Good morning, everyone, and welcome to the Coca-Cola FEMSA First Quarter 2021 Conference Call. As a reminder, today's conference is being recorded, and all participants are in a listen-only mode. At the request of the company, we will open the conference for question-and-answer after the presentation.

During the conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered 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, which can materially impact the company's actual performance..

Thank you, and good morning, everyone. Thank you for joining us today to discuss our first quarter 2021 results. With me are Constantino Spas, our Chief Financial Officer; Matias Molina, Strategic Planning Director; and Jorge Collazo; Head of Investor Relations. Let me begin by saying that I am encouraged by our first quarter results.

The overall trends that we saw during the quarter provide promising signs of gradual recovery for the coming quarters.

As we navigate what is still a very dynamic environment, marked by an increase in COVID-19-related lockdowns that mainly affected our performance during January, our mitigation actions and the passion of our team to serve our consumers enabled us to deliver the second consecutive quarter of consolidated volume growth since the start of the pandemic.

Once again, despite significant currency headwinds, our ability to adapt to complex operating environments and drive efficiencies across the entire organization enabled us to protect our profitability, leading to a consolidated operating margin expansion of 60 basis points.

While 2020 was a year of resiliency and transformation for Coca-Cola FEMSA, we aim to make 2021 a year capitalizing on opportunities across all of our strategic fronts. On today's call, I will briefly review our first quarter results, expanding on trends and our performance across key markets.

Then I will hand the call over to Constantino, who will guide you through each division's results and expound on raw material trends, hedging strategies and initiatives that we are implementing to ensure our solid cash flow generation and disciplined approach to capital allocation, including dividends and CapEx. Reviewing our results.

Consolidated volumes increased 0.9% versus the first quarter of 2020. Notably, this also marked a 0.6% increase versus our volume for the first quarter of 2019.

This increase was driven mainly by volume growth in Brazil, coupled with double-digit growth in Guatemala and Argentina, as well as significant sequential recoveries in Colombia, Costa Rica and Nicaragua, which achieved positive year-over-year volume growth.

As we better manage lockdowns and their effects on consumer demand, we continue to see improvements across beverage categories in most of our territories. The performance of our sparkling beverage category continued to accelerate and outperform our consolidated volumes..

Thank you, John, and thank you all for joining us on today's earnings call. And I will now expand on our division's first quarter highlights. In Mexico, our top line remained flat driven mainly by a 2.7 volume decline, as pandemic-related lockdowns were still impacting this market, as John previously described.

These factors were offset by average price increases, resulting from headline pricing and our revenue management initiatives. Our ongoing cost and expense management initiatives continue to drive efficiencies and savings, helping us to expand our operating margin.

We believe that many of these savings are sustainable and will help us to continue protecting our margins in this market during 2021..

Thank you, Constantino. Our company has undertaken profound transformation over the past years, renewing its purpose, culture and strategy. We are confident that we have the right talent, capabilities and initiatives to deliver long-term growth and shareholder value.

Although, the overall operating environment remains very dynamic, we are encouraged by the overall trends and strategies that we will be continuing to roll out in the upcoming quarters. Once again, our top priority is to protect our employees, ensuring a safe work environment while supporting our clients and communities.

Additionally, we are especially encouraged that all of our territories delivered volume growth in March, and we are seeing consolidated double-digit growth in April. This positive trend reinforces our confidence that we are on the right track to continue our business recovery. Thank you for your continued trust and support.

Operator, I would like to open up the call for questions..

Thank you. Our first question comes from Isabella Simonato with Bank of America..

Hi, good morning everyone. Thank you for the call and the questions. And my question is more related to the mix, right, we saw that that affected top-line dynamics pretty much across the board, and most importantly, in South America.

I'm wondering how you're seeing the evolution of it considering that in terms of the rollout of acclimation, things are relatively slow.

How can we think about the mix of channels and the mix of presentations throughout the year? And in that sense, how -- what's the pricing strategy to offset the cost pressure? I understand you are relatively well-hedged in the main commodities where I understand that given the currency and the real in commodities, in general, you will face cost pressure not only this year but also in 2022.

