Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q2 2021 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Coca-Cola FEMSA's Second Quarter 2021 Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance 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, which can materially impact the company's actual performance. At this time, I would now like to turn the conference over to Mr. John Santa Maria, Coca-Cola FEMSA's Chief Executive Officer. Please go ahead, Mr. Santa Maria.

Thank you, operator, and good morning to everyone. Thank you for joining us today to discuss our second quarter 2021 results. We hope that you and your families are safe and well. With me today are Constantino Spas, our Chief Financial Officer; Matias Molina, our Strategic Planning Director; and Jorge Collazo, Head of Investor Relations. I am very encouraged by the meaningful improvements and solid results that we have achieved during the second quarter. Although the COVID-19 pandemic continues to weigh on daily life across the world, our company is gaining momentum. This is driven not only by mobility and economic recovery across our territories, but also by our ability to execute and deliver results on all of our strategic fronts. A year ago, we shared with you our 5C framework, which have guided our mitigation actions with clear -- with a clear objective of protecting our employees, supporting our communities, reinforcing our cash flow and ultimately, emerging a stronger company. Before reviewing our results, I want to recognize the unwavering passion and commitment of our team to serve our clients and consumers through these unprecedented times. Their daily efforts are a cornerstone of our company, and we are tremendously proud of the entrepreneurial consumer-centric culture that we are building together. On today's call, I will walk you through the highlights of our second quarter results. I'll also take a moment to dive deep into the strategies we are implementing in our Mexican operation, before closing with some comments about the enhancement of our collaboration framework with The Coca-Cola Company. It is very positive news that we continue to bolster our successful and long-standing relationship for the long term with KOF. Before we open up the floor to take questions, I will then hand the call over to Constantino, who will guide you through the division's performance, our raw material hedging strategies and our first green bond report. He also will discuss the steps we continue taking to ensure the company's solid cash flow generation, which enabled us to increase our cash position by 8% during the quarter as compared to year-end 2020, even after paying down debt and the first installment of our dividend. Moving on to our results for the quarter. Our consolidated volumes increased 9.1% year-over-year and 1.3% increase as compared to the same period of 2019. This increase was driven by volume growth across all of our markets. Notably, Brazil, Colombia and Guatemala are all growing versus 2019, while we continue to see an acceleration in the sequential recoveries in the rest of our territories. As consumer behavior and channel performance normalize at the increasingly faster pace, we saw some strong performance across all our beverage categories. Our sparkling beverage category posted solid volumes in both Brand Coca-Cola and Flavors, while our stills and personal water categories achieved double-digit growth across all of our territories driven mainly by increases in mobility and the gradual recovery of on-premise channel. Specifically, our sparkling beverage category grew 6.5% year-on-year, led by 5.3% volume growth in brand Coca-Cola and 11.5% growth in flavors. Most importantly, when compared to 2019, our sparkling beverage category grew 3%, driven mainly by the solid performance of Brazil, Colombia and Guatemala. Another benefit from increased consumer mobility is the performance of on-the-go consumption occasions. Our still and personal waters volumes which significantly over-indexed on these occasions are recovering at an impressive pace. To give you a sense, our still beverage category volumes increased 35% year-on-year and 4.4% as compared to 2019. Our monthly average of active clients continues recovery, surpassing prepandemic levels, driven mainly by the resilient traditional trade and the reopening of the on-premise channel. In Mexico, on-premise volumes increased more than 50% year-on-year. While in Brazil, we achieved double-digit growth despite significant restrictions in the month of April. With regard to our mix, we saw significant recoveries in single-serve presentations as compared with the previous year. However, there is still a runway for additional mix recovery. To give you a sense of what is happening, in Mexico, our single-serve mix has recovered 6 out of 10 points of single-serve mix that has shifted during the pandemic era. So we're seeing a comeback, but we still have some runway for increased single-serve mix growth. Driven by volume growth, our revenue management initiatives and improvements in our price/mix, our consolidated total revenues increased 10.9% year-on-year. Notably, we achieved this growth in the face of continued unfavorable currency translation effects from all of our operating currencies into Mexican pesos. Excluding these headwinds, our comparable top line grew 19.2% year-on-year and remained flat compared to 2019. Regarding our gross profit, our raw material hedging strategies, coupled with our cost-cutting and savings initiatives, these offset increases in raw materials cost, the depreciation of most of our operating currencies in Central America and Argentina and the higher concentrate costs in Mexico. Importantly, as discussed in our earnings release, we are resuming the recognition of tax credits on concentrate purchased from Manaus Free Trade Zone in Brazil, beginning in the second quarter. As a result, we registered an extraordinary MXN 1.083 billion in our cost of goods sold for the fourth quarter. This amount is equivalent to a cumulative credit suspended since 2019 and until the first quarter of 2021. Notably, this decision is supported by the recent developments and opinions from external advisers. Considering these effects and despite the gradual normalization of certain operating expenses, such as marketing and labor costs, our operating income increased 41.3% versus 2020 and 14.4% versus 2019. Additionally, our operating cash flow increased 21.7% year-over-year, 9% higher than our 2019 baseline despite a comparable that includes significant noncash effects related to currency fluctuations during the preceding year. Finally, our controlling net income increased 38.9%, driven mainly by our operating income growth coupled with a decline in other nonoperating expenses related to the impairments of MXN 903 million recognized during the same period of 2020. Now I will expand on the strategies behind resiliency and innovation that our position in Mexico -- our Mexico operation for long-term growth and continued success. First, we are driving this market recovery through a consumer-centric and multi-category portfolio that is leveraging our execution capabilities and ability to provide affordability to our consumers. As a result of our initiatives