Coca-Cola FEMSA SAB de CV Q3 FY2026 earnings call

Corporate Strategy and Growth Algorithm:

• The company’s long-term growth strategy focuses on developing the beverage industry by expanding consumption across categories, occasions, and markets.
• Competitive advantages are built on five pillars: brand strength, unparalleled distribution reach, consistent ATL/BTL investment, customer-centric execution, and leading-edge digital capabilities.
• Management emphasized that while volumes are at record highs, the focus is shifting toward translating this growth into improved profitability through disciplined RGM and operational efficiencies.

Innovation and Portfolio Expansion:

• Significant traction was reported from recent product launches, including Coca-Cola Triple Zero, Topo Chico Sparkling Lemonade/Orange, and Ciel Aguas Frescas.
• These innovations are performing well above expectations, with some experiencing supply shortages due to high demand and repurchase rates.
• Digitalization tools like Juntos+ and Juntos+ Advisor are enhancing customer engagement, order recommendations, and sales force productivity, with digital revenues representing ~42% of traditional trade revenues in Brazil.

Regional Operational Highlights:

• Mexico: Despite a challenging consumption environment following the excise tax implementation, volumes grew 4.2% off a low base. Market share gains were achieved in sparkling beverages (+70 bps value share). However, margins faced pressure from a shift toward multi-serve formats, rising minimum wages, and increased freight costs.
• Brazil: Volumes increased 3.9%, supported by strong growth in Zero Sugar (+15%) and energy drinks. The company continues to gain market share across nearly all categories. Profitability is improving through single-serve portfolio optimization and cost efficiencies.
• Colombia: Volumes surged 15.9%, outperforming the industry, driven by favorable macro conditions and higher purchasing power. Energy drinks and sports drinks saw double-digit growth. The operation is benefiting from scale and cost absorption.
• Argentina: Volumes remained flat amid inflationary pressures, but the company maintained affordability and profitability through differentiated price-pack architecture.
• Disaster Relief: Following the August earthquake in Colombia, the company provided supplies and committed to supporting affected communities and rebuilding stores.

Profitability and Cost Management:

• Gross margin expansion was driven by lower sweetener and PET costs due to hedging strategies and currency appreciation against the US dollar.
• Operating margins faced headwinds from higher marketing, freight, maintenance, and labor expenses, as well as foreign exchange losses.
• The company maintains a disciplined approach to capital allocation and commodity hedging, having secured significant portions of 2027 raw material requirements.

Consolidated Performance: Volumes increased 5.3% year-over-year to 1.1 billion unit cases, marking a record third quarter. Total revenues rose 10.9% to MXN 79.7 billion (up 11.3% on a currency-neutral basis), driven by volume growth and revenue growth management (RGM). Gross profit increased 14.5% to MXN 37 billion with a gross margin expansion of 140 basis points to 46.5%. Operating income grew 15.4% to MXN 11.9 billion (margin expanded 60 bps to 14.9%), though excluding a non-recurring MXN 1.1 billion insurance recovery in Brazil, underlying operating income would have risen 7.4% with a margin contraction of 40 basis points to 13.6%. Adjusted EBITDA increased 16.2% to MXN 16.8 billion (margin expanded 100 bps to 21.1%). Net income increased 5.5% to MXN 6.2 billion.

Mexico and Central America: Volumes grew 4.8%, and revenues increased 8.3% to MXN 46 billion. Gross profit rose 11% to MXN 23 billion (margin +150 bps to 49%). Operating income declined 3.1% to MXN 6 billion (margin contracted 170 bps to 14.3%) due to unfavorable mix from multi-serve formats, higher freight, labor costs, and FX losses. Adjusted EBITDA increased 3.1% to MXN 9.6 billion.

South America: Volumes grew 6% to 448 million unit cases. Revenues surged 14.7% to MXN 33 billion. Gross profit jumped 19.2% to MXN 14.6 billion (margin +160 bps to 43.2%). Operating income increased 51.2% to MXN 5.3 billion (margin +380 bps to 15.7%), significantly boosted by the MXN 1.1 billion insurance recovery; underlying profitability remained strong. Adjusted EBITDA rose 39.7% to MXN 7.2 billion.