So how you're seeing pricing and actually real price increases to consumers to improve profitability? Thank you..

Hi, Isabella, it's John. I think in terms of the package mix, it's story-telling. What we've been seeing during the quarter is growth in our multi-serve one way packages. And we've also seen significant growth in our multi-serve returnable packages.

Single serves, both nonreturnable and returnable packages have been coming up month-after-month from double-digit declines to very low single-digit declines in the multi-serve and pardon me, in single-serve one way packages and mid single-digit range in the single-serve returnable packages, which is just a reflection of continuing opening of our client base.

As of today, and when we look back to last year, our client base is probably only 1% less than what we had last year. So it basically shows a tremendous development of how all our customers have been reopening and how the pandemic has been iterating over time.

If we think about the mix going forward or looking back, we still have about four to five points of incremental single-serve mix that we should see coming through both Mexico and Brazil as we go forward, as these channels continue to open going forward.

And in terms of pricing, we've always been thinking, and we always have established pricing in line with inflation. So we have been taking those prices in Mexico. Mexico is just price increased – took a price increase during the beginning part of April, late part of March, and we continue to see volumes recover in Mexico as well.

So we continue to see encouraging signs of channel recovery on the on-premise channel, single-serve recovery on our package mix, which is our most profitable package, and also continued growth in our average price – average pack size price. So the mix going forward should be very significant in terms of the improvement we see.

Constantino, I don't know if you'd like to add something. .

No. I would add that on top of all that, we are – we're continuing, I mean, to rely much more on our end-to-end analytics platform that allows us to, on top of headline pricing and the price back architecture that John just mentioned, also continue to optimize discounts and promotions.

In that case, that's very relevant as the consumer behavior is changing every day given the impacts of the pandemic. So we need to continue to rely on our analytics pace in order to be more efficient in the deployment of discounts and promotions, and that evidently translates into pricing also..

No, that's very clear.

But just a quick follow-up, but I mean, when we think about even the prices in line with inflation and the mix picking up, is that enough to pass through the cost pressure across the board, especially when Coca-Cola is also increasing concentrate prices? Overall, do you think margins can, this year and especially in South America, be similar or even higher than what we saw last year?.

In the case of South America – I mean, let's understand one thing. The main headwind during the quarter was a very tough comparison versus the first quarter of 2020. That included a tax benefit of approximately MXN455 million.

That's significant, right? Coupled with the unfavorable – the currency translation and price/mix effects that we just expanded on. I think that we're optimistic to your question about the outlook that we're able to protect the profitability for the year.

If we exclude the extraordinary effects, we have hedged our main raw materials to protect those margins. Currently, we're hedging most of our sugar needs, at prices that are around 12% below what we paid in 2020. And in currency terms, we have hedged approximately 27% of our needs at around R$5.4 per dollar.

If you add to that, the effect of the beer transition, that should be less than 50 basis points at the consolidated level than we initially guided for the year, I think that we were very well positioned to protect our margins in the case of Brazil.

And also, if you look at Mexico – first of all, raw material hedging strategies, I think, have been quite successful. Despite the increasing oil prices, our PET needs are fully hedged at a very attractive price that are even lower than what we paid in 2020.

In addition, our teams have done an impressive job in implementing cost and expense efficiencies, mainly in maintenance, marketing and freight costs. And we believe that, that a significant part of these efficiencies are sustainable for the future.

If you look at PET and aluminum, we're hedged at prices that are around 5% to 10% below what we paid in 2020.

And if you couple that with what John expanded on pricing in Mexico, slightly above the inflation, considering all the discounts and promotional efficiencies that I mentioned, and in line with inflation in South America, I think we're confident that we're capable of protecting the profitability during the year.

I don't know if that adds some more color to your concern, but I think that we're pretty confident that we're capable of protecting the profitability..

Sure. No, that’s super helpful. Thank you very much..

Thank you. Our next question comes from Carlos Laboy with HSBC..

Yes, thank you. Good morning, everyone.

