Earnings Call Transcript - KOF Q2 2020

Operator, Operator

Good morning everyone and welcome to the Coca-Cola FEMSA Second Quarter 2020 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 up the conference for questions after the presentation. 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. 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'd like to turn the conference over to Mr. John Santa Maria, Coca-Cola FEMSA's Chief Executive Officer. Please go ahead Mr. Santa Maria.

John Santa Maria, CEO

Thank you. Good morning, everyone. Thank you for joining us today to discuss our second quarter results. I hope you and your loved ones are safe and well. Constantino Spas, our Chief Financial Officer; Jorge Collazo, Head of Investor Relations; and Matias Molina our Head of Strategy are also on the call today with me. Before discussing our results for the quarter, I would like to take a moment to express our solidarity with all of the people who have been affected by the COVID-19 pandemic and my sincere gratitude to the health care community and essential workers who have been fighting against this globally and specifically in our countries. Importantly, I want to express my recognition to all of our Coca-Cola FEMSA employees for their unwavering dedication. Our team has risen to the occasion, delivering outstanding service to our clients, consumers, and ensuring our business continuity and product supply, while supporting communities in need. During our call today, I will not only address our second quarter results, but also update you on our mitigation actions and comeback plans, as well as the early signs of recovery that we are seeing across our markets. Then, I will close with additional insights on our omnichannel capability. Finally, Constantino will expand on each division's results and provide you with an update on our financials underscoring Coca-Cola FEMSA's solid cash flow generation and strong balance sheet. The resiliency of our business, coupled with the deployment of market strategies and mitigation actions, enabled us to deliver better-than-expected results in the face of unprecedented operating challenges. Our consolidated volumes declined 7.2% for the quarter, driven mainly by the implementation of mobility restrictions across our territories. During our previous conference call, we described a mid-teens consolidated volume decline for the month of April. During May, certain territories were gradually transitioning to partial lockdowns resulting in sequential volume improvement that was driven mainly by a recovery in Brazil. The positive overall trend continued in June as client reopenings allowed for improvements across markets, categories, channels and packages. In the face of such complexity, it is important to highlight the resilient overall performance of our core operations in both Mexico and Brazil, where volumes declined mid-single digits for the quarter, and also our Guatemala operation, which continued to grow versus prior year during the same period. Our total revenues declined 10.2%, driven mainly by price/mix headwinds, coupled with unfavorable currency translation effects from most of our operating currencies in South America. These effects were partially offset by our pricing and revenue management initiatives in key markets. On a comparable basis, removing currency translation effects, our topline would have decreased only 8.6%. The unfavorable price/mix effect was driven mainly by increased demand for multi-serve presentations across our markets, as consumption occasions leaned towards at-home consumption. We expect this effect to gradually normalize as markets, especially the on-premise channel, continue to gradually reopen. Our operating income declined 19.1% as decreasing PET costs and operating efficiencies were offset by the unfavorable price/mix effect, the reduction of tax credits on concentrate in Brazil, higher concentrate costs in Mexico and the depreciation of most of our operating currencies compared with the U.S. dollar. On a comparable basis, our operating income would have decreased 17.6%. For the quarter, foreign exchange impacts on our operating income remained significant, accounting for more than MXN 360 million. To give you a broader sense of our ability to mitigate the effects of COVID-19 on our operating income, we estimate an approximate impact before mitigation actions of MXN 3.9 billion during the quarter, mainly driven by volume declines and price/mix headwinds. However, our countermeasures coupled with favorable raw material trends enabled us to offset approximately MXN 3.4 billion of these headwinds, effectively mitigating more than 85% of the gross impact. Notably, thanks to these countermeasures in the face of the quarter's complexities, our operating cash flow margin remained flat versus the previous year at 19.1%. Finally, our controlling net income decreased 39.4% year-over-year, driven mainly by impairments to our Estrella Azul dairy joint venture in Panama and our Leão non-carbonated beverage joint venture in Brazil. By normalizing our controlling net income excluding these impairments, our earnings per share would have declined only 18%. While we continue to operate under a high level of uncertainty and some markets worldwide have reversed or delayed reopenings, based on current overall trends, we continue to expect our second quarter results to be the most impacted quarter of the year. Moving on to an update on our strategies, mitigation actions, and comeback plans. As we noted during our first quarter conference call, we developed and implemented a framework comprised of five key areas, which is what I call the five Cs: collaborators, clients, consumers, communities, and cash flow. Our priorities are clear. We are guiding our business through short-term operating disruptions while ensuring execution of our long-term goals. First, we