
But it really is also a volatility hedge for the Coca Cola system in all of Latin America.
Very clear thank you.
Yes, yes of course very clear.
And then if I can do a follow up my second question.
Grant's on the whole dose plus rollout.
Just wanted to ask a little bit about this new effort and how you ambition to beef up the product offering whether pilots are being included in this platform and how this fits with the whatsapp effort that you had been rolling out so successfully across Latin America.
Yes.
I'm, sorry, I had a hearts out years did you hear that.
Duncan.
Sure.
It's a question regarding our omnichannel.
Before John and Tom <unk> and its connection its connection with multi multi category offering for the for the customer.
So I can take it for leap and that have John complement.
As you have seen we are basically <unk>.
Spending every month, our digital coverage of our Omnichannel platform I think there's a couple of principles that are very important in the way we have envisioned.
The b the Omnichannel platform and at the same time, how it plays alone.
With multi multi category offering.
Customer are first of all.
It is truly a multichannel focus so what we are doing is using digitalization.
A way to enhance and expand the touch points with our customers for the way that the customer interacts with Coca Cola FEMSA through digitalization is not a productivity tool to reduce cost, but an enhancement.
To increase our service level and the possibility of interaction with us so as of today, we continue to center.
Our efforts are being <unk>.
<unk> has with their customers with our pre seller physical presence and the.
Same time, we're adding whatsapp, we have added whatsapp capabilities and interaction through Whatsapp and we're rolling out a digital lap in the case of the swaps.
Most of our markets.
Very programs matter in a sequential manner and in the case of Mexico. We also have a pilot that is testing very different.
Proposition to a certain sector.
Sector of of customers right. So we're expanding our product line.
Secondly, this allows for the winning goal the service window for our customers to increase significantly.
Case of Mexico for example, a new plant that we are being able to accept.
Orders by 11 69 pm.
And one day and deliver them the next day or so and in different countries, we're trying different configuration and service.
Windows, So that allows for our customers to be less time growth strength.
Our product offering and make sure that they can go.
Deep and broad in our portfolio.
And connect with the multi category product offering that we have now the customer is less time constraints and the pre seller is less constrained.
Howie for a broader portfolio without hindering execution and efficiency on the physical on the physical route there.
Evidently will lead us increased as we.
Expand our relationship with different partners like the one that we just mentioned with Heineken in Mexico. This will allow us to continue to enhance our multi category offering.
A way that we have defined which is customer focus.
And value accretive for everyone in the value chain, so for our customer for their consumers for Coca Cola FEMSA.
For the partners that can benefit.
From the usage of a such a powerful route to market and commercial platform like Coca Cola FEMSA.
The very high level construct of the thinking behind digitalization and Omnichannel.
Capabilities very much focused on.
Increasing the impact and the effectiveness of our platform and not as a means of pure efficiency and cost reduction and productivity evidently productivity has come along but the focus is on the effectiveness side and on increasing our net.
Promoter score with our customers and creating value for everyone in the value chain evidently for our shareholders to I don't know.
John if you want to complement on that and Felipe I don't know if that answers your question.
No.
I would just say that everywhere, we put together.
Correct.
Correct partnership.
On the <unk>.
Last one.
The incremental Coca Cola.
Portfolio volume.
As well as incremental coverages and sales of <unk>.
And the volumes and it's turned out to be very synergistic.
And we are very clear.
As to what the next steps need to be.
To be able to continue advancing towards our goal of putting 2 million customers on our platform.
Short order and every partner in every country that we operate in.
And so this is one of our core foundations for our strategies.
Then through that offer the relevant services.
For the traditional trade as we start building this common channel platform.
That's very clear thanks to both of you and again congratulations for all the achievements.
Thank you.
Thank you very much.
Thank you.
We will now take our next question from.
Thiago Bartolucci from Goldman Sachs. Please go ahead your line is open.
Yes, hi, good morning, everyone. Congrats on the results guys and thanks for the presentation and for taking the question I'll I'll also like to pick it up alternative John to say congrats on a Monday to handling costs and good luck to young men constantino on the new roles.
Well done guys I have a quick follow up on the operating front constantino in her remarks.
<unk> B T and sweeteners worried the lines in which costs came under more pressure on the quarter, especially in Mexico ranked could you. Please again.
The Samsung how did raw material prices are evolving program in 'twenty three and the details around the Heck did you have a little pulse credit for it so far.
Yeah, Let me let me provide.
Some.
Some color on the hedges and all have also.
Oh, Hey answer some other questions right. So.
And in terms of raw materials and.
<unk> hedges.
Just to give you a sense of how significant for hedges have been doubling the cost we have saved approximately $1 2 billion vessels year to date.
Does the raw material hedging initiatives of this year. So so as expected we saw increases in raw material prices as you mentioned, particularly pp in sugar across most of our markets. However, our hedging strategies have definitely helped us mitigate the impact of most of the commodities we use.
Well let.
Let me give you a couple of examples.
Corn prices have increased double digits, but we were able to mitigate the impact in hedge or needs a fructose.
Rice's that are around 20% below the spot price to give you a sense of that we hedged 90% for Mexico in fructose in 2022 and in 2023, we have hedged.
