10/25/2024

speaker
Melissa
Conference Coordinator

Hello and welcome to Coca-Cola FEMSA third quarter 2024 conference call. My name is Melissa and I will be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call, your lines will be on listen only. If you require assistance at any point, you may press star zero to be connected to an operator. I'll now turn the call over to Jorge Creasso, Investor Relations Director. Please go ahead.

speaker
Jorge Creasso
Director of Investor Relations

Thank you, Melissa. Good morning, everyone. Welcome to this webcast and conference call to review our third quarter 2024 results. Joining me this morning are Ian Craig, our Chief Executive Officer, and Gerardo Cruz, our Chief Financial Officer. As usual, after prepared remarks, we will open the call for a question and answer session. Before we proceed, Please allow me to remind all participants that this conference call may include forward-looking statements and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties that can materially impact the company's performance. For more details on this, please refer to the disclaimer in the earnings release that went out earlier this morning. With that, let me turn the call over to our Chief Executive Officer to begin our presentation. Ian, please go ahead.

speaker
Ian Craig
Chief Executive Officer

Thank you, Jorge. Good morning, everyone. Thank you for joining us today. Our third quarter results reflect the resilience of our business and the ability of our team to execute our strategy with local focus. Despite facing unfavorable weather in Mexico and the tough comparison base from the previous year, Our revenues and operating income grew double digits year on year. Strategically, we continue implementing initiatives to grow our core business and improve our service levels. In digital, we continue progressing with Juntos Plus, reaching 1.2 million active users, while enhancing our user experience with the development of new features. By the end of the quarter, 56% of our customer base were digital buyers, six percentage points ahead of the previous quarter. We are also encouraged with the rapid adoption of Premia Juntos Plus, our loyalty program, which reached more than 920,000 enrolled clients, a 21% increase versus the prior quarter. Aligned with our strategic priorities, we remain committed to removing infrastructure bottlenecks to enable sustainable long-term growth. To this end, we are not only increasing CAPEX investments, but also improving the efficiency of our bottling lines and optimizing the layout and density of our warehouses across our territories. As with other parts of the world, weather events have increased in frequency and strength. In less than a year, the state of Guerrero in southern Mexico is once again facing the consequences of a strong hurricane. With this in mind, we want to express our sincere support to all the people affected by Hurricane John. As part of our protocols, we have taken action to ensure the well-being of our collaborators and their families, as well as community actions undertaken together with PHMSA and our partners at the Coca-Cola Company. As we usually do, I will begin this call by summarizing our consolidated results for the quarter. Then, I will take a moment to dive deeper into key developments and highlights from our territories. At the close, I will hand over the call to Jerry, who will walk you through our division's performance. Now, moving on to review our consolidated results for the third quarter. Despite double-digit volume growth in the previous year, we increased our consolidated volumes by 0.8% to reach 1.04 billion unit cases. This growth was driven mainly by Brazil, Guatemala, and our Central America territories. offsetting volume declines in Mexico, Colombia, and Uruguay. Sparkling beverage volumes outperformed, driven mainly by brand Coca-Cola's 2.8% growth. Still beverages grew 4.9%, and bottled water remained flat, offsetting mid-single-digit declines in flavors and bulk water. Despite the moderation in the pace of volume growth, total revenues for the quarter grew 10.7%, reaching 69.6 billion pesos, driven mainly by our revenue management initiatives and favorable mixed effects. Unlike previous quarters, this quarter saw a more neutral currency translation impact, with currency neutral revenues increasing 11.3%. The positive translation effects from most operating currencies into Mexican pesos were balanced out by the depreciation of the Brazilian Real and the Argentine Peso. Gross profit increased 11.3% to reach 32.1 billion pesos, leading to a margin expansion of 20 basis points to reach 46.1%. This increase was driven mainly by top-line growth, easing raw material costs, and favorable hedging strategies. However, these effects were partially offset by an increase in purchases of finished products in Brazil, higher fixed costs, and the depreciation of the Argentine pesos. Operating income increased 13.9% to reach 9.6 billion pesos, with operating margin expanding 30 basis points to reach 13.8%. The positive effects from top-line growth and favorable mix coupled with cost and expense efficiencies, continues to mitigate margin pressures from higher operating expenses such as labor, marketing, freight, and maintenance. Importantly, our operating income for the quarter includes a favorable effect of approximately 340 million pesos driven by the recovery of insurance claims in Mexico related to the impact of Hurricane Otis in Guerrero. which affected the region in October last year. Excluding this effect, our operating margin would have contracted 10 basis points to 13.4%. Adjusted EBITDA for the quarter increased 18.4% to reach 14 billion pesos, and adjusted EBITDA margin expanded 130 basis points to 20.1%. Finally, our majority net income increased 8.9% to reach 5.9 billion pesos, This increase was driven mainly by operating income growth, which was partially offset by an increase in our comprehensive financial results and in income taxes. Now, expanding into our operations highlights. In Mexico, our volumes declined 1.5% compared to double-digit growth last year. This quarter's performance was affected by 50% more rainfall and lower temperatures than the previous year. Additionally, consumption patterns during the quarter moderated, driven by a deceleration in private consumption growth and overall economic activity. Against this backdrop, we continued implementing initiatives aligned with our priority to grow our core business. For instance, the implementation of our revamped portfolio architecture enabled brand Coca-Cola volumes to remain stable year-on-year. driven by 6% growth in multi-serve one-way presentations and 7% growth in zero sugar. In steels, growth was driven mainly by strong performance in brands Powerade, Fuse, and Monster, as well as our Santa Clara dairy portfolio. In line with this initiative and our commercial prowess, our team has focused on expanding our customer base, successfully adding 70,000 new customers in Mexico year-to-date. Furthermore, we continued advancing our digital transformation