Good morning, everyone, and welcome to the Coca-Cola FEMSA's Third 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 this conference call, management might discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as a good faith estimate made by the company. These forward-looking statements reflect management's expectations and are based on current available data.

Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. At this time, I would like to now turn the conference over to Mr. John Santa Maria, Coca-Cola FEMSA's Chief Executive Officer. Please go ahead, Mr. Santa Maria..

first, an unfavorable currency translation into Mexican pesos; second, the tough top-line comparison base that included one-time tax effects in Brazil of approximately MXN1 billion; and third, the transition part of Heineken's beer portfolio in Brazil, which led to a decline of approximately 31% in beer revenues for the quarter.

Notably, excluding unfavorable currency translation effects, our comparable total revenues increased to solid 8.8% year-on-year. Gross profit increased 2.1%, a resilient performance, driven mainly by favorable raw material hedging strategies and efficiencies across our operations.

We achieved this performance in the face of increased raw material costs and the depreciation of most of our operating currencies as compared to the U.S. dollar.

Additionally, as discussed during our second quarter performance call, we have resumed the recognition of a tax credit on concentrate purchased from the Manaus Free Trade Zone in Brazil, which also supported our gross margin performance as compared with previous years. Operating income declined 9% versus 2020.

However, when normalized for nonrecurring tax effects in Brazil, excluding MXN 620 million for the third quarter of 2021 and MXN 1.6 billion from the same period of 2020, our operating income increased a solid 6.3%. Operating cash flow declined 7.5% year-over-year, which when normalized for the previous mentioned effects, increased by 2.8%.

Finally, consolidated net income increased 38.8% to reach MXN 3.4 billion, driven mainly by a decrease in other nonoperating expenses related to the last year's sale of the dairy joint venture in Panama, Estrella Azul, and impairments recognized during the same period of 2020.

Let me provide some additional color on the operating environment and strategies we are implementing across key territories. In Mexico, we faced challenging weather conditions characterized by increased rainfall and lower average temperatures for a significant part of the quarter.

Additionally, as COVID-19 cases started to increase during July and August, key regions of the country, such as Mexico City, reintroduced restrictions to mobility and hours of operation at certain points of sale.

As understandable as these measures are, we are encouraged that our continuous decrease in cases enabled Mexico City and other key regions of the country to ease restrictions as of October 18 and transition to a green light according to the epidemiological traffic light in Mexico.

Importantly, in the face of this dynamic environment, we continue to focus on the consumer-centric approach and our ability to provide affordability to our consumers.

As a result, key regions in Mexico that faced milder weather conditions during the quarter, such as the southeast, were able to increase volumes 5.6% year-on-year and are reaching our 2019 baseline numbers. Notably, we continue to invest significantly on our strategic priorities.

For example, with regard to our portfolio, the new formula and visual identity of Coca-Cola grew double-digit rates. Also, our focus on increasing the coverage of our universal refillable bottle, which provides substantial affordability to our consumers, continues to provide share gains.

Our execution scores continue improving, mainly in the traditional and on-premise channels, especially after such a long lockdown from last year. With regards to our B2B WhatsApp order-taking platform in Mexico, we expect to reach approximately 270,000 clients by the end of the year. The result of this feature in Mexico exceeded expectations.

As compared with January, client acceptance has increased by 13%, reaching a very encouraging 93%, while average tickets for these clients has increased 18%. Initially, our home delivery routes in Mexico have emerged as complementary channels and continue to grow significantly.

We now operate home delivery in all of our operating units in Mexico with over 500,000 clients registered, and we continue reinforcing this growing value proposition by taking credit card payments, almost in all territories.

As a result of these initiatives, we believe that the headwinds that affected our Mexico operation during the third quarter are transitionary. Moving on to Brazil, our volume in the quarter increased 7.1% year-on-year. This strong performance is underscored by the share gains, mainly driven by the sparkling, juice, tea, and energy categories.

Although we a quarter that marked the transition of Heineken and Amstel brands to the Heineken distribution network, we continued the rollout of Tiger, and we included brand Eisenbahn in our distribution network.

I'm encouraged to say that together with Heineken and Coca-Cola Company, we have completed the transition without major disruptions to our clients and consumers. At the same time, we wasted no time evaluating and executing additional options to further complement our beer portfolio.

First, in August, we announced the acquisition of Brazilian craft beer brand that is Therezópolis together with Coca-Cola Andina. Then in September, we announced a distribution agreement to distribute SeaGalicia portfolio together with the Coca-Cola system in Brazil. Importantly, Brazil continues to lead the rollout of our WhatsApp B2B platform.

We have increased the effectiveness and the relevance for our clients. We are bringing more clients onboard, and they are purchasing more items while increasing consumer satisfaction metrics. As a result, we have set up close to 300,000 clients and already 30% of our total orders in the country are digital, up from 20% in December 2020.

