Earnings Call Transcript - KOF Q4 2022

Operator, Operator

Good morning, everyone. Welcome to Coca-Cola FEMSA Fourth Quarter and Full Year 2022 Conference Call. As a reminder, today's conference is being recorded. Please follow the operator's instructions. At this time, I will now turn the call over to Jorge Collazo, Coca-Cola FEMSA's Investor Relations Director. Please go ahead.

Jorge Alejandro Pereda, Investor Relations Director

Thank you, and good morning, everyone. I'm joined this morning by Ian Craig, our Chief Executive Officer; and Gerardo Cruz, our Chief Financial Officer. Before we begin, please take note of our cautionary statement. As customary, this conference call may include 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. And now it's my pleasure to introduce our CEO, Ian Craig. Please go ahead, Ian.

Ian Marcel Craig García, CEO

Thank you, Jorge, and good morning, everyone. Thank you for joining us this morning. Let me begin by saying that I am honored to assume the responsibility of becoming Coca-Cola FEMSA's Chief Executive Officer. I am grateful to FEMSA, to our Board of Directors, and to our entire organization for their trust and support. I am encouraged by the growth opportunities we see for Coca-Cola FEMSA. I also want to take a moment to recognize John Santa Maria's contributions over his 27 years at the company. John dedicated himself 24/7 to Coca-Cola FEMSA and guided it through challenging times, including the recent COVID-19 crisis. He leaves the company operating with positive momentum. Thank you, John, for your leadership over the years. It is a very important moment for our company. We are well positioned to continue accelerating our growth. During 2022, we reached record levels of volume, revenues, and operating income. At the same time, we continued to increase investments in the business. Additionally, we significantly expanded the rollout of our Juntos+ B2B omnichannel platform and expanded our multi-category strategy to explore new revenue streams. Notably, we achieved these results in the face of a volatile environment that affected industries worldwide. These positive results are a testament to our company's resilience, the ability to locally execute the right strategies and the talent and commitment of our team. Now I would like to cover the following topics on today's call. First, I will review our results for the quarter and highlight some of the key achievements for the year across markets, including an update on the rollout of our Juntos+ B2B omnichannel platform. Then, I will close my remarks by sharing an initial set of insights and strategic priorities. We will continue updating you on these priorities as the year progresses. After my remarks, I will hand the call over to Gerry, who will walk you through our division's performance, our financial results, and provide you with our financial objectives and priorities. With that, let's begin with a review of our consolidated results for the fourth quarter. For the fourth quarter, our consolidated volumes increased 4.6% year-on-year, reaching 995.3 million unit cases. On a comparable basis, this represents an increase of 3.6%. This volume growth was driven by the positive performance achieved across most of our markets, which was partially offset by a slight volume decline in Colombia. As was the case throughout the year, growth continued across all beverage categories. Our core sparkling beverage category grew 3%, while our noncarbonated portfolio grew 12% and bottled water grew 17%. We continue leveraging initiatives to drive single-serve mix growth. In Mexico, single-serve volumes for the year increased 11%, leading our single-serve mix to increase 1.5 percentage points as compared to the previous year, reaching 30.2%. In Brazil, double-digit growth in both returnable and one-way single-serve presentation led our single-serve mix to reach 23.5%, an increase of 2.7 percentage points year-on-year. Moreover, we continue to accelerate the growth of Coca-Cola Zero Sugar across our territories. This no-sugar offering continues to grow at a double-digit pace across our key markets. Just to share a few examples. In Brazil, Coca-Cola Zero Sugar volumes increased 27% during the year, while in Mexico, its volumes increased 11% compared with 2021. Affordability remains an important growth driver. This is exemplified by the rollout of our universal returnable bottle in Mexico. This presentation is now present across our territory with volume growth of 82% versus the previous year, driven mainly by significantly expanded coverage. As a result of these strategies and our point-of-sale execution, we continue to reach record levels of market share