Grupo Bimbo Sa Spns/Adr

Good day and welcome to the Grupo Bimbo's third quarter 2023 results conference call. If you need a copy of the press release issued yesterday, it is available on the company's website at www.grupobimbo.com. Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risk and uncertainties and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. I would now like to turn the conference over to Mr. Rafael Tamias, Chief Operating Officer of Grupo Bimbo. Please go ahead, sir.

Yes, good afternoon, everyone. Thank you for joining us. Connected on the line today is our CFO, Diego Regiola. Mark Bendix, Executive Vice President, and several members of our finance team. Unfortunately, Daniel is unable to join us today, but I will try to communicate the message the best way I can. Before presenting the company's financial results, I would like to express on behalf of myself and our group of BIMBOS associates our deepest solidarity with the people from the state of Guerrero, who is currently facing an extremely difficult situation after the impact of Category 5 Hurricane Otis on the Mexican Pacific Coast, which has severely affected the city of Acapulco and its surrounding regions. Although the enormous damage that this phenomenon has caused is very difficult to quantify yet, we hope that families will soon be able to return to their homes and find the necessary strength to recover their daily lives and move forward. Around 500 Grupo Bimbos associates live in the affected areas who are taking all necessary actions to ensure their well-being as well as that of the families, our consumers, and customers. We will be monitoring very closely the situation to take the actions to help alleviate the impact of this event. Our hearts are with you. I'm going to start now. In the face of a very strong Mexican peso, increased but moderated inflationary pressures, and the MEPS non-cash benefit register in the third quarter of 2022, which makes the comparison in some metrics tougher, Our results for the third quarter were exceptional as we reached record levels for net sales and adjusted EBITDA, of course, excluding FX rate impact. And our EBITDA margin strongly expanded 50 basis points, now a standard at a robust 14.6%. Both key metrics have consistently improved, showcasing 10 years compound annual growth rates of 5% and 7% respectively. Moreover, we successfully completed two strategic acquisitions, and our capex investments reached record-breaking levels so far. We also advanced towards our ESG goals, reaching 27 countries which are now operating with 100 renewable electricity, and we were ranked number one as the company with the best corporate reputation in Mexico by Merco. In September, we held the 2023 Bimbo Global Race, and thanks to more than 300,000 participants, including 180,000 virtual runners, more than 2.8 billion slices of bread are being donated to food banks around the world. Before I jump into the results of the quarter, I would like to share with you the three investments we made through Bimbo Ventures, our venture capital arm, Harbinger Motors, Healthy Brand, and Shinka. We also kick-started our second edition of Bingo Open Door, our open innovation program focused on collaborating with promising startups. In this year's edition, we are focusing the program on the cookies and bars categories. Looking now into the results by region for the quarter, North America delivered another quarter of a strong top-line growth, growing more than 6%, excluding FX effects, across all categories with notable growth rates from buns and rolls, breakfast and salty snacks. However, volumes were soft consistent with the overall category, but more than upset by carryover pricing, which was implemented in 2022. It is relevant to mention that the rate of decline is slowing sequentially. In fact, in the first weeks of October, we saw share gains on our sweet baked goods and English muffins businesses which are critical to the overall success of achieving North America's top and bottom line objectives. Adjusted EBITDA margin constructed 80 basis points. This construction is primarily due to continued but moderated inflation, category and channel mix, partially offset by improved productivity benefits. We remain focused on eliminating waste and investing in key areas of our business to optimize our operations and ultimately reach our full potential. As we move forward into the fourth quarter, we anticipate a better volume performance. This improvement will be a direct result of the innovative and effective commercial strategies we are currently implementing in the marketplace. we remain confident in our ability to overcome these challenges and drive the growth trajectory in the right direction. During the quarter, we