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Hello and welcome to the Coca-Cola Femsa second quarter 2026 conference call. My name is Vinicius and I will 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 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. I would now like to hand the call over to Pamela Ortiz, Investor Relations Director at Coca-Cola Femsa. Pamela, please go ahead.

Good morning, everyone, and welcome to Coca-Cola Femsa's second quarter 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. 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 right hand feature in your Zoom toolbar. With that, let me turn the call over to Ian, our CEO, to begin our presentation about the second quarter results. Ian, please go ahead.

Thank you, Pame. Good morning, everyone. Before reviewing our second quarter results, I would like to take a moment to address the earthquakes that struck Venezuela on June 24th. This unfortunate tragedy resulted in loss of lives, thousands of injuries, and significant displacement across affected communities. It has impacted many people throughout the region, including employees of Coca-Cola Femsa de Venezuela and their families. We extend our deepest condolences to those who have lost loved ones and express our solidarity with everyone affected by this tragedy. Our immediate priority has been to support our employees and their families, as well as the impacted communities. With broader support from Femsa and the Coca-Cola Company, we are contributing to the humanitarian response, including the donation of more than 100,000 liters of water and other essential emergency supplies to communities in need. We remain closely engaged with the team on the ground, and will continue supporting our people and the broader community as recovery and rebuilding efforts progress. Now, let me walk you through our consolidated results. Our second quarter showed sequential improvement at a consolidated level, driven mainly by record second quarter volumes in Brazil, Colombia and Guatemala, where we continue to drive growth in the industry. At the same time, Mexico continued to face headwinds from the excise tax increase and the softer consumer environment. Against this background, we remained focused on implementing our sustainable long-term growth model, continuing to gain share across markets and categories, and capitalizing on the FIFA World Cup opportunity. The FIFA World Cup represented a brand-building platform across our territories this quarter, We executed a comprehensive 360-degree plan combining exclusive customer promotions such as panini stickers, special edition cans, FIFA merchandise, and our red-tide execution around stadiums, particularly in Mexico City, fanfests, and on-premise jams. This integrated approach strengthened consumer engagement, translated into incremental demand, and reinforced the positive momentum of our brands throughout the port. The final tally of the FIFA World Cup resulted in new highs in key Coca-Cola trademark brand engagement metrics such as reputation, positive buzz, purchase consideration, among others. Across our operations, reinforcing the platform's role as a long-term brand building investor. Moving on to our quarterly results. Consolidated volume for the second quarter grew 3.5% to reach 1.1 billion unit cases. This growth was driven mainly by volume increases across most of our operations, partially offset by a volume contraction in Argentina. Total revenues for the quarter grew 4.7% to 76.3 billion pesos. This increase is explained mainly by our volume growth and revenue growth management initiatives, which were partially offset by unfavorable mix and currency translation effects. On a currency neutral basis, total revenues increased 6.6%. Gross profit increased 8.8% to 35.9 billion pesos leading to a margin expansion of 180 basis points to reach 47.1%. This positive performance was driven mainly by favorable sweeteners and PET costs As compared with the previous year, reflecting the benefits of our disciplined hedging strategy, together with the appreciation of most of our operating currencies as applied to our U.S. dollar-denominated raw material costs. These effects were partially offset by carrier aluminum costs. On a currency-neutral basis, gross profit rose 10.7%. Operating income rose 9.1% to 10.7 billion pesos, while operating margin expanded 60 basis points to 14%. This positive performance benefited from the recognition of 265 million pesos in recovered insurance claims in Brazil. Excluding this insurance recovery, operating income which have increased 6.4% with operating margin expanding 20 basis points to 13.6%. Our operating leverage and expense efficiencies, particularly in labor and rent, drove this normalized margin expansion. These benefits were partially offset by higher freight and marketing expenses, as well as a lower operating foreign exchange gain compared with a prior year. Adjusted EBTA for the quarter grew 12.1% to 15 billion pesos, and EBTA margin expanded 130 basis points to reach 19.7%. Excluding the effects of insurance claim, adjusted EBTA grew 10.1%, and EBTA margin expanded 90 basis points to 19.3%. Finally, our majority net income grew 16.9% to 6.2 billion pesos, mainly reflecting higher operating income and a lower effective tax rate. This growth was partially offset by an increase in our comprehensive financial results, which Jerry will discuss in more detail later. Turning now to our key markets, let me highlight the main operational and strategic developments during the course. In Mexico, volumes increased 1% year over year. As I mentioned earlier, our quarterly results continue to reflect headwinds from the FIS tax increase and softer consumer dynamics. However, our sustainable growth strategy, supported by strong commercial execution and the FIFA World Cup, continues to deliver share gains, which will enable us to emerge stronger and return to growing the industry. Being a host country for the FIFA World Cup represented an important grant engagement opportunity for Mexico specifically. Incremental demand was primarily generated in host cities through fan fest activations and other consumer touchpoints, while non-host cities experienced a more limited impact. For its part, Powerade delivered an uplift of 150 basis points of market share while generating strong positive brand buzz. Supported by its prominent role within the P4 World Cup activations and a dedicated 360-degree commercial plan that included the launch of PowerEdge Zero and Libid Edition flavors. Perhaps more importantly, the quarter demonstrated the effectiveness of the strategy we implemented following the excise tax increase. Designed to deliver sustainable growth, strengthen our competitive position, and ultimately to return to growing the industry, This strategy was built on four complementary pillars. First, we adopted a differentiated revenue management approach, improving our relative price positioning in regions with high competitive intensity. As part of this pillar, we continued reinforcing affordability to returnable and multi-serve presentations. Returnable offerings, including our two-liter PET returnable presentation, have successfully expanded household penetration without cannibalizing our one-way portfolio. Second, building on the momentum of the Coca-Cola Zero playbook, we continued expanding this segment, which grew 24% year-on-year, while leveraging the FIFA World Cup, as I previously mentioned. Third, we strengthened our core flavors portfolio and heritage brands, ensuring consumers can access their favorite beverages across multiple price points and consumption locations. Fourth, we innovated and launched offerings in underrepresented