Operator: Be your moderator for today's event. Please note that this conference is being recorded. For the duration of the call, all participants will be in a listen-only mode. You will have the opportunity to ask questions at the end of the presentation. To do so, please use the raise hand feature in Zoom and we will open your line. If you experience any technical issues during the call, please use the chat function to request assistance.
Operator: I would now like to hand the call over to Pamela Ortiz, Investor Relations Director at Coca-Cola FEMSA. Pamela, please go ahead.
Pamela Ortiz: Good morning, everyone, and welcome to Coca-Cola FEMSA's Q3 2026 results conference call. Today, we are joined by Ian Craig, our CEO, Gerardo Cruz, our CFO, and the rest of the Investor Relations team. Before we begin, let me remind all participants that today's conference call may include forward-looking statements that should be considered as good faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon currently available data.
Pamela Ortiz: The actual results are subject to future events and uncertainties that can materially impact the company's performance. For additional details, please refer to the full disclaimer in the earnings release that was published earlier today. After the prepared remarks, we will open the call for questions. To ask a question, please use the raise hand feature in your Zoom toolbar.
Pamela Ortiz: With that, let me turn the call over to Ian to begin our presentation about the Q3 results. Ian, please go ahead.
Ian Craig: Thank you, Pam. Good morning, everyone. Before discussing our Q3 performance, I would like to take a moment to address the earthquake that struck Colombia in August and which impacted the communities of Pereira and Cali. Together with FEMSA and The Coca-Cola Company, we provided more than 180,000 liters of water, 30,000 meals, and essential supplies to affected communities. We also committed to supporting more than 1,000 traditional trade stores and helping rebuild approximately 150 stores. We remain in close coordination with our local teams and are committed to supporting our employees, their families, and the communities affected. Now, let me walk you through our consolidated results. Our Q3 performance demonstrates how our focus on sustainable growth, leveraging our portfolio and capabilities, translates into results across markets with distinct consumer dynamics and macroeconomic conditions.
Ian Craig: Our long-term growth algorithm is based on developing the beverage industry by expanding consumption across categories and serving new consumption opportunities. Indeed, our record Q3 consolidated volumes demonstrated the effectiveness of our commercial strategies across our regions. Our competitive advantage combines the strength of our brands, unparalleled distribution reach, consistent above-the-line and below-the-line investments throughout the years, consumer-centric execution, culture, and leading-edge digital enablers. Importantly, we continuously tailor our commercial strategies to the specific consumption trends and economic realities of each market, allowing us to capture growth opportunities while strengthening our competitive position. Let me highlight how our strategy is translating into results across our operations. Starting with Mexico, volumes increased 4.2% year over year off of a low base last year, which was still impacted by the consumer backlash.
Ian Craig: Our focus on affordability, differentiated price pack architecture, and commercial execution supported further share gains, including a 70 basis point increase in sparkling beverage value share as of September versus the prior year. Our approach is anchored in protecting profit affordability, strengthening commercial execution, accelerating portfolio innovation, and leveraging our digital capabilities. Together, these pillars have enabled us to navigate a challenging consumption environment while positioning our business for sustainable long-term growth. Portfolio innovation continues to unlock incremental growth opportunities by expanding our presence in emerging beverage categories and capturing new consumption occasions. During the quarter, we launched Coca-Cola Triple Zero, further strengthening our zero sugar portfolio, as well as Topo Chico Sparkling Lemonade and Orangeade, which have already achieved 70% traditional trade coverage and a 40% repurchase rate.
Ian Craig: Meanwhile, Ciel Aguas Frescas flavored water, launched last quarter, continues to gain traction, reaching 65% coverage in the traditional trade with a market share gain of 7.6 percentage points since its launch in May. These portfolio innovations in key white spaces bode well in our efforts to continue to drive industry growth, capturing new consumption opportunities. Lastly, digitalization continues to strengthen our customer relationships and enhance our commercial effectiveness. Through Juntos+, we are driving a higher average ticket by 19% versus the prior year and increasing the time and quality of our interactions with clients. Overall, Mexico's performance reinforced our confidence in the direction of our strategy. Our commercial capabilities have enabled us to sustain volume growth, gain market share, and develop new beverage categories. Looking ahead, our priority remains to build on our competitive momentum while gradually improving profitability through disciplined revenue growth management and operating efficiency.
Ian Craig: Turning to Brazil. Volumes increased 3.9% year over year, reflecting the sustained positive momentum of our business and share gains. Brazil remains one of Coca-Cola FEMSA's most compelling structural growth opportunities, supported by significant headroom to lead industry growth and expand our participation across beverage categories. During the quarter, we continued leveraging our differentiated commercial capabilities to capture these opportunities, focusing on expanding our Zero portfolio availability, strengthening execution at the point of sale, and deploying proven route-to-market and digital capabilities. As a result, Coca-Cola Zero continued delivering strong growth, with volumes up 15% versus prior year, while flavors and still beverages grew 8% and 20% respectively, versus prior year. Within our flavors portfolio, we have won close to 4 percentage points of market share, driven by brand Sprite's outstanding performance.