Moving on to Colombia, this market posted a solid 26.8% year-on-year volume growth. Remarkably, this is 12% ahead of our volumes in 2019. Growth is driven by the overall macro recovery, coupled with our portfolio initiatives and the reopening of the on-premise channel.

During the third quarter, we surpassed a number of active clients we enjoyed before the pandemic, and our successful affordability initiatives, such as the launch of our universal bottle, grew 19% versus the previous year. The universal bottle has allowed us to gain up to two points in share of sales.

Notably, our B2B omnichannel solutions in Colombia already represent more than 5% of sales for the country. In Guatemala, we have captured many opportunities to sustain our growth. And as a result, our volume has continued to grow double digits since 2018.

This performance is supported by outstanding execution, share gains, and increases in the number of active consumers. [Indiscernible] we continue developing a winning consumer-centric portfolio, enabled by omni-channel execution and expanded cooler coverage. Finally, I want to highlight our performance in Argentina.

By a complex environment, the execution of our strategic plans has enabled us to regain momentum. For the quarter, our volumes increased 15.9% and are 7.9% higher than in 2019.

Results encouraging that restrictions have eased as of October 1, now allowing for 100% capacity in restaurants, cyclical capacity of massive events, and a gradual reopening of borders our portfolio initiatives in the country are enabling us to gain share.

In high-growth categories, such as energy drinks, Monster is now positioned as category leader with double-digit growth. Our focus on revenue management has enabled us to grow our top line, driven mainly by favorable package mix.

With regards to profitability, our top-line growth and the mitigation actions we undertook during 2020 are driving an encouraging recovery in profitability.

Going forward, despite a still volatile scenario, we are confident that our resilient business model and the actions we are taking within the position will position Argentina for a sustained long-term recovery. In summary, we are confident that we have clear strategic priorities to achieve our targets for the year.

At the same time, we are ensuring the necessary investments behind our capabilities in order to ensure our long-term growth and transformation, adapting to the needs and context of each of our markets. Finally, I want to share some thoughts on our vision for 2022 and beyond. We have 4% on how COVID-19 has reshaped consumer preferences worldwide.

Waste a substantial reconfiguration of the share of wallet, and brand trust across different consumer categories. At the same time, new consumption occasions have emerged and more and more consumers are changing the way they shop.

With this in mind, companies are making technological investments to digitize their best customers and consumer interactions with a new standard of excellence for retailers and brands. Part of our transformation, Coca-Cola FEMSA is reshaping and adapting to thriving this new environment.

We have strengthened our relationship with our partners, worked hand-in-hand with the Coca-Cola Company to align our five-year strategic growth plans, and continue building a winning consumer-centric portfolio while exploring multi-card opportunities across our markets.

As we previous earnings releases, we continue to roll out pilot programs to test the distribution in our complimentary categories, such as leading spare brands, other alcoholic beverages, and leading consumer products in certain markets.

This is consistent with the enhancement of our cooperation framework announced last July with the Coca-Cola Company.

Reflecting on our vision for Coca-Cola FEMSA and the actions we are taking, I am confident that we are building the right set of capabilities to continue positioning our company for long-term growth and value creation for many years to come. With that, I will now hand the call over to Constantino..

Thank you, John, and thank you all for joining us on today's earnings call. I will now expand on our division for quarter highlights. In Mexico, our volume remained flat year on year, while revenues increased 7%.

Our successful pricing initiatives in a favorable price mix environment were partially offset by tough weather conditions and mobility restrictions faced during this quarter. In Central America, our operations delivered a very strong volume performance. Our volumes increased double digits in all of our markets in this particular region.

Notably, this division delivered double-digit growth as compared to the same period of 2019. On the pricing front, our average price was impacted by the negative currency translation effect over Central American currencies into Mexican pesos.

As a result, our quarterly revenues increased 7.3% in the Mexico and Central American division and 2.1% as compared to the same period of 2019. On the profitability front, our gross profit margin for the division remained virtually flat.

Our successful raw material hedging strategies were partially offset by the effects of increasing commodity prices and higher concentrate costs in Mexico as compared to the same quarter of 2020. We'll definitely continue to protect the profitability by maintaining a disciplined hedging strategy and implementing savings and efficiencies.

Moving on to the expenses front. During this quarter, we continued to see a normalization of certain operating expenses, such as marketing, labor, and maintenance, as a result of an increase in mobility and the gradual normalization of our operations.

It is very important to highlight the fact that we are maintaining a high-profit base in Mexico and Central America as compared to our 2019 baseline. Looking at our operating income increased 4.1% and expanded 30 basis points when compared to 2019.

Going forward, we'll continue to focus on protecting our margins by leveraging efficiencies and the hedging strategies to offset the dynamic supply chain and raw material environment we're all facing. If we move on to South America, we're encouraged by another quarter of very strong volume performance.