successfully acquired Mile High Bakery in Colorado, U.S., known for producing buns and English muffins for the QSR channel. This strategic acquisition strengthened our geographic presence in this high-growth industry and opened doors to new QSR customers in the U.S. In Mexico, We are thrilled to report a remarkable increase of over 8% in net sales, primarily driven by favorable price and product mix. Notably, we witnessed healthy growth in various categories, especially tortillas, cookies, buns, cakes, and snacks, and double-digit growth in the convenient and retail channels. Our adjusted EBITDA margin posted significant expansion, surging by 140 basis points. This was a direct result of sales performance, coupled with lower cost of sales and enhanced distribution network efficiencies, including the incorporation of digital solutions. These achievements reflect our commitment to delivering quality products while ensuring cost-effective operations for sustained growth in the Mexican market. Moving to EAA, we achieved an outstanding growth of over 20% in sales, excluding the impact of FX fluctuations. This remarkable growth was primarily driven by a positive price and product mix throughout the region with notable strength in Iberia. Additionally, the continued robust performance of BIMBOK-USR, especially in China, along with the contribution from our strategic acquisitions of Belpitar in Romania and St. Pierre in UK contributed to this growth. Adjusted EBITDA margin posted a strong 100 basis points expansion mostly due to the strong sales performance, lower cost of sales, and the successful implementation of productivity enhancing initiatives. During the quarter, we also completed the acquisition of the majority stake of our QSR business in Switzerland, Cortiza, leaving us with a 60% stake of the business. This allows us to integrate the facility in our footprint to further enhance our presence in the country. Finally, Moving on to Latin America, excluding effect-to-effect, net sales increased more than 14%, with growth in local currencies in every organization, highlighting Brazil and the Latin Sur division, favorable price mix across the region, and strong volume performance in Brazil, which continues to post record-breaking results. Adjusted EBITDA margin reached a sustainable double-digit record level at 10.5%, attributed to the strong sales performance, improved product mix, and productivity benefits across the business, highlighting the extraordinary performance of Brazil. I would now like to turn over the call to Diego, who will walk you through our financials. Please, Diego, go ahead. Thank you, Rafa. Good afternoon. Thank you for joining us today. Our third quarter results continue to improve. especially when we consider a soft consumer environment and a complex operating environment in some markets. We were able to reach record levels of net sales and adjusted BBVA, of course, excluding the superficial effects. Our sales grew above 8%, excluding FX effects. Our adjusted theta margin expanded 50 basis points, reaching 14.6%. and our operating margin, excluding the net non-cash benefit of the third quarter of last year, improved by 30 basis points. However, our financing costs rose by over 30%, mainly due to increased debt, deep refinancing of our perpetual bonds completed earlier this year, and the impact from higher interest rates. As a result, of the FX translation effect, the net effect and the higher financing costs, our net minority income declined by 31%. Our community effective tax rate closed the quarter of 33.5%. Shifting to the balance sheet, our net debt to adjusted dividend ratio stands at two times, with total debt increasing by 23 billion pesos. This primarily because of a higher debt position, the perpetual bonds refinancing accounting impact, and the strategic acquisitions completed in the past 12 months, coupled with our intensive capital expenditure program aimed at fostering our prospective expansion across diverse countries and product categories. We have also seen a rise in short-term debt. mainly due to the upcoming maturity of our 2024 bonds. We are continuously evaluating market conditions and alternatives to face such maturity. At the same time, we remain confident given the flexibility and liquidity that our committed revolving credit facility for $1.93 billion provides to us. Our net operating working capital increased by 3.3 days over the third quarter of 2022, equivalent to around 3.4 billion pesos, mostly due to increases in inventories and clients. Lastly, despite the FX rate conversion effect, our local currency results remain strong, and we would like to reaffirm our 2023 guidance.

We continue to anticipate change growth in a low-to-mid single-digit range.