Ian Craig: Importantly, we continued gaining share across nearly all beverage categories, with gains of approximately 1.2 percentage points in total non-alcoholic ready-to-drink beverages and nearly 6 percentage points in energy drinks. These results reinforce our competitive momentum and demonstrate how our portfolio is well-positioned to address evolving consumer preferences. We also continued advancing our commercial strategy with a focus on improving profitability by strengthening our single-serve portfolio, increasing its share of our sparkling beverage volume mix by 80 basis points to reach 27.7%. Digitalization remains an important enabler of this strategy. Through Juntos+ and Juntos+ Advisor, we continued enhancing customer engagement, improving order recommendations, and optimizing our commercial teams' productivity. These tools are helping us strengthen customer coverage and increase the effectiveness of commercial visits. As of September, digital revenues represented close to 42% of traditional trade revenues, with an 18% increase in average ticket size.
Ian Craig: Turning to profitability, we remain focused on translating volume growth and stronger commercial execution into improved operating leverage through disciplined revenue growth management, portfolio optimization, and continued cost efficiencies. At the same time, we are maintaining a disciplined investment approach to support sustainable long-term growth. Looking ahead, while we are mindful of a potential post-election slowdown, we remain confident in the Brazilian market's long-term potential. Our scale, commercial capabilities, and quality portfolio position us to continue to capture growth opportunities while sustainably improving profitability. Turning now to Guatemala. Volumes grew 8% year over year, outperforming the non-alcoholic ready-to-drink industry, which expanded approximately 5.5%. The Guatemala operation continues to benefit from favorable consumption dynamics supported by remittances, attractive demographics, and urbanization trends.
Ian Craig: Our strategy remains focused on developing the beverage industry by offering affordable price points, strengthening our core colas category, expanding our single-serve portfolio, and enhancing execution in the traditional trade. During the quarter, energy drinks grew 98%, supported by improved product availability. Meanwhile, our 360 degree POWERADE strategy delivered a turnaround in sports drinks, resulting in a market share gain of approximately 1 percentage point, supported by increased cold drink availability through cooler investments and enhanced execution capabilities with Juntos+. At the same time, productivity initiatives, including bottle light weighting and cost-to-serve optimization, helped mitigate PET and diesel cost pressures while improving operating efficiency. Moving on to Colombia. Volumes increased 15.9% year over year, supported by strong consumer demand, higher household purchasing power, and disciplined commercial execution. The consumer environment remained favorable, supported by higher wages, favorable weather conditions, and GDP growth of approximately 3.5%.
Ian Craig: Our portfolio and package strategy continued delivering strong results, with sparkling beverage volumes increasing 15.4% during the quarter, including 13.5% growth in colas, 19.2% in Coca-Cola Zero, and 23.9% in flavors, supported by Quatro and Sprite. Non-carbonated beverages grew 12.9% year to date, driven by POWERADE and Monster, up 48.4% and 55.9% respectively. Additionally, our recent launch of Fury achieved 30% customer coverage in its first month, reinforcing our ability to develop emerging beverage categories. We also continued strengthening our digital capabilities through Juntos+ by enhancing platform functionalities to drive customer engagement and leveraging loyalty plan initiatives with nearly 90% of our traditional trade customers now using Premia points. Importantly, we continue to translate volume growth into improved profitability through increased scale and cost absorption. Finally, turning to Argentina, volumes remained flat year-over-year amid continued pressure on household purchasing power, despite inflation moderating to 33.4%.
Ian Craig: Against this backdrop, our disciplined RGM and differentiated price pack architecture continued balancing affordability with profitability. Our sparkling beverage portfolio grew 3.9%, supported by Coca-Cola Zero and Sprite. While digital orders through Juntos+ increased 21% year-over-year, enhancing customer engagement and commercial productivity. Looking ahead, we remain focused on strengthening our competitive position and maintaining operating discipline as we navigate the challenging consumption environment. Our Q3 performance reinforced Coca-Cola FEMSA's multiple avenues for long-term growth. We are focused on developing the beverage industry by expanding consumption across categories, occasions, and markets. Our sustainable competitive advantage is built on five key strengths: the power of our brands, our unparalleled distribution reach, consistent investment, ATL and BTL throughout the years, our customer-centric execution culture, and our leading-edge digital capabilities. Together, these strengths provide a differentiated platform to unlock new consumption opportunities, deepen customer relationships, and drive sustainable, profitable growth.
Ian Craig: For the remainder of the year and into 2027, we are well-positioned to capture the significant growth opportunities and untapped potential across our markets. At the same time, we remain vigilant and well prepared to navigate financial market volatility and any potential resulting cost pressures. Our revenue growth management initiatives, operating efficiencies, scale, and digital capabilities will remain key levers to support our performance. Looking ahead, I am particularly excited about the pace and quality of innovation we expect to bring to consumers across the region, together with our partners at The Coca-Cola Company.
Ian Craig: Their focus on innovation, supported by the Latin America innovation hubs, is starting to deliver encouraging results. Recent launches, including Coca-Cola Triple Zero, Topo Chico Sparkling Lemonades and Orangeades, Ciel Aguas Frescas, and a revamp of Sprite Zero reflect this moment. With an exciting pipeline of innovations ahead for 2027, I am confident that the best is yet to come.
Ian Craig: With that, I will turn the call over to Gerry to review our Q3 financial results.