This division delivered 11.7% volume growth as compared to 2020 and a 12.7% increase as compared to our 2019 baseline. As John mentioned, this quarter, we saw remarkable performances in Argentina and Colombia, driven by increased mobility, coupled with share gains in these markets.

Our revenue management initiatives, prudent pricing, and volume growth in the division were partially offset by unfavorable currency headwinds. Moreover, our quarterly revenues were impacted by the partial transition of our beer portfolio in Brazil.

Finally, as also John previously described, we must consider a one-time effect in our comparison base due to an entitlement to reclaim tax payments in Brazil for approximately MXN1 billion. Our top line decreased slightly by 1.9%. However, if we exclude the currency translation effects, our top line would have increased 8.1% during this quarter.

On the profitability front, our gross profit in South America decreased 5.6%, representing a margin contraction of 160 basis points. This decrease was driven mainly by the depreciation of our currency as compared to the U.S. dollar, an increase in freight and sugar costs, and the effects of our partial beer transition.

These effects were partially offset by the resumption of tax credits on concentrate purchased from the Manaus Free Trade Zone in Brazil. Our operating income for the division decreased 20.6%. By normalizing the extraordinary tax effects in Brazil, as we previously described, our operating income increases more than 35% year-on-year.

Although tax environments are very dynamic, as this has been the case for Brazil for the last couple of years, at this point in time, we do not anticipate that this could lead to additional volatility to our P&L. Let me provide you with an update on our raw material hedging strategies.

In Mexico, we have hedged all of our PET needs for the remainder of the year, and we have hedged 45% of our 2022 needs at prices slightly above the ones we’re currently paying. Notably, for the remainder of 2021, we have also hedged around 75% of our aluminum needs in Mexico and more than 90% in Brazil.

On the sugar front, in Brazil, we have covered approximately 70% of our sugar needs for the year and more than 40% for 2022 at very attractive prices. All in all, we remain confident that these strategies will continue to mitigate treasures to our profitability for the fourth quarter as we move into 2022.

I will now expand on our financial results, which reflect our initiatives to strengthen our balance sheet and financial position. Our comprehensive financial result recorded a decrease as compared to previous year, driven mainly by a foreign exchange gain as our net debt exposure in U.S.

dollars was positively impacted by the depreciation of the Mexican peso and the Brazilian real. In addition, we recorded lower interest expenses, driven mainly by the payment of short-term financing incurring during the first quarter of 2020 and the payment at maturity of a Mexican peso-denominated bond.

Now let me expand on the successful issuance of our sustainability-linked bonds in the Mexican market. Consistent with our financial discipline, our strong credit profile, and commitment to sustainability, we’re happy to say that we priced our first-ever sustainability-linked bond in the Mexican market for MXN9.4 billion.

These bonds were priced in two tranches, MXN6.9 billion at a fixed rate due in seven years and MXN2.4 billion at a variable rate due in five years.

This transaction also represented the first-ever sustainability-linked bond issuance for the Mexican market and has received broad participation from investment-grade dedicated investors, confirming Coca-Cola FEMSA’s financial discipline and focus on sustainability.

As part of this transaction, we’re publicly committing to achieve a water use ratio of 1.36 liters of water used per liter of beverage produced by 2024 and a water use ratio of 1.26 by 2026. Today, our water use ratio is 1.49 liters, a benchmark of water efficiency for the Coca-Cola system.

For additional details on our use of the proceeds and commitments related to this transaction, you can find a copy of our sustainability-linked bond framework on our website and a copy of second-party opinion provided by Sustainalytics, who confirmed that our ambitious targets are aligned with sustainable bond prices.

Finally, I want to underscore Coca-Cola FEMSA’s financial strength, which is once again reflected in our strong balance sheet and solid cash flow generation.

As of September 30, 2021, our net debt-to-EBITDA ratio closed below 1 times compared to 1.13 times at the end of 2020, while we closed the quarter with a cash position of more than MXN50 billion. Additionally, highlighting the strength of our cash flow generation and our confidence in Coca-Cola FEMSA’s solid financial position.

On November 3, we will pay the second installment of the 2020 dividend in the amount of MXN0.63 per share for a total cash distribution of approximately MXN5.3 billion.

With regards to CapEx, we will continue to take a very disciplined approach to capital allocation, using our cash control tower methodology to ensure that we maintain solid cash flow generation for the remainder of the year.

I am very encouraged by our achievements during this quarter and very proud to continue making history in terms of our sustainable financing as we are confident that these efforts will not have – only have a positive environmental impact, but also bolster the environmental commitments across our industry.

As always, we’ll continue to focus on driving growth while continuing to create social and economic value, which at the core of our company’s principles. And with that, I will now hand the call back to John for his final remarks. Thank you very much for today’s patience and listening to our call. Thank you..