segments, such as our recent launch of Ciel Aguas Frescas, which has been positively received by consumers. Supported by our state-of-the-art digital initiatives, these four pillars have translated into a stronger competitive position across channels. For instance, our Juntos Plus platform maintains strong momentum with digital sales now representing 38% of the traditional trade and 19% of total revenues. We strengthen execution at the point of sale by increasing purchase frequency, improving average ticket, and expanding cooler products. Looking ahead, we expect the consumer environment in Mexico to remain subdued. We will continue strengthening our competitive position through affordability, accessible price points, innovation, and digital execution, positioning us well to deliver profitable long-term profits. In Guatemala, volumes grew 3.4% year-over-year. Supported by a stronger consumer environment and disciplined execution across our portfolio. Economic activity continued to improve during that quarter, supported by stronger household consumption and resilient remittances, which grew 7.5% year-over-year. Looking ahead, GDP growth should remain supported by consumption, remittances, and favorable demographics. With a population increasing approximately 1.3% annually, which is above the broader Latin American average. In this context, our strategy remains focused on unlocking volume opportunities through market development and consistent execution. We continue to drive per capita consumption by expanding affordable price points and strengthening our one-way and multi-serve portfolios. This approach supported strong momentum in sparkling beverages, where our share increased by 90 basis points year-over-year. We also expanded our favors portfolio with a more competitive and differentiated portfolio, enabling us to reach more consumers and consumption occasions beyond the strength of Brandt Gold College. We continued accelerating customer expansion by capturing white space opportunities and investing in coolers. Our customer base grew 5.2% to approximately 156,000 customers, while cooler coverage increased 40 basis points to 78.8%. Overall, Guatemala offers a compelling combination of healthy consumer fundamentals We remain confident in our ability to convert these opportunities into sustainable volume growth and profitability over time. Turning to Brazil, where our volumes increased a solid 5.2%. Despite high interest rates, low unemployment and real income growth continued providing support for consumption. In this environment, our Brazil operation continues to outperform the industry through discipline, commercial execution, and digital capabilities, as well as by capitalizing on the FIFA World Cup opportunity. As a result, we continue gaining share across key categories within the non-alcoholic ready-to-drink industry. Our core portfolio delivers growth across our three main beds. First, within our Zero Sugar portfolio, Coca-Cola Zero Group 15% and Sprite Zero Group triple digits. Second, flavors reached double-digit growth supported by Sprite and Fanta. And third, still delivered 23% growth driven mainly by Monster, teas, and sport drinks with Powerade. In sparkling beverages, our single-serve mix was another highlight of the quarter, improving 2.6 percentage points compared to March 2026. reaching 28%. We drove this result by capitalizing on the FIFA World Cup and Panini exclusive stickers in our 600ml brand Coca-Cola presentations. These not only increased transactions, but also provided a positive tailwind to our profitability. We also continue to strengthen our commercial capabilities through digital transformation. We're leveraging Junctus Plus Advisor, Our next generation platform to provide supervisors and frontline teams with better insights, suggested ordering capabilities, and enhanced commercial execution. These investments are helping to improve assortment quality, increase average ticket, and further strengthen customer relationships. Looking ahead, we expect election-related spending and strong execution to support the second half of the year. While we continue to closely monitor regulatory developments that could result in a more challenging backdrop in 2027. However, we remain confident in the long-term growth opportunity of the Brazilian market and in our ability to continue delivering long-term growth. Turning to Colombia, volumes increased 17.7% year over year. Supported by minimum wage increase and improving consumer environment and strong execution across our portfolio. Macroeconomic indicators continue to improve during the quarter. Unemployment declined to 8% in May, its lowest level for that month is 2001, while consumer confidence reached the strongest sustained recovery since 2015. Although job creation remains supported in part by the public sector and labor informality remains structurally tight, the overall macroeconomic backdrop points to a gradual improvement in the consumer environment. Our affordability strategy in Colas continues to deliver results, supporting further market share gains in the one-way portfolio. At the same time, we continue strengthening our position in flavors, Delivering 27.2% quarterly volume growth, supported mostly by Cuatro, our grapefruit flavor, and Sprite. We also continued advancing our strategy in still beverages by prioritizing profitable growth in margin-accretive categories. Powerade and Monster were among the strongest performing brands during the quarter, allowing us to capture attractive growth opportunities while improving the quality of our portfolio. Our digital capabilities remained another important driver of execution. Through our Juntos Plus platform, we continued increasing customer engagement, helping us to improve ordering frequency, strengthen assortment, and deepen our relationships with our customers. Overall, Colombia delivered a strong combination of volume growth, share gains, and operating leverage, underscoring Colombia as one of our key growth marks. In Argentina, volumes decreased 2.8% year-over-year, mainly reflecting a truck driver strike that affected the beverage industry within our region, together with continued softness in consumer demand. Although macroeconomic conditions have continued to stabilize, the recovery in consumption has been slower than anticipated. Thank you for joining us. While strengthening our competitive position, contributing to a 100 basis point increase in our CSD market share. We also continue reinforcing our leadership in flavors, mostly capitalizing on the strong momentum of Sprite. Beyond sparkling beverages, we remain focused on growing profitable NCB categories, which posted year-over-year volume growth. While the competitive environment remains intense, Particularly with increased pressure from value-oriented and gig-brand offerings, we remain confident that our affordability strategy, disciplined commercial execution, and balanced portfolio position us well to continue strengthening our competitive position as consumer demand gradually recovers. This quarter once again demonstrated the value of our long-term sustainable growth model While Mexico navigated a more challenging consumer environment, we are laying the foundations to emerge stronger and grow our industry. In our South American operations, particularly Brazil and Colombia, we continue to deliver industry growth, strong volumes, and profitability. This geographic diversification, together with our ability to capitalize on markets, with stronger momentum while maintaining disciplined execution across the region continue to support our consolidated results. With that, I will hand over the call to Jerry to expand on our division's results.