and the gradual normalization of mobility, our volumes during the second quarter grew across all our beverage categories. Volumes, excluding bulk water, increased 3.9%, driven mainly by 19% growth in still beverages and solid 47.5% growth in personal water. This recovery is only low single digits below our 2019 baseline. Indeed, in June, we closed the quarter flat compared with 2019 despite unfavorable weather in Mexico. Notably, during the quarter, we successfully launched the new formula and visual identity of Coca-Cola Sin Azúcar or Zero Sugar, with a great reception from our consumers as we continue to incentivize growth of our nonsugar portfolio. We are convinced that affordability will remain an important growth driver in Mexico. For this reason, we continue investing behind this core capability. During 2020 and 2021, we have invested more than MXN 140 million in production lines and returnable bottles and cases. Additionally, the launch of our Universal Bottle, or Botella única, which enables us to use the same refillable bottle for brand Coca-Cola, flavors and even noncarbonated beverages, such as Valle Frut is delivering better-than-expected results. It has allowed us to gain up to 3 percentage points of share in our flavored sparkling category, and its success in noncarbonated beverages has also been [ outstanding ]. Notably, Valle Frut has become our second leading brand in terms of [ volume ] in this attractive presentation for our consumers, where we have launched it. We are also working on complementary distribution models to increase our service levels, reflected in double-digit growth in emerging channels such as distributors and wholesalers. Speaking of complementary channels, our home delivery routes continue to achieve double-digit revenue growth. We have already introduced 266 additional routes that are enabling us to better serve our consumers' needs directly to their homes. We are implementing these top line growth initiatives simultaneously with initiatives that enable us to operate as [ a leaner ], more profitable Mexico operation. These strategies, which began in 2019 with the implementation of our Fuel for Growth program have allowed us to generate savings of approximately MXN 250 million. As we move into 2020, our Mexican operation redoubled its effort to generate cost and expense efficiencies, achieving an impressive MXN 4 billion of additional savings. Most importantly, our ability to generate efficiencies, freed up resources that became sustainable savings for us to reinvest in the market, our collaborators and our infrastructure. Our cost and expense efficiencies over the past 2 years have allowed us to consistently increase our operating income and operating cash flow in the face of an uncertain and volatile environment. Today, our Mexican operations profitability is ahead of 2019, and we maintain a significant amount of savings that we generated during 2020. Finally, we must underscore the acceleration of our digital initiatives in Mexico. Notably, we are now serving more than 100,000 clients through our WhatsApp omnichannel platform, and we began to pilot test our B2B URL-based platform called Juntos. Looking ahead, we are confident that we are positioning for our Mexico operation for long-term continued success. Our team is guided by clear strategic priorities to continue building solid capabilities while continuing to generate the necessary efficiencies that enables us to invest behind our growth and transformation. Now let me shift gears to provide you with an update on the rollout of our omnichannel digital platforms. During our previous conference call, we noted that our chat box-enabled business WhatsApp platform, which enables seamless order taking with an enhanced customer experience and lower cost to serve, was serving more than 300,000 active clients in Mexico, Brazil and Guatemala. To give you a sense of our rapid rollout, during the second quarter alone, we increased the number of clients served by an additional 50,000. Notably, in Brazil, our most advanced market in this rollout, volumes sold through our WhatsApp platform, represent more than 5% of our total volumes sold in the country and growing. Finally, we are ecstatic to announce that we have enhanced our cooperation framework with The Coca-Cola Company. Over the years, our companies have continuously worked together to build a very successful long-standing relationship. This solid relationship has enabled us to successfully navigate ever-changing macroeconomic and industry dynamics by driving a consumer-centric mindset and a fundamental transformation in the way we operate and collect [ when we go ] to market. In order to continue strengthening this relationship and to adapt it to new times and opportunities, our company's recently concluded conversations that resulted in an enhancement of our cooperation framework announced previously, ensuring the necessary alignment to guide our business relationship in the long term. This enhancement is designed to ensure long-term alignment in the following key areas. First, growth plans. We have agreed to build and align long-term strategies and business plans to ensure a coordinated execution. These growth plans aim to increase our operating income via top line growth and volume expansion, cost and expense efficiencies and the implementation of marketing and commercial strategies and productivity programs. Second, relationship economics. This is to ensure that the economics of our business and management incentives are fully aligned towards long-term system value creation. This provides additional certainty on the levers that regulate concentrate pricing going forward, fully directing our focus towards our shared objectives, always considering investments and profitability levels that are beneficial to both Coca-Cola Company and Coca-Cola FEMSA. Third, potential new businesses and ventures. As the system continues to evolve, we agreed to explore potential new businesses and ventures such as distribution of beer, spirits and other consumer goods. Lastly, through a joint general framework of digital initiatives, we acknowledge the great opportunity to develop a joint digital strategy across strategic quarters. The above is consistent with James Quincey's comments during The Coca-Cola Company's earnings call last week, and I quote, "We are working together to improve distribution economics and open new revenue streams by providing other CPG brand access through our deep customer relationships and distribution." This new relationship model is great news for both of our companies. It further strengthens our relationships, ensuring long-term alignment, partnership and certainty, positioning us to accelerate further towards our shared purpose of refreshing the world. In summary, we continue to deliver on all of our strategic fronts, from strengthening our relationship with our partners to building a solid portfolio while accelerating our digital initiatives, all while continuing to successfully navigate still a complex dynamic environment. Once again, we are confident that our mitigation actions and our positive momentum positions us on the right path to continue achieving our targets for the year. With that, I will now hand over the call to Constantino.