Thank you, Constantino. In closing, I’m encouraged by what the future holds for Coca-Cola FEMSA. We have the right strategy, talent, and culture, and we continue to deliver accelerated results across all our strategic fronts as we described during today’s call.

Although, our market environments remain dynamic, our ultimate goal is as clear as ever deliver sustainable long-term growth and shareholder value for many years to come. Thank you for your continued interest, trust and support and for joining us today. Operator, I would like you to open the call for questions now..

Thank you. [Operator Instructions] Our first question comes from Felipe Ucros with Scotiabank..

Thank you. Good morning, John, Constantino. Thanks for taking my question, and congrats on the results. Very well forecasted on the Brazil impact.

Just on my side, on distribution agreements, just wondering, it seems that in the comments about the distribution agreements in the release, you mentioned Mexico and Panama in the list of countries where you’re now testing distribution pilots.

So I just was wondering if you could give us a little more detail about what pilots you’re conducting in those two countries. Also, I saw a mention of consumer product brands, which I thought was a little strange, I would have thought you would have mentioned beverages. So maybe it’s referring to non-beverage products.

I just wanted to confirm that it just pops into my mind as I was reading it. Thank you..

Sure. Felipe, thank you so much for your question. Yes. I mean, let me try to frame this. And I mean, first of all, what we’re doing across different geographies beyond Brazil, right, everything started with Brazil, where we’ve had a legacy business of beer, and we – you all know the story, right, and where we’re at today.

But as we mentioned a couple of months ago, our cooperation framework with Coca-Cola is now enhancing our ability to focus on our multi-category strategy.

In line with that, in conjunction and in agreement with the Coca-Cola Company, we’re running pilot programs that will enable us to assess and learn from new shopper and consumption occasions and gather necessary insights to strengthen our value proposition for retailers and consumers in the future.

So with that in mind, this is allowing us – this has allowed us to start thinking about our value proposition with a true customer-centric approach. And I know that sounds a lot like cliché, but this is – in our case, we’re leaving that to a full extent.

So we’re looking at our value proposition from the customer backwards and how does that add value to that to us and to the consumers, right? With that in mind, we’re looking at categories that are adjacent to our value proposition, but they’re also going beyond beverages. So to confirm your question, that is 100% accurate.

So we’re going in some of these pilots, we’re starting to test value proposition that includes not only beverages, right? So for example, in Mexico, we’re running a pilot program in the city of Teva right now, you can go check to distribute the portfolio of one of the leading and very significant alcoholic brand companies with – an agreement with them, we’re – we decided not to disclose it right now at a pilot level, but it’s out there, right? So the points of sale are currently being served by us in this portfolio.

And we believe that this will allow to serve new consumption of patients and boost Coca-Cola FEMSA sales with a combined execution and the focus to a portfolio that serves the traditional beyond premise and the home delivery channels.

On the other hand, in another region in Mexico, we’re beginning a pilot program with one of the world’s leading FMCG company. It has anywhere from household products to personal care products that we believe will enable us to serve new shopper occasions and strengthen this one-stop-shop value proposition for the traditional trade.

So that’s, for example, in Mexico, very recent, and we’re moving along those lines with a lot of optimism in terms of what results we can get from that. In the case of Panama, where we started working with one of the leading beer companies in the world.

And we’re already running a pilot program there with distribution and sales in Panama to, which we believe is very complementary in the way we address the market and it solidifies our route to market, as well as it brings to life this value proposition focused on the customer-centric approach. And in Brazil, we have enhanced our portfolio.

We already have confectionery. We placed quite well in some of our channels. And we’re also adding new alcoholic beverages beyond the Biago project that we’ve extensively tested in Brazil, and we are expanding into other regions, and we’re adding also other consumer good propositions into this process. So it’s very exciting. It’s very dynamic.

We believe that these pilots will scale up quite fast, and then we will be able to provide for more visibility and information on them. And we remain extremely focused. This is a significant change and shift in the way Coca-Cola FEMSA has addressed the market.

It levers up our ability to serve with our phenomenal frequency and penetration in the market. And it’s a win-win for many players in the value chain, the customer, the consumer, ourselves, the Coca-Cola Company, and our potential planners. And I hope that addresses your question, Felipe.

And more than welcome to host any of you in our regions, so you can see them live..

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

Thank you. Thank you for the call. Good morning, everyone. I have two questions.

First of all, when we look at margins in South America, can you give us a little bit of more color per country, where you saw more pressure where you saw some countries eventually outperforming, and how you’re forecasting or expecting in 2022, considering that eventually have a tougher consumption environment in some countries.

How can we think about profitability for South America? That will be my first question.

And second question, regarding the beer sales, I understand that the transition is completed right in Brazil and how you’re seeing the pickup of the brands that you’re left in the portfolio and the ramp-up of Tiger and eventually the other brands that you guys are rolling out? Thank you..