Thank you, Ian, and good morning, everyone. Expanding our division's results for the quarter. In Mexico and Central America, our volumes increased 1.4% supported by volume growth across all territories in the division. Revenues were flat at 45.4 billion pesos as our volume growth was offset by unfavorable NICs and currency translation effects into Mexican pesos. On a currency neutral basis, revenues increased 2%. For its part, gross profit increased 3.9% to reach 22.2 billion pesos, resulting in a gross margin expansion of 170 basis points to 48.9%. This margin expansion was driven mainly by lower raw material costs, particularly For sweeteners and PET, reflecting the benefits of our hedging strategy, together with the appreciation of the operating currencies in the division as applied to our U.S. dollar denominated raw material costs. Operating income in the division declined 7% to 6.4 billion pesos, and our operating margin contracted 110 basis points to 14%. This decline is mainly explained by higher expenses such as marketing and freight coupled with a lower operating foreign exchange gain as compared with a prior year. These factors were partially offset by operating expense efficiencies such as labor. Finally, our adjusted EBITDA margin in the division remained flat at 9 billion pesos and 19.7% respectively. Moving on to South America. Volumes increased by a solid 6.9% to 426 million unit cases. This increase was driven mainly by volume growth in Brazil and Colombia that was partially offset by a volume contraction in Argentina. Revenues in South America increased 11.8% to 30.9 billion pesos, driven mainly by volume growth and revenue management initiatives, which more than offset unfavorable currency translation effects into Mexican pesos from most operating currencies in the division. On a currency neutral basis, total revenues in South America increased 14.1%. Gross profit in the division increased 17.7% to reach 13.7 billion pesos and gross margin expanded by 220 basis points to 44.4%. Driven mainly by favorable mix coupled with lower raw material costs and the appreciation of most of our operating currencies as applied to our U.S. dollar denominated raw material costs. These effects were partially offset by higher aluminum and secondary packaging costs. On a currency neutral basis, gross profit increased 20.1% year on year. Operating income in South America rose 46.5% to 4.3 billion pesos, while operating margin expanded 330 basis points to 13.9%. As Ian previously mentioned, this quarter we recognized insurance claims in Brazil for 265 million pesos. The improvement in operating income was driven mainly by operating leverage coupled with expense efficiencies such as rentals and labor. These efficiencies were partially offset by higher marketing and freight expenses. Finally, adjusted EBITDA in the division increased 35.6% to 6.1 billion pesos for a margin expansion of 340 basis points to 19.6%. Now let me expand on our comprehensive financing results. which recorded an expense of 1.3 billion pesos as compared to an expense of 1.2 billion pesos during the same period of the previous year. For the quarter, the increase was driven mainly by the following factors. First, we recognized higher netted interest expense mostly as a result of the issuance of new debt during the first quarter of 2026. Second, we recognize the lower gain in financial instruments of 88 million pesos compared to a gain of 154 million pesos in the prior year, primarily reflecting the valuation of matured financial instruments and lower rates in Brazil. Finally, these effects were partially offset by a higher foreign exchange gain of 96 million pesos during the quarter as compared to a gain of 55 million pesos in the same period of the previous year. This was driven mainly by the appreciation of the Mexican peso as applied to our U.S. dollar denominated net debt. As I mentioned during our previous earnings call, the global commodity environment remains volatile. As such, we continue to lean on well-established protocols and governance structures that enable us to plan, respond, and adapt effectively our hedging strategy. Providing an update for this year, we have hedged 65% of our PEP requirements, 96% of sugar, 98% of HFCS, and 73% of aluminum. In addition, following our policy, we are already taking hedges for 2027, resulting in 80% for sugar, 80% for HFCS, and 54% for aluminum. which allows us to reduce short-term volatility and provide visibility for the upcoming year. This disciplined hedging strategy together with our continued focus on cost and expense optimization provides greater visibility over our input costs allowing us to plan ahead with greater confidence while protecting margins over time. Let me briefly address our capital allocation priorities. First, we will continue investing behind the business to support long-term profitable growth. While our capital intensity is naturally moderating after several years of expanding our capacity, for 2026, we continue to expect CapEx to be between 7% to 7.5% of revenues. At the same time, we continue to invest selectively where additional capacity is needed. Recent examples include the inauguration of our new PET production line in Costa Rica and our new aluminum can line in Uruguay, both of which enhance our manufacturing capabilities and position us to support future growth across those markets. Second, we remain attentive to M&A opportunities that meet our strategic and financial criteria. We have a strong track record of disciplined capital deployment, and that approach remains unchanged. Third, returning capital to shareholders continues to be an important component of our capital allocation framework. We have been conducting a comprehensive review to evaluate the alternatives available, and we will share updates as this process evolves. Turning to sustainability, the Mexican Stock Exchange recognized Coca-Cola Femsa with the best total score in Mexico CSA 2025 award positioning us as the leading sustainability performer among the listed companies evaluated. We also receive the highest distinctions in the environmental governance and economic categories. These recognitions reflect the consistent execution of our sustainability strategy and its integration across our operations. Before turning over the call for questions, I would like to share an update regarding our investor relations team. As you may have seen in this morning's earnings release, Pamela Ortiz will become Director of Investor Relations. Pamela brings an extensive experience in capital markets and investor relations, including her previous role as Investor Relations Manager at Femsa. Jorge Collazo, who has been part of the Coca-Cola Femsa investor relations team since 2016, will take on a new responsibility as strategic planning director for Coca-Cola Femsa Brazil. In addition, Lorena Martin, currently investor relations manager, will assume a new role as FP&A manager at our LATAM division, while Natalia Zariñana will become investor relations manager. The team has been working closely together to ensure a smooth transition and continued support for our investors and analysts. With that operator, we're ready to open the floor for questions.