Gerardo Cruz: Thank you, Ian. Good morning. I will begin with an overview of our consolidated Q3 results, followed by our divisional performance. I will then provide an update on our financing results, commodity hedging strategy, and sustainability achievements. Consolidated volumes increased 5.3% year-over-year to 1.1 billion unit cases, marking a record Q3 volume for Coca-Cola FEMSA. This milestone was achieved by volume growth across all regions, reinforcing the strength of our diversified geographic footprint and our ability to adapt our commercial strategies to the distinct consumer dynamics and operating environments of each market. Total revenues increased 10.9% to MXN 79.7 billion, driven primarily by volume growth and our revenue growth management initiatives. These positive effects were partially offset by unfavorable mix and currency translation effects. On a currency-neutral basis, revenues increased 11.3%.
Gerardo Cruz: Gross profit increased 14.5% to MXN 37 billion, resulting in a gross margin expansion of 140 basis points to 46.5%. This improvement was supported primarily by lower sweetener and PET costs compared with the previous year, reflecting the benefits of our hedging strategy, together with the appreciation of most of our operating currencies against the US dollar, which reduced the cost of dollar-denominated raw materials. These benefits were partially offset by higher aluminum costs and unfavorable mix effects. On a currency-neutral basis, gross profit increased 14.8%. Operating income increased 15.4% to MXN 11.9 billion, while operating margin expanded 60 basis points to 14.9%, reflecting MXN 1.1 billion related to recovered insurance claims in Brazil. Excluding this non-recurring benefit, operating income would have increased 7.4% with an operating margin of 13.6%, representing a contraction of 40 basis points.
Gerardo Cruz: These positive effects were partially offset by higher marketing, freight, maintenance, and labor expenses, as well as a recognition of an operating foreign exchange loss as compared with a gain in the previous year. Adjusted EBITDA increased 16.2% to MXN 16.8 billion, with a margin of 21.1%, representing an expansion of 100 basis points. Excluding the insurance recovery in Brazil, adjusted EBITDA increased 10.6% with a margin of 19.7%. Overall, these results reflect the strength of our operating performance and our continued focus on balancing sustainable growth with cost management. Finally, majority net income increased by 5.5% to MXN 6.2 billion, primarily reflecting the higher operating income. This benefit was partially offset by higher income taxes and higher net financing expenses, which I will address in more detail shortly. Turning now to our business unit performance. Let me begin with Mexico and Central America.
Gerardo Cruz: Volumes increased 4.8% year-over-year, supported by positive performance across all territories in the business unit. Total revenues grew 8.3% to MXN 46 billion, as volume growth was offset by unfavorable portfolio mix and currency translation effects. On a currency-neutral basis, revenues increased 9.3%. Gross profit increased 11.6% to MXN 23 billion, resulting in a gross margin expansion of 150 basis points to 49%. This improvement was driven primarily by lower raw material costs, particularly sweeteners and PET, supported by our hedging strategy and the appreciation of our operating currencies against the US dollar. Operating income declined 3.1% to MXN 6.5 billion, while operating margin contracted 170 basis points to 14.3%. Despite the year-over-year contraction, profitability improved sequentially compared with the first two quarters of the year, reflecting progress in our efforts to gradually recover margins.
Gerardo Cruz: However, marketing, labor, and freight expenses, together with an operating foreign exchange loss as compared with a gain in the previous year, impacted profitability. These pressures were partially mitigated by our hedging strategy. As Ian discussed, our commercial strategy in Mexico continues to prioritize affordability, market share gains, and innovation to better serve new consumption occasions. While this approach has supported our competitive momentum, the increase in the mix of multi-serve presentations has resulted in an unfavorable impact on the price mix, putting additional pressure on margins. Looking ahead, we remain focused on progressively strengthening performance through revenue growth management initiatives to improve package mix and profitability, supported by the continued pursuit of procurement, supply chain, and operating efficiencies. Finally, adjusted EBITDA increased 3.1% to MXN 9.6 billion, with a margin of 20.8%.
Gerardo Cruz: Moving on to South America. Volumes increased 6% to 448 million unit cases, supported by volume growth across all countries. Total revenues increased 14.7% to MXN 33.7 billion, driven by higher volumes, revenue growth management initiatives, and a favorable currency translation effect from Colombia. On a currency-neutral basis, revenues increased 14.1%. Gross profit grew 19.2% to MXN 14.6 billion, with gross margin expanding 160 basis points to 43.2%. This strong performance was supported by top-line growth, lower raw material costs, hedging strategy, and the appreciation of most operating currencies against the US dollar. These benefits were partially offset by higher aluminum prices. On a currency-neutral basis, gross profit increased 18.4%. Operating income increased 51.2% to MXN 5.3 billion, while operating margin expanded 380 basis points to 15.7%. As I previously mentioned, our reported results included MXN 1.1 billion related to insurance recoveries in Brazil.
Gerardo Cruz: Excluding this non-recurring benefit, South America delivered strong underlying profitability supported by operating leverage, favorable mix, and continued operating expense efficiencies. These improvements were partially offset by higher marketing, freight, depreciation, and labor expenses. Finally, adjusted EBITDA increased 39.7% to MXN 7.2 billion, with a margin expansion of 380 basis points to 21.4%. This performance highlights our ability to translate volume growth and improve commercial execution into stronger profitability as our South American operations continues to scale. Moving on to our comprehensive financing result. We recorded a net expense of MXN 2 billion, compared with an expense of MXN 1.3 billion in the same period of last year. This increase was primarily driven by two factors. First, higher net interest expenses, mainly reflecting the additional debt issued during Q1 2026.