with Juntos Plus. This quarter, we added approximately 70,000 monthly active buyers to our app, reaching 405,000. Today, in Mexico, digital orders represent more than 40% of our total, supported by the rollout of our loyalty program with more than 260,000 customers redeeming points. Looking ahead, we are confident in the prospects for growth in our Mexico territory, driven by the continuation of consumption drivers, such as increases in disposable income from real wage growth, social programs, infrastructure projects, and nearshoring trends. Consequently, we remain committed to expanding our manufacturing capacity by 4% in 2024, including a third new bottling line that is expected to begin production next month. In terms of our workhouse capacity, we are expanding pallet positions by more than 25% as compared to 2023, adding four new distribution centers coupled with layout optimizations and increased productivity. Notably, we have expanded our primary distribution fleet by 13% and secondary distribution fleet by 6%, strengthening our ability to meet growing demand in Mexico. Moving on to Central America, volumes in Guatemala increased 7.5%. Our initiatives to grow the core business continue driving outstanding results in a market that enjoys a young and growing population where consumers are moving from rural to urban areas. Guatemalan consumers are looking for convenience and affordability while rapidly increasing digital adoption. All these factors are tailwinds for long-term growth. To maintain this rapid volume pace, we are focusing on capturing white spaces in the market and improving our service levels. For instance, in 2024, we have increased our total customer base by 7% year-on-year, adding 9,000 customers, while our digital line base doubled as compared to the previous year. As we have mentioned in previous calls, Guatemala has doubled its volume since 2017. Therefore, we need to increase production, warehouse, and route-to-market capacity to enable future growth. To this end, we have added two production lines in 2024, and we expect to add two more next year. Alongside these efforts, our supply chain team is increasing the number of routes by 17% in 2024 as compared to 2023. Now, moving on to our markets in South America. In Brazil, despite the suspension of our plant in Porto Alegre, we continue to deliver consistent volume growth of 6.3% year-on-year on the back of favorable weather and improving macro fundamentals supported by positive consumption patterns. We have continued to improve our service levels versus the prior year, reducing unavailability as well as increasing our client count and visits. which have supported our positive results. Additionally, our robust 360-degree plans, together with a Coca-Cola company for Coca-Cola Zero Sugar, have continued to accelerate its volume growth to reach 59% year-over-year. Regarding sports and energy drinks, brands Powerade and Monsters have achieved double-digit volume growth of 52% and 15% respectively. leveraging the Olympics, Copa America, and Copa Libertadores, as well as capitalizing on other market opportunities. Year-to-date, our multi-category revenues, excluding beer, grew 24%, This growth led our multi-category revenue mix without beer to reach 2% during the quarter, aligned with our ambition to reach 5% of revenues in the coming years. In digital, half of our clients are placing orders on a weekly basis with Juntos Plus. Additionally, our loyalty plan continues to gain traction with more than 100,000 clients redeeming points year-to-date. We have also launched a pilot of our new Salesforce Automation Tool, Juntos Plus Advisors, which has already delivered promising results. Powered by advanced AI models, Juntos Plus Advisors enhances our Salesforce capabilities, enabling us to support our clients to reach their full potential. This tool significantly complements our customers' omnichannel experience, offering a more seamless and personalized interaction across all touchpoints. We expect to gather learnings from this initiative and expand the rollout to the rest of Brazil and other markets in 2025. Finally, our recovery plan to reopen our facility in Porto Alegre is moving according to expectations. We have now resumed operations in our distribution center, initially at partial capacity, while bottling of production is expected to resume gradually in the upcoming month. We expect to operate at full plant capacity during the first half of 2025. In Colombia, as was the case during the second quarter, we continue to see a decline in consumer confidence and household expenditures. Consequently, our volumes for the quarter contracted 4% year on year. In this environment, Our team implemented initiatives to provide affordability to our consumers in both single-serve and multi-serve refillable bottles. As a result, we have increased our refillable coverage, driving 6% volume growth in these presentations year over year. Additionally, our team in Colombia remains focused on expanding our customer base. As a result, we have added more than 22,000 customers, 6% ahead of year-end 2023. Despite softer top-line growth in Colombia, our team's effort in driving cost and expense efficiencies is driving profitability improvements. Finally, our quarterly performance in Argentina. Although the impact on consumption during the year was worse than expected, macro indicators such as monthly inflation have continued to largely improve, piercing the 4% monthly inflation figure. To best navigate this environment, our strategy is focused on maintaining our customer base and household penetration to be well positioned for the eventual economic recovery. This strategy has allowed us to maintain attractive price points as we offer convenience and promotions to our consumers. So far, this approach is working, as we have been gradually recovering volumes throughout the year. Consequently, we are reporting stable volumes for the third quarter compared to the previous year. At the same time, our team continues leveraging rigorous cost and expense controls while accelerating digital as a labor. Year-to-date, our digital client base has doubled, and digital orders represent 30% of our total orders in the traditional trade. As we have mentioned in previous calls, we anticipate a gradual recovery in Argentina as our team continues executing a playbook that is allowing us to outperform and emerge stronger. Reflecting on the first nine months of the year, we have progressed along the three key drivers that have been a priority for the year. Build on the growth momentum of our core business. Take Juntos Plus version 4.0 to the next level with the deployment of advanced AI capabilities. And three, continue fostering a customer-centric and psychologically safe culture for Coca-Cola FEMSA. As we enter the final stretch of the year, we remain committed to our strategy and the implementation of our sustainable long-term growth model. With that, I will hand the call over to Jerry.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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