Okay, at this time we're going to open it up for questions and answers. If you have a question, please click on raise hand for audio questions or write it down in the Q&A session for reading questions. Please. Remember that company's name should be visible for your question to be taken. We do ask that when you pose your question that you pick it up your headset to provide optimum sounds quality. Please hold while we pool for questions. Our first question comes from Álvaro Garcia from BTG. Sir, your microphone is open.

Hi, Ian, Jerry, Pam. Thanks for the space for questions. I'll let other analysts ask about Mexico. I wanted to ask about Monster in Brazil. I was wondering if you could maybe unpack how much of that growth is coming from household penetration versus geographic expansion within your territory. And maybe if you could just comment from a broader perspective how much it complements your portfolio in Brazil. Thank you.

Hi, Alvaro. This is Camila. So, basically, the energy grains category in Brazil has been performing quite strongly. We have the CAGR of the last four quarters has been growing around 25% growth. So, overall, we believe that we are capturing share versus other competitors. It's been boosted mainly by portfolio innovation, which we have launched a couple of New Flavors, and also complementing a lot our strategy together with sports drinks and CFDs overall.

Álvaro, in terms of household penetration versus geographic expansion, coverage does continue to increase. We track it, it continues to increase, so there is not really geographic expansion, but improvement in coverages per se. and Improvement in Household Penetration. You have to, it's worthwhile to consider that this category has a bunch of tailwinds, including GOP ones. It's amazing what's happening in energy. Half of its volumes are now in zero sugar or no-cal offerings. So we only expect positive things from Monster. And it's Thank you very much. Thank you.

Our next question comes from Ben Tudor for Barclays. Sir, your microphone is open.

Good morning. Thanks for that, Ian, Jerry, Pam, and Alvaro. Thanks for letting me ask that Mexico question. So on that, it would be great if you could help us unpack a little bit the performance throughout the quarter, especially considering we had a couple of easier comes last year from very bad weather, if I remember right. So I want to understand a little bit the dynamics throughout the quarter and in line with that, what your expectations are Thank you very much. So, Ben, you're right. The volumes improved sequentially.

So if we look within the quarter, the first two months were negative, slightly negative, around the 3.5% range. And then June, it picked up to a growth of over 12%. But that, like you rightly pointed out, was mostly due because of the comps. We have seen trends continue to improve, so that's good for Mexico. And I think we have, you know, quite a bit of share cushion in Mexico. So going forward, I think this leaves us room to consider starting to catch up what we've had of the gap left in pricing with inflation. So things are looking slightly improved in Mexico, but I would say the environment competitive-wise and consumption-wise is still challenging. So you're right, you know, the pumps get easier. We have built a share cushion, but I wouldn't say we're off to the races in Mexico because there's still, you know, a sluggish consumer environment overall.

Perfect. Thank you very much.

Thank you. Our next question comes from Enrique Brustolini from Bradesco. Sir, your microphone is open.

Hello, everyone. Thank you for taking my question. I would like to follow up precisely on the point of pricing in Mexico. We saw, you know, another quarter of realized prices slightly down in your own year. So if you could help qualify the impact that MIGS has here from the impact, you know, that actual, Thank you. Hi, Enrique. So I'll give a broader context on the strategy, which we've touched upon in prior calls.

And then I'll let Jerry go through the impacts, which were mostly mixed. So what we did this year, going through the tax increase and knowing that we had a really challenging consumption environment as well, is we ended up passing about 85% of the total impact that we had between tax and inflation. So we didn't pass through everything. And the rationale with that was using our models and what we had learned from prior exercises, we believe these models are better outcome. So just to give context, in the last time we had had such a large EF price increase was 2013-2014. In that year, we transferred a lot of price. Thank you for joining us. Thank you for watching. Share responded. So now we have enough of a share cushion built that we can continue to pass through in price and catch up with inflation, which we hadn't done. So we should be able to finalize that in August. And with that caution that we have, we should end up the year positively. It's always an uncertainty because you don't know how things are going to react. But I think what our model tells us is we should be able to do it and end of the year, you know, improving our relative competitive position. That's overall as a strategy. And maybe, Jerry, if you can help expand on, you know, the price mix effects, which were the main culprit, I believe. Yeah.

Thank you, Ian, and thank you for the question, Enrique. As Ian mentioned, I think even though we usually expect when we see a tough disposable income situation like the one we're facing this year in Mexico, given the increase in the excise tax, we usually see mix shifting significantly towards more affordable packaging alternatives. But this year has been especially strong. Mix has been shifting significantly towards one-way multi-serve presentations, especially the three-liter presentations. And I would say that it's kind of a positive and negative situation. The impact that we see in mix flows through our P&L, but I think it's positive that we continue seeing consumers deciding for purchases within our portfolio of alternatives. So, we maintain our positioning with consumers within households. which should position as well for the recovery year after the excise tax gets cycled. So, as Ian mentioned, given the share that we've built, the share cushion that we've built during these past few months, we expect to close the inflation gap that we still have for the remainder of the year, which should give us a little bit of a tailwind for our P&L as the year progresses.

That's really helpful. Thank you.

Our next question comes from Fernando Olvera with Bank of America. Sir, your microphone is open.

Hi, good morning. Thanks for the space for questions. I have two follow-ups regarding Mexico and just one more question. The first one is related to volumes. Do you still see and the minus two minus four percent for for the year now based on year-to-date volume and consumers behavior and the other one is I remember that in the first quarter no competition was aggressive so if you can comment on that of how competition behaved during this quarter would be great and and the last question is regarding your margins in Mexico We saw gross margin expanding 170 basis points and then operating margin contracting 110. So can you give us more color about that contraction of how much came from freight expenses and how much from marketing? And in the case of marketing, I also want to check with you if the increase was mostly related to the soccer World Cup. Thank you.

Hi, Fernando. So, in terms of, you asked about volumes, competitive intensity, and then with that I'll hand it over to you, Jerry, I'll take that first. So, in terms of volume, I think, like I mentioned in Ben's question, so trends have started to improve partially because of the base effect of But with this improvement, I would say we should be able to move our guidance from the slightly negative to flourish. So, for us, it now should be flourish volumes, right? Plus, minus. So, that's what we should expect for full year. I would like to see the... How volumes respond once we finish the August adjustment to recover inflation? So that's why I'm still keeping flattish. Okay, Feb? Okay. In terms of competitive intensity, it remains very high in Mexico. But like I mentioned, we were quite conservative. We leveraged our models to the fullest, all of our intelligence. And it worked very well. So, I mean, we're gaining like half a point of share of NARTDs in Mexico. So, it's a lot of share gains, almost 0.7 in CSDs. So, everything in Mexico is green in share, everything, every single segment, stills, fruit drinks, teas, water, energy, sports drinks. So, we built a cushion. And like I said, now we can move. It'd be too early to say if we can adjust the guidance to above flash because precisely we need to adjust in August and see how consumers digest this completion of the inflation password. Jerry?

For your second part of the question, Fer, regarding operating margin, we did see impacts mainly coming from three factors. First one, freight. We saw a 20% increase in freight expense versus the previous year. Then we had, and I mentioned it during the prepared remarks, we had smaller operating FX gain as compared to the same period of last year, which accounted for a significant portion of that margin deterioration in this quarter. And third, and connecting it to your last part of the question, marketing expense was 9% higher This was the biggest factor impacting operating margin. And as you well point out, our budget for marketing this year was front-loaded for the first part of the year to support the World Cup initiatives that we, I think, executed quite well during the first half of the year.