Gerardo Cruz: Second, a loss on financial instruments of MXN 377 million compared with MXN 39 million in the previous year, primarily reflecting higher interest rates in Brazil. Additionally, we recognized the lower gain in monetary positions in inflationary subsidiaries for MXN 64 million as compared to a gain of MXN 136 million recorded in the same period of the previous year. Turning to our commodity outlook. The global raw material environment remains volatile, reinforcing the importance of our disciplined hedging strategy and established risk management framework. Throughout 2026, our hedging positions have helped mitigate fluctuations in key commodity prices, providing cost visibility and supporting our profitability. For the year, we have hedged approximately 65% of our PET requirements, 88% of sugar, 98% of HFCS, and 74% of aluminum. Importantly, we also continued building our hedging positions for 2027 in line with our established policies.
Gerardo Cruz: To date, we have secured approximately 16% of our PET requirements, 85% of sugar, 94% of HFCS, and 54% of aluminum. Despite the challenging commodity environment, we have been able to capitalize on selective market opportunities to secure part of our 2027 requirements at prices broadly in line with those of 2026. These positions are particularly relevant as we plan for next year, providing greater visibility into our expected cost structure and allowing us to mitigate potential pressures through our revenue growth management strategy. Before concluding, I would like to highlight an important milestone in our sustainability journey. Coca-Cola FEMSA achieved a new record score of 82 points in S&P Global's corporate sustainability assessment, reflecting our continued progress in integrating sustainability into our business strategy and operating model.
Gerardo Cruz: This achievement reinforces our commitment to strong governance and the continuous improvement of our environmental and social performance for diversified operations, with record Q3 consolidated volumes and continued progress in profitability. While we face different challenges and operating conditions across our markets, our priorities are consistent: driving our commercial momentum, improving operating efficiency, and maintaining a disciplined approach to capital allocation, aiming to achieve sustainable long-term growth.
Gerardo Cruz: With that, we can open the call for questions. Operator, please go ahead.
Operator: Okay. At this time, we are going to open it up for questions and answers. A reminder to please limit yourself to one question at a time. If you have a question, please click on raise hand. Please remember that your company's name should be visible for your questions to be taken. We do ask that when you pose your questions that you are picking up your headset to provide optimum sound quality. Please hold while we pull for questions. Our first question comes from Lucas Ferreira with J.P. Morgan. Sir, you can open your microphone.
Lucas Ferreira: Hi, guys. Thanks for the space for a question. I will keep myself to one question then. My question is on the Mexico business environment. You guys had a very good volume performance in Q3. The volumes are back to the levels we were seeing in 2023, 2024 for a Q3. Also circling that in a weak comp of the previous year of 2025. My question is what to expect from here. How do you see the consumer and how you guys adjusted your strategy from Q2 to Q3? Because Q2, we still saw sort of a turbulent market. How you guys adjusted the strategy to keep expanding the market share and how you see, like I mentioned, the consumer as we go into next year. Thank you very much.
Ian Craig: Hi, Lucas. How are you? This is Ian. A couple of points. If we take a step back, H1 of the year was pretty challenging because of the price pass-through of the excise tax, which was very large. That really impacted us. Then in July, things started gradually looking up. But it is fair to say that we still all the way up to the end of Q3, had a low base to compare because we still had the consumer backlash last year. You have to keep that in mind.
Ian Craig: For the Q4, the differences are we started taking RGM initiatives in August, and we are probably going to do further RGM initiatives in mid-November to make sure we are covering any impacts that we have from both the FX or any raw materials, and be able to continue to improve on our profitability. That is the difference there. What I would address is within still a tight consumption environment in Mexico, our daily sales are either flattish or in the trend versus former or continuing to improve gradually. You see that small improvement, and what we think is very exciting is we were not participating in several white spaces, Lucas. For example, just mother-in-law research, I mean, the three recent launches in Mexico are way above what we expected to the point where we are having supply shortages to delivering.
Ian Craig: Coke Triple Zero, it is never too late is the idea behind the campaign, and it is amazing because there were a lot of people that are Coke lovers that could not or did not want the caffeine after certain hours in the afternoon, and we are untapping that potential with the brand that they love, and it is an incredible formula and brand idea, and it is just getting started.
Ian Craig: Then we have Ciel Aguas Frescas, the flavored waters, with tremendous share gains. We have not even finished rolling out a new flavor or getting enough share of visual inventory. The traction that this innovation is doing is very encouraging. Finally, the largest white space that I think we had was sparkling lemonades and orangeades, where we were not participating, and that is a segment that has been growing very healthily. The acceptance by the Mexican consumer of Topo Chico Sparkling Lemonade and sparkling orangeade has been 180% above what we expected, to the point where we are again with supply shortages. I would say, wrapping it up, because it is a very pertinent question, that daily trend, it continues to very gradually improve or be flat versus prior months. But now we do not have the benefit of the base with a lower consumer backlash.
Ian Craig: That being said, we have stronger RGM initiatives since August, and now in November we are getting ready for that, and we have very good innovations passing through the pipeline. That is what fixes our growth algorithm for Mexico, Lucas.