Thank you, John, and thank you all for joining us on today's earnings call. I will now expand on our division's second quarter highlights. Beginning with Mexico. Our top line increased a solid 12% driven mainly by pricing initiatives and the gradual recovery of our price/mix. On profitability, our successful raw material hedging strategies have enabled us to expand our gross margin despite increases in commodity prices and the higher concentrate cost in Mexico. Specifically, we can confirm and increase in concentrate cost for sparkling beverages in Mexico, which is effective this month of July. This increase not only is in line with previous adjustments, but also is part of our mutually beneficial relationship for the long term. Together, we will continue to invest behind the market to continue driving growth. Moving on to the expenses front. During this quarter, we began to see the expected normalization of certain operating expenses, such as marketing, labor and maintenance. While we maintained a disciplined approach to savings and efficiency. We move to Central America. Our operations delivered another solid quarter. We have seen double-digit volumes driven mainly by a 15.9% volume growth in Guatemala, which continues to grow consistently over time as well as solid performances in Panama and in Nicaragua as these markets continue to recover from the very strict lockdowns and distancing measures they have experienced. On the pricing front, average price declined as the revenue management initiatives were offset by the negative currency translation effect or Central American currencies into Mexican pesos. Exemplifying our operational excellence in the region, we're extremely proud that The Coca-Cola Company recognized the Guatemala operations as the best in Latin America in terms of execution, reflecting our relentless focus on operational excellence. As a result of all this, our quarterly revenues increased 10.5% in the Mexico and Central American division and 4.3% if we compare them to the same period of 2019. Our operating income in the Mexico and Central American division increased 9.3%. Finally, our operating cash flow increased by 5.2%. As John previously mentioned, we will continue to focus on driving our cost savings and operating expense efficiencies that, coupled with the raw material hedging strategies, make us confident in our ability to protect margins for the remainder of the year. We move on to our South American division. We're encouraged by 17.9% volume growth, which was driven by double-digit growth in all the markets. In Brazil, we again delivered a solid performance, with volumes increasing 15% in the face of significant lockdowns at the beginning of the quarter. Moreover, in Colombia and Argentina, where volumes increased by 23% and 29%, respectively, while Uruguay reported a 14% increase. Comparing this volume performance with the second quarter of 2019, our South American division's volume increased 6.8%. Our revenue management initiatives, recovery in price/mix and volume growth in the division were partially offset by currency headwinds, driven primarily by a 12.6% unfavorable translation effect from the Brazilian real. Despite these headwinds, our top line increased by 11.7%. If we exclude the currency translation effects, our top line would have increased 29.9% during this quarter. We work continuously to enhance our affordability, through our returnable presentations and continue gaining share across our territories to ensure sustainable business growth. Despite all of these currency translation effects, our gross profit in South America increased 32%, representing a margin expansion of 650 basis points. This increase was driven mainly by our favorable raw material hedging initiatives, cost efficiencies and the recognition of MXN 1.083 billion related to the resumption of tax credits on concentrate purchased from the Manaus Free Trade Zone in Brazil. Our operating income for the division increased significantly, even with the normalization of these extraordinary tax effects recognized during the quarter, as we cycle through a low comparable base in 2020, resulting from the effects of pandemic across our South American division. Now let me expand on the raw material hedging strategies. We have hedged all of our PET needs for the remainder of 2021, and we have hedged almost 50% of our 2022 needs at prices that are slightly below the ones for 2021. Notably, for 2021, we have also hedged around 75% of our aluminum needs in Mexico and almost 80%, 8-0 in Brazil. On the sugar front, we have covered around 70% of our sugar needs for the year and almost 50% for 2022 at very attractive prices. We're confident that these strategies will continue to allow us to protect their profitability in the upcoming quarters as we move into 2022. Now I'd like to expand on the financial results, which reflect our initiatives to strengthen our balance sheet and our financial position. Our comprehensive financial results recorded a slight increase as compared to the previous year, driven mainly by a foreign exchange loss as net debt exposure in U.S. dollars was negatively impacted by the appreciation of the Mexican peso. This effect was partially offset by lower interest expenses, driven mainly by the payment of short-term financing incurred during the first quarter of 2020 and the payment at maturity of a Mexican peso-denominated bond for MXN 2.5 billion. I would really want to underscore Coca-Cola FEMSA's financial strength, which is once again reflected in a strong balance sheet and solid cash flow generation. As of June 30, 2021, our net debt-to-EBITDA ratio closed below 1x compared to the 1.13x at the end of 2020, while we closed the quarter with a cash position of more than MXN 46 billion. Additionally, highlighting the strength of our cash flow generation and confidence in Coca-Cola FEMSA's solid financial position, on May 4, we paid the first installment of the 2020 dividend in the amount of MXN 0.63 per share with a total cash distribution of approximately MXN 5.3 billion. This dividend represents an increase of 3.7% compared to the dividend paid during 2020 and a 42.4% increase compared to the dividend paid during 2019. With regards to CapEx, as we mentioned on our last call, we have budgeted a ratio of approximately 6.5% through revenues for the year as we continue to focus on increasing our affordability capabilities across the markets. Importantly, we will continue to take a very disciplined approach to capital allocation, which is customary in the way we do business at Coca-Cola FEMSA, 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 to see solid recovery trends in our business. Even as we continue to operate under volatility and uncertainty, our ability to navigate challenging environments and the success of our mitigation actions bolster our confidence in Coca-Cola FEMSA now and into the future. We will continue to focus on generating efficiency and maintaining a conservative approach to capital allocation, while we continue to explore different avenues for growth to continue creating value for our stakeholders. Talking a little bit more about beer, I would like to move on to Brazil and provide you with an update of a redesigned distribution partnership with Heineken in this market. The approval process progressed as fast as we expected, and the new distribution agreement became valid as of May. However, as we discussed during our previous conference call, given the challenging COVID-19 environment, the transition has experienced slight delay. We now expect to begin the transition during the upcoming weeks in the third quarter of the year. It's important to mention that we have been working together with Heineken and The Coca-Cola Company in all the necessary preparations to ensure a very smooth transition for all of the clients and customers. Additionally, good news, Tiger, one of the Heineken's top global brands, has been launched in Brazil. We're already distributing this product in our South Brazil territories, and we see a great potential. It really complements our beer portfolio in the high-growth, mainstream, pure malt segments, Fantastic product and fantastic brand. Finally and equally important sustainability plays a fundamental role in our corporate strategy. With this in mind, I encourage you to visit our first green bond report, which was published on June 30 of this year. In this report, we provide you with an update on the allocation of the use of proceeds from the green bond issued last year, focused on 3 main categories that we believe we can create the most positive impact with, circular economy, water stewardship and climate action. As it's customary with these bonds in light of best practices, we reported on the use of proceeds for the period for 2018 to 2020, allocating $235 million or more than 33% of the proceeds from the green bond. And with that, I will now hand the call back to John for his final remarks. Thank you very much.