60% of all of our needs for 2022, and 30% for 'twenty 'twenty three the most effective commodity as we mentioned has been D. D and we now have covered more than 70% of our needs for 2022 and already 30% for 2023.
Based on our on our commodity risk management process in Brazil.
<unk> prices have also increased importantly brought our hedging strategy. Once again have allowed us to partially mitigate that impact for 2022, we have hedged more than 90% over needs at prices that are around 20% below market value and we have hedged 30% of our needs.
For 2023, so all in all although it is certainly.
Certainly a very dynamic environment with a lot of pressure, we're confident that with our pricing initiatives, where we increased in line or ahead of inflation, depending on the market fundamentally.
Sustained by revenue growth management combined with hedging initiatives like the ones that I have described we will be able to substantially mitigate the pressures and protect the profitability of Coca Cola FEMSA Jorge I don't know if you want to add something something additional to these.
Remarks.
I think thats.
That's the most important $5 something I would just probably say that combined with this.
Going forward you know the.
The teams the operators have a very robust flattened.
We are executing for.
For the remainder of the year, but also position ourselves very well.
Going forward in terms of.
Leveraging our top line initiatives the hedging strategies that you just described.
There are capabilities that should allow us to mitigate margin pressures as we move into 2023 and some of these hedging.
Hedging strategies described of natural rollover rollover effect.
That's clear guys. Thank you very much.
Okay.
Thank you Thiago.
We will now take our next question from Sergio Matsumoto from Citigroup. Please go ahead. Your line is open.
Yes, good morning, it's Sergio Matsumoto from Citigroup.
John .
Best for Us.
In the next chapter and of course that we look forward to working with you on the FEMSA site.
My question I guess on.
Thank you.
My question is on <unk>.
The.
The call is that you mentioned John in the Flora 2022, I believe it's in Mexico were.
65% of volume growth would like.
Would it come from single serves.
Can you give us more context on this on how much attribution, you'll give to increase in mobility.
And how does the consumption environment or single service compare now to pre pandemic.
Times and what are the optimal sales mix or a single served in the long term not just wanted to add more.
More.
Although a.
A few years ago. Thank.
Thank you.
A lot of this central Thank you for your comments and I appreciate that very much.
But one other thing that we're doing through our authentic olefins. So is.
Yes.
Focusing on single serve.
Multi packing.
In modern channels. So when you walk in there you're going to start looking at modern channels having.
Extremely large assortment.
Are those sort of multi packs not only a single consumer.
Some of our brands, but also combined brands.
A combined packed with.
Coax, maybe Panther is a coax and sprites etcetera, and it has to do with going out there and giving the consumer what they want.
We have found is that this is some.
The behavior of drinking single serve is something that we had not exporting as much as we could.
Given our recorded it we found that the consumption occasion of impact home, we put together these types of packages.
And.
Again, the new team that brings growing at a remarkable rate.
<unk>, 5% versus 2020 in Mexico, and Brazil up in terms of percentage points.
How much further can we go.
No I wouldnt venture.
A number there, but you will see that we were continuing to push this not only in Martin channel, but also look for the right inadequate packaging.
But multi packs for traditional codes.
Alright, thank you.
Thank you.
Alright, thank you.
Well now take our next question from Rodrigo Alessandra from UBS. Please go ahead. Your line is open.
Hi, thank.
Thank you very much for taking my question.
Two quick ones if I may.
Hum beer sales team, Brazil appears that the sequential recovery was it faster than previous quarter. So just curious as you look like anything she or was it just seasonality or inflation driven.
Any comments regarding that the Opex fund in which category. They are in Brazil, It would be very helpful.
The second question would be as we approach a garage.
And if you have any.
Preliminary thoughts on the on the dividend for next year.
Would be my two questions. Thank you.
Jorge you want to take the.
Yes, yes, absolutely.
Absolutely.
Thank the peer the peer fired per se I think thanks for the question Rodrigo.
Just just to point out one thing actually this quarter. This third quarter is the first quarter that we.
Basically mark the unfavorable comparison days, reflecting the transition now that basically happened last September so a little bit is related to that though that we are not fully are comparing with a quarter with the fourth heineken portfolio from the previous year final you know so that's.
Some good news in the sense of the comparison base this quarter by Mark there.
The first or the last quarter that we cycled that that transition for these where you started the year revenues declined around 45%.
This quarter.
As compared to the rate of approximately 60% that we had in the previous quarter.
Secondly, I'm, taking advantage of the question and to provide you some additional color on beer.
We're doing several initiatives there around the you know first for example, with various third parties, we're rolling out a new marketing campaign.
So please let's call in Portuguese.
Important data.
Yeah.
Great campaigns that were rolling out and most importantly, as we mentioned during during the previous call.
We're building this portfolio for the long term in terms of it.
Building great brands.
That doesn't happen overnight. So we continue to foreclose on coverage expansion for example, with ICM band accelerating its momentum in its coverage continued to build tiger.
Focus on execution and Brian building that we're doing together with Heineken there.
So all in all of our legal where we're very optimistic about the portfolio in the future.