Lucas Ferreira: That is very clear. Thank you, Ian.
Operator: The next question comes from Henrique Brustolin with Bradesco BBI. You can open your microphone, sir.
Henrique Brustolin: Hello, and thank you for taking my question. Mine will also be to Mexico and Central America, but regarding margins. The question is especially how we should think about the SG&A that we see pressuring margins going forward, right? Because we see this very strong gross margin performance in the region. But throughout the year, SG&A has been a source of pressure. So if you could help us understand how much of that is a deliberate investment in marketing and commercial activities that you are doing, versus cost inflation that we may think as being more recurring, just to think about the pace of margins and that line going forward. I think that would be very helpful. Thank you very much.
Gerardo Cruz: Thank you, Henrique. I will kick it off. Starting with the pressure that we are seeing, which is, I think, a good problem to have. The pace of volume performance has been significantly better than what we had planned for Mexico specifically. This has been driven by a significant increase in volumes in multi-serve presentations, specifically our 3-liter Coke presentation. We did not have this in consideration in our budget. That has helped in terms of the scale of our business, but also has put a lot of pressure in terms of profitability and in margins. That, on the revenues side of it, has been something that we have been dealing with, and trying to see how we can mitigate it. Going further down the P&L, the other, I think, relevant factor that specifically affected the Q3 is operative FX, the volatility in currency.
Gerardo Cruz: The peso had a significant impact, a depreciation impact in the last part of September, which resulted in our accounts payable denominated in dollars having a significant impact in our P&L for the quarter. This is something that we expect, given that we have seen weakness in the peso and expect weakness in the peso to continue for the remainder of the year. This is something that we are expecting to continue and are looking to take action to mitigate as we move forward. Those, I think, are the two main components.
Ian Craig: I think we need to add labor. What has been happening in Mexico is with the increase in the minimum wage going on a compounded rate that is double digits, the first years of these policies were very accretive because even though they pressured our labor expense, the consumption that it brought had a much higher multiplier effect, so it was a net positive. Now, more and more, with the current level of the minimum wage, when there is a large impact, it translates into impacting to other categories or levels of collaborators that are not at the minimum wage. We do not have anyone below the minimum wage, but that go further up the chain. So it has a larger compounding impact on labor cost.
Ian Craig: That is why I was telling Lucas, Henrique, on the prior question, that we need to be and are very fine-tuned, and that is where Gerry and his team come in, to any potential impacts from FX, from labor, and have ready the RGM initiatives that we need to cover the quarter whenever we have any of those impacts. So I think we are very fine-tuned. Any of those impacts come across to all of the industry, so we are very comfortable with RGM initiatives that are done to undertake offsets to those type of impacts, because they might have a one-quarter lag, but that is about it. Because when they are industry-wide like this, we feel pretty confident that we can navigate them, but we need to be very fine-tuned to adjust the timing, and that is where Gerry and the purchasing team and the hedging team come in.
Gerardo Cruz: One last factor, Henrique, that is also related to the volume outperformance that we have had, and especially the mix, is our freight expenses have increased significantly versus last year. We have had to ship mainly to the southeast of Mexico. A lot of product from our Toluca plant has resulted in an increase in freight expenses. This is something that obviously we are looking to address, taking care of efficiencies in our existing plants in the southeast and a longer-term project of a new plant in that region.
Pamela Ortiz: I'll just add that despite these pressures, we have seen sequential improvement in profitability compared to the first 2 quarters, given the strong volumes and the gradual recovery of operating leverage as well.
Henrique Brustolin: That's very clear. Thank you very much.
Ian Craig: Thank you, Rick.
Operator: Our next question comes from Benjamin Theurer from Barclays. You can open the microphone, sir.
[Analyst] (Barclays): Hi, this is Rahi on for Ben. Just looking at Brazil, what should we expect to your strategy given potential fiscal changes, specifically if we see some excise taxes or taxes on CSDs? Just looking for more color on how you might mitigate the impact of volume that the price increase would have. Thank you.
Ian Craig: Hi, Rahi. So in the case of Brazil, I think there is a selective tax that is due to come in with amount of the tax. We are in close conversations with the government relating to that tax, looking for it to not have an impact, meaning that the new tax be the same as what we have. But we can't really manifest ourselves on what the government is finally to put through. I'd prefer to defer yet on this answer because until the government actually comes out and sends the measure, we don't know exactly the amount that it will be. What we can tell you is, again, anything that comes through, if it's not a neutral movement, we would need to be very agile and move swiftly with our RGM initiative to cover 100% of that impact. So in the field, we've built a formidable share cushion.
Ian Craig: The level of share that we've been able to capture in the last 3 years has just been very large. I do not foresee any scenario where, if for whatever reason it's not neutral, we wouldn't do a full RGM pass-through of this. Okay? Then there's also the impact, you didn't ask about it, but it's in Brazil, of the reduction in the work schedule. That will also have an industry-wide impact. The working week is due to change from 6 by 1, 6 working days to 1 rest, to 5 by 2. That will have an impact across the industry, and that's another impact that we need to pass through via RGM. For both, I can't tell you the amount of the tax because we're hoping it's neutral, but we don't know. But when we know, if it's not neutral, we'll need to adjust it.