Thank you so much for your question. Margins in South America. Well, as we mentioned, if you exclude the extraordinary tax effect, our EBITDA margin would have expanded approximately 140 basis points to reach 14% EBITDA. This would be a 15% EBITDA growth year-on-year. So to give you more color, this is explained by the following effects.

We had better volumes across the division overall. Two particular markets in South America that are recovering price mix, Argentina and Colombia, are performing very well.

So these are markets that, despite the difficult conditions they face very differently, they have been recovering their price mix, and that has had a positive effect in their margins. Favorable raw material hedges. As we mentioned, we’ve been doing quite a good job, I think, so far at hedging of raw materials.

And on the other hand, despite that extraordinary tax effect, we had the reduction of tax credits in Brazil, right? So that’s one element that explains the effect in South America for the margins.

In addition, as you mentioned, and we’ll elaborate more on that, the transition of our beer portfolio initiated, right? And that has a negative impact to margins in the short term.

As you are letting go of a premium set of brands, Heineken and Amstel, you’re maintaining economy brands that have lower margins structurally, and you’re incorporating – hello? Hello? Maybe the call dropped?.

I’m on the call..

You want to just complete where u stopped?.

Hello, John. I’m on the call here. I think Constantino is back online as well..

Yes. I’m back online. I’m very sorry if I got cut off, technical difficulties..

Okay..

Okay. I think we’re all back online..

Okay. So as I was saying, we had a – and sorry for that technical difficulty. We got cut off the line. We’re transitioning the beer portfolio, and that has a negative impact in the short term.

As I mentioned, you’re letting go of two treatment brands with healthy and high margins, keeping economy brands that are lower margin structurally, and adding new products into your lineup that are very positive in margin, but they’re very low in volume in the beginning, right? So that effect impacts the margins.

We’re also seeing increases in sugar costs in Brazil and Colombia and evidently, and this applies to most of our markets, the normalization of marketing, labor and maintenance expenses in our operations is picking up, right? So in 2020, a company of this size you take a lot of measures for cost containment.

Some of them roll over and you start to – you have to start letting go of some of them and the normalization of that also has an impact when you look at it versus 2020. So that, in my opinion, is the explanation for margins. It’s a mixed situation. But we believe that once the tax effects are out of the base.

Once the transition into the portfolio is full effect and the new brands that are – we’re very optimistic about them, start to gain traction. And the hedging strategies that we’ve put in place will be able to protect our margins.

And in some markets like Colombia, I could even say that 2022 should be a year of – with high probability of margin expansion to I don’t know if that addresses your question. And once again, I’m sorry for the interruption..

And Isabella, I think the other thing, just to add to what your second part of the question, was how was our sales. First of all, we’re very, very pleased on how the portfolio is developing. Having the high premium craft in there with Therezopolis, which is an extraordinary liquid, is doing wonderfully.

And the launch of Tiger is also according to expectations. It’s doing well. And Eisenbahn, we’re gaining distribution levels well above historic levels. So I think overall, how we are developing our beer portfolio in Brazil is doing well.

How we’ve configured the portfolio in terms of structure of super-premium, premium, and cores and economy is developing correctly and the volumes are coming and the distribution levels are coming. So we’re pleased to see the performance of how things are developing..

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

Hi, John. Hi, Constantino. Thank you for taking my question. I have two questions on my side. First one on Brazil. Once again, you delivered a very solid volume performance this quarter. But your peer and Dino, on the other side, reported a decline in soft drink volumes.

So it would be very interesting to hear from you your thoughts on what could mainly explain this gap? And how you are seeing the demand outlook going forward in the country? And the second question on my side is basically on your solid balance sheet. You mentioned that you are with a net debt-to-EBITDA ratio below one times.

So it would also be very good to hear from you what are your capital deployment priorities if you would be considering distributing extraordinary dividends or even repurchase shares? Thank you very much..

Thank you, Marcella. Well, I’ll take this one, and I’ll have John complement with his thoughts. Well, we can talk on behalf of India.

So, I can give you our perspective, what’s driving that consistent volume growth in Brazil? First of all, we have been gaining market share across categories, including record levels in sparkling in the energy drinks, right? So our portfolio, our decisions on portfolio, gearing our portfolio towards affordability with initiatives, such as multipacks, that higher penetration of returnable.

And the huge effort that we’re putting behind understanding shopper habits with digital – with heavy digital presence and tailoring our value proposition there has allowed us, by accelerating the rollout of these digital capabilities to continue to grow.

On the other hand, John mentioned that we – on our digital front, we have more than 200,000 customers using what we call our Juntos Plus platform, which is centered at this point in time in a WhatsApp business platform.

And this represents 50%, almost 50% of our total customer base in Brazil, right? We are managing over 15,000 orders in one day, and that’s growing by each week. And that’s equivalent to increasing in a traditional model over 200 resellers in terms of order injury effort.

