Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) Q1 2024 Earnings Call Transcript April 24, 2024

Coca-Cola FEMSA, S.A.B. de C.V. beats earnings expectations. Reported EPS is $1.4, expectations were $1.2. Coca-Cola FEMSA, S.A.B. de C.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to Coca-Cola FEMSA First 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 in a listen-only mode. However, you will have the opportunity to ask questions at the end of the presentation. [Operator Instructions] I'll now turn the call over to Mr. Jorge Collazo, Investor Relations Director. Please go ahead.

Jorge Collazo: Good morning to you all and welcome to this webcast and conference call to review our first quarter 2024 results. Joining me this morning is Ian Craig, our Chief Executive Officer and Gerardo Cruz, our Chief Financial Officer. As usual, after prepared remarks, we will open up the call for a question-and-answer session. Before we proceed, just a reminder for all participants to take note of our cautionary statement included in the earnings release that went out this morning. 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. With that, let me turn the call over to our CEO. Please go ahead, Ian.

Ian Craig Garcia: Thank you, Jorge. Good morning, everyone. Thank you for joining us this morning. Coca-Cola FEMSA showed another strong performance on top of the positive results achieved in 2023. As we mentioned in our previous earnings call, in 2024, we are focusing on three key drivers. First, build on the growth momentum of our core business. Second, take Juntos+ Version 4.0 to the next level with the deployment of advanced AA capabilities and third, continue fostering a customer centric and psychologically safe culture for Coca-Cola FEMSA. During today's call, I will provide you with an update on the main developments of our business. Our views on the operating environment and our strategic progress focusing on the three key drivers.

Then Gery will walk you through each of our division's performance and provide updates on our progress regarding sustainability. With that, let me begin by summarizing our consolidated results for the first quarter. Our volumes accelerated sequentially to increase 7.3% year-on-year, surpassing 1 billion unit cases. This increase was driven mainly by the strong performance achieved in Mexico, Brazil, Guatemala, Colombia and most of our Central America South Territories, which offset volume declines in Argentina, Uruguay and Panama. We continue to report volume growth across all beverage categories. Sparkling beverage volumes grew 7.5%, driven mainly by brand Coca-Cola, which achieved 7.9% growth. Still beverages grew 5.4% and bottled water grew 12.1%.

Total revenues for the quarter grew 11.2%, reaching MXN63.8 billion driven mainly by solid volume growth, offsetting an unfavorable currency translation related to the appreciation of the Mexican peso as compared to most of our operating currencies. On a currency-neutral basis, our total revenues increased a solid 17.7%. Gross profit increased 11.7% to MXN28.4 billion leading to a slight margin expansion of 20 basis points to 44.6%. This increase was driven mainly by the operating leverage resulting from our solid top line performance and depreciation of most of our operating currencies as compared with the US dollar. These effects were partially offset by higher sweetener costs across our operations and a significant depreciation of the Argentine peso as compared with the previous year.

Our operating income increased 11.6% to MXN8.6 billion with operating margin remaining flat at 13.5%. Our operating leverage, top line growth and cost and expense efficiencies enabled us to maintain flat margins despite increases in operating expenses such as labor, freight and maintenance. Notably, our comparison base includes a larger non-cash foreign exchange gain due to the significant appreciation of the Mexican peso during the same period of the previous year. Adjusted EBITDA for the quarter increased 13.5% to reach MXN11.9 billion and EBITDA margin expanded 40 basis points to 18.7%. Finally, our majority net income increased 27.8% to reach MXN5 billion. This increase was driven mainly by the operating income growth, I previously described, coupled with a decrease in our comprehensive financing results.

This decrease in comprehensive financial result was driven mainly by the significant depreciation of the Mexican peso during the first quarter of 2023, which generated a non-cash foreign exchange loss of MXN640 million in the year earlier period. Now expanding on our operations highlights for the first quarter. In Mexico, our volumes increased 6.9% reaching 490.4 billion unit cases. We continue to see a favorable macroeconomic backdrop, driven by structural and demographic tailwinds, such as decreasing unemployment and continuously improving payrolls. For instance, Mexico's unemployment rate has declined from 5.5% in June 2020 to 2.6% in February 2024, while average wage in real terms has increased by almost 18% in five years. This environment, coupled with favorable weather and our initiatives to grow our core business are driving strong demand across our Mexico territory.