Ian Craig: And in the case of the workweek, besides the productivity initiatives, there's a gap that we can't cover that, and we would be adjusting that via RGM. Okay?
[Analyst] (Barclays): Yeah, makes sense. Thank you so much.
Ian Craig: Thank you.
Operator: Our next question comes from Álvaro García with BTG Pactual. You can open the microphone.
Alvaro García: Hey, Ian, Gerry. Hope you are doing well. My question is on Juntos+ and Premia and Premia points incentive structures. It has been a couple of years now of really leaning into what I think has been very productive incentive structures for you, and I was wondering, when you think of guided missions, when you think of what you have got in your key clients to do, what is next on that front? Where do you think you can take that to going forward? Thank you.
Ian Craig: Hi, Álvaro. I think with Juntos+, it is pretty much where we needed to be. Right now, the team is working on basically fine-tuning the algorithms to help increase the ticket. I think on the app, it is pretty much just smooth sailing, and the new features that are coming on are all looking to improve the customer experience and increase the average ticket. We are not going to get very large gains from widening the base because it is already pretty much available everywhere, and it is just a natural trend of digitalization, which has different bases in the different countries. But we do see that when we keep refining our tools, that the average ticket continues to provide a premium, and the indicators regarding improved coverages help us improve that ticket and improve share. What is going to be making a lot of difference to us is the advisor tool.
Ian Craig: Our Juntos+ Advisor sales force tool. There we only have it in Brazil with order entry. We have it in Mexico without order entry, so we will be rolling out in Mexico the order entry this year, and we will be rolling it out in the rest of LATAM without order entry. And there are a lot of benefits from the advisor tool for the sales force. There, like I said, there is improved visitation, improved combined coverages. The time and quality of the visits improve, and we see that translating directly into improved execution on market share. For this year, we are seeing a lot of improvement coming up from the advisor sales force tool rollout, which that is finalizing. Going along for this year. And then we are going to be coming out in Brazil with a sales supervisor tool, which is fantastic. Think of it this way.
Ian Craig: The first thing that we did was hand the app to our clients so they have the best technology. Then we handed it to our sales force, in Brazil with order entry, in Mexico without order entry. And we are going to be rolling out the order entry and the different modules for the sales. And now we are rolling out the sales force supervisor tool. It is incredible. What we are piloting now, it is amazing. The supervisor sees where are the gaps, what exactly he needs to coach which sales personnel on, where he needs to reinforce the positives of the sales team. And all of this is done in real time, so it is not waiting till the end of the month to see, or the end of the week, how things are going. I think that is going to be the second part of the uplift.
Ian Craig: I know we are pretty excited. I think that the digital piece, like I mentioned, is one of our fifth key strengths, and it is only going to keep growing. But it is going to be coming now from the sales advisor tool and from the supervisor tool more than from the app in our opinion, Álvaro.
Alvaro García: That was very
Ian Craig: I want to complement the
Alvaro García: No, that was great. Thank you. That was very comprehensive. It will be interesting to see how it works in a tougher macro environment. Thank you.
Ian Craig: Thank you, guys.
Operator: Our next question comes from Emiliano Hernández from GBM. You can open your microphone.
Emiliano Hernández: Hi, Ian, Gerry. Thanks for the space and congrats on the results. Going back to Mexico, following the recent pricing, how has the initial consumer response been? Also, looking ahead to 2027, do you see room to implement inflation-linked price increases at the beginning of the year, or would you prefer to maintain a more conservative pricing strategy to support volume growth and further market share gains? Thank you very much.
Ian Craig: Hi, Emiliano. The August adjustment where we finalized closing the gap between the tax and inflation was well digested. We have to be cognizant that the consumption environment remains tough, but anything that we see now is going to be pretty much across industry. So, different to the tax, where we were very conservative and moved gradually on the tax and inflation impact because it was so large, and we are very confident we did the right NPV strategy. Like we mentioned, we have seen other territories of, for example, other bottlers within our territory are performing much different. So, we are confident that that was the right strategy.
Ian Craig: We are also pretty clear that going forward from what is coming, which is relating to labor or FX and the trickle-down to raw materials, we need to be very vigilant and pass through immediately via the best RGM strategy that we can do, any type of impact. We have enough of a share cushion. We are also with positive momentum. The innovations give us a lot of support for this. They are amazing. I cannot overstate enough how well they are being received by the market, and the pipeline that is coming is very strong. So, I think we are in a good position to be able to be vigilant with RGM, so that we do not see any impact, or we make sure to adjust for any impact, and we will still be able to deliver share gains. I am pretty confident of that.
Gerardo Cruz: Right now, Emiliano, thinking of 2027, I think this would be the first of the last 3 years where we have, I would say, a fairly normal operating year. At least this is our expectation. As Ian mentioned, with the innovation pipeline that we have, that is supporting growth, and on the back of share performance that we have had, given the strategy that we pursued of maintaining our presence with the consumer this year, I think we are moderately optimistic on the outlook for next year, that we can start taking the benefits of this NPV multi-year strategy that we started up this year. That is a little bit of where we are.
Emiliano Hernández: That is great. Very clear. Thank you, and congrats again.
Operator: Our next question comes from Henrique Morello with Morgan Stanley. You can open the microphone, sir.