So, when you look at the conjunction of those different tools that we have put in the market, the focus and the consistency, which I think is very important. This is not something that happens overnight.

We have been doing it for a few years now, and we’re able to navigate the pandemic quite well, I think, in Brazil, and the resulting volume are there, as you mentioned. So the consistency is also an important element that continues to drive volume growth. I don’t know, John, if you want to add something else to the….

Marcella, thanks for the question. I think a lot of it has to do in terms of our performance in Brazil is the fact that we are coming across with a very high value proposition for our customer. And what Constantino I just spoke about in terms of the digital order taking capability to what’s up.

What we have done is, basically, we have never taken any sales force out. We’re keeping all our feet on the street. And we’re complementing via digital, the ability for small stores to order anytime anywhere. So we’re getting a lot more volume from smaller accounts, a lot more activity per account.

We’re growing our – the number of items being sold per store. And as we complement the portfolio, what the consumer – customer is looking for from a multi-category perspective, we’re getting enhanced ordering per customer per store. So I think that is a very large key to what’s going on.

And so that, combined with a multi-packing strategy that we have for both single-serve and multi-serve I think, is really what’s distinguishing our Brazil portfolio performance right now. And I think the other thing is where we are today is we’re getting to the point of all-time shutter where you have an all-time share highs in Brazil.

So, I think that’s – I can’t really speak about Andina, – but I think that’s what’s driving our performance there. And on the balance sheet side obviously, our intent is to continue to expand our geographic footprint – And we are in active conversations with the Coca-Cola Company.

– to define determine what the logical expansion strategy is for Coca-Cola FEMSA. What sense for the system and what will bring the most value for the entire for both companies. So our intent is not to go out at this point, okay, and go out and deliver in any extraordinary dividend that to the base business.

We have ample reinvestment opportunity across many initiatives and then we look for continued inorganic growth..

That’s very clear. Thank you, guys..

And to complement, John, I mean, in these conversations and in line with the framework collaboration fan that we have mentioned. These had organic opportunities should not only be interpreted only in the bottling system and expanding our geographical footprint.

The – we’re also looking at capabilities, capabilities that can enhance your value proposition, for example, in how to enhance our digital capabilities going forward. And we’re looking at very different possibilities in terms of inorganic expansion and deploying our capital.

So the way that we’re looking at the business right now is quite different than we used to. And with that in mind, we’re redefining that inorganic growth path, as John mentioned, in conjunction with the Coca-Cola Company. I think you got cut off a little bit, so thank you for your question..

Very clear. Thank you, both..

Thank you. Our next question comes from Alan Alanis with Santander..

Thank you. Good morning, everyone, and thanks for taking my question, and congratulations on the results. Let me follow-up on the previous question. I mean, you have MXN 2.5 billion of cash. You’re under one-time net debt-to-EBITDA. So that means your firing power in Italy, above MXN 6 billion, without losing your investment grade.

You mentioned geographical expansion, but we also mentioned new capabilities can – what is the likelihood is like this – what is the likelihood that that you deploy capital in a large way, considering the firepower? Or will you prefer to go into a series of small incursions into all of these projects? That would be my first question..

You want to take that?.

Yes. Hi, Alan. How are you? Listen, I think if you think about where we're going on in this framework and the low industry new renewed relationship we have with the Coca-Cola Company. What we're doing is finding – first, there is a way of looking at the consumer or the customer that allows us to become more customer-centric.

So as we go forward and open up to a multi-category approach in all of our markets, okay, there is opportunities to think about acquisitions that are not only Coca-Cola brand territories, but also those companies that could actually add value to a multi-category platform that we're building together. So that's the first part.

Secondly, our preference would be to continue to expand and significant expansion of territory to make a difference for Coca-Cola FEMSA piece for the system. And secondary acquisitions to enhance value with other categories; as we continue to learn about these businesses, as we go forward to be able to bolt them into the system.

I think it's too early to tell that we'd go out there and make a major acquisition, something that we particularly don't know about, especially when we're just opening ourselves up to multi-category.

And I think the third piece to think about, Alan, is as we build out our new digital capabilities, we would need to also probably entertain the thought of joining, partnering or federating with other people to be able to build this capability.

So it would be not too far-fetched to think about investments in tech partners that would allow us to complement our platforms, and that's where we're heading..

Well, like Constantino said, I mean, you are really looking at the business in a different way than in the past. Congratulations for that. Last question really quickly, I mean, I know you made already comments regarding beer in Brazil.

I mean, but if I'm running the numbers here correctly, I mean you did lose about one-third of your volumes in the quarter year-over-year. Heineken reported yesterday and they said that they had declines in Brazil in the mid-teens, and Amstel reported this morning and they're seeing high single-digit growth in volumes.

So how do you see the trajectory in terms of recovering the lost volume of the Heineken brands in Brazil going forward in terms of the number of years? I think Andina mentioned yesterday, two to three years, would you agree that how long it will take to be back at the level before you let the Heineken and the Appstore brand goal?.