Thanks, Constantino. We have a clear vision for Coca-Cola FEMSA. With our renewed purpose, culture and strategy, we are confident that we are taking the right steps to develop future digital capabilities as we accelerate to deliver sustainable long-term growth and shareholder value. Importantly, through our enhanced cooperation framework with our partner, The Coca-Cola Company, we have strengthened our long-standing successful relationship that remains one of our key strengths. Although the overall operating environment remains uncertain, we are confident in our capabilities to continue delivering on our targets for the year as we continue to protect our employees, ensure a safe work environment while supporting our clients and communities. In short, we are confident that we are on the right path to emerge as an even stronger Coca-Cola FEMSA. Thank you for your continued trust and support and for being with us today. Operator, I'd like to open up the call for questions.

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

Congrats on the results. No questions on that front. But maybe I was wondering if you could give us an update on Diageo pilot in Brazil. Any updates you can give us. More importantly than the status, maybe if you could tell us about the lessons that you've learned so far from the spirits pilot and what you expect from that going forward. And then maybe in second place, if you could also give us an update on the JV in Colombia. Just wondering if there's any developments on the regulators front.

Felipe, this is Constantino. Go ahead, John. Go ahead.

No, no. I was just going to say on the Colombia piece, there is any news. We're in the same situation we were last quarter. And we continue to have very strong relationships with ABI, and we're talking about how we proceed going forward, but we do not have anything concrete yet to announce. And on Diageo piece, I'll let Constantino talk about that.

Yes. Thank you, John. Felipe, thanks for the question. Yes, as you mentioned, we continue to evolve our relationship and pilots with Diageo in Brazil. I think there's a series of interest payments. So that's very straightforward with that particular piece. We're moving on and we're expanding as every day on a slightly broader footprint within -- still within a pilot environment and framework. Having said that, yes, we've done some interesting analysis on the performance. It's -- first of all, it's very positive. Once you have segmented properly, the channels and the portfolio, we're seeing an overall benefit across all of the portfolio. So we are seeing upticks in our core portfolio, where we go with the total beverage solution, which I think is the most relevant highlight. There's definitely a complexity in this market as the arrangement of the current distribution footprint in the spirits category is very complex. It has many players involved, and controlling the execution is always something that's complex. In our case, that's I think one of the biggest benefits, being able to go directly and calling directly on the stores and the on-premise accounts and being able to control execution. So that also delivers a significant benefit to the portfolio. And all in all, we're also learning a lot from promotions, cross-promotions with our portfolio and Diageo's portfolio, and we're starting to identify interesting opportunities not only on the promotion side and co-execution, but also on the innovation side. So there's a lot of learning on that end, and we continue to be very optimistic of that development. I hope that clarifies and provide some color to your question, Felipe.

Very clear. Maybe if I can do a short follow-up on market shares. I'm just wondering if at this point, are you seeing any signs that your ability to adapt during the pandemic and provide affordability options is translating into share gains on the way out of the pandemic.

Yes, we are. As we discussed, I think one of the bigger things that we're looking at is initiatives and delivering affordability, and affordability through returnable presentations, whether it be single-serve sizes or multi-serve sizes. And as we complement our portfolios in a lot of different ways, either through returnable and refillable multi-serve plastic, refillable bottles or glass refillables, we're seeing enhanced share gains in the categories. But what's really exciting is that we're continuing to roll out the universal bottle. And where we're replacing that, we're having not only Coca-Cola products placed in our bottle, but also flavored products be placed in that bottle. And so when we launched that in Mexico, for example, where we have the most experience with it, we are seeing a 1 to 3 points share gain in flavors in the CSD side. But the incredible growth is also coming from noncarbonated as we put Valle Frut in it. So the share gains that we're seeing across NARTD in general, given affordability is very large. We start talking about plus 1, plus 2 in NARTD, that's huge. And this is something we're doing all over our territories. So I think our ability to maintain and grow share is something that I feel very confident about.

Our next question comes from Marcella Recchia with Credit Suisse.

I have 2 questions, if I may. The first one is about Mexico. You mentioned about concentrate cost increase and also the normalization of operating expense. So my question is, going forward, how can we reconcile both of them with respect to the evolution of your margins in the region? And my second question is if you can share with us, what are your expectations in terms of EBITDA margin paths in Brazil from retaking IPI tax credits again?

Jorge, do you want to take that one?

Sure, Constantino. Yes, yes, absolutely. Yes, it's Jorge here. So I would say first on the Mexico piece. In Mexico, I would say that yes, there is an increase on the cost of concentrate that as we flagged before, it was likely to happen. It was in line with previous adjustments and for that reason is manageable, right? And then we have the piece about the raw material hedging strategies that Constantino also mentioned during the remarks and the normalization of certain operating expenses such as marketing, labor and maintenance, right? If we put all these together, what we're thinking, Marcella, is that we're very confident on our ability to protect margins during the remaining of the year, right? We have price/mix improving as well. So that's the piece on the expectation, I would say, for Mexico going forward.

Perfect. And...

And you mentioned about the second piece of your question. Sorry.

Yes, sure. Basically, in Brazil, if you can share with us in terms of margin impact, what are you expecting as tailwinds from retaking IPI tax credits again?