Henrique Morello: Hi, Ian, Gerardo, Pamela. Thank you so much for taking my question. Congratulations on the results. I have just one quick question on capital allocation. In the past few quarters and conference calls, you have been talking about possibilities on addressing the balance sheet, the low leverage, and possibilities around that. My question is if anything changed in your mind right now in terms of priorities in capital allocation, given this quarter's results, and how is your mind on the possibilities around potential extraordinary dividends or buybacks in the next 12 months or so as well? Thank you very much.
Gerardo Cruz: Thank you, Henrique. As we had discussed earlier in the year, given that the excise tax that came in Mexico as a very quick surprise by the end of last year, we wanted to wait a little bit and let this year work out to see how things would move. We are finalized with the analysis that we were looking into, and we expect to have news for you on what the mechanism of capital return for shareholders will be that we will put in place earlier in next year.
Henrique Morello: That is clear. Gerry, thank you.
Gerardo Cruz: Thanks, Henrique.
Operator: Our next question comes from Thiago Bortoluci with Goldman Sachs. You can open your microphone, sir.
Thiago Bortoluci: Yes. Hey, guys. Good morning. Thank you very much for the space for questions. On the forward, we are just entering the El Niño season, and we are seeing different impacts across the region, obviously a lot of weather disruptions. Although we recognize it is surely, and no one really knows how the final impact will be, what can you share with us about what you are seeing in this first month, and how are you preparing for this season? Thank you very much. Particularly on the side of demand. Thank you very much.
Ian Craig: Hi, Thiago Bortoluci. I hope you are not going to hold me to a weather forecast because it is not my expertise. What we have been seeing, it is sort of neutral in Mexico between temperature and rainfall overall. In our territories, like I say, sort of neutral versus other years. We have some colder weeks, but we have also had some warmer weeks. It is a little bit drier now, so it is pretty neutral. It tends to be positive so far in Central America, Colombia, Venezuela. In the case of Brazil and Argentina, it has been wetter, so it has been more negative there. That is more or less what we are saying, but it is anyone's guess how that behaves.
Ian Craig: In terms of how we get ready for high season in South America and the holiday season in Mexico, I think we are well-positioned in pretty much every market in terms of either our capacity or inventory strategy, except for Colombia. We are quite strained in Colombia and Venezuela. We are quite strained in those two territories, quite strained. The volume growth has surpassed any expectations. It is high double digits in both countries. In those two countries, we are strained for capacity. Our inventories are very low, so we do not have enough, let us say, breathing room in those two countries. We are investing behind them, but it is really a tough supply scenario. For the rest, I think we are quite well-positioned.
Thiago Bortoluci: This is helpful. Thank you very much.
Gerardo Cruz: Thank you.
Operator: Our next question comes from Felipe Ucros from Scotiabank. You can open your microphone.
Felipe Ucros: Yeah. Most of my questions were asked, but I have a small one on SG&A in LatAm. When I backed out insurance claims from Brazil, it looks like there was a bit of SG&A pressure in LatAm a little more than for the coming quarters. Thank you.
Ian Craig: SG&A pressure in LatAm was the question. So stripping out the insurance.
Gerardo Cruz: Yeah. Excluding the insurance effect. I believe the question, if I heard correctly, is pressure on SG&A in LatAm, right?
Felipe Ucros: Yes. That is correct.
Gerardo Cruz: One of the components, Ian was addressing it in the previous question, and it relates to demand outpacing forecasts, especially in Colombia. So this operation is striving to get capacity to where demand is, and this has resulted in a significant increase in freight expenses, which is pressuring SG&A for that operation. Also labor expenses overall have been pressuring the results in all of our operations.
Pamela Ortiz: I will just add, Felipe, that remember that also the base has MXN 280 million of insurance recovery that you should also adjust for. With that, excluding in both periods the benefit of the insurance, South America grew 29% EBIT. So it is an underlying really strong performance from, as Gerry was mentioning, mostly Brazil and Colombia. But all of our operations are growing well into double digits operating income.
Felipe Ucros: Very clear. Thanks a lot for that, guys.
Pamela Ortiz: Thank you.
Gerardo Cruz: Thank you.
Operator: Our next question comes from Alejandro Fuchs from Itaú BBA. You can open your microphone, sir.
Alejandro Fuchs: Thank you, operator. Alejandro, Gerardo, Pamela, thank you for the space for questions, and congrats on the results. I just had a very quick one regarding one of Gerardo's comments about 2027 being a much more normalized year. When we look at the largest 2 countries of your operation, it seems that next year, SG&A pressure will continue, right? You have labor reforms on the working week on both countries, minimum wage, as Ian was explaining, maybe increasing a little bit as well and pressuring an already high SG&A pressure this year. I wanted to understand a little bit the more normalized year for the operation, is it because you expect maybe top line and volumes to maybe be even better than this year? I wanted to understand a little bit your expectations maybe on the consumer front demand for Mexico and Brazil for next year. Thank you.