continue to focus on the health and well-being of our employees above anything else. Our reinforced health sanitation and hygiene protocols and our rapid deployment of protective equipment proved essential for our daily business continuity. Today many of these protocols and practices are becoming not only a daily routine but also our system and industry benchmarks. Second, we remain close to our clients in supporting their safe reopening. A key driver of positive volume trends has been our clients' consistent safe reopening. In Mexico, we saw the biggest number of closures during the last week of May, with approximately 15% of clients closed. Since that point, we have witnessed consistent reopenings. For instance, our exemplary Tienda Segura or Safe Store program has supported more than 30,000 clients in Mexico, reopening for business by extending protective measures, promotion, and commercial initiatives to customers to reactivate their businesses. Third, we are leveraging our direct-to-consumer channels while offering unmatched affordability. To maintain our momentum, we are increasing our offering of returnable presentations, Magic Price Points, and multi-packs across markets. As a result, refillables grew more than 25% during the quarter in Mexico and more than 20% in Brazil, leading our Brazilian market to achieve a record share of sales in the sparkling beverage category. Share gains were not only limited to Brazil, as our affordability portfolio allowed us to gain value share across our territories. Importantly, in Mexico, our home delivery routes, Coca-Cola en tu hogar, are growing more than 30%, while our digital trade channels are growing more than 140% year-over-year. Fourth, we continue to support our communities. Year-to-date, we have donated more than 3 million liters of beverages to medical centers and vulnerable communities. Importantly, we are collaborating with authorities by leveraging our market spaces and trucks to communicate preventive health measures. Additionally, we continue to donate COVID-19 tests in Brazil and we helped set up a temporary medical facility in Mexico that has been open since late April. Fifth, we continue to protect our cash flow and liquidity while strengthening our balance sheet. Our cash control tower enabled us to improve our cash flow from operations by 14% year-on-year, driven by cost and expense control as well as working capital improvements. We will continue to aggressively target savings and to reprioritize CapEx across our operations. Notably, our cash position at the end of the quarter was more than MXN 43 billion. Even after paying the first installment of our annual dividend by more than MXN 5.1 million, our cash position grew. As part of our priority of consistently returning cash to our shareholders, the second installment of our dividend is intended to be paid in early November, and we continue with that commitment. Aligned with the clear ambition of becoming our clients' preferred real-time sales and delivery platform, we are accelerating the development and rollout of our omni-channel capabilities. Given these tools' increasing importance in our anticipated new normal environment, I want to take this opportunity to expand on our approach and where we are in this journey. Our omni-channel strategies consist of leveraging state-of-the-art digital enablers to enhance the experience when contacting with our customers and consumers, intensifying our market presence and taking advantage of real-time fully integrated platforms and information. With these initiatives, we expect to: first increase sales by adding options and increasing our service window to 24/7; second, improve our value offer and customer experience; and third, enhance our efficiency and productivity. Currently, we are rolling out three major enablers: first is WhatsApp for business, an automated chatbot-enabled order taking platform; second, our Juntos portal for digital order entry and engagement via an app or website; and third, our order tracking capability. These enablers, which are fully integrated into our transactional system, allow for seamless order taking with operating efficiency and enhanced customer experience. Brazil, our most advanced market, has become our testing ground with an accelerated rollout of WhatsApp completed last month to 260,000 customers, of which 60,000 are now placing recurring orders. Initial results are better than expected in terms of volume, market share, and order recovery. For instance, the number of chatbot orders placed year-to-date represent close to 60 additional presellers on the street. Additionally, more than 90% of chatbot interactions do not require the assistance of a human agent, boosting our contact efficiency. And our Wingman feature, which supports our presellers if they miss a visit, is allowing us to recover approximately 25% of otherwise lost sales. Importantly, through our Juntos portal, more than 50% of our orders are happening outside working hours, achieving our objective of completing 24/7 order availability. Going forward, as part of our accelerated pipeline, we expect to fully roll out enterprise WhatsApp in Mexico and Colombia during the second half of 2020 and a light version in Guatemala. Moreover, our Juntos portal is already a reality today in Argentina and Brazil with light versions in place for Costa Rica, Colombia, Uruguay, and Panama, and we expect to roll it out in Mexico before year-end as well. In summary, I am optimistic about the way we continue to transform our organization and invest in innovative capabilities. I am confident that Coca-Cola FEMSA enjoys a resilient profile, the right set of talent, and the right capabilities to continue navigating in today's dynamic COVID-19 driven environment, and most importantly, to succeed over the long term. With that, I will now hand the call over to Constantino.