Okay, so in that case, it's fair to assume that it will normalize in the second half?

We expect for the second half of the year a better comps in terms of marketing expense, but that should be the case. The fact that we can't foresee in the same way as VFX impact that we had during the second quarter. Great. Thank you, Ian and Jerry.

Thank you.

Our next question comes from Fraulein Mendez with J.P. Morgan. Sir, your microphone is open.

Hello, guys. Can you hear me well?

Yes.

Hi, Fraulein. Thank you. Hi, hi, hi. So, I just wanted to understand your thoughts and maybe the lessons learned from the growth in Brazil regarding the zero portfolio translated into Mexico. We are seeing, obviously, very strong growth, but how are you able to distinguish between how much of the growth of zero is, let's say, incremental to the category versus, you know, customers switching from the full sugar to the zero? And at what points Do you think zero becomes like the true growth driver for Mexico to grow beyond, let's say, the run rate that we have seen in the past couple of years?

I think your question is very, very important. What we've seen across markets when we start to implement the Brazil playbook for Coca-Cola Zero is this consistent either high single digit or double digit growth year over year. And it's very important that we follow all of those elements in the playbook. The first

Years of that playbook usually Coke Zero sources growth from competitors, juices, and even waters.

It doesn't cannibalize in a major way, at least at first. So for example, in Mexico, we're around 4% mix. So it's very, very small mix. In Brazil, we're at 30% mix. When we do start to see cannibalization, and like you said, Thank you for joining us. All of the rest, Mexico at 4%, Guatemala, I don't even think it's to 2%. The rest are around, you know, Colombia, 9%. There's plenty, plenty of incremental volume to come. And that's what we're seeing in Coke Zero. We're also starting to experiment and learn with Sprite. Sprite is... A jewel that the system has that we didn't exploit connects very well with Gen Zers and it's something that should also follow that type of trend. So we're betting a lot on Sprite, leveraging Sprite Zero and I hope to start bringing good news on Sprite going forward. But it's the same sort of playbook there. I don't know if that's helpful.

If I had a second question just on Brazil and Colombia, very strong results in the first half, second quarter. What could be different in second half or should we assume this run rate into the second half given what you're seeing on the ground?

I can start with that question, Freud. We expect Brazil to continue performing well in line to what we've seen. Colombia, you'll see an effect in the base, even though we do expect average daily sales to continue growing at the same pace that they've been growing during the first half of the year. Last year, during the second half of last year, we already saw Colombia recovering performance trends, so the comps are a little bit tougher in the third quarter and fourth quarter for that operation, but we will continue to see a healthy pace of growth coming from Colombia. Thank you very much.

Our next question comes from Renata Cabral with Citi. Leon, your microphone is open.

Hi, Ian, Jerry, Ken. Thanks so much for this space for questions. I just want to follow up on Mexico. On the first quarter, you mentioned that consumers traded more aggressively than expected into large remote service packs. So my question is if that behavior is stabilized during the second quarter, and if you're seeing consumers regularly returning to single-serve packages, or it is still mixed, it's still under pressure. And my second question is a follow-up regarding Brazil. You just said that it's continually expecting Thank you for joining us. Thank you, Renata.

I'll kick it off. As you well point out, the first quarter we did see a significant impact coming from MIGS. That carried on into the second quarter. Even a little bit more than what we had budgeted for at the start of the year, and we do expect that trend continues for the remainder of the year with significant higher mix of multi-serve presentations, especially one-way. Having said that, we are being very prudent in terms of measures that we're taking to support single serve performance. We have seen a bit of an improvement weather coming on in Mexico that usually helps single serve presentations. And we're also investing in single-serve dedicated coolers in Mexico, which should also help performance in single-serve as we move ahead.

You asked also, Renato, about the industry. So, NER-TV, and this is Brazil, NER-TV industry in Brazil, has been growing, I would say, the last three months. It started out the year, I think it was growing in January, then it declined in February, March, and it renewed April, May, June growth. This is the industry overall. CSDs moved from negative the first five months to flattish. We're talking volumes. And what's really driving the growth mostly was NCVs. Thank you for joining us. The industry is positive, but not at the level that we're doing, and that's why it's translating into share.

Thank you so much. Very good column.

Thank you, Roberto. Our next question comes from Enrique Morello with Morgan Stanley. Your microphone is open.

Hi, everyone. Thank you so much for taking my questions. So my question is on the margin dynamics in South America. So really strong performance there, even excluding the insurance gain. So if you could just explore a bit more details on the main underlying drivers behind the margin expansion and how you are seeing those drivers progressing throughout the year in the second half and in 2027 as well. So, for instance, if you could comment if Colombia, with the big volume increase, was an important driver, or if it was more related to the hedges of raw materials, the fact that you are cycling, or maybe some SG&E efficiencies or other COGS components that maybe we don't have much visibility, and also looking at your current hedge positions for the second half for next year. Thinking about Brazil and Colombia doing very strongly and Argentina struggling a little bit. When balancing those things out, how sustainable or how should we think about those margin expansion rates for the remainder of the year and for 2027 as well? Thank you very much.

Thank you, Henrique. So, for us, I think we're very happy with what we're seeing in terms of margin performance from South America. And we've talked about this for a while. Our strategic playbook for improving profitability is aimed specifically at Brazil and Colombia, which are the two main sources of improvement in margins in South America. And what we're most happy about is that we're seeing structural improvement in margin performance in both operations in line with that playbook. So, the main source of that improvement is operating leverage as we continue to grow and create efficiencies in both of our operations. It's very well translating into improvement in margins. So, we do expect that that trend continues as we move forward. I think in Brazil we're getting to a moment where it becomes competitive to the rest of our operations. In Colombia, we think we still have a lot of headspace of improvement in profitability that will continue to flow as time progresses.

We've worked very hard to do this, like I said, under our sustainable growth model. It's always, you know, leveraging our RGM expertise to the fullest to make sure we continue to lead industry growth and improve our relative competitive position. And it's a year-over-year process. You get into this virtual circle when you improve your relative scale, your size, your efficiencies, and you get a more orderly market. And that's what's happening there.