John and Constantino, could you please expand on the adoption of your B2B platforms in Mexico and Brazil and also maybe shed some more light into where your stage – what stage of development you're at in terms of your digital capabilities in Colombia?.

Constantino, do you want to take first one..

I think you're very, very passionate about it. But yes, sure. I mean that's – I'll start, and then I'll let John complement on some aspects of it. If we look at it from a digital initiative perspective overall, let me give you some interesting highlights.

I think, first of all, we're working very hard on the pure digital player front, right? And we're growing triple-digits versus previous year, for example, in Mexico.

And these include all the pure players, Amazons, the brick and click like Walmart, the aggregators like Corner Shop, and the foodservice aggregators like Rappi and Uber Eats, right? So on that front, we're growing triple-digits.

We're very focused on continuing to develop this channel, which is a reality and a channel where we need to continue to improve and get more sophisticated in the way we handle the channel. And that is something that has been rolled out in all of our markets, particularly Mexico, Brazil and Colombia, to your question.

On the other hand, and our trade omnichannel capability, we've been implementing what software business as a contactless selling method, as you all know.

In the case of our chat bot-enabled WhatsApp platform, it's currently serving more than 300,000 customers, of which 220,000 customers are in Brazil and growing very rapidly, 80,000 in Mexico, with a very ambitious plan to grow to 150,000 customers in Mexico very, very quickly.

We have been managing over 15,000 orders daily, which is equivalent to 200 free sellers in terms of order entry. So today, that is about the size of a very relevant region in terms of preseller, when you compare the amount of orders that we're experiencing through platforms.

And during the pandemic, we have also improved the value offer by adding options and expanding the time window to place an order for customers, whether B2B, web and app developments. And on the other hand, it's not only about WhatsApp. There are some customers that continue to rely on URLs.

Our platform that's called Juntos is a real-time customer development relationship portal where we have price, promotions, segmentation capabilities. And that has been rolled out in basically most of our markets with a couple of exceptions such as Nicaragua and other markets in Central America, but we will eventually roll that out.

And then we have also sped up the development of our omnichannel platform as a response of the pandemic combining trade and at-home solutions to capture the full value of the market. On the home delivery front, Carlos, we've also been, as John mentioned in his initial remarks, expanding our home delivery channels in Mexico.

And a key element of that expansion in the, I'll say, improved performance is also the digitalization of the home delivery routes, which is another element that's very significant in terms of our technological developments.

And all of these developments, as we have mentioned before, sometimes we test them in one lead market, but at the same time, those tests inform the deployments in other markets. So far, Brazil has been on the cutting edge of that. But it is not only limited to Brazil.

So let me give you an example of something that we are implementing in Brazil that we started testing in Colombia, which is a promotional push capabilities through WhatsApp. We have been able to test that in Colombia and has going to be extremely successful.

And now we're enhancing once more our most advanced digital platform in the company, which is the Brazilian WhatsApp deployment. So as you can see, we're working in a synergistic way across our markets. And the intent is to continue to roll out in all of our markets where the market conditions and the market structure permits.

I don't know, John, if you want to expand on particular topic since you're very….

I know. Carlos, how are you? I think stepping back on this. Today, we have a very significant capability on what I would call our B2B platform, our WhatsApp platform, which is conversational commerce, okay. And it's tied in directly to our transactional system. Today, we have 300,000 accounts on it.

The important thing about this is that we have 200,000 accounts in Brazil, and that's probably about 40% of all our customer base. And what we're experiencing is an uplift in orders per month in a number of -- per month by putting and applying this service to our consumers and giving them 24/7 capability.

But also, we're looking at a higher ticket size as well as expanding number of items per order. So we're getting it both vertically and horizontally in terms of development. In Mexico, we were out to about 80,000, 90,000 accounts right now.

But more importantly, I would say that we've been working very hard and diligently on making sure that we can scale this terrific platform across all of Coca-Cola FEMSA, and we'll be in a position to do so by the end of the second quarter.