Constantino Spas, CFO

Thank you, John, and thank you all for joining us on today's earnings call. I hope that you’re all safe, and your families are also safe and healthy. I will expand now on our division's highlights for the second quarter. In Mexico, our top line decreased 8.1%, driven by a 5.8% volume decline and an unfavorable price/mix. These effects were partially offset by our pricing actions implemented in March and June and our revenue management initiatives. Importantly, we continued to leverage our strength in the traditional trade channel while reinforcing our value proposition via returnable presentations and Magic Price Points. These initiatives combined with a relentless point-of-sale execution and a reinforced position in the direct-to-consumer channels are providing an additional boost to our market share momentum. In Central America, where volume declined 7.4%, driven mainly by the effects of COVID-19, containment measures in Panama and Costa Rica, as well as Nicaragua's complex environment, our impressive performance in Guatemala partially offset these markets' volume decline. On the pricing front, a positive currency translation effect from our Central American currencies into Mexican pesos mainly offset the price/mix headwinds we experienced. As a result, our top line decreased 5.6% in the Mexico and Central American division. Importantly, despite the effects of COVID-19, concentrate cost increases, and the depreciation of the Mexican peso, our operating income margin for the division expanded 160 basis points, while our operating cash flow margin expanded by 200 basis points. This expansion was driven mainly by declining PET costs, currency hedging initiatives and savings related to our Fuel for Growth efficiency program that we implemented in 2019, as well as our operation's outstanding job generating additional savings and efficiencies. In contrast, our South American division faced a more challenging overall environment. Volumes for the division declined 9.5%, driven mainly by a tough April due to the rapid implementation of social distancing measures and lockdowns. Like most parts of the world, these measures have been gradually relaxing, allowing our Brazil and Uruguay operations to post positive volumes during June, while Colombia improved to a single-digit decline. On the other hand, while Argentina showed mild improvements during June, this market remains very complex, as the pandemic adds complexity to the structural macroeconomic challenges. Due to these factors, we’re prioritizing affordability throughout our portfolio, while maintaining a very disciplined approach to costs and expenses. Just like the case for the Mexico and Central America division, our pricing initiatives were offset mainly by price/mix headwinds. These factors, coupled with the negative currency translation effect due to the depreciation of most of our operating currencies in the division, led our top line to decline 17.3%. If we exclude the currency translation effects, our top line would have declined only 8.3%. Under this environment, the division's profitability faced a challenging comparison base, driven by our decision to temporarily suspend tax credits on concentrate in Brazil as of the fourth quarter of 2019. This effect combined with lower volumes, unfavorable price/mix dynamics and currency headwinds pressured our margins. However, favorable PET prices and expense efficiencies partially mitigated these effects. I'll now expand on our financial results, which are the outcome of our initiatives to strengthen our balance sheet and financial position. Our interest expense recorded a reduction compared to the previous year, driven mainly by reliability management initiatives, including the tender offer and make-whole of a 2023 U.S. dollar bond. These effects were partially offset by additional short-term debt that was incurred mainly in Mexican pesos during the first quarter of the year, to reinforce our cash position amid the pandemic that we encountered in mid-March. As part of our comprehensive financial results, we reported a foreign exchange gain of MXN 8 million as compared to a loss of MXN 91 million, driven mainly by a positive mark-to-market from cross-currency swaps that benefited from the appreciation of the Mexican peso during the quarter. These effects were partially offset by our cash exposure in U.S. dollars, which was negatively impacted by the appreciation of the Mexican peso compared to the first quarter of the year. Additionally, we recognized a gain of MXN 81 million in monetary positions in inflationary subsidiaries, compared to a loss of MXN 36 million during the same period in 2019 related to Argentina. As John previously mentioned, our controlling net income was negatively impacted by impairments recognized in our other non-operating expenses, totaling MXN 903 million. These impairments correspond to two elements: the first is the Estrella Azul dairy joint venture in Panama, as the outlook of that operation was negatively impacted by the pandemic, and the second is our Leão non-carbonated beverage joint venture in Brazil, driven by a change in the business model of this joint venture, transitioning from a centralized production model to what we envision as a more profitable internalized model. Finally, I want to highlight Coca-Cola FEMSA's strength and resiliency, as reflected in its robust liquidity position and strong cash flow generation. As of June 30, 2020, our net debt to EBITDA ratio is 1.2 times and our cash position exceeds MXN 43 billion. Our company has ample flexibility, and it's within our priorities to implement the right protective measures while returning cash to our shareholders. Accordingly, the first installment of our dividend was paid on May 5, representing a 37% increase versus the previous year's dividend. Going forward, we will continue leveraging our expense controls and efficiencies, reevaluating and reprioritizing immediate needs while prudently managing our CapEx to continue strengthening our cash flow for the year. As we mentioned during the first quarter earnings call, we're confident that we're taking the right steps at the right moment. Despite the expectation that the second quarter will be the most impacted, we remain confident that our conservative profile and resilient business model will enable us to continue our path towards our long-term objectives. With that, I will now hand the call back to John for his final remarks. Thank you very much.

John Santa Maria, CEO

Thank you, Constantino. We are encouraged to see trends moving in the right direction. Despite the significant volatility and uncertainty faced during the first half of the year, we are on track to deliver on our strategy, satisfying our clients and consumers, deploying cutting-edge transformational initiatives, and leveraging our disciplined approach to capital allocation while maintaining our solid financial position. We are confident that we have the right objectives and capabilities to emerge as a stronger Coca-Cola FEMSA, committed to delivering sustainable value creation for all our shareholders and stakeholders for many years to come. Thank you for your continued trust and support. Operator, I would like to open the call to questions.

Operator, Operator

And our first question will come from Isabella Simonato with Bank of America. Go ahead.

Isabella Simonato, Analyst

Thank you. Good morning. John and Constantino, hope everyone is fine. I have a couple of questions. First of all, Coca-Cola mentioned in their results that they were seeing July volumes down mid-single digits, improving from what they saw throughout the second quarter. Can you comment on how you're seeing the performance in your territories versus their indication for July, and how you're seeing the performance of each channel, now that the on-trade is reopened in most countries? That would be my first question. The second question is can you elaborate a little bit on the beer performance in Brazil throughout the quarter in terms of how you saw volumes and prices throughout the months of the second quarter? And finally, you highlighted a lot in the comments how strong the balance sheet is, which we totally agree and actually leverage is quite low. What can we think in terms of capital allocation going forward, maybe dividends, buybacks or CapEx? Thank you.

John Santa Maria, CEO

Okay. From March, when the pandemic began, to April, which was the toughest month, we saw some improvement in May. In June, our volumes were in low single digits, but by the end of the month, three of our markets started showing positive growth compared to last year, and that trend is continuing. In July, the outlook remains positive as we see stabilization and improvement in most markets. In Mexico, growth is moving towards low single digits, while Brazil is experiencing its second consecutive month of growth. Smaller markets like Uruguay are recovering, Guatemala shows growth, and Colombia is moving from steep declines in the double digits to low single digits for July. We're witnessing ongoing improvements in trends. In terms of channels, we experienced a setback in May, losing about 15% of our client base, predominantly from traditional trade and modern off-premise accounts. However, that number has improved, and we are now down 10%. We are seeing week-to-week account openings and gradual improvements in on-premise channels, where social distancing regulations are limiting capacity to about 30%. Although these venues are open, they are not experiencing significant traffic, indicating a slow recovery. The fastest-growing channels across all our markets are traditional mom-and-pop stores. Our modern channel saw an initial surge in April but retracted in May and June before starting to recover. At present, much of our sales are in multi-serve packages as affordability becomes increasingly important for consumers. As Constantino mentioned, returnable package growth has reached 25% in Brazil and 20% in Mexico. These packages play a crucial role by addressing home consumption, affordability, and proximity for consumers in traditional trade. Regarding beer, we continue to see growth. Heineken has reported strong share gains in Brazil from our Heineken portfolio, and we are executing well, aligning with their marketplace announcements. Looking ahead for capital allocation, we have increased our dividend base and will continue to assess its future. If opportunities arise, we may be able to be more aggressive next year. More importantly, we will focus on investment opportunities internally, particularly in returnables, while adhering to our established parameters of 5.5% to 6% of revenues. We won't require more than that to position ourselves well for potential accretive acquisitions as they become available. Constantino, would you like to add anything?

Constantino Spas, CFO

No, I would also like to highlight, Isabella, that in Mexico we're starting to see two remarkable elements under the channel performance; definitely digital channels. So, all the digital channels in the markets where we have a position are in a series of commercial initiatives, growing triple digits and that is something that we will continue to see. It's a natural progression of channel behavior and channel mix going forward, and we continue to be much more competitive and define and execute and implement more capabilities aligned with the digital channel growth. On one hand, we're seeing a resurgence of our home delivery channel in Mexico. Home delivery channel in Mexico has grown 30%. I think it’s an interesting discovery for us. Now that we have much more digital capabilities, we can enable that home market channel further with our digital capabilities. We believe there is an interesting opportunity for growth there as our consumers change their consumption occasions and begin to focus more on home. We have around 1,000 home channel routes, and we are aggressively expanding that with an ambition of finalizing this year with 1,500 home delivery channels if possible. That’s an interesting opportunity—we discovered a new trend as our consumers have changed their consumption behaviors and are moving more into the home experience. Regarding the beer performance, as John mentioned, Heineken covered it well. To reiterate four elements: you need very strong brands with great equity, which we believe Heineken has done a great job with; we need remarkable execution, and we strongly believe we have a fantastic platform for execution in the on-premise channel; and definitely, we need the on-premise channel to start recovering, and that is what is happening today. As we continue to see reopening in the on-premise channel, we should continue to sustain that type of performance on our beer portfolio in Brazil. Does that answer your question, Isabella?

Operator, Operator

We'll take our next question from Carlos Laboy from HSBC. Go ahead.

Carlos Laboy, Analyst

Yes, good morning everyone. John you mentioned that Brazil has become an advanced market testing ground. I was hoping you could expand on that. And on a related basis, how do you engage Chatbox, WhatsApp and these other digital order taking tools to ensure that you're not just a better order taker but a better market developer?

John Santa Maria, CEO

Okay, sure. Thanks, Carlos. How are you doing? Yes, Brazil has turned out to be the most significant, or at least the most advanced market that we have right now. I would say that, behind Brazil is Argentina and closely following is Mexico as we've continued to roll out. In terms of what we're doing, we have various tools. Chatbox is one of them and taking orders there; we’re up to about 116,000 customers in Chatbox in Brazil. We're targeting 250,000. But what's really amazing is that, first of all, we’re getting most of the orders coming in outside of working hours. Secondly, it’s even coming in on the weekends, which we usually have very poor service on. So in that sense, we're developing new markets and making ourselves more available. Our adoption rate is impressive—approximately 300% more than what we expected, and that has proven to be extraordinarily beneficial in terms of customer-centricity. They’re adopting this very fast and are extremely satisfied with what we’re doing. Also, we have order tracking capabilities in Brazil, which not only allows customers to order via Chatbox, but also track their order in real-time on GPS, knowing when it will arrive. We’re putting together a suite of tools that is improving customer satisfaction. I genuinely think that customer satisfaction over the mid-to-long term translates into market share preference and brand equity as well. So as we progress, Carlos, we continue to enhance these tools. For instance, in Argentina now, on our B2B URL-based system, we’re also starting tests with Mercado Libre for QR payment systems that launched last month. We’re amplifying the portfolio of commercial tools available to retailers very quickly. This, along with our in-store execution with continuous coverages with Coca-Cola and efficient merchandising, is becoming tremendously powerful. The combination of these tools is distinctive compared to what competitors are doing, and while other players could match this over time, the amount of work and investment needed in the systems and IT infrastructure that is required to link those tools to our transactional systems is considerable.

Constantino Spas, CFO

To piggyback on John's comments, Carlos, I think that you're highlighting something that we strongly believe in: we are not a bottler but a market developer. Achieving that status is a combination of multiple variables. Digital capabilities like those being tested in Brazil will be further identified and rolled out in other markets as well. However, let's remember that this continues to rely heavily on executing traditional capabilities. A great demonstration of that is what we've achieved in Guatemala. As you all know, we consolidated two outstanding franchises that were not under Coca-Cola FEMSA. Once we consolidated this operation, we leveraged what Coca-Cola FEMSA is renowned for: understanding the local market, being insights-driven, and having a customer-focused approach. We then looked at the operations from the inside out, seeking improvements internally and driving efficiency while refining our operations. Year-to-date, Coca-Cola FEMSA Guatemala has grown 8% versus the previous year despite the pandemic. We have grown six points in terms of non-alcoholic ready-to-drink share in value compared to last year while breaking historical production records and significantly increasing our pre-sell effectiveness. We are also enhancing route-to-market productivity significantly. We are determined to enhance value not just for Coca-Cola FEMSA but also for our customers and consumers. I think a great example of that is our revenue management capabilities and our pricing strategies that have improved across the countries where we conduct our operations. I wanted to take advantage of your question to explain more of our operating model, which combines traditional and digitalization efforts in the right balance.

Operator, Operator

And our next question will come from Alvaro Garcia with BTG. Please go ahead.

Alvaro Garcia, Analyst

Hi, John, Constantino, Matias. Hope you're all well. My question is about concentrate pricing in Mexico. My understanding is that the three years’ worth of concentrate price hikes in the previous agreement are now over as of July in Mexico, but we know this is a pretty dynamic agreement. Obviously, Mexico is one of Coke's more defensive markets globally. So I was wondering if you can provide insight into whether or not these hikes might be over, if concentrate prices might increase again in Mexico, or if there are any conversations with Coca-Cola at the moment regarding this matter. Any color on this would be greatly appreciated. Thank you.

Constantino Spas, CFO

Sure, Alvaro. As you mentioned, concentrate price increases are part of the way our relationship is structured with Coca-Cola. It is one of the critical elements of our ongoing dialogue. I can tell you that there will definitely be concentrate adjustments in the future, and whenever that happens, we will inform the market about it. The magnitude of potential increases and their impact on our P&L is still under discussion with Coca-Cola. It’s important to note that our margins comprise multiple variables, and we currently have favorable raw material tailwinds on our end. We have also made substantial productivity improvements internally. Our revenue management practices rely heavily on data and analytics, allowing us to define our price architecture effectively. So, we believe there’s not necessarily a direct impact from concentrate price increases translating into a margin hit if that eventuality arises. Therefore, moving forward, we should anticipate some concentrate pricing adjustments. The specific magnitude and resulting business impacts need further definition, and the current situation is exceedingly complex. Our healthy relationship with Coca-Cola remains one of the strengths of our business. We're pleased to see how quickly we've reprioritized initiatives with Coca-Cola and how closely aligned we are as a system today with ongoing meetings to share best practices. There’s a recognition of the severity of the situation both in Mexico and in other markets, which keeps us engaged in healthy dialogues every day.

John Santa Maria, CEO

No, I would just add that incidents are part of the relationship, and this will continue as we move forward. The Coca-Cola Company's rights and responsibilities are clear, and they are unquestionably aware of the sensitivity of our business today – especially given the dynamic environment we’re facing in several countries. So, it’s certainly going to be something that we’ll be continuing to discuss as we navigate through this together.

Operator, Operator

And next, we'll hear from Felipe Ucros with Scotiabank. Go ahead.

Felipe Ucros, Analyst

Thanks. Good morning, John and Constantino, Matias. Thanks for the space for questions and hope you and your families are doing okay. I wanted to focus a little bit on the traditional channel. You did have a couple of comments during the call discussing how the channel is reactivating after peak closures happened throughout about the middle of the quarter and things are improving. But I wanted to ask, if you could focus on the long-term consequences of those closures. I imagine some smaller, less professionalized shops might not reopen. Sometimes I think this might lead to concentration—either bigger mom-and-pop stores might thrive or perhaps some of those smaller stores that might go out of business could be taken over by the modern trade. Could you explore the consequences of this period of closings and what it might mean for the system? Additionally, I would like to ask if you could discuss any advances on packaging development. There have been some articles about different drinks companies exploring paper-based packaging. Is this something that you guys have explored? Obviously, it’s incredibly hard with carbonated drinks but is there any exploration of alternative packaging given the backlash over PET from the public?

John Santa Maria, CEO

Thank you, Felipe. Listen just to give you a little bit more context about the traditional channel. We are, like I said, probably down 10% in terms of the total account base. That’s about 150,000 accounts; 70% of those are probably on-premise accounts or small on-premise accounts. We see that of the 10% that we talked about, maybe 2% or 3% of that not returning due to being too small or undercapitalized. What typically happens in Latin American crises is that, given the number of businesses that close, there’s a surge in the opening of smaller businesses. We haven’t necessarily seen that yet, but we do expect it to happen with smaller shops coming on stream as people look for ways to make a living. That being said, the traditional trade—the trends that we see are that if you exclude this temporary effect of COVID, more technology is becoming integrated into the traditional trade, either through what we’re implementing with omnichannel capabilities or what other players are doing. The traditional trade is not as disadvantaged in customer service or consumer engagement perspectives compared to larger shopping formats or modern channel stores. If I were looking at that, it is a powerful statement for the channel's future competitiveness. One fundamental change we’re seeing is that consumers are spending more time at home, meaning that proximity becomes even more critical. This impacts how traditional trade remains competitive against modern channels. Let me give you an example about that: We traditionally do not have multi-packs in the marketplace or in these channels, however, Mexico is offering bi-packs or two-packs in traditional trade of a Coke and a flavor so they can deliver directly to homes. There's a slight discount, but these familiar products that would usually only be in larger channels are now also being offered at neighborhood outlets. I believe over the long haul, there will not be significant channels disrupted. Rather, the growth of technology in traditional trade will create a more level playing field.

Constantino Spas, CFO

Regarding packaging development, Felipe, yes paper is definitely a challenge for carbonated drinks, but there's opportunity for non-carbonated beverages. From our understanding, the Coca-Cola Company is extremely active in this area. However, let’s not forget our two main initiatives focused on recycling and the usage of recycled resin. Our commitment to increasing the percentage of recycled resin is significant, and we remain supportive of the World Without Waste initiative that the Coca-Cola Company has set for 2030, where 50% of our PET materials must utilize recycled resin. We view this target as achievable by 2025, not waiting until 2030. The other notable aspect is our investment in returnable packaging. Returnable packaging has positive environmental impacts, and consumers are rediscovering those benefits. Coca-Cola FEMSA is probably the leading company in the system in this regard. On a consolidated basis, returnables represent 35% of our CSD portfolio, and under the pandemic, we’ve seen it increase to around 45% in Mexico, while Colombia, Argentina, and Uruguay are around 30% with similarly strong growth in Brazil in double digits. We have a solid base with returnables and are highly committed to improving our strategy around them. We have initiatives to reduce the water usage in the returnable circuit, increasing our turns per bottle, and several innovation efforts underway to continue enhancing this segment. I hope this provides insight into our sustainability efforts.

Felipe Ucros, Analyst

That's very good color. Thanks a lot. If I can follow up on that, have you guys explored pushing returnables not just as an affordable option but as an environmental option? I really haven't seen that in advertising, but is that something you guys are exploring?

Constantino Spas, CFO

Yes, absolutely. There’s a big initiative with the Coca-Cola Company around that. Returnables are recognized by younger consumers, who are increasingly becoming aware of the environmental impact they provide, which is considered very positive. Coca-Cola is working hard on promotion and raising awareness of returnable packaging's benefits, not only in terms of affordability but also in its environmental impact.

Operator, Operator

And we'll take our final question from Marcella Recchia with Credit Suisse. Go ahead.

Marcella Recchia, Analyst

Hi, John. Hi, Constantino. Thank you for taking my question. I have two quick questions here. The first one is about your impairment charge in this quarter. Do you have any expectation of further impacts going forward? And my second question would be about your initial thoughts regarding the pension reform impact for the company if the proposal that was published yesterday were approved. Thank you very much.

Constantino Spas, CFO

Hi, Marcella. I'll take the first one and leave John for the latter question as we’re approaching the hour. Yes, as we mentioned, the impairment was based on two businesses: Estrella Azul in Panama, which is our dairy joint venture with Coca-Cola, and our Leão joint venture, which is a non-carbonated beverage joint venture in Brazil. In the case of Leão, we could foresee future impacts as we’re transitioning from a centralized business model to an internalized model. We are still discussing and redefining what potential initiatives can be taken with the Leão assets going forward. Looking ahead to the impact, we don’t have any definite predictions regarding that. Therefore, we will keep everyone informed as things develop. I’ll now turn it over to John to discuss the pension reform.

John Santa Maria, CEO

I don’t have much to add on the pension reform right now, but we’ll continue monitoring the situation closely and will communicate any potential impacts as necessary. Thank you.