As for the adjusted dividends, we expect to have a growth between the mid to high single-digit range, as we feel confident that during the fourth quarter, we will have a north quarter with a margin expansion. For capex, we continue to expect to be within the range we previously provided. with investments between $1.7 to $2 billion. We have weathered the worst of the impact from commodities inflation, and as we move into the fourth quarter and beyond, we will start to see some tailings. These, combined with operating leverage from sales growth and productivity gains from past investments in CapEx and OPEX, as well as the positive effect of our FX rate hedges will help us to reach our profitability targets for the year. In conclusion, we remain committed to our long-term goals and look forward to continuing our journey of growth and profitability. Thank you for your attention and ongoing support.

We can now proceed with the Q&A session, please.

Thank you. begin the question and answer session. If you have a question, please press star then one on your touchtone phone at this time or at any time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. We do ask that when you pull your questions that you pick up your handset to provide optimum sound quality.

Please hold while we pause for questions. And the first question will come from Fernando Alvera with Bank of America.

Please go ahead, sir.

Hi, good afternoon, and thanks for taking my question. The first one is related to North America. How do you expect mix and categories to behave in the fourth quarter and 2024, given the softness and unfurl mix that you observed this quarter? And my second question is related to Mexico. If you can explain the lower administrative expenses and how should we think about this line going forward? Thank you.

Mark, do you want to take the first question in North America?

For sure. Great. Good afternoon, all. Let me talk to you a little bit about what we see in North America. First off, I need to share with you how proud I am of our frontline associates. how they continue to rise to any challenges presented to us, and we know we're seeing a dynamic environment. So as we navigate through this dynamic environment in which we compete, we remain focused on controlling what we can control, right? So we're going to continue to leverage our frontline capabilities to drive top-line growth across our categories, so that relies on new innovation, alternate channels, sweet baked goods, and snacks. We continue our disciplined pricing execution in the face of ongoing inflation. We're actively monitoring the demand elasticity trends and our channel mix so that we can adjust to meet the evolving needs of our customers and consumers and drive the improvement, margin improvement that we expect. What we're seeing now is we're seeing that inflation is beginning to moderate and we expect that rate of inflation uh starting to improve in q4 which is uh which is welcomed our supply chain continues to improve as well and we made meaningful progress on our cost savings and productivity initiatives which are in turn led to vast improvement in our service levels so all in all we're we're looking at many facets in this dynamic environment and we are cautiously optimistic for the fourth quarter Thank you. Fernando, this is based on different efforts. One, of course, is having a very tight control of expenses. We have continued to push aggressively internally the zero rate methodology and being very conscious on every dollar that we spend in all the different geographies of the company. We have also been able to use and leverage more the use of technology, which is also helping. And finally, I would say we have a positive tailwind effect by having a stronger peso exchange rate on the expenses that we have outside of Mexico. I will present less pesos because of the easy strength of the Mexican pesos.

Great. Thank you so much.

The next question will come from Ricardo Aldaz with Morgan Stanley. Please go ahead.

Hi, everyone. Thanks for the call. I wanted to insist a little bit more in North America, specifically on sweet snacks. It's roughly the same question that I asked in the previous call. But I noticed in your preliminary remarks that it seems that sweet snacks, or at least if I understood correctly, sweet snacks are improving. And I find that very interesting. We noticed that competition within the sweet snack category specifically has been tougher in 2023. So I just wanted to see if you can expand specifically on this category. Is it anything specific that you're doing? We've discussed many times perhaps Bimbo attacking the C-Store channel more effectively, if maybe that could be a possibility. So just wanted to expand a little bit more on that category specifically. The second question, which is also in the U.S., but a little bit related to the other stuff, I just wanted to get the latest on your private label exposure and the evolution of the mix, because I noticed you mentioned a couple of times unfavorable mix in the U.S. as well, so I just wanted to get a sense on private label. And then just a very quick question is, you know, how management, how you guys are thinking or assessing the risk of potential demand impacts associated with, you know, GLP-1 drugs and, you know, overall the obesity drugs discussion that is picking up in the U.S.

Appreciate the time. Thank you. Okay.