That's super clear. Thank you very much. Thank you, everybody.

Our next question comes from Tiago Bartolucci with Goldman Sachs. Please, go ahead, sir.

Hey, guys. Good morning. Thank you very much for taking my question. I have a follow-up on one of the latest comments from Jerry on his opening remarks regarding capital allocations. and the potential usages for the balance sheet, right? We understand this is still work in progress, no decision was defined, and certainly this is not a guidance, but when you sit with the board to discuss what are the best usages for excess cash, any color on how to think about dividends, ordinary, extraordinary, buybacks, the potential comfortable leverage you would be willing to get into and any time to start deploying this potential balance sheet we're leveraging would be greatly appreciated. Thank you very much.

Thank you, Thiago. Yeah, that's where we are. I think regarding, and I mentioned it in the remarks, regarding returning capital to shareholders, we're very aware of the situation that we're facing. We think we have a clear picture of the alternatives we have. We just have to take care of the timing issue of making the decision and taking it to the board. But we are in that process. And as mentioned in the remarks, we will let you know as this process evolves during the year.

That's right. Thank you very much.

Thank you, Gerardo.

Our next question comes from Rodrigo Alcantara with UBS. Sir, your microphone is open.

Hello. Good morning, afternoon, guys. Ian, Jerry, congrats, Dan, and George for your appointments. My question would be for Ian. In Brazil, right? As you correctly said, the growth mainly driven by share momentum. It's been a while since we have seen this strong performance when we compare to your largest competitor, right? It's been a while, not just a thing of one quarter or two. So my question would be here, Ian, how far is KOF from, let's say, its first share of the Brazilian market, just to understand the room for For Momentum to continue. And more importantly, right, I mean, your view, what's been driving these share games? Are we talking price competitiveness, market execution? Is it just like consumers liking more the products, the liquids that you sell, right? Just to understand these massive share games that we have seen, In the non-alcoholic system there in Brazil. And my second question would be, perhaps not very far to ask you, perhaps more a question to the Coke company. If in relation to innovation, you know, we saw recently one of your competitors launching a no-luck protein beer, right, in Brazil. And so far, you know, aside from the Coke Zero concept, which has been a success, right, We have not seen, you know, such a big thing in innovation. I mean, you can correct me if I'm wrong here, but from you guys, from the Coke system and all that, so my question would be here, I mean, what's next for Coke in Latam for this year? I mean, any big launches that you may be planning, any new categories that you may be interested in to explore? That would be very helpful, Ian. Thank you very much.

Hi Rodrigo, so I will talk first about you mentioned the headroom or the possible headroom in Brazil and then about innovation in general. So I think in terms of headroom in Brazil, there's plenty still first from per capita per se. for the industry. So there's still a lot of space to continue to grow the industry and expand the industry, and that's what we're doing. When you look by segment, then there's also headroom in terms of share. In the case of Brazil, I would say in CSDs, the main headroom is in flavors. What we've done there is amazing with the zero portfolio. So in Brazil, we're gaining 400 basis points of sharing flavors. It's wild what's happening in Brazil, and this is due to Sprite Zero, so we made sure we were very well positioned with excellent flavor profiles in the zeros category for flavors, and that's translated into very large share gains in flavors. We've never seen that, and that's doing well, and we're moving the segment towards where we have better positions. When you look at NCVs, I think we've made the smart choice of focusing on the profitable NCVs. And I would say, you know, energy, there's plenty of headroom. We are around 50% share, so we still have plenty to go there. Peace, it depends on innovation. And there, I agree with you that we've been a little bit behind the ball, and I'll talk about innovation a little bit in a general context, so I'll say it. We have that work to be done in these sports drinks. We're innovating well. We need to leave the industry there on oral enhanced hydration, so that's something that we're lagging. And in waters, it's really the incapacity that we've been missing, and we're investing behind that. We have a lot of stocks in water. So I would say for Brazil, there's still plenty of headroom, like I mentioned, within those categories. When we talk about innovation in general, the first message that I would like to give is I think I'm very confident that we've mapped out in every country, let's say the top three value buckets in terms of innovations that we need to address. and Coke Company is working very closely with us on addressing those top three buckets. They vary by country, but they're working very hard on that. Are we as fast as we could be? No. But what we've done or what the company is doing is they've reorganized themselves into three different marketing and development units in LATAM. So one is Mexico, one is Brazil, and the rest. And those are decentralized. So we do expect to see an increase in the pace of delivery of these products. So it's still to be seen, but the team is now in place and we should start to see more speed in the pipeline. The way these buckets of value have been identified, you know, it's clear and perfectly aligned with both companies. And I'm pretty confident. So, in Mexico, you know, we had a volume of opportunities in Aguas Frescas, Orange Aids, and Orange El Clasico. We just started delivering on Aguas Frescas. It went so well that we ran out of concentrate. Now we're going and fixing that. And the other two buckets should be coming in the fourth quarter and first quarter. So it's not as fast as we would like, but they will be addressed, and they will be addressed with fantastic formulas and brands. So I'm confident that when that starts to flow through in the fourth and first quarter for Mexico, we should start to see some really good results. For the other countries, the big issues are mostly, I would say, Still in profitable NCVs, where it be isotonics, oral enhanced hydration, and of course energy, moving to local production. So everything I believe that is large and relevant has been mapped and should be addressed, you know, between the fourth quarter and I would say the first half of next year. So I think the pipeline is pretty robust, Rodrigo. It could be faster, yes. But it's pretty robust and it should start to gather speed as the team is in place and starting to deliver without having to go through internal LATAM or corporate Atlanta protocols. So they've been empowered and should be going faster. So I'm pretty confident that Thank you very much. Thank you.

Thank you very much for joining us. We completed our omnichannel digital ecosystem in Brazil as our first market. That from there rolled out to Mexico and this year is finishing in the rest of our operations. And this is a very important factor because it allows us to much better understand the dynamics at the point of sale and much more effectively execute on those opportunities using our digital capabilities with guided missions and our loyalty program as an incentive mechanism to our customers to help us with execution at the point of sale. This has resulted in improving combined coverages in our stores. And we already see the benefits of that platform translating into the performance that we're also seeing in share in Mexico. Ian mentioned all our board looks green in share performance in Mexico. and we expect to see those tailwinds coming also in the rest of our operations as this year progresses.