Gerardo Cruz: Specifically, Alejandro, for Mexico, my comment was related to having had the consumer backlash in 2025 and the excise tax increase in 2026. Right now, we are not foreseeing any of those sorts of impacts for 2027, and we are planning, obviously, for a more normalized year in terms of exogenous factors affecting our performance. I think the pressures that we have seen in terms of labor increases, the minimum wage increase, and Ian was explaining it with a lot more detail, the impact that that has in terms of the spiral effect in labor expenses and increases, given that the minimum wage gets closer to our base entry-level wages, that pressures the next level and so on. That puts a bit of pressure, but we think of that as regular course of business for our operations, not as an extraordinary impact. This is specifically for the case of Mexico.
Gerardo Cruz: For the case of Brazil, we do have the labor reform as an extraordinary impact for 2027 expected, which, as Ian mentioned, we plan to address through productivity initiatives as well as RGM. We understand, obviously, this is an impact that will affect the industry as a whole. So the space that we have built in share allows us to pass through any of these impacts to the consumer with reasonable impact in demand.
Alejandro Fuchs: Super clear. Thank you, Gerardo.
Operator: Our next question comes from Ulises Argote with Santander. You can open the microphone, sir.
Ulises Argote: Hi, thanks for the space for questions. One more on Mexico from my side. I was wondering if you could provide any details there on the performance on the different channels, and maybe some insights as to how you are seeing the competitive environment developing. I think particularly in the center of the country, it would be interesting to hear. Thank you.
Gerardo Cruz: On channel performance, what we have seen, Ulises, this year, and this is by design. As you remember, at the beginning of the year with the excise tax coming on, we decided to maintain our competitive position and our scale, especially in the traditional trade favoring affordability. This has been the goal throughout the year, understanding the impact that the excise tax has on disposable income. This has resulted in an unusual behavior in terms of channel this year with traditional trade reclaiming a bit of space versus modern trade and others. Even though this quarter we are seeing all channels growing, traditional trade has been outperforming, which is good for our business in terms of maintaining contact with the market, with the point of sale, and positioning our portfolio well with that focus in affordability.
Gerardo Cruz: As Ian mentioned, this has given us a cushion in terms of share to address how we start 2027 and we close out this year.
Pamela Ortiz: Just to complement Gerry on that, Ulises, the consumer environment remains challenging, and also the performance of the channels talks to that. Year to date, the traditional trade is gaining a couple of points to the modern trade. Also talking about the consumers looking for that affordability on the market. We will continue to work on our price pack architecture and serve the different channels, but still the traditional trade right now is gaining a couple of points year to date.
Ulises Argote: That is very clear. Muchas gracias.
Gerardo Cruz: Gracias.
Pamela Ortiz: Gracias.
Operator: Our next question comes from Fernando Olvera from Bank of America. You can open your microphone, sir.
Fernando Olvera: Hi. Hello. Thanks for taking my question. Just a follow-up regarding South America. As you mentioned, excluding the insurance gain, margins keep improving. Can you give us some color on how margins behave by country in South America, and in which country do you see further room for improvements going forward? Thank you.
Gerardo Cruz: Thank you, Fernando. I will kick it off. This has been a multi-year initiative that we have and have stated publicly. Both Brazil and Colombia had been coming off as our operations with the biggest head space in terms of profitability improvement. I think Brazil is a little bit ahead, as compared to Colombia, having had significant gains for the past few years. Even though we still have some head space, and considering Brazil this year had the extraordinary insurance recovery, we still have a few points of profitability to gain to get Brazil to where we want it to be. In the case of Colombia, this is the first year of the past four where we have had a significant gain in profitability.
Gerardo Cruz: As you remember, Colombia had the excise tax implemented that was a three-year, three-step tax, which basically what ended up happening is any price increase that we were taking was just going to compensate for the excise tax there. This is the year where we finally cycled the effect of the excise tax, and we were able to have all of the productivity gains, efficiencies put in, and RGM initiatives flow through our P&L, having a year of significant gain in profitability. Colombia still has a lot of room to improve, and this is the focus that our team has in Colombia for our long-term plan to continue improving both profitability and return on invested capital. Those two operations I would highlight.
Gerardo Cruz: The third operation that I think is worth mentioning, a smaller operation, but Panama, where we went through a reset of our portfolio to address a competitive situation that we were facing there. We had a significant drop in profitability in our Panama operation, and for the last two years, we have been working on regaining that. That will be a long-term project as well, but moving in the right direction and certainly excited of the results that we are seeing of the plan that we put there in place.
Pamela Ortiz: I will just add that also this is the result of the three-year period of highly investing on the different regions on distribution and production capabilities, which are right now reflecting on profitability and reducing our cost to serve. Also, there is still room to continue to capture those efficiencies on the investments we have done in the past.
Fernando Olvera: No, this is great. Is this possible to have, what is the level of EBITDA margin in Brazil and Colombia? I mean, any idea that you can share?
Gerardo Cruz: We do not give out the specific details by country, Fernando. We would be glad to address generals with you on a separate call.
Fernando Olvera: Okay. Oh, perfect. Thank you so much.
Gerardo Cruz: Thank you.
Pamela Ortiz: Thank you.
Operator: This concludes the question and answer section. At this time, I would like to turn the floor back to Pamela Ortiz for any closing remarks.
Pamela Ortiz: Thank you everyone for your continued interest in Coca-Cola FEMSA and for joining us on the call today. As always, the IR team is available to answer any follow-up questions. Thank you. Have a great day.
Operator: Thank you. This concludes today's presentation. You may disconnect now, and have a nice day.