Let me talk a little bit about sweet baked goods and how we're doing that. Thanks for the question. So, obviously, volumes have been soft. but they're also trending along with the total edibles category, which is down 2.1%. Total breads are down 2.3% in units, and total sweet bake is 2.7%. And we know that the consumers are stressed and seeking value, for sure. And from a share perspective, private label and value brands have gained unit and dollar share. So we continue to invest in our marketing, delivering enhanced programs, and trying to deliver excitement in our brands. We recognize that sales growth across all categories is driven by prior year and pricing actions for the most part. And so if you look across many of our categories, our share performance was often mainstream, breakfast and sweet baked goods, while premium and buns and rolls were growing along with snacks. But like many CPG companies, we continue to experience those cost pressures across many of those areas in our business, from elevated input costs, transportation, real estate, labor, and offset by carryover pricing and strong execution. We're excited about our Sweet Bakers, and we continue to invest in portability. And just as the question suggested, expanding the channels where those sweet bakers will become relevant, like C-Store. So we see a great opportunity in that expansion. In terms of, I'll hit the second question, which was, I think private label is what you mentioned. And so let me give you a little bit of a feeling about what we're seeing in North America. So category volume is soft, including private label. However, private label, is gaining share, both dollar and units. Consumers are now seeking volume. Now we're seeing that there's been a challenge for consumers and certainly a dynamic environment for sure. Our mainstream premium buns and rolls and breakfast and sweet pancakes were challenged as consumers traded down the private label and value-based retailers. Consumers are largely gravitating towards value and channel in club and mass as well as private label also some premium buyers are also trading down the mainstream so while we focus our efforts on branded business we do have a significant private label business and our private label and food service business play an important role in our portfolio so we're focusing heavily on that we look from asset utilization to building partnerships for our customers And our goal is to ensure that we're continuing to improve the profitability and efficiency of our non-branded business. And just as a bit of perspective, during the pandemic, many of the manufacturers narrowed their SKU assortment as a necessity to mostly branded items as we were all challenged and had a smaller workforce. And now that the pandemic is over and our job is not solely feeding America, The SKU assortment has expanded again, and the availability of full SKU assortment and branded label expansion. So just for perspective, the gains that we made in share in dollars, we've largely kept from during COVID. Now, the last quarter has been challenging, but we remain optimistic that our initiatives on promotion, productivity, and innovation will continue to add momentum for us.

I will take the authentic question.

We're looking and studying it seriously, like any upcoming trend or change in consumer habits. We do believe at this point that it is too early to tell the effects, also the side effects, and potential scalability. What we can also tell you is that when we take a look at our categories, our overall sentiment is positive. Our balance is positive because we're seeing a continuous and strong shift to branded and packaged because consumers keep looking for safety, convenience, and innovation. Take a look at our expanding geographical footprint. The fact that we are making our recipes also more natural and simple. And last but not least, we are laser focused on grain-based solutions, which is one of the key points of the upcoming planetary diets. So nutrition is not only about eating less, but in our case and in the case of grains, all the recommendations is about to eat more. So in overall, I would say we are cautious, we are serious about assessing it, but we are confident and busy to keep growing our categories.

Very helpful. Thanks, everybody. Okay.

The next question will come from Ben Theuer with Barclays. Please go ahead.

Yeah. Good evening, and thank you very much for taking my question.

Congrats on the results. I just wanted to follow up on two things that you flagged in your report and wanted to maybe get a little more color as it relates to just the volume performance across different regions. So you clearly put on a little more of an optimistic term, but I wanted to understand what you're seeing in volume dynamics, North America, Mexico in particular, but also EAA and LATAM, consumer behavior, down trading, back trading, private label versus brand. Where do you think this is going to shake out in the next, whatever, two to three quarters or so?

You want to start, Mark, with the U.S.? ?