You want to take that, Constantino?.

Sure. I think that two years is a prudent horizon, Alan..

Okay..

But at the same time, the way that, for example, Therezopolis is a very, very small brand today with enormous potential, the best, offensively, and both the value proposition that has the craft architecture in mind and the liquids are great, and our distribution capability will definitely drive exponential growth there from a very small base.

Estrela is a fantastic brand, and as you've seen, they're also looking at expanding capacity for local production in Brazil, too. So that can also complement the Heineken portfolio and grow very rapidly. And at the same time, I must say that we're also having conversations and we have other initiatives in the beer portfolio in the pipeline, too.

So it's early to tell two years would be very prudent. I think that what we're seeing, for example, in Eisenbahn, our coverage is growing super fast. And that provides us some light on the potential of some of these brands in our system that Coca-Cola FEMSA has. So two years, prudent.

I would try to – we'll do everything in our hands to be more aggressive and faster in that equipment..

Yes. You have a lot of degrees of freedom in terms of who you can partner with beer. I wish did the best on that recovery. I mean, last comment, this is not a question, but I'm just going to put it out there. I think we're going to look at this Heineken departure as a kind of strategic mistake from their side in Brazil.

But anyway, that's more for another conversation.

Congratulations on your results, and thank you so much for taking my questions?.

Thank you, Alan..

Thank you, Alan, for your question..

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

Yes. Good morning, everyone. John, I don't know if you covered this a little bit a bit earlier. But how does FEMSA's top management changes impact your ability to address some of the big-picture, value-creation opportunities that you see specific for Coke FEMSA.

Senior management changes sometimes bring the opportunity to rethink or to redirect certain opportunities that you're working on?.

Carlos, how are you. Good to talk to you. I think the way I would interpret the senior management changes at FEMSA. FEMSA is that Daniel is bringing continuity to something that has been begun by Eduardo.

And Eduardo was a key component in ensuring that both FEMSA and the Coca-Cola Company have come to an agreement on this new joint development framework that we have.

And so what I see in the appointment of Daniel is somebody that brings further experience and knowledge of acquisitions, has the ability to develop businesses internationally through M&A and has a global perspective that complements exactly the strategy that was being put in place by FEMSA.

So I think this is a boost to a strategy that we have in place, so continued expansion via inorganic expansion. So I think it's – we're looking at probably accelerating even further the opportunities we have under this new management team..

Thank you..

Thank you. Our next question comes from Lucas Ferreira with JPMorgan..

Hello, everybody. Thanks for the space to ask questions. John, regarding the – your strategy of growing multi-category, don't you think that the fact of the coke system being sort of a different platform, probably upgrading in the same country, it's a weak going, I would say. For instance, you mentioned some of these multinational CPG companies.

Would they have to – in order to do sort of a broader countrywide partnership, would they have to also partner with all the bottlers in order to achieve all their customers? So are you seeing some sort of a coordination between the bottlers to get into the same direction in this sense? Or you feel comfortable doing the partnerships yourself? Can you talk about that aspect of the Coke system in this multi-category strategy? And if you have any idea of – if this initial, let's say, experience is already contributing to actually improve your own sales, right? This is actually bringing – if this is a synergic corporation, not only just a pure distribution operation, if you're seeing your customers actually more satisfied with the whole service you're providing to them.

That's my question. And the second question, if I may, is more of a follow-up to Alan's question. I think kind of Constantino kind of answered this. But your portfolio in Brazil today, I guess, is too much skilled to value and mainstream. You're now with Therezopolis, with [indiscernible].

So don't you think you're going to need to reinforce more the premium portfolio since this is the fastest-growing portion of the market? Thank you..

Okay. Constantino, do you want to take that one, the last one first? And then we'll build on the other ones..

Sure. As I mentioned before, we're in the process of building up the portfolio. As you know, it's a combination of mainly Heineken drives and other relevant partners and including own brands, like Therezopolis. The latter doesn't happen overnight, right? So we are – we're building the portfolio.

We definitely have mapped out what is the ideal portfolio for value proposition that definitely includes premium and super premium brands, and we're in the process of developing those in conjunction with Heineken in some spaces and within – with other partners in other plants. So yes, the answer is definitely we need premium. We're working on it..

Okay. Listen, on the fact of what you asked about the multi-category experiences. Are we selling more? Are we not selling more? First of all, the customer satisfaction metrics that we see are growing and growing across Mexico – I'm sorry groceries that we have already out there with this and in Brazil particularly.

And when you start thinking of an indicator that makes a lot of sense for whether this is successful or not is the number of items per store that you're selling. So when we put this on top, and we start looking at the number of items at the store that we're using, they're signing with active users, we're selling 27% more.

[Indiscernible] with the digital platform and the multi-category platform put together. Okay.