Yes, Marcella. Yes, on that, I would say -- yes. Sorry, Constantino. On that, I would say, Marcella, what you can consider for, let's say, on a quarterly normalized amount for IPI tax credits going forward should be around MXN 120 million, right? So this should represent approximately 100 basis points additional to our South America -- the South America division expectations for this year. This including the onetime income that we recognized during the quarter, right? And of course, this number around MXN 120 million would depend on seasonality, timing of inventories, et cetera. But I think it's a fair estimate that you can consider going forward.

Marcella, [ based ] on the 8% that we have in the IPI in Brazil right now.

Our next question comes from Ricardo Alves with Morgan Stanley.

Sorry, if I missed a few of this in the preliminary remarks, but a quick question is on Brazil volumes. We were very positively surprised with your performance in Brazil already significantly above '19. So just if you could share a little bit more details on the main drivers here. I appreciate it's a combination of factors, right? But if there's a couple of them that you could -- you think it's worth flagging. For example, how your competitors are doing, how you're doing relative to your competitors and perhaps even if there's something that is boosting demand here that you think is not sustainable over the coming quarters? That's question number one.

You want to get that, Constantino?

Sure. So Ricardo, basically, what I would say is it's -- first of all, it's consistency. I think that Brazil is very typical in terms of how Coca-Cola FEMSA operates, which is being very consistent with the value and growth drivers that we have across all of our operations. And here, I would say a big part of that is moving and continuing to adjust the portfolio towards affordability. And this basically is all around multipacks, returnables. And on the other hand, a lot of this is also driven by our heavy digital presence, right? We're growing in the digitally native channels very -- in a very accelerated fashion. And we're adapting to these new shopping habits that the consumers have, right, which have been even more reinforced during the pandemic, right? So that's one piece. We're definitely seeing a rollout of our WhatsApp for business, which John mentioned in his remarks. We have more than 200,000 customers using WhatsApp for -- as a platform of engagement. And this is about 50% of our total customer base, right? So we have also been able to capture some orders that previously we would lose all because of traffic, because of a certain amount of circumstances that we're now capturing -- recapturing with the digital initiatives, too. So that's one piece. And the outcome of that is market share. And we have seen considerable increase in market share in Brazil, also very, very consistent. We're growing basically in all of the categories in Brazil, which has also been a trend for the last few quarters. And that's, I think, the consequence of a lot of consistency and great execution. So that would be my take on what's going on in Brazil. And we expect that to continue. It's now ingrained in the way we do business. It's part of our operating model, and I don't foresee any significant changes in that regard. So we grew in CSDs. We grew in teas. We grew in energy drinks. We grew market share in juices, and those are record levels, right? In colas, energy drinks and teas, we're seeing record levels of market share. So I think that all in all, when you put all of these things together, there's a good case of consistency and operational excellence overall on the commercial front. I don't know, John, if you want to add something?

No, Ricardo. I think I'm really, really very pleased to see what Brazil is doing. And first of all, as Constantino said, and as a result of many things, but first of all, is continue to have excellent execution. And taking that execution not only from a physical world to a virtual world, okay, where we're doing a lot with the WhatsApp platform and getting our customers -- the customer journey experience that they require. And secondly, I think there's a focus on affordability, okay, through returnables and multi-packing. And multi-packing, we continue to expand our multipacking on multi-serve, that capability continues to grow. But we will also be focusing and continue to focus on single-serve multi-packing expansion. So there's a combination of things that are going on there are just continuous builds on efficiency, on focus and on execution that allows Brazil to be where it is. And I think we'll continue to gain momentum. And what is very encouraging, too, is to see that although we are taking a little bit longer with the transition from beer. There is -- there's strong brands coming in from Heineken to be able to go out there and continue to build our momentum in Brazil. So overall, we see a very consistent growing strategy in Brazil. That is now clear the tax effects, okay, was a little bit of an overhang. And the beer -- whether the beer dilemma was there or not, and I think that soft. So we're very confident going forward with the Brazilian operation.

Yes, indeed, quite impressive. Thanks for such detailed answer. And second, I mean, I think that, John, you kind of already touched on that second question was on Brazil beer. And a couple of questions on that. Just if you could repeat, I think I missed when exactly you think you guys are going to be able to roll out the new agreement over the coming months. And then maybe, we've discussed Tiger in the past. You touched on that as well. But is there anything more at this juncture that you can share with us in terms of what would be the next steps? Just as an example, I mean, given the higher flexibility that this contract is providing you, I mean do you actually think that there could be other avenues of growth within beer at this point?

Matias, do you want to take a crack at this? I guess not, Matias.

Let me -- John, it's Jorge here. And maybe taking the first part of Ricardo's question.

Sorry, I was on mute.

No worries, Matias. Let me take the first part of Ricardo's question about the timing of the transition. So Ricardo, the timing of the transition, what Constantino mentioned during the remarks, is that we expect it to begin in the upcoming weeks. So we expect that to begin during the third quarter. We are expecting that around August, September, still the final date to be defined. But what's important as well, as Constantino mentioned, is that we are already working in everything that has to do with the back office, right, everything with Heineken and The Coca-Cola Company to ensure this transition is as smooth as possible to our clients.

Yes. I would just add, we were saying that Tiger in the call is [indiscernible] -- Tiger is already launched in the south of Brazil, and we are going to complement the launch, as Jorge was mentioning, in this quarter [ in all our ] territories. And in addition to that, we're working for new launches with the operation to launch and complement our beer portfolio in Brazil. And to your last comment, we already talked about Diageo, and the pilots are running with them. So that will also complement our portfolio in Brazil in different categories. And initiatives like that, we're constantly evaluating and we'll have news soon.

Our next question comes from Álvaro García with BTG.

I have a couple of questions as well. My first one is on the new cooperation framework. I was wondering if there was anything to say specifically about the economics of distributing things like beer that maybe weren't set in stone in the past. So any specific comments on how the economics might have changed or maybe how much more fixed they might be than the past with this new agreement. That's my first question.

Do you want to take that one, John? Or do you want me?