Thank you. As I hope you detailed in the last question, we remain optimistic that the challenge consumer will start migrating back. It's been definitely a challenge consumer in the last quarter. It's like no dynamic that we've seen recently with post-COVID environment. We've got people that are being welcomed back to work. So sweet bakers and breakfast have been a bit challenged. We think that evens out as we go forward and the work environment begins to even out and we continue to invest in our promotion and our innovation strategies. It's what we've seen With our promotional strategy, the U.S. is not the same that we've seen in previous years. So we know it's a dynamic environment, but we know we're making investments in innovation, in alternate channels that we see significant growth for the U.S. So we remain optimistic. Rafa, do you want to handle the rest of the world? Yes, I will start with Mexico, being Mexico important for us. Like many other companies, the volume has been soft following very acute price increases. However, it is evolving positively quarter after quarter, so we expect soon to be growing again. Okay? Modern trade is already growing robustly, and we have identified clearly what are those cells where we should be focusing, which is around some categories on the traditional channel and in the center of the country. And in those areas, this is where we are over indexing our promotional programs and price pack architecture changes. In overall, we're seeing two things. One is a good trend recuperating in part because And the fact that the last price increases made last year, one could claim that we were pushing the envelope a little bit much, so we're going to have a positive comparison. On the other side, we're also experiencing some down trading to cheaper options inside our portfolio or with a competition and also private label. We have recognized that in the last months and we have started a three-leg program. The first one being to deliver superior quality and we are obsessed with making sure that a high percentage of our net sales are done with clearly superior products. So this is something that it is an internal dynamic that is getting a lot of traction. Number two, we're going into a increasing significantly the level of our innovation and and and we have programs where we have ready replicas to roll out and last but not least we are pushing hard to become a lower cost producer and in this sense having a more neutral effect regardless where our volume is going Okay, perfect. And then I have one just quick follow-up, I guess, for Diego. Looking at the comprehensive financial costs during the quarter that went up by a little over 31% to $3.1 billion, if I look at it on a year-to-date basis, it's also up like 40% versus the same nine-month period last year. So going forward, how should we think about it? I mean, it's explained some of the debt itself and the higher position and some of the higher rates on that, but is that a level we should now assume for a quarterly basis or is there something we need to consider that's going to bring that cost down on a quarterly basis from that three-ish billion level we've seen more recently? Yes, Ben. The effect that we have been facing in the third quarter and the three quarters of 2023, basically in one hand because of the increase in debt. As I mentioned, we have been, and you all know, we have been paragliding in our capital expenditure program. We're expanding our production capacity here with new factories, new lines, light extensions, and investments are all over the place. On the second hand, we have also been successful in doing some strategic bond fund acquisitions that have continually demanded additional resources. So these main two factors have taken the company to an increase on the leverage. The second is the accounting effect from the refinancing of the perpetual bonds. Since we called the bond, we recognized the amount of the protection bonds as debt, but also the interest expenses related to these bonds were previously recognized on the equity line, and since that date, they have been hitting the P&L of the company. this effect will remain going forward, as we are already refinancing a strategy of these $500 million, mainly through the issuance of the local bond in Mexico, the two certificates we're tracking here, for 15 billion pesos. Also, considering this, I think that this year in particular will see an extraordinary increase because of these two factors of increased leverage plus the accounting effect of the perpetual bond. And lastly, the effect from higher interest rates. Now, the good news is that we have more than 70% of our debt with the fixed rate. As you know, we have a very conservative and strong debt profile. We have a lot of bonds that were issued for 30 years. We have been moving a little bit also to the variable side. As we did with the issuance of the local bond, the $3 billion are variable, $8 billion