So we'll have that capability in all of our important markets, Guatemala, Colombia, et cetera, to be able to start conversation commerce with all our accounts. And I think that's really, really important. By the end of the year, we should have integrated omnichannel capability in Brazil, and very shortly after that, in Mexico.

And we're also looking at rolling out digital payment systems also throughout Brazil, and shortly after that, in Mexico towards the end of the second quarter. So I think we're moving fast and we're moving aggressively.

And we're also testing, along with the digital payment platform, differentiated and increased categories and multi categories in Brazil.

As you know, in Brazil, we're looking at also not only doing beer, but we're also looking at doing spirits, and we're also looking at doing some other type of categories, as we are testing some salty and sweet snack platforms that are working well for us.

So we're complementing our digital capabilities with expanding categories and distribution of categories throughout all of Latin America. And so I'm excited about this. And Constantino's talked about our home delivery sales in Mexico, and we're looking to increase that platform by about 40%.

But what was really interesting is, we digitize this platform.

We're seeing a revenue increase of double-digit rates in each household that we go to and doing this with a much -- with a digital platform and digital payment systems, which allows us the analytical base to understand how and what we sell into at least a million homes in Mexico coming shortly.

So the developments across all the digital platforms are very significant.

Am I still on the line?.

That’s really helpful. Thank you so much..

Yes. You’re welcome..

Thank you. Our next question comes from Marcela Recchia with Credit Suisse. .

Hi, John, Constantino. I hope you are well and thank you for taking my questions. I have two questions. First on Colombia.

Could you provide us an update on the status of the joint distribution agreement with ABI? And secondly, on Brazil beer, if you can comment on the percentage of your last year's beer volumes that you expect to retain after the redesigned deal with Heineken starts to kick in.

And which and when other brands are expected to be introduced? Thank you so much..

Sure. Let me start with the first question about Colombia. And as you saw last Friday, we have to go through the process of looking for approval with -- to seek in Colombia for the joint distribution of ABI and Coca-Cola in Colombia. That distribution agreement was denied in the first instance.

The Colombian government has put up certain objections that we will be addressing, and we have a timetable to address those over the next two weeks. We fully intend to go back and work with the Colombian government to understand what their -- where the concerns are.

But we really are confident that we can address those, as there are many other companies that have joint distribution platforms throughout the country, and we think that the overwhelming benefit for the consumer and client in Colombia would be very beneficial.

And I think it's just a matter of working with the Colombian government to be able to do so. Constantino, do you want to add something? I don't know if Constantino --.

Well, that covers it, John. We continue -- we're convinced that this could be positive for the industry. So we're going to make sure that we exhaust all of our discussions with the authorities and put on the table all the points of view and the value of these types of associations could bring to the Colombian market and to the Colombian consumer.

So I think we still need a few more weeks in front of us in order to have a final point of view and a final position on that from the authorities. So this is just the initial stage..

Yes. And your second question on Brazil beer, I think one of -- we expected the transition to start sooner given the complications of COVID in Brazil. This is obviously when we drag out a couple of months. We still fully expect this will take place during the latter part of the second quarter or the beginning of third quarter.

As we have discussed before, there would be a little lag in volume given the disruption and the changeover between us and the Heineken platform. We thought and we still project that if it were at the same time, we would have a margin hit consolidated of about 50 basis points.

That, obviously, by the delay is going to be less affected for the year, and it's going to give us more time to recover during this year -- or not having as impacting this year and recover next year in a faster manner. I don't have a hit -- an expectation on the volume front. Constantino, I don't know if we discussed that before..

Well, no. And I would focus more on your question around portfolio, and I would like to elaborate on that. I mean we're clearly extremely happy with the portfolio that we are building with Heineken, not only on the current brands.

But as we mentioned in our previous call, there were some interesting innovations, an interesting brand and launches that we will put through our platform with the Heineken company.

But at the same time, the way we're looking at this, and that's the way we look at business overall, it's consumer and customer centric, right? So when you focus on your portfolio from a customer-centric point of view, there are clearly some interesting spaces that are going to -- and we're working on it with other brewers in order to provide for the best value proposition for a platform to a retailer.