• Mexico: Management anticipates further Revenue Growth Management (RGM) initiatives in mid-November to offset potential impacts from FX fluctuations and raw material costs. Daily sales trends are gradually improving or flattish compared to prior months, without the benefit of a low base from last year's consumer backlash.
• Brazil: While mindful of potential post-election slowdowns, management remains confident in the long-term structural growth opportunities. They plan to address any future excise tax impacts or work week reductions via agile RGM initiatives to protect volume and margins.
• General Outlook: For the remainder of 2026 and into 2027, the company expects to capture significant growth opportunities. They anticipate 2027 to be a more normalized operating year regarding exogenous shocks (like the Mexican excise tax), though labor reforms in Brazil will require proactive management.
• Capital Allocation: Management confirmed they have finalized their analysis regarding capital return mechanisms for shareholders and expect to announce news earlier in the next year (2027).

• Macroeconomic and Regulatory Risks: Continued pressure on household purchasing power in Argentina and Mexico. Potential impact of new excise taxes in Brazil and labor reforms (reduction of work week) affecting industry-wide costs.
• Operational and Supply Chain Risks: Strained capacity and low inventory levels in Colombia and Venezuela due to volume growth surpassing expectations. Freight cost pressures in Mexico due to shipping distances.
• Input Cost Volatility: Ongoing volatility in global raw material prices (PET, aluminum, sugar). Exposure to foreign exchange fluctuations, particularly the depreciation of the Mexican Peso and Brazilian Real against the US Dollar.
• Labor Costs: Significant increases in minimum wages in Mexico and Brazil, creating compounding effects on broader labor expenses beyond entry-level positions.

Q: Lucas Ferreira (JPMorgan) asked about the sustainability of Mexico's volume growth and how the strategy has adjusted from Q2 turbulence.

A: Ian Craig noted that Q3 benefited from a low base due to last year's consumer backlash. However, daily trends are now gradually improving. The key differentiator for Q4 is the implementation of RGM initiatives starting in August and continuing in November to protect profitability against FX and input cost pressures. Innovation pipelines, such as Triple Zero and Topo Chico, are exceeding expectations and driving organic growth despite tight consumption.

Q: Henrique Brustolin (Bradesco) inquired about SG&A pressures in Mexico, specifically distinguishing between deliberate marketing spend and recurring cost inflation.

A: Gerardo Cruz explained that volume outperformance, particularly in multi-serve formats, created an unplanned scale that pressured margins. Additionally, the September peso depreciation caused significant operating FX losses on dollar-denominated payables. Ian Craig added that the compounding effect of rising minimum wages is increasingly impacting labor costs across all employee levels, not just entry-level. Freight costs also rose significantly due to shipping products to Southeast Mexico.

Q: Rahi Parikh (Barclays) asked about Brazil's strategy regarding potential fiscal changes, such as excise taxes, and how volume/price might be mitigated.

A: Ian Craig stated that while they hope the new selective tax will be neutral, they are prepared to execute full RGM pass-throughs if it is not. Furthermore, the upcoming reduction in the work week (from 6 days to 5 days) will impact the industry. The company plans to cover productivity gaps and cost impacts through RGM, leveraging their significant market share cushion to maintain demand.

Q: Thiago Bortoluci (Goldman Sachs) asked about the impact of El Niño weather patterns on demand and supply readiness for the high season.

A: Ian Craig described weather impacts as mixed: neutral in Mexico, positive in Central America/Colombia/Venezuela, and negative (wetter) in Brazil/Argentina. Supply-wise, Mexico and most regions are well-positioned. However, Colombia and Venezuela are facing severe capacity strains with very low inventories due to volume growth far exceeding forecasts, requiring immediate investment to meet demand.

Q: Alejandro Fuchs (Itau BBA) sought clarification on why management considers 2027 a "normalized" year given ongoing SG&A pressures from labor reforms.

A: Gerardo Cruz clarified that "normalized" refers to the absence of extraordinary one-off shocks like the 2025 consumer backlash or the 2026 excise tax shock. He distinguished between regular business pressures, such as minimum wage increases, and extraordinary events like Brazil's labor reform. Management expects to navigate these through productivity initiatives and RGM, maintaining confidence in top-line growth and share retention.