plus $10 billion. We have some short-term financing also that are variable, and we will be doing facilities where we have access. So this is also putting a little bit more pressure, but again, the main two components are leverage and the accounting effect. Now, the accounting effect, we will not have that difference for next year. And I mean, still early to be an indication on our expectations for 2024. But this year has been a little bit more intensive uh as any other year uh in terms of the demand of cash uh because of the combination of topics and acquisitions perfect thank you thank you very much the next question will come from felipe euchris with scotia bank please go ahead great uh thanks operator uh good evening uh thanks for the space My first question is on North America decoupling. You've had a string of very good results over the last few years, but it seems that the U.S. is decoupling a little bit from the other markets. Excellent quarter outside of the U.S., double-digit EBITDA and growth rates in FX neutral terms, but obviously less strong in the U.S. Very often other markets tend to follow the U.S. in these cycles. So I guess my question is, My question is, are you expecting some kind of deceleration in the other markets? Or are you seeing any signs that the consumer is reaching a similar exhaustion point that we're seeing in the U.S.? Or is it really a tale of two markets as far as you can see in consumption trends? Renata, do you want to address the link to other markets from the U.S.? ? Yes, and you started with the U.S., and I will ask Felipe to rephrase again. I had a problem with my connection. Apologies. You can start, Mark. We will answer you, Felipe. Felipe, obviously what we're seeing in the U.S. is a consumer trend. We're seeing consumer confidence up a little bit, but it's still at historically low levels. However, the consumers are trading down for this period of time, seeking value and choosing private label and more economic items. But we continue to invest in our premium products. As Rafa said, we're investing in absolute superior quality in the U.S. as a main And so we're hoping that the consumers come back. We're beginning, as Rafa mentioned earlier, we're seeing some buoyancy in our breakfast items. And that gives us hope that this dynamic in the U.S. is starting to alleviate. But obviously, we've got to continue to watch it very dynamically. And in terms of the link to other parts of the world, the U.S. being a trend, I'll let Rafa address that. Yes. What I would say is that what we see in most geographies is a temporary effect on consumers being more pricing and therefore choosing more value for money propositions. And at the same time, we see an accelerated effect, but not in every geography and not with the same intensity and characteristics of let's say the hard discount evolution, right? And so we are attacking both effects in a different way. As we mentioned before, on the temporary down trading, we are working on price pack architecture. What we see, and Diego was mentioning at the beginning of the meeting, what we're going to be starting to see some relief of the pressure of the raw materials. And it is now our intention to put money back in the market in order to make our products more temporary attractive. On the other side, on this accelerated effect that I claim, again, it's not everywhere and not with the same intensity and characteristics, we are recognizing the evolution of hard discounters or private label push in some geographies, and our intention is to reach every consumer. In the end, building portfolio solutions for everybody. And this is where, and I reiterate that, one of our main concerns or occupations, better, is to become a low-cost producer so that making sure that it's going to be a neutral effect regardless where our volume is going. So a lot of activity internally in the company to take advantage and to be more, I would say, attractive, both in the temporary issues and in the more permanent ones. No, that's very clear. Thanks, guys, for those comments. Maybe just a follow-up. It's another quarter. a very strong see-saw and retail growth in Mexico in those two channels. So just wondering if there's any particular micro drivers behind that. I would say that our sales people are doing an excellent job in nurturing and developing the channel. both in making amendments, positive amendments in our go-to-market, making it more easy and more profitable for both us and the customer. And also we are pushing certain categories that convenience stores are very eager to invest on. So it is a combination of sales savvy, go-to-market adjustments, and picking up the right categories to push. But yeah, we are very happy with the job done by our sales associates in this channel. We are over-interesting, I would, at least in this period of time that we are preferring. We're doing it slightly better, obviously. Great. Thanks a lot for your comments, guys.