So one of the big discoveries that we're having and is logical is that if we give – if we change the dilemma from order when I get there to order whenever you want, we're getting orders in at very late hours with a lot more time by retailers to order more Coca-Cola and also them to put together a better purchase portfolio for the other items that they have.

So we're seeing some very important numbers on items per store, but we're seeing a lot more adoption of more purchases per store of the entire multi-category portfolio. So it's –obviously, there is a virtuous circle here that is working okay, that favors the customer but also obviously favors what we sell, and that's exactly what we're looking for.

And on the system issue with the rest of the Coca-Cola system, I think a lot of – when you start looking at the players out in the fast-moving consumer goods world, you either go through wholesalers or you go through distributors. And the options that they have to do that is obviously they're plenty.

And when you start becoming a potential distributor, I think you have to earn your way out to the right of becoming a preferred and unique or exclusive distributor, okay? So I think as we go forward, Coca-Cola FEMSA and other large bottlers will continue to lead the way in terms of multi-category.

The smaller bottlers are going to have to take on and backfill on these brands wherever there is more interest on the brand's part to have better distribution in the territories that they have. So I think weaker bottlers, as you say, will have the opportunity to do this, okay? But I think it's going to be a second step for the system..

Thank you very much..

Thank you. [Operator Instructions] Our next question comes from Antonio Hernandez with Barclays..

Hi. Good morning. Thanks for taking my questions. Regarding volumes in Mexico, you face the weather headwind and also higher product cases in a part of the quarter.

But excluding that, how are you seeing performance ahead?.

I struggled to listen to your question, Antonio. Could you repeat the question, please? At least in my case, it was difficult for me to understand..

Sure. It's regarding volume performance in Mexico. You faced a couple of headwinds, such as weather conditions and higher mobility restriction, in a part of the quarter.

Excluding that, how do you see volume performance and your expectations ahead in Mexico?.

Jorge?.

Sure. Hi, Antonio. This is Jorge. So yes, Antonio, as you mentioned and as John was highlighting during his remarks, the weather was definitely an important factor this quarter.

Actually, if you look on a regional basis in the Southeast of Mexico that faced easier or milder weather conditions, we did see growth that was actually basically flattish versus our 2019 baseline. So that's encouraging for what's for us going forward. So we do expect to see a recovery on that in the fourth quarter.

And then as we move into 2022, we have been discussing our plans with the Mexico team, and they are optimistic we're going to focus on affordability. We have several initiatives to continue to drive and push affordability to offer value for our customers, for our consumers in Mexico. So we think that volumes should grow in 2022.

And of course, that would mean that they will be ahead of our 2019 baseline, right? So weather was definitely an important factor this quarter, Antonio..

Okay, perfect. Thanks a lot. .

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

Hi, John, Constantino, Jorge. Thanks for the call. One follow-up also on volumes in Mexico. I know the weather was a big factor, but Coke sort of mentioned this market share, small market share losses. So if you could just discuss sort of market share dynamics in Mexico, it would be great.

My question apart from that is, and this came up a couple of times yesterday on the Coke call, given how tricky the operating environment is, obviously, particularly on the cost front into next year.

And given this new framework with Coke, is it fair maybe to think of any flexibility on concentrate from Coke? Or should we read into that at all or not really? Thank you..

Thank you for the questions. First of all, I think we – the – The relationship we have with the Coca-Cola Company is not something that's going to give you flexibility short term, but it's going to give you a long-term certainty.

And I think what you're going to – what we have was the ability and the dialogue and the alignment of understanding what is required short term or not and whether we need to support each other more one way or another. So I think just to answer your question, no, there wouldn't be any of that flexibility.

But I do think that there were any cases where we need to have additional support from the Coca-Cola Company for particular programs, they're always open to that. So I wouldn't read too much into it as you were satang.

And secondly, on the dynamics of share in Mexico, I think we have a very competitive marketplace in Mexico City, a very competitive marketplace in Mexico City. And we – given some delays that we've had bottles on supplier bottles and the availability of bottles in certain machineries.

We have not been able to go out there and execute fully our packaging strategies, okay? And that has led to slight decreases, as you say. But it's basically contained to two or three sites that we understand, different dynamics. It's probably Mexico it is different than the outside of Mexico City.

And we're fully aware of what – where these issues are from and how to address them in the future..

Great. Thank you very much, John. .

Thank you. That is all the time we have for questions today. I would like to now turn it back to our presenters for any closing remarks..

Well, thank you for your confidence again and interest in Coca-Cola FEMSA. As stated, we are transforming this business into something that is very different than what a bottling – bottler is. And we understand the capabilities of tomorrow's bottle are very, very different than what they were in the past.

And I think we're making enormous strides to build those capabilities along all countries in Coca-Cola FEMSA. So as always, our team is available to answer any of your remaining questions. And thank you for your participation today. Have a good day..

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