Excellent, excellent. Thank you, Ian. Jerry, also regards to Maria Tila. Thank you, guys. Congrats on the results.

Thank you.

The next question comes from Alejandro Fuchs with Itaú. Sir, your microphone is open.

Thank you, operator. Thank you for the space for questions. First of all, congratulations to Pamela, Jorge and Lorena on the new responsibilities. I have two quick ones, if I may, in Brazil. The first one is, you know, after this strong In the last couple of quarters that we have seen, maybe Ian, I wanted to see if you could elaborate a little bit more how Juntos Close Advisor is helping the team on its execution and driving also part of this strong growth. That'll be the first one. And then the second one, I want to touch on your comment on regulatory changes potentially coming to Brazil next year. I wanted to see if that ends up happening, if the strategy would be similar to the implementation in Mexico this year, right? There's a price that I thought it was very interesting what you explained. But those would be the two ones. Thank you.

Thank you. I'll start at the end and then let... Pamela and Lori and Jerry to compliment me on the advisor figure. So, you know, it's still early to say how we would address a potential selective tax increase in Brazil. It's too early. We don't know whether that tax will be at a level That keeps us whole versus the taxes that we have. So remember, the amount of federal taxes in Brazil are being reduced and consolidated. So if that tax is set at a certain threshold, then it would be a wash and there wouldn't be a tax increase. If they set it up at a higher threshold, Alejandro Ponce García, Gabriel Ponce García It depends on that magnitude. So I can tell you this. If it would be a very large magnitude, then probably we might do something like the Mexico one. If it was a wash or there wasn't a large increase, then I think you could be a lot more comfortable in passing all of it through together with the tax. So it's still a little bit early to... Andres Alonso-Garcia From six by one day to five by two, and that also has an impact on costs and employment. And that's also, you know, something that I believe a lot of people are starting to realize how inflationary it's going to be and how disruptive it could be, given that Brazil is at absolute full employment and very tight labor markets. So you also have that to deal with whether it does or does not go through. More and more, I'm hearing that it might not go through because it's disruptive. So my main comment is there are too many variables either on the cost side with this label, potential labor journey adjustment, or on the magnitude or not of a tax increase to really give you a description of what we plan to do yet. You can go through the figures on advisor, please.

Regarding advisor, Alejandro, a few data points that I think are helpful. We have advisor rolled out in our Brazil and Mexico operation. We started out at Brazil. And we see consistent performance numbers in both operations, in both positive numbers coming from the use and the implementation of Advisor. We see improvement in geo-efficiency and the visitation of our customers. We see, and this is a very important part of the results that we're seeing in share in both operations, we see improvements in combined coverages, both for CSDs and stills. Larger in Brazil, that we're coming from more headroom and improvement in both CDs and in stills. In Mexico, even though we do have high combined coverages already, we still see improvements of about three percentage points in combined coverages for our whole portfolio. We see improvements and the quality of guided missions that we're executing at the point of sale, both from our resellers when they visit the store as well as From our customers that we recruit as part of our execution team using our loyalty program, 100% of our pre-sellers are using Advisor as their sales tool when they visit the store, which achieves the omni-channel experience, commercial experience and tactics for each of our customers. which is very, very personalized by customer looking to maximize value generated for the customer as well as for the company. So those are a few of the data points that we're following. We're expecting to launch Advisor in the rest of our operations through this year. We're working on this, so by next year we will be able to share performance improvements in the rest of Coca-Cola Femsa with Advisor rolled out.

That was super clear. Thank you very much, Ian and Gerardo. Thank you. Thanks.

Our next question comes from Carlos Laboy. With HSBC, the microphone is open.

Carlos?

There we go, sorry about that. There you are. Here we are. In addition to Xero, have you reformulated brand Coca-Cola this year for lower caloric content than Mexico? And if so, can you share with us maybe some of the benefit that this is having in terms of lower sugar costs for your gross margins? And then second, so what do you attribute the growth in one-way mix while the consumer remains really banged up here in Mexico? Is the refillable proposition price gap working well enough, or is there something else at play here that is not giving you the refillable lift at a time like this?

Hi, Carlos.

So, the first point of your question, we haven't reformulated to reduce calorie content in the original soft flavor formulas of Coke or flavors in Mexico. So, we haven't done that. So, there's nothing there of uplift by reducing, you know, Full-calorie sweeteners or to increase artificial sweeteners mix, that is not something that we're doing there. In terms of why I would say why multiserve one way is performing better than refillables, it's not that refillables are performing poorly. It has to be looked at through more through the lens of the price points. So we're analyzing, so we are doing well with refillables to single serve, sorry, not single serve, one-way multi-service is performing better. And what we're analyzing is we move the way in the refillables From a price point that we need to get to, the formula where it gets is with exactly parity price over our main competitors. And for that, we would need a two liter respite. But it's a relevant investment, and what we're looking at there is first a pilot to see if it makes sense before we go down that route. So we're off of the price point where we need to be, and we would need to have a two-liter rest pit. So if that works, Mexico would be the only market where we would have three different multi-serve returnable presentations. So all markets have one glass and one PET multi-serve returnables. That no longer gets us to the price point where we need to be in Mexico, Carlos. We need to have a third one, a third PT one. So before we go down that route, the pilots need to show us what the metrics are accretive.

Well, that's very helpful. Thank you so much, Ian.

Thank you, Carlos.

The next question comes from Emiliano Hernandez with GBN. Your microphone is open.

Hi Ian, Jerry, Tame, congrats on the results and thanks for the space for questions. Maybe just a quick follow-up in Mexico. Could you comment on the regional performance? How did the southeast perform relative to the central region? Are you seeing meaningful difference in consumer demand across these geographies? Just putting aside the World Cup booths, which are to assume have more benefits in the central region. Thank you very much.

Thank you, Emiliano, for the question. We saw uniform performance across all our regions. We had seen Southeast underperforming in the first quarter, so we're happy to see Southeast Mexico now performing significantly better, but I would say performance during the quarter was uniformly positive across all of our operations. The World Cup, as Ian mentioned in prepared remarks, I think was a very successful event in terms of The way that the consumer and market in general interacts with the brand, especially the Coke brand, as well as Powerade, which were the brands that were flagship for the World Cup. So that was a very positive development. But we're happy to see the regional performance across our territories being uniformly strong.

The next question comes from Antonio Hernandez with Actinger. The mic is open.

Hi, good morning. Congrats on your results. Just a quick one regarding raw materials. You already mentioned your hedging strategy and how far you are in terms of hedges for this year and next year. But I wanted to get a sense if these raw materials are maybe, you know, if you're facing higher prices or how do you see overall raw materials for the next year, even with hedges? Thanks.

For this year, as compared to last year, we up to now have seen this benefiting our performance. As you well mentioned, and I mentioned in the prepared remarks, we have a significant portion of our exposure hedged for this year, so that certainly has helped. I would say the spot prices for raw materials are very volatile and very dependent on developments in the Middle East. We do see that volatility, especially on energy-related raw materials. But given that we have this hedging process in place that allows us to have or reduce volatility significantly on our results, we continue benefiting from that reduction in volatility. And it's especially helpful in years like this one where you see pressure to the upside in prices. But it works well in any scenario because it allows us to provide more certainty to our operators for them to focus on market decisions and pricing decisions related to market dynamics rather than volatility coming from outside factors. So that's a little bit of where we are in terms of our hedging strategy and raw material environment. Okay, and these hedges for next year, how do they compare versus this year's hedges? Yeah, for next year, we already started positioning our hedges also with a very attractive positioning, especially on sweeteners, both HFCS as well as sugar. On packaging, we also already have a pretty high position in hedging for 27 in aluminum. What we still have or are lagging a little bit behind is on DT hedges for next year. We're looking for alternatives to start hedging for next year, and you may imagine that with volatility and uncertainty coming from the Middle East, suppliers are waiting a little bit to see how this evolves so that we can start positioning our hedges for next year. So that's, I think, the packaging exposure that we have for 2027.

Okay. Perfect. Thanks a lot. Have a nice day.

Thank you.

Next question comes from Felipe Ucaros with Scotia Bank. Your microphone is open.

Great. Thanks, operator. Good morning, Ian, Jerry, and team. Thanks for the space and congrats to Pam. I think most of my strategic questions were asked, but I have a quick one on the possibility of a stronger than usual El Nino. Looks like you're pretty much covered on the hedging of raw materials that could move because of El Nino. So I think the risks are probably down to the top line at this point, whether you have a lot of precipitation or cold conditions versus whether dry or hot. Just wondering how you see that mix across your regions. Is this a phenomenon that makes things better? I know, for example, in Colombia, where I grew up, it does get drier and hotter. But just wondering how that mix comes out across the entire region that you cover. Thank you.

Hi, Felipe. So, obviously, it's very dangerous to go into forecast this. This type of event, so like you said, what we can mention is what's happened in the past. So what's happened in the past for COVID, it's been positive, except for southern Brazil and Argentina, Europe. So overall, it's very positive, let's say from Paraná up north, in Brazil it's positive, and it tends to be More precipitation from southern Brazil, Uruguay, and Argentina. So that's like the overall mixed effect for cost. It's still, you know, it's always a challenge to forecast the weather, but like you said, that's what we've seen in Colombia, Venezuela, Central America, in most of our territories in Mexico, but it's more rainy for south Brazil, Argentina, and Uruguay.

Up to now, Felipe, we haven't seen significant disruptions in weather patterns. So, even though we do expect that the phenomenon materializes as the year progresses, up to now, I think it's been fairly in line with typical weather patterns across the board.

Very, very, very helpful comments. Thanks a lot, guys. Thank you.

The next question comes from Ricardo Alves with Morgan Stanley. Your microphone is open.

Hey, Ian, Jerry. Nice chatting with you. Thanks for the follow-up. We thought that this quarter was remarkable, and it made us think about the last few years when I guess that this question is more to Ian, but when you assess the strategy you've implemented over the past three years or so, I think that there are multiple clear successes, right? The penetration of Juntos Plus was quite impressive, the expansion of No Sugar that we discussed today, No Sugar Beverages, the share gains in Mexico. I would be curious, however, on, you know, the areas that are still concerning you. What are you thinking about when you're looking at the next couple of years if we're assessing again the strategy? Because I think that this was a long conference call when we talked about many, many different things, right? Shorter term issues like the soft Mexican consumer and how you are tackling the affordability in Mexico. Thank you, Ricardo.

I believe that you asked in terms of risks, and I think we covered those. So in terms of risks, really, we would be, you know, continuing below potential growth in Mexico would be something that would be a concern for us. There's plenty of potential in Mexico, and finding a way to unlock that and translating into consumption. And specifically the main concern, although I think there could be a silver lining and a positive outcome here, would be the potential for the Brazil tax and the labor reform. So I would see those would be the major risks out there. Everything else, you know, we happen to be in a vibrant industry in a part of the world where we have positive demographics, and disposable income trends over the next 10 to 15 years. So there's a lot of tailwinds to us. And I think we've gone into a very positive flyaway in every country where we're expanding relative scale, which gives us a more rational industry and we can focus on growing the pie. I think, I don't remember who made that question on the innovation piece. We could do a little better there, but I'm also pretty confident on how that thing goes. So, you know, I wouldn't say that anything is taking over my sleep, except, like I said, whether we continue with a slower-than-potential growth in Mexico, although we would be outperforming there, and if in Brazil things get to an adjustment year in 27 because of attacks, and potential labor journey. But that's basically it. We're very fortunate to be in the industry we are in. We have a great partner, great formulas, great brands. I wouldn't substitute my portfolio for anyone else's. And with the introductions that we should be doing, you know, and the digital enablers, Ricardo, I think it's just giving us an edge and making it, I wouldn't say easy, but making it... Every day, a little bit more targeted approach with ourselves. We're pretty confident on how things are moving with those two risks that I highlighted.

Perfect. That was very clear, Ian.

Thank you so much. Thank you, Ricardo.

This concludes the question and answer section. At this time, I would like to turn the floor back to Mrs. Pamela for any closing remarks.

Thank you all for your interest in Coca-Cola Femsa and for joining us on today's call. As always, the IR team are available to answer any of your remaining questions. Thank you. Have a great week.

Thank you. This just concludes today's presentation. You may disconnect now and have a nice day.