The next question will come from Alvaro Garcia with BTG. Please go ahead. Mr. Garcia, possibly your audio is muted.

Sorry about that. I was muted. Good evening, gentlemen. Thanks for the space for questions. Two questions. The first one's for Mark on tactics on the penetration in the US. Where are we sort of in the story of increased penetration across channels. I feel like there's a lot of room to be had there, and I'd love to hear your latest thoughts on that. And then another one very similar to what Felipe just asked on sort of your channel mix in Mexico, but sort of focusing on the traditional channel. You mentioned it's an area of opportunity, particularly in the center of the country, and we noticed Pepsi's numbers were quite weak as well, missing with the volume declines. Is there something going on in the traditional channel? Why do you think we've seen a little bit more of a lag in the traditional channels relative to modern trace?

Thank you very much. You cut out a little bit on your first question. It was a question regarding TACIs.

It was about sort of where we are in the evolution of greater penetration across specific channels.

Yeah, so you're exactly right. We continue to make investments in alternate channels, and we believe that the expansion of our portfolio plays well in the C-Store environment and the alt channel. So we are actively investing, and you'll continue to see us in automation, in price pack architecture, so that we can penetrate those channels more completely and have a much higher penetration rate. So your question is absolutely right and targeted and definitely an area of focus for us. And regarding Mexico's softer evolution of volume in those cells that I was referring, mainly more on the center of the U.S., either U.S. or Mexico, excuse me, the traditional channel and sweet woods. The reaction is typically lower when you want to revamp volume in traditional other tools in order to ignite excitement in modern trade. That is one of the reasons. We're seeing a better evolution on those cells lately. The weather didn't help either. So it was an unseasonable rainy season that affected sweet baked goods, immediate consumption, and sweet baked goods in medium consumption is done in the traditional channel. All over Mexico, but also in the central. So, and we have noticed that there was less money in the market, especially in the center. Okay. But we are addressing those issues. We're trending better. We're developing price pack architecture in Sweet Bay Goods. The weather is being better now for our sales purposes. So I would say that it is a temporary effect, okay? I think there's also a macroeconomic effect that we're seeing. With the appreciation of the Mexican pesos, you know this better than me, only remittances, which is a very important driver for consumption in the country, it's been less Mexican pesos, although it has continued to grow every month and every quarter. In Texas terms, it has had a negative effect, and I think that this is also putting some additional pressure at that level of the socioeconomic level that is more dependent on remittances.

Yeah, that's a good point. Thank you very much for the call.

Good point, definitely. The next question will come from Alan Alanis with Santander. Please go ahead.

Thank you, and thanks for taking my question. A couple of questions, one regarding costs and the other regarding going back to salty snacks and packaged. Regarding costs, we're seeing the sugar prices at a 10-year high. I mean, it's over 40% higher year-to-date sugar prices. What's the impact that we should expect on this? I know that other commodity prices are not seeing as much increases but what's the impact that we should see in the United States and North America from this surge in sugar prices? That would be the first question. And then the question regarding salty snacks, the way I want to frame it is you've been extremely successful with Takis. How big is Takis and what are the chances that you can develop other brands and other salty snacks that you have in Mexico, in the United States of that magnitude? and of that success. Thank you. Yes. I can take the first one regarding cost of the impact from sugar. You're right. As you mentioned, what we see in record high prices for sugar in the last 12 months, we have seen an increase of over 50% in sugar now. First of all, we feel positive, as I mentioned, in terms of the commodity costs that we will pay, not only in the fourth quarter, but in the coming year. And we will start to see the decline in many of the commodities, being the most relevant one in our portfolio. We're finally starting to see these declining prices because of the hedging strategy that we have in place, that is really secure. And that's why I mentioned that we feel very optimistic about the emerging expansion in the software. We finally want to start to see some deflation. Even, not everything is positive yet. Sugar has been increasing. We will have an impact directly in sugar next year. Unfortunately, we cannot disclose the specifics by every commodity or raw material. What I can tell you to give you the right perspective is that sugar is less than 3% of our total cost of sale.

Very small.

But it's not as big as some other commodities, as in the case of wheat, of course. But when we try to see the same effect a year and a half ago, then we have to weather these many quarters of very high impact inflation effect on our P&A.

Got it. That's very clear. That's very, very clear.