And at the same time for them to be able to deliver the best value proposition to for their consumers. So we're currently ongoing conversations with a series of other international brewers as well as some interesting ideas on a local brands. This is ongoing, and we will be able to deploy this, no doubt, in the upcoming months.

I think we're going to end up with a very solid portfolio, a portfolio that covers all the way from economy to super-premium segments in Brazil that are very relevant with different type of beer offerings.

And at the same time, this is complemented by the work that we are doing and expanding with Diageo in Brazil on other categories, right, on spirits. So if you look at it from an on-premise customer-centric value proposition delivery, I think that we -- in the near future, we're going to have an extremely solid proposition for customers.

And that's where we would like to focus our attention. And hope that helps provide some color for you..

Sure. Super helpful. Thank you very much..

Thank you, Marcella..

Thank you. Our next question comes from Alvaro Garcia with BTG. .

Hey, good morning. Thanks for this special questions. A couple of questions. My first one is on gross margin in South America. I understand there's a specific one-offs, but I was wondering if you could break down, Constantino, how much of the decline was Brazil and how much was Argentina, sort of trying to break down the moving parts within that.

And on the pressure in Brazil, specifically, how much is you a channel mix or how much is just the FX transaction headwind? That's my first question. .

Well, I'm going to have Jorge to answer that one. .

Yes. Thank you. Thank you, Constantino. Yes, of course. So Álvaro, as you know, we don't disclose by country, but you can certainly consider that most of the decline at the gross margin level for South America this quarter came from Brazil, right? We approximately have for Brazil this quarter a decline on the gross profit of approximately 20%.

But as you consider, these comes from the decline of having this onetime of -- that's very important, right? So I would refer to the comments that Constantino mentioned on our expectations for profitability in South America going forward, right? I think we have this quarter a very tough comparison.

But as we move along to, along the year, we'll have easier comparison basis, I think we are going to start seeing an inflection point on profitability in South America, right? And as you know, the second piece that has an important effect on profitability in South America continues to be Argentina, right, where we continue to face a challenging raw material, a challenging decline in terms of both top line and of course, in terms of currency.

.

Great. Thanks for that. And then my second question is on Fuel for Growth. I was wondering if you could perhaps provide an update on what should we expect maybe in terms of further restructurings or further savings from Fuel for Growth, just a general update there? Thank you..

Well, our Fuel for Growth program continues as we have planned. Most of the efficiencies that were initially diagnosed and have a plan accordingly to the magnitude of the efficiency that we wanted to capture are either in place or there's slightly more there.

But in terms of reorganization, although this is a ongoing – an ongoing dynamic in any organization, most of our major restructurings that we've done are already in place. So we still had some small adjustments that are basically driven more by the operational dynamics. But overall, most of the major restructuring continue – is already in place.

We still have some improvements and some efficiency to be captured in manufacturing in some plants, but those are plans that are – already been mostly executed. And so, I feel very comfortable where we're at and it's already part of our business culture. So it was initially a program.

And today, it's part of a continuing – continuous dynamic in terms of efficiency.

At the same time, and in line with that, we are also starting to deliver and implement our deal-based budgeting initiative in the organization and that is still incipient in the process of implementation, but we'll definitely provide with some updates in the upcoming earnings call.

So it's more comprehensive than just the restructuring that we did initially. Now it's expanding into zero-based budgeting where we have identified some interesting efficiencies that we can execute behind spend, most importantly..

And a lot of learning from our COVID-19 pandemic, these are times where some of your paradigms and some of your operating principles are stressed, and you have identified ways of doing this in a much more efficient and effective way. And those are learnings that will continue to be implemented through our day-to-day business going forward.

I don't know, John, if you have a... .

Yes. Yes, I'd like to just complement a couple of things. This is a process and it's been a program that has been in place for the last three years, and at its heart is a change in the culture of the company. And one of the biggest components of which is the functionalization of the company.

And obviously, we've targeted a series of restructuring back then, of which we are now complete. And we don't foresee any further restructurings going further, but we've seen some enormous progress, not only on the cost side, but on the cultural side.