Sure. Look, first of all, I think on the economics going forward, the economics that we have really are with the brand owner. And it depends on the premiumness or the nonpremiumness of the portfolio that we're looking at, but they're pretty much in line with what we had before. The way we're looking at it is, okay, we're swapping out brands or we're refilling that brands. Plus, we have within our agreement, the ability to increase or to have our own, if you want, other international brands put in there, non Heineken brand, so that also gives us the ability to magnify margins over time. So I think it's similar, but it gives us -- the agreement gives us a lot more flexibility to enhance portfolio and also to enhance margins. Constantino, you want to add to that?

Yes, I think that's in regards to our current Heineken setup, as John mentioned. In regards with The Coca-Cola Company, we have, as John mentioned in his remarks, we definitely have developed a new framework that allows for us to work on other non-KOF portfolio of products, which include beer, in the rest of our markets wherever this makes sense for the business. We have sorted out some economical framework around that, but is definitely something that we want to keep to ourselves. It's confidential, so we'll maintain that reserve within The Coca-Cola Company and us. But it will definitely have the ability now to continue to develop a much more expanded portfolio that goes beyond Coca-Cola products and particularly, once more beer and spirits wherever we believe that makes sense for the system in order to enhance a, I would call it, a customer-centric value proposition that allows for expansion of our Coca-Cola portfolio, which includes alcoholic beverages and nonalcoholic beverages as of today. Does that answer your question?

Yes. Yes, it seems like more of the same sort of in line with what we had discussed in the past. So that's very helpful. Thought maybe there'd be something new as per this new agreement. My second question is more a clarification more than anything else. You mentioned in your prepared remarks that on the mix front in Mexico, you've recovered 6 out of 10 points. I was wondering if you can clarify that, maybe give us a bit more color as to how you see mix recovering in the second half. I don't know if that was 6 out of 10 percentage points or if that was a 6 out of 10 index. If you can clarify that, that would be great.

Yes, Álvaro. It's Jorge. Yes, I can take on that last piece on -- regarding the mix. So to give you a sense, what we had is single-serve in Mexico usually is around 35% of the mix, let's say, pre pandemic. What we saw last year and the second quarter of 2020, that shifted towards multi-serve. So that means that single-serve was reduced to approximately 25% of the mix, and now we have recovered approximately 6% of that mix, right? So we still have about 4 percentage points more to recover to reach again pre-pandemic levels. I don't know if that clarifies your question, Álvaro.

Yes.

Álvaro, this is Constantino. And the drivers behind that there is an external factor, which is mobility, the more mobility, the more impulse and on-the-go consumption, so that helps. And on the other hand is also the adjustment of our brand price pack architecture, right, and the revenue growth management initiatives. So the combination of both elements is driving that recuperation of the single serve.

Right. And Álvaro, the most impacted channel we had last year was the on-premise traditional channel. So the small mom and pop restaurant, they just went out of business. It was a tremendous impact for us and a major one for them. So as they start coming back online, we're seeing that recovery. And we're seeing more and more openings as we -- store openings as we go forward. So I would say that as a trend would show, we've recovered 6 points of those 10 and probably by the balance of the year, we can cover most of that.

[Operator Instructions] Our next question comes from Carlos Laboy with HSBC.

John, can you please expand on what has changed in the evolution of both Coke and Coke FEMSA that is -- that seems to be naturally taking you to trust each other more. It doesn't from the outside, seem to be just personalities. It seems to be deeper, more institutionally grounded, something that outlasts people. And to put this trust and common values, if you will, to the test, are you at a point yet where you can start talking about taking out redundancies from both sides? And this is something that's always been delicate and a bit elusive.

Okay. Thanks for the question, Carlos. I think there are a significant amount of major structural concept that have changed. And let me start out by saying that the first one and the one that has moved a lot has been The Coca-Cola Company. And in our opinion, the ability to go out there and think from a consumer and customer-centric position, to see what is required to satisfy consumer needs and customer needs today in an environment where technology is driving a different way of competing has led them to think and has led us to think together on what is it the way we need to -- how do we have to serve customers. And that basically is taking us from a single point of contact between the Coca-Cola system and the client to a platform mentality so that we can go out there and start erasing and solving friction points for the trade. And I think that's a huge mindset shift. And I think you saw that in the quote that James had in his earnings release. And I think it's also part and parcel about what we have agreed upon in our new relationship framework going forward. So I think the first thing is there is this understanding and realization that technology is driving change. Technology is driving the way we compete. Technology will [ definitely ] drive different ways of customer preferredness or where customers are going shopping, and we have to change along with that. So I think we're going to become more and more of a platform solution for customers, and Coca-Cola is definitely on top of that and with that. And the other thing is that we recognize is that secondly, it is a partnership. We can't do it alone. And this new economic and economic framework that we put together with The Coca-Cola Company is one that gives us, Carlos -- the framework was announced in 2016, and this cooperation framework [ announced previously ]. And basically, what is enhanced for is territorial, first aspect is 2016 cooperation framework was based on Mexico. This cooperation framework covers all of Coca-Cola FEMSA. And what it does is gives us certainty of a couple of things. First is we both believe that we have an enormous amount of growth opportunities going forward. Secondly, what we -- I think it also gives us is a framework on which to look at how we both invest together and how we're looking at returns together. So all of a sudden, there's not an unbalanced way of looking at either side of profitability. So it gives us certainty going forward as to what is our perspective on returns given investments. And I think -- and that's a midterm to a long-term proposition. And I think that leads to the trust that you're talking about, okay? It leads to the fact that once we have this in place, that we have to start measuring together online and off-line capabilities. That is basically measuring together knowledge-based, consumer-based information like The Coca-Cola Company has with really business to business and what we do in the operational asset side piece so that we come off-line to online, then we start taking out a lot of redundancies because we have to work much more seamlessly. I think the foundations for trust are definitely there. I think the capabilities that we're developing are extremely powerful. And I think the relationship that we have with The Coca-Cola Company along those lines is excellent, and we're working together very strongly on a very shared vision going forward. Does that answer your question?