Regarding share, we continue with gains in cola, but have seen impact in flavors due to unavailability. Additionally, we saw share gains in water, energy and sports drinks. To give you a sense of the strong demand we are seeing in Mexico, we achieved historic production records of 186 million unit cases in March. However, despite our supply chain team's effort to add capacity, productivity and improve our customer service metrics, we still identified unserved demand during the quarter, mainly in the flavors category in the Southeast region of the country. To address this situation and consistent with our priorities, we are on track with our ambitious capacity build up plan. On March 22nd, a new PET one-way line started production, and only three days later, a new distribution center began operations in the Valley of Mexico.

Finally, as we mentioned on our previous earnings call, we began the rollout of our Version 4.0 Juntos+ in Mexico during the first quarter of 2024. Our customers' adoption and feedback has exceeded expectations. In just a second month after its launch, we have more than 214,000 active buyers in this new version from a total of 490,000 monthly active purchasers in the country. Importantly, 36% of our traditional trade orders are already done digitally. We are confident that with these capacity expansions coupled with our commercial plants and our customer centric culture, we will continue driving positive results in Mexico. Moving onto Guatemala. Our volume increased 17% as we continue outperforming with brand Coca-Cola energy and juices. During the previous earnings call, we mentioned that on a comparable basis, volume in the country has doubled since 2017, and we continue to see plenty of opportunities for continued strong growth.

Regarding B2B, Guatemala is growing its monthly active buyers with the rollout of Juntos+, strengthening our digital relevance in the traditional trade. For instance, we have reached 68,000 monthly active purchasers, representing 50% penetration of our customer base. To continue supporting growth, we're also adding capacity in Guatemala. During the quarter, a new one-way bottling line started production, and we are on track to switch on a new returnable bottling line next June. Now moving on to our South America division. In Brazil, a resilient macro environment with controlled inflation and declining interest rates, coupled with favorable weather drove 10.4% volume growth during the quarter to reach 288.2 million unit cases. We continue strengthening our competitive positions across key beverage categories.

For instance, we reached record levels of share in the sparkling beverage category, driven mainly by gains in brand Coca-Cola. Notably, Coca-Cola Zero Sugar continued its impressive rate of growth in Brazil, growing 49.2% year-over-year. As we continue to focus on growing the core, our single serve mix increased 0.4 percentage points versus the previous year, reaching 24.2%, while profitable emerging beverage categories accelerated, driven mainly by Powerade, which grew 39.5% year-on-year. Similar to Mexico, strong demand tailwinds are putting our infrastructure under significant stress and our supply chain team is taking both short-term and long-term actions aligned with our strategic priority to debottleneck our infrastructure to support our growth ambitions.

Finally, on the digital front, we continued scaling Version 4.0 of the Juntos+ app in Brazil, with more than 65% of traditional trade orders now done digitally. In Colombia, despite a challenging environment driven mainly by stubborn inflation, our volumes increased 9.7% to reach 88.3 million unit cases. Our team's focus on improving service and availability, coupled with our commercial initiatives is resulting in share gains across categories and channels. Among the initiatives to grow the core, we're expanding our refillable platform, while focusing on single serve mix growth and our Zero Sugar portfolio. As in other high potential markets, we are increasing capacity and streamlining our value chain. We expect to install two new lines this year.

One will begin production during the first half of the year and the other before year-end. Finally, Argentina. As anticipated, the consumer environment during the Q1 worsened significantly, leading to a 28% contraction in disposable income. This challenging start to the year, coupled with unfavorable weather, led our volumes in the country to decline 16.9%. However, despite the many uncertainties ahead, the team remains focused on the objectives set for the year. Leverage affordability, drive cost and expense controls and increase productivity. We're focused on protecting the short-term to emerge stronger in the long-term. And although how to predict, we continue to expect gradual sequential improvement as the year progresses. As I previously mentioned, we are encouraged to start the year with positive momentum.

We have robust plans for the year and most importantly, we have the right team to execute them across our markets. Together with our partners at The Coca-Cola Company, we are prioritizing long-term sustainable growth. With that, I will hand the call over to Gery.