Now, over the last year, we had accumulated taken out from this -- from our supply chain savings probably $60 million in 2019 -- in 2020 alone and another $56 million before that. On the organization cost front, we have taken out about $80 million over the two-year combined, a three-year combined total.

Our total savings last year was about $160 million, $180 million worth of cost savings given all the -- always Fuel for Growth focus that we've had.

But I think more importantly is that we've now allowed for our functions to start working collaboratively across all our territories, and we've instituted what we call our functional communities, which allow each community to participate in a program or a project that would increase our efficiencies across that particular function and has led to enhanced digitization, enhanced implementation of systems and increased efficiency across all of our processes.

And I think that's really, really important and as we go forward, okay, internally on our culture and our digitalization process. What we have in place today are 27 -- about 27 key, key projects that we're looking at for digitization, which we have 10 agile teams working on currently.

And so the progress behind what you've seen in the past, coupled with this new culture of functionalization, be enhanced with agile process inside the company makes it, I think, something that's going to be sustainable and allow for increased capabilities and also increased continued margin support.

So, I think the transformation of Coca-Cola FEMSA continues from two years to today and is accelerating across a lot of different fronts. .

Great to hear and certainly there's good result across the board on the SG&A front. Thank you very much John..

Thank you, Al..

Thank you. Our next question comes from Ulysses with JPMorgan..

Hi guys. Thanks for the questions here. A couple of kind of housekeeping items on my side, but maybe any comments you can make on the Mexico outsourcing bill changes that were approved and what kind of impact we can expect from this maybe, if any? And the second on the CapEx, you are guiding here for a slight increase versus the previous years.

Can you share a bit on the details on what are the main investments and main projects you will have for this year and how the CapEx breakdown looks across regions, maybe even in a very broad basis? Thank you..

Yes. Thank you. Ulysses, in terms of outsourcing, we don't see any major restructuring coming out of these new initiatives in this -- this law. I think we're going to be fully compliant within the time frame established, and it will have some minor administrative adjustments.

But we fully expect any of the incremental costs that are coming out of such legislation and regulation to be minor, and we'll be able to cover that throughout the year. In terms of CapEx, what we're doing is, I think, accelerating where we're seeing incremental volume and profit.

A lot of our capital expenditures is going to be going towards increasing our returnable footprint for universal bottles. We have an aggressive plan in Mexico. We have an aggressive plan in Colombia. And we continue to see aggressive investment in Brazil also with increased in both Sol initiatives.

A lot of this also has to do with our digital capability, but our two major focuses currently are making sure our affordability portfolio is in place, and also that our sustainability initiatives, turning or looking at recycling, particularly in Mexico, and collection capability throughout all of PET collection capability throughout all of our countries are in place as well.

Constantino, I don't know if you want to add something..

Yeah. I think that's – it's a good summary, John. It's focusing on the market. It's our first priority. So that's returnables, bottles and cases, and evidently, coolers, wherever that is a growth driver, right, in the market. So that's paramount for us, returnable capability and serving the markets properly on that end.

On the other hand, digital capabilities, I think we expanded a lot with Carlos' question on that. And then in line with that, it is also an important bucket on IT infrastructure. And at the same time, the Cybersecurity investments that are very, very relevant for us.

Very important, and in a point in time where a company is digitizing much more on an everyday basis, our Cybersecurity capabilities need to continue to be enhanced. And we're very serious about it, and we're putting significant resources into relative terms of what we have had in the past on those items. I think that summarizes it..

Perfect. Very clear, guys. Thank you very much for the color..

Thank you..

Thank you. That's all the time we have for questions today. I would like to now turn the conference over to our presenters for closing remarks..

Well, thank you for your confidence and interest in Coca-Cola FEMSA. As always, our team is available to answer any of our – of your remaining questions. Jorge is always available with his team.

And I think what is very encouraging, again, just to point out is the continued volume trends that are positive throughout all our markets that we've seen in March and April, and a continued opening of our client base as we go forward. And thank you again for your time and attention. Stay healthy. Stay safe..

Thank you. .

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect..