Coca-Cola FEMSA, S.A.B. de C.V. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Support for Affected Communities: Expressed support for those affected by storms in Mexico and condolences for the passing of Board member Ricardo Guajardo Touché.
• Consolidated Results: Consolidated volume declined 0.6% to 1.04 billion unit cases. Revenues grew 3.3% to MXN 71.9 billion. Gross profit increased 0.9% to MXN 32.4 billion. Operating income increased 6.8% to MXN 10.3 billion. Adjusted EBITDA increased 3.2% to MXN 14.4 billion. Majority net income increased to MXN 5.9 billion.
• Market Performance:
  • Mexico: Volumes declined 3.7%. Implemented initiatives to incentivize demand, recovered share in modern trade, and adjusted price pack architecture.
  • Guatemala: Volumes increased 3.2%. Gained share in key categories. Juntos+ and Juntos+ Premia growing.
  • South America:
    • Brazil: Volumes increased 2.6%. Share gains in nonalcoholic ready-to-drink. Coca-Cola Zero grew 38%. Juntos+ user base expanding.
    • Colombia: Volumes grew 2.9%. Share gains in brands. Digital adoption growing.
    • Argentina: Volumes increased 2.9%. Focus on affordability, single-serve mix, digital, and lean cost structure.
• Cost and Supply Chain: Supply chain team reached savings commitment, generating $90 million year-to-date. Hedging strategies in place for commodities.

Segment Performance

• Mexico and Central America: Volumes declined 2.7% to 612.1 million unit cases. Revenues decreased 0.2% to MXP 42.5 billion. Gross profit decreased 2.6% to MXN 20.2 billion. Operating income increased 1.1% to MXN 6.8 billion. Adjusted EBITDA declined 1.4%.
• South America: Volumes increased 2.6% to 423 million unit cases. Revenues increased 8.7% to MXN 29.4 billion. Gross profit increased 7.2%. Operating income rose 19.7%. Adjusted EBITDA increased 12.6%.

Guidance

• Mexico: Expect challenging volume performance in 2026 with low to mid-single digits decline due to excise tax increase.
• CapEx: Delaying CapEx in Mexico, pushing out projects to align with volume expectations.
• Tax Impact: Anticipate impact on pricing power, expecting limited pricing above inflation.

Risks

• Macroeconomic Challenges: Soft macro background in Mexico affecting volumes.
• Excise Tax Increase: Impact on pricing and volume in Mexico.
• Weather and Natural Disasters: Impact on operations and communities in Mexico and Brazil.
• Argentina Elections: Potential impact on consumption and economic stability.

Question and Answer

• Q: A couple of questions. I think that on our side, the main surprise of the quarter came on Mexico and Central America profitability. When we try to calculate the adjusted margin, so taking out the insurance gains from last year, we actually see Mexico and Central America margins up about 50, 60 basis points, if I'm not mistaken. So clearly, a big improvement from the 200 basis points decline that we saw in the second quarter. So to us, that's a remarkable improvement, obviously. But when I look forward, I'm interested in -- is this something that was mostly driven by a better operational leverage because volumes improved on a sequential basis? Or is it much more about internal initiatives and cost-cutting initiatives that you may have put in place to adapt to a new reality of volumes? So I just wanted to go a little deeper on eventual efficiencies that you are looking within KOF in Mexico and maybe Central America because we don't have the breakdown exactly. So that would be my first question to explore a bit more the improvement on profitability.

A: Gerardo Celaya: Thank you, Ricardo. I'll jump on the first one, first on profitability on Mexico and Central America. And there's a few parts to this question. So starting first on gross profit. We are continuing to see pressure on gross profit, even though we see volumes performing better versus last year, that's mostly related to having a lower base from the third quarter of last year. But we are seeing some gross profit pressures coming from mix that are affecting at the gross profit level. But going further down the P&L, the main reason for us turning around our profitability are savings initiatives. We're working all across our P&L to identify and execute savings initiatives starting from raw materials cost and expenses that has been a tailwind for us this quarter. We're optimizing marketing spending. We went through also restructuring in our teams to adapt to our current volume conditions, also preparing for what we're expecting for next year and the supply chain initiatives and other smaller savings initiatives that we are working on. And also, there's a virtual effect that you see in EBIT margins also that we are benefiting from. This is related to operating expenses, accounts payable denominated in foreign currency with a peso -- with a strong peso that is providing also relief to our EBIT margin as well.

• Q: Alejandro Fuchs with Itaú. Congratulations on the results. I have just one very brief one related to CapEx. I saw the comments Ian here and on the release about kind of rethinking CapEx a little bit for next year. We have seen at least 3 years of high investments. I wanted to see if you can share a little more color what are the initial thoughts, right? Where would be kind of the savings in CapEx coming from? And this is -- is this just a delaying of the CapEx, as you were saying with volume recovery probably 2027. So if you could give us a little bit more detail, that would be very helpful.

A: Ian Marcel Craig García: It's exactly that, Alex. So let me give you an example. And it's mostly in Mexico but it's in a couple of other countries where volumes weren't as high as we expected, for example, Guatemala. Let me give you the example of Mexico. We were putting in a couple of new lines, 3 new CDs. The lines are going ahead as planned but the distribution centers, for example, we've taken the land site but we're not going ahead with the construction. Because the worst thing that we can do is if we're going to have a low to mid-single digits volume decline next year due to the tax is to put in 3 new distribution centers and have those distribution centers be unproductive. You just get the extra depreciation, labor cost and you don't need it if our volumes are going to be facing that contraction from the tax. So it's really pushing out Mexico 2 years out. That's basically it.

• Q: Lucas Ferreira with JPMorgan. Ian, first of all, a follow-up on your comment now. You mentioned low single digits decline in Mexico. Was this just sort of to illustrate or this is the number you are working with for Mexico next year? That wasn't exactly my question. My follow-up on the tax story. If -- well, first of all, the transition towards that around 30% reduction in the calories for the sugary drinks, how fast you guys are thinking on getting there? And if you think there could be any sort of impact on the flavor, on the consumer adoption, anything like this you can comment on sort of the risk of going towards that 30% reduction? And then the other question I have is, if this adjustments towards a sort of a new more leaner structure for Mexico right now, if it's -- how far we are from getting there? So you mentioned the CapEx. Is there anything else to be done still on the expenses side, cost side that you can help us understand to better model Mexico next year? And if I may, a second point is on Brazil, another clarification. If you look at your operations, let's say, in regions outside Rio Grande do Sul with the ramp-up of the plants, how the business is working? I mean you mentioned market share gains. Is this like sort of a better go-to-market strategies? Or is there anything related to pricing there, execution? So just to understand a bit how the operations, let's say, excluding the effect of the ramp-up of Rio Grande do Sul is going, if you're seeing sort of a bad weather, consumer dynamics? I'm asking because we see a lot of other consumer companies complaining right about the consumption in Brazil kind of slowing down. So wondering if you also noticed this happening in Brazil.

A: Ian Marcel Craig García: So let me -- there were several points there, Lucas and I'll ask Jorge to help me on some of those. But I would say the main point is whenever you see a more challenging economic environment or disposable income for consumers and things get tight, usually single-serve mix suffers and you move into multi-serve. And within multi-serve, you move into multi-serve returnables. And that's just a natural mathematical result of looking for lower price per liter, okay? And that correlates a lot with transactions. So that's the main directional point. What we do then is, focus a lot on the magic price points. And if you take that -- I mean, I think transaction, like you said, is important. But really the biggest, biggest thing is maintaining our volume base and our household penetration. So for us, the main focus that we have now in Mexico, when we look at our relative competitive position, the biggest gap is in traditional channel, refillables and that's what we are addressing. And what we're addressing that is with the 1.25 liter glass at the MXN 20 price points, which competes with Pepsi 1.75 liter and 2-liter Red Cola at that same price point. So we didn't have anything there. And now we're having the 1.25 liter glass there and that's a very big and important price point. It also drives transactions when you look at multi-serve per se. And then upsizing our 2.5 liters [indiscernible] PET to 3 liters and that's around the MXN 33, MXN 34 price point, which competes with 3 liters [ one way ] of Pepsi and Red Cola. So obviously, we have a very good brand that commands a brand equity lead and that allows us to be able to inconvenience our consumers with a returnable presentation that they have to carry to and from the point of sale but that really is the way that we're able to have that revenue management initiative there. That's our big focus per se. You see all of the transaction growth, for example, the biggest example is Argentina, will recover naturally with single-serve mix as the economy improves. So I would say the biggest and most important question for us with the excise tax increase looming is maintaining our household penetration and volume base really more than the transactions.