And the reiteration of margin in the coming quarters is very useful. Okay. Thank you. Thank you, Diego. And maybe I can take the other one. Shorty is definitely one of our categories that is doing positive over the years. Very small player though. And definitely in some of the, let's say, mature salty snack markets for us, such as Latin Centro, for example, we have already started to complete the portfolio, taking advantage of the Mexican portfolio that could resonate more with the local consumer. Yes, definitely we're doing that. Got it. But what's the relevance? I mean, any order running through the scale of packages in the United States or any quantification of how much contributes to the U.S. business growth? Is it material? Is it not material? And unfortunately, we do not disclose that specific information. Okay. No worries.

Thank you so much. Congrats on the results.

Thank you.

The next question will come from Lucas Fiera with JP Morgan. Please go ahead.

Hello, everyone. I have two follow-ups.

The first one on the comments you made about the growth of private label, of consumers down trading, and also this view on the commodity prices going forward. The question is if you see risks of promotional activity picking up and eventually some price rollbacks. I know it's not common, especially in the U.S., but If you're in any specific category, you see a bigger risk of that happening. And also, you know, Mexico and other regions, if you see something similar. And the other follow-up is about your capital allocation. So you guys are being very active in especially buybacks, so that appetite remains in place with the share of the level they are and considering your priorities for capital allocation. Thank you. Yes, Rafa, if you want to, I can take the first one. Let me go back a little bit to 2022, because we need to have the right context of where we're standing. As far as you remember, 2022 was a very strong year in terms of stock line growth, both in volumes and even more because of price increases. So we needed to increase prices as we were facing a huge inflation effect from main road up there, and as I mentioned a minute ago, some minutes ago, particularly from wind. Now, if you see the numbers of 2022, it's hard to understand that having the price increases that we have, and really volume increases, and really productivity initiatives, and we lost 60 basis points on our EBITDA margin of 2022. So that can tell you a lot in the magnitude of the inflation impact that we have during that year. Now, during 2023, for the first quarters of the year, we still have a huge effect on the previous price increases, as every quarter has been passing through this kind of effect it's lower. So we're chipping these price increases. Just to give an example, in North America, the last round of price increases happened in October of 2022. So we're going to still have some positive impact from the last year price increases, but only the last round. So this year, what Because of what we did on the pricing architecture and on the planning of 2022, we didn't show the need to continue to increase price. Because of the changes that we have in place, as we provide visibility to the operations of the company through this strategy, we knew that we were going to start to have some tailwind effects in the fourth quarter. And if you remember when I provided the guidance for the full year 2023, I did mention that the second half of the year, and particularly the fourth quarter, we will start to see some deflation effects. Now, what I want to tell you overall is that even though we're starting to see commodities at a lower cost, this doesn't mean that we have lower costs than previously to 2022. 2023 is going to be a year in which if we do not recover 100% of what we lost on margins in 2022, we're going to be very close to recovering it. Now, again, remember that an important component of this margin increase has a capital behind it. There are a lot of productivity efforts that we put in capital in order to achieve that additional profitability. And we need to see the payback for that. So what I want to tell you is that even though we're positive in terms of commodities, it's not that we have space to think on being aggressive on promotions or even thinking on lowering our prices. Yep, and I can compliment on that. I would say that we are ready to be more attractive and more visible. and more accessible but this is done through price park architecture putting back money into the market promoting more innovations replicating what we have in in the market and other markets and in and basically being more active in trade spend but more on permanent exhibitions rather than high-end laws so it's again more attractive more visible more accessible

Okay. Excellent. Thank you very much.

This concludes our question and answer session. At this time, I would like to turn the floor back over to Mr. Diego Gaxiola for any closing remarks. Please go ahead, sir.

Yes. Thank you all for your time today. Please do not hesitate to contact us with any further comments or questions that you might have. Thank you.

Thank you. This concludes today's presentation. You may now disconnect your line at this time and have a good day.