Next quarter of course of America, a like for like comparison, there for the portfolio.
As compared to after the transition.
And it's behaving.
We said, mostly as a nice curve on their development partner.
The via portfolio and that's what we're what we're focusing on.
And Rodrigo on the dividend side.
We have been delivering a very solid dividend just as a reminder, our current dividend represents an increase of.
Seven 7% versus 2021.
The amount of 11.
11 four.
In Mexican peso, so which is important and it is an increase of 53, 4% versus 2019, which underscores our commitment and our view of total shareholder return as of now we continue to have.
Our capital allocation priorities quite clear first of all to continue to deliver a sustainable ordinary dividend that's attractive to our shareholders.
Reinvest in the business John was mentioning the significant investment in Capex in the last couple of years that we that we have put behind the business.
Focused on growth and last but not less important to continue to look for value accretive growth opportunities. So that is our focus right now.
We will pay our next installment of the dividend in November 3rd and once more underscore the significant increase versus 2019 and evidently versus 2021 of our current dividend policy.
I hope that helps.
Great. Thanks for the coming Constantino Cork and just just to complement there. If you can give a I know it's still a small world.
I'll leave that you're targeting there or how is it going on with that.
With the rest of them multi category.
Memphis Campari.
The restaurant category.
It'd be helpful as well thank you.
How did you pick that one too.
Sure absolutely Yeah, I would say really what we're seeing is you know great results because.
If you think about for example, a year ago in October when we were beginning with the pilots for example.
The agile PNG in Mexico, well, we were beginning basically one seating.
Each of which cases alone because of weather.
The address and better growth for PNG and over the course of the year, we have been able to expand the critical mass of those pilot smaller gathering learnings.
A lot of insights from from that development.
Similarly, with have been growing that in Brazil.
Perfect.
With comparable no gathering learnings things that are going in the right direction.
And so I would say that overall, we're very very enthusiastic about about the trajectory that we're getting with pilots and also with the early days of their distribution agreements that we have with better credit.
Right.
Yes.
Okay. Okay. That's great. Thank you very much.
Okay.
Thank you.
Okay.
Well now take our next question from Luis Willard from GBM. Please go ahead. Your line is open.
Yes.
Hi, guys. Good morning, Thanks for taking my question.
I joined the rest of my colleagues in wishing you the best of luck.
And your next.
Ventures so.
Basically I mean, I'll try not to be repetitive here in my question, but I mean, it's remarkable to see the acceleration.
The deep penetration progress, especially in Mexico as you have mentioned throughout the call. So as it continues to gain momentum.
Over the next quarters in the next year.
And you continue to think of it as an enhancer of ecosystem.
Do you see demonstration also increasingly relevant when you think of capital allocation in the future.
Yes.
I want to let me see if I understood your question.
You mentioned it is given the.
Evolution, and the increase of relevant and digital channels for Coca Cola FEMSA Wood.
Capital allocation on digitalization B, a priority going forward is that the question just to make sure. It was.
That's precisely it.
Okay, Yes for sure.
We have stated.
In previous in previous calls and interactions.
The way that we're looking at value accretive place.
On inorganic growth.
Capital allocation, we have we have.
And focusing on assessing opportunities that Eric.
Evidently.
On one end.
Spending our footprint in the current business where opportunities.
Com that are both strategically sound and value accretive we will not do any inorganic place just for the sake of growing but they definitely have to bring value both strategically and economically for our shareholders at the same time looking at.
Jason <unk> and other categories with the Coca Cola company that can make sense for our network within the beverage sector.
Such as you know.
Other other categories that might be and <unk> space.
Non carbonated et cetera that is something that we always.
Look at and the Coca Cola Company is very active on both fronts. This region than in other parts of the World and also to answer your question looking at technologies and digital partners that could enhance our value proposition to our customers and the ultimate channel.
At form that is fully digitally enabled and at the same time that can allow us to accelerate it.
With capabilities, our digitalization efforts. So the answer is yes, we are looking at and assessing different opportunities in all of those three different spaces as we normally do as part of our of the course of our activities on an everyday basis.
I hope that clarified.
Yeah, no that's perfect. Thank you very much.
Thank you Louis.
It appears there is no further questions at this time, Mr. John Santa Maria I would like to turn the conference back to you for any additional or closing remarks.
Thank you operator, and thank you all for your confidence and interest in Cola Cola FEMSA and.
As always our Investor relations team led by software and all of his team are available to answer any of your questions or many.
And any questions you may have.
And I would like to again just take the opportunity.
To all of you for.
Continued support during my tenure as CEO .
And just reiterate.
Got.
Excited I am about the continuity that come along with them.
And the strategy, though underlying and how we see.
Accelerated momentum glycolic grandson.
Not only are we growing faster.
Investing more and we're also returning an enormous amount of money back to shareholders. So we've got three very good levels going in terms of <unk>.
Our strategy and I think that you haven't gone up answer irreplaceable.
Absent from Latin America, but all of us.
We want to grow.
Global scale.
So thank you very much.
Thank you.
Thank you for joining today's call you may now disconnect.
Yes.
Thank you very much operator for your help today.
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