Gerardo Cruz Celaya: Thank you, Ian, and good morning to you all. As usual, let me summarize our division's results for the first quarter. In Mexico and Central America, volumes increased 7.9% to reach 579.8 million unit cases, accelerating sequentially, driven by positive performance across most of the division's territories. Revenues increased 12.6% to MXN37.8 billion, driven mainly by volume growth and partially offset by unfavorable translation effects into Mexican pesos. Excluding these effects, revenues increased 14.1%. Our gross profit increased 12.4% to reach MXN17.9 billion, resulting in a gross margin of 47.3%, a 10 basis point contraction year-on-year. We are offsetting higher sugar prices in the division with top line growth, the appreciation of the Mexican peso and favorable raw material hedging initiatives.

Operating income increased 13.4% to MXN5.7 billion, driven mainly by our gross profit performance and variable expense efficiencies. Our operating margin expanded 10 basis points to 15% as our gross profit growth was offset by an increase in operating expenses such as labor, marketing and freight. Importantly, our comparison base includes a larger non-cash foreign exchange gain, driven by the significant depreciation of the Mexican peso during the first quarter of 2023. Finally, our adjusted EBITDA in the division grew 15.5% with a 60 basis point margin expansion to 20.5%. Moving on to South America. Volumes increased 6.6% to 428.8 million unit-cases. We continue to see solid volume growth in Brazil and Colombia, increasing 10.4% and 9.7%, respectively.

As Ian previously mentioned, this volume growth was partially offset by a 16.9% volume contraction in Argentina and a 3.6% decline in Uruguay. Our revenues for the division increased 9.3% to MXN25.9 billion as our volumes and revenue management initiatives were partially offset by unfavorable currency translation effects into Mexican pesos, especially driven by the depreciation of the Argentine peso. When excluding currency translation, our total revenues in South America increased 23.4%. Gross profit in South America increased 10.5% or 27.4% on a currency-neutral basis, leading to a margin expansion of 40 basis points to reach 40.6%. This increase was driven mainly by the operating leverage resulting from top line growth and favorable raw material hedging strategies.

However, these effects were partially offset by increases in raw material costs, such as sweeteners and the depreciation of the Argentine peso as applied to our US dollar denominated raw material costs. Operating income for the division increased 8.2% to MXN2.9 billion. On a currency-neutral basis, operating income increased 27% and operating margin contracted 10 basis points to 11.3%. This margin performance was driven mainly by our gross profit growth coupled with cost and expense efficiencies that were offset by margin pressures in Argentina. Finally, adjusted EBITDA in South America increased 10.1% to MXN4.2 billion or 30.7% on a currency-neutral basis. Regarding our comprehensive financial results for the quarter, as Ian previously mentioned, we recorded an expense of MXN1.2 billion as compared to an expense of MXN1.4 billion during the same period of the previous year.

This decline was driven mainly by a foreign exchange loss of MXN640 million registered during the same period of the previous year as compared to an MXN26 million gain registered this year. In addition, we registered a decrease in interest expense, driven mainly by the payment at maturity of MXN7.5 billion denominated bond. These effects were partially offset by a decline in interest income, driven mainly by a decline in interest rates, a loss in the market value and financial instruments and a lower gain in monetary position in inflationary subsidiaries. Finally, I want to take a moment to comment about sustainability. As we have mentioned in previous calls, one of our six strategic priorities is to foster a sustainable future. To this end, we are pleased to report that we have successfully allocated the proceeds from the $705 million green bond issued in September 2020.

In accordance with its framework, these proceeds were allocated across eligible categories in climate action, water stewardship and circular economy. Moreover, we continue making efforts to enhance our sustainability reporting with our 2023 integrated annual report. We adopted the SASB standards and the new integrated format that includes the Global Reporting Initiative table or GRI, disclosures recommended by the task force on climate related financial disclosures and the performance in detail section. Among other report highlights regarding world without waste targets, we published a 33% usage of recycled resin on track to achieve our goal of incorporating 50% recycled resin in our PET bottles by 2030. In terms of water stewardship, we reported an industry-leading water use ratio of 1.42 liters per liter of beverage produced, demonstrating our commitment to efficient water management.

As you all know, social initiatives are also an integral part of our sustainability strategy as we have benefited more than 359,000 people through our community development actions. Finally, regarding diversity and inclusion, we continue progressing towards our 2030 goal of including 40% of women in leadership positions, advancing to 29% in 2023. For more detailed information on our sustainability efforts and achievements, I encourage you to refer to our 2023 integrated annual report, which is available on our website. With that, operator, we are ready to open the call for questions.

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