We'll move to our next question. Our next question comes from Isabella Simonato with Bank of America.

I have 2 quick questions. First of all, regarding the new framework with Coke, right? And you mentioned the diversification of the portfolio, right, the potential to diversify the portfolio in different markets. This is just to make sure I understood correctly. This is only on distribution? Or as it's happening with the new Heineken agreement in Brazil, eventually, you're pursuing production of other types of beverages in other markets. Just to make it clear that I got it correctly. And thinking about production itself, right, in beer, which I understand that the agreement with Heineken gives you some flexibility, is this the first option? I mean, eventually, do you think that becoming a brewer is part of the plan? And competing in this segment more head to head is an interesting avenue of growth in your view? Or this would be more of an alternative in cases -- or I mean, the idea initially with the Heineken agreement is to distribute the brands that are going to be launched and eventually partner with spirits company, things like that and then producing other types of beverages will be a third option? Just to understand how you're thinking about this agreement.

Sure. Isabella, thanks for the question. Let me try to clarify this. The frame that we have in place right now with The Coca-Cola Company is basically something that, again, is based on customer centricity. And what it basically does is what we're trying to do is go out there and find through a correlated manner, a portfolio of either products or services, okay, that would allow us to enhance the relationship of the Coca-Cola portfolio with the retailer. And in that sense, the objective is not to sell other things, okay, which is a by-product. It is to sell more of the Coca-Cola portfolio along with other things that satisfy our customers. The point being is that what we are looking for is distribution and enhancing distribution at this point. When we start thinking about beer and the Heineken experience that you're talking about in Brazil, there isn't -- it is not in our thinking to become brewers. What we would want to do is complement the portfolio of beers that we distribute, okay, if it becomes -- if there is a customer and a consumer need for it. But it's not our vision to become brewers in Brazil or elsewhere. So what we're thinking about is how to become really a solution for our retailers and consumers, without getting into the asset intensity of brewing or having to do brands, okay, and it's not necessarily our business. So what we're looking for is customer and consumer fronting execution and distribution opportunities. Constantino, do you want to add anything to that?

Yes. Just to emphasize what John is saying, I mean, I think we're pretty good at what we do. So we're great at distribution and a great commercial platform in all the markets where we're present. In the case of Brazil, I think that we -- it's a great demonstration of when you couple specialization and great players in what they do, right? So we're -- in the case of Brazil, we're blessed to be working not only with The Coca-Cola Company, which is a fantastic brand builder, but we also have a great beer partner in Heineken. We have a great relationship with Monster in energy. So when we put together great execution and focus on the commercial side, commercial engagement and distribution, at the same time, great brand building with great products, we think we have a phenomenal opportunity to grow, which is also the case in the pilots that we have with Diageo and some other potential partners. So that's the idea at the end of the day. It's being able to leverage, thinking with the consumer and customer in mind, a customer-centric platform with great brands and with top-of-the-game execution and operational excellence on the distribution and commercial side. So that's where we want to focus. Definitely not on the beer-making side or the production beyond what we do in terms of The Coca-Cola Company portfolio. I hope that clarifies it.

Our next question comes from Luis Willard with GBM.

Kind of on your results, maybe another follow-up on the agreement with Coca-Cola. My question is, what have you learned so far from your experience in beer in Brazil? Do you think can be applied to the rest of the territories, given this [indiscernible] Coca-Cola agreement? That will be the question.

Constantino, you want to take that?

Sure. Luis, thanks for the question. I mean the distribution of beer in Brazil has gone for a long time, right? We've had a, we call it, our first stage relationship with Heineken and then this renewed relationship that we're beginning to put together this year, and as we mentioned, hopefully, early in Q3, right? So there's a lot of learning. I mean, first of all, once more, there was a previous question around that, more on the Diageo and spirit angle. But there's -- the most important learning is that there's definitely synergies in some particular channels, in some markets under some circumstances, right? So you have to identify that opportunity, that segment and the type of portfolio that can drive those synergies, not only operationally, but also thinking with the customer in mind, which is something that is once more critical for our model today and even more so going forward, it's a customer-centric value proposition, right? So when you think about the customer first and you understand what are his needs, then you can put together a synergistic portfolio that can be executed properly with efficiency and with value creation on that side. So that's one big learning. The other one is that's definitely a category where innovation is a must. Consumer trends and consumer changes are something that's continuous in the beer category. So we need to have beer partners that are adaptive to the circumstances. And that's why I mentioned a great partner that we've had with Heineken in Brazil. So the ability to not only create great brands, but also be on top of the game and drive the proper innovations for consumers is fantastic. And then finally, very basic, but execution is a key driver of growth and service level for the customers. And that is also something that we know we cannot compromise. Our digital initiatives that we have put forward and that we're rolling out across all of Coca-Cola FEMSA have that in mind. So we're not looking at reducing sales calls or eliminating the physical sales call. In our model, that is the center of everything, and we just do an overlay of digital tools and touch points that enhances the value proposition. And that definitely allows for an increased execution and for driving growth on the beer category. So I think those are the 3 key learnings that I could share with you all in all. I hope that helps.

And I guess the last one is to do what we need to do and fulfill what we need to fulfill in terms of thinking about solving customer pain points. That is a very important category for us to play in because of the volume it represents for a customer. So that's something that we're going to continue to focus on.

Our next question comes from Antonio Hernández with Barclays. Antonio Hernández Vélez Leija: You've already mentioned your expected ability to maintain margins in Mexico, given price/mix and the different strategies. But I just wanted to see if you could quantify a little bit more on what was the impact from concentrate costs and also from the higher marketing labor and maintenance expenses and you are expecting this also going forward and maybe at what amount?

Jorge, do you want to take that one?

Sure. Yes. Antonio, yes, on the margin piece, I would say first on the concentrate, I would say that concentrate is minimal in the guidance that we have given for concentrate on a 12-month basis. It's an amount of around $35 million. So when I say minimum, I refer to this guidance that we have previously provided and that we can offset with other savings and price and mix and the initiatives that we are implementing. So I mean that the adjustment is there, of course, but I wouldn't flag that as a bigger piece. And the second piece around marketing and labor, Antonio, in Mexico to give you a sense, marketing, I mean, we are cycling, of course, the second quarter of the previous year when obviously, the pandemic started, and we got back on expenses, and we were focusing on efficiency, so the amount of marketing, the increase in marketing that we're looking at right now is in the range of around 50%, right? But it's getting to more normalized levels, which would be around 3% to sales, right? And on the labor, it's similar. In the labor, what we have seen an increase year-on-year, it would be something around the 10 percentage range because, obviously, we -- last year also, we delayed certain bonuses and compensations and then we pay them. So we have that comparable effect, okay? So does that clarify your question, Antonio? Antonio Hernández Vélez Leija: Yes. Perfect.

Our next question comes from Lucas Ferreira with JPMorgan.

Two follow-ups on Brazil and agreement with Heineken. The first one, you mentioned in the fourth quarter earnings conference call that you expected beer volumes to drop by around 40%, and your margin is something like 50 bps for South America. Do you think the estimates now being conservative on so we're seeing strong volumes, you guys optimistic on the ramp-up of the agreement and bringing Tiger in? So my question is, do you think this is still valid or it sounds like conservative right now? Obviously, we've taken aside the IPI number you just gave. And the second question...

Lucas, let me take that before your second question, just to get it out of the way. It's definitely conservative. Those estimates were considering a transition beginning in May. Now we're looking at a transition and hopefully, around September. So I would think more around 20% rather than the 40% that we talked about in the fourth quarter call, okay? So that's definitely one. Maybe you can [indiscernible].

And just a quick note on that as well. Lucas, you mentioned volumes, but that guidance or expectation was for beer revenues, okay? Just to clarify.

Exactly. Exactly.

Okay. Yes, that's right. Sorry, I -- but that's [indiscernible]. The second question was more about the strategy in Brazil now with this new agreement related to the digital strategy. Mainly when we think about, let's say, the B2C and also the platform that, for instance, Heineken has with their own clients. My question is, if you guys going to have similar digital strategies? Or in other words, if somehow [ you can ] compete when getting your own, let's say, delivery apps, delivery platforms straight to the final consumer? Or do you foresee that there might be another partnership for instance, a single app where it can get delivered Heineken and Coke and all the brands or you expected to make sense? Or you foresee maybe you guys having separated platforms to deal with your customers and with the end customer also? That's my question.

John, do you want to take that one?

I heard every other word of it. So I didn't quite understand it. I'm sorry.

Okay. Let me repeat the question, John.

I can take [indiscernible]. I think the question was, if I understand correctly, is whether we're going to stay serving on the digital front, mainly through WhatsApp or we're thinking about a platform or an app that incorporates other categories as well. And if that was a question, I would say yes. In our plans, we have an omni-channel strategy that contemplates a platform, a multi-category platform to serve with all our portfolio the customers that we have. And we're gradually implementing that today. The WhatsApp, it's a channel that serves very well with a lot of engagement and very good results. So we're growing out of that, and that will be eventually all communicated and flowing to the preference of the clients.

Yes. Sorry, because I didn't quite understand the question. But yes, in that term, we are looking at not only -- an omni-channel platform has a lot of different components. And obviously, the WhatsApp is one. URL is another one. We have this interconnected with our sales -- mobile sales force automation system, the [indiscernible] and our -- in our back room -- our telesales system. So when you think about it, it is a whole platform that we are creating, okay, which we will be also using to invite other CPG companies on to be able to distribute other categories through there, okay, whether it is through direct wholesaling or purchase and sale of the product or through e-wholesaler model where they can plug into this platform and leverage up on the relationships that we have. So that's where we're going with.

And just to clarify, so would Heineken have their own strategy? You guys can have your own strategy and what -- will there be like a connection between the 2, eventually a partnership? In other words, if I am a customer, I want to buy Heineken, but I also want to buy Tiger, do I have a single platform or will I have to go into 2 different apps to get my beer delivered. And you guys have also [ liquor ], so how that's going to play out?

No, no. At this point in time, the portfolio we need to handle is the one we have on our site, on our application, our omnichannel platform. That doesn't mean that we could not cross-sell on each other's. But we haven't had those detailed discussions yet, okay?

As of today, Lucas, just to clarify, to your point, yes, if a customer, an on-premise account wants to buy the Heineken brand, after the transition is in effect, they would have to go through the Heineken platform with route to market. And if he wants to buy Tiger brand, they will go through our platform and our route to market, okay?

Exactly.

Our next question comes from Sean King with UBS.

I apologize for belaboring this point, but I'm trying to understand the change to the relationship economics. Would it be wrong to interpret it as an adjustment to the incidence-based pricing model to allow sort of sharing of the economics of the non-Coke brands, which were increasingly important to FEMSA's portfolio? Or is there really no change? This is really to drive customer synergies with an expanded portfolio to drive Coke system profits and that the concentrate pricing is sort of business as usual?

Matias, do you want to answer that one?

Sure. We're not getting to the details of -- into that level of the agreement, but I would say it's not the same, and it's not just helping within the portfolio. But clearly, that's the most important thing with regards to our strategy together with The Coca-Cola Company as incorporating other categories.

Thank you. This concludes today's Q&A. I would now like to turn the call back over for closing remarks.

Well, thank you all for your confidence and interest in Coca-Cola FEMSA. They are very interesting times and very changing and dynamic times. We are, I think, executing on all our strategic fronts, and we're seeing increased momentum in all sides of our business. As always, our team is available to answer any of your questions, and I thank you for the confidence and interest always in KOF. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.