across key categories and markets. For the quarter, our revenue management capabilities enabled us to grow consolidated total revenues by 14.9% and 18.9% on a comparable basis. It is important to note that this solid top line performance was achieved despite the unfavorable currency translation effect into Mexican pesos, resulting from the strengthening of the Mexican peso as compared with other operating currencies. Nonetheless, it is important to remind you that for the fourth quarter, our beer revenues are comparable versus the previous year, no longer impacted by the beer transition in Brazil. Moving on, our gross profit increased 12.9% to reach MXN 27,068 million, while our gross margin contracted 80 basis points to 44.2%. This contraction was mainly driven by higher PET and sweetener costs that were partially offset by revenue growth management. Our operating income increased 15.9%, reaching MXN 9,013 million. Our operating margin remained flat at 14.7%. As was the case throughout the year, this performance reflects our resilience and our team's ability to extract efficiencies. On a comparable basis, excluding M&A and currency translation effects, our operating income increased 18%. Finally, our operating cash flow for the quarter increased 12.3%, reaching MXN 11,954 million, resulting in an operating cash flow margin of 19.5% for the fourth quarter, a 50 basis point contraction. This contraction was driven mainly by a comparison basis that included noncash operating foreign exchange gains recognized during the previous year. In summary, 2022 was a positive year for Coca-Cola FEMSA. Our full year volumes surpassed 3.7 billion unit cases, increasing 8.6% year-on-year. Additionally, we reached the highest level ever of top line operating income and operating cash flow. Our top line for the year was MXN 226.7 billion. Operating income reached MXN 30.8 billion, and our operating cash flow totaled MXN 43 billion. I will now highlight some of our operational milestones for 2022. These achievements reflect our positive momentum and how well positioned Coca-Cola FEMSA is to accelerate growth. First, in Mexico, we achieved historic volume of 1.9 billion unit cases, leading the Coca-Cola system's growth in the region by expanding 5.5% compared with the previous year. Our top line growth in Mexico marked the highest in a decade, and we grew in every category and channel, with double-digit growth in the modern trade, single-serve, and our zero sugar, hydration, and dairy categories. For the year, we further transformed our portfolio by increasing affordable coverage, strengthening the noncarbonated portfolio, and expanding multi-category pilot tests that now reach more than 400,000 clients. Additionally, we continued rolling out our Juntos+ B2B platform in Mexico, reaching 383,000 monthly active purchases. Moving on to Brazil. Our nonalcoholic ready-to-drink volume surpassed 1 billion unit cases for the first time in franchise history by growing 12.5% year-on-year. This growth was supported by our improved competitive position, gaining share to reach record levels in key categories such as sparkling, flavors, teas, sports drinks, and energy. Moreover, our Juntos+ B2B platform’s monthly active purchases increased month-over-month to reach 231,000 by year-end. In Colombia, our volumes for the year also reached a historic 330 million unit cases, representing 10.8% growth year-on-year. Our revenues for the country increased double digits as affordability and execution allowed us to gain more than 2 points of share in the nonalcoholic ready-to-drink categories. In this important market, we have further focused on expanding our customer base, adding more than 120,000 new clients over the past 3 years to reach a historic client base. Finally, I want to highlight the results of our Guatemala operation. Volumes increased 12.1% for the year in Guatemala, reaching 147.2 million unit cases. This performance was achieved, thanks to our execution, related share gains, and client base expansion. During the year, we added more than 14,000 clients, while we continue to strengthen our supply chain and affordable portfolio. In summary, we accelerated the role of our Juntos+ commercial platform across our key territories by adding more than 70,000 active monthly purchases during the quarter to reach 833,000. Digital revenues for the full year reached $1.2 billion, surpassing our target for the year. Our operational highlights include solid results from our supply chain and engineering team. During 2022, our supply chain reinvention project drove more than $55 million in savings. Overall, for the last 3 years, this initiative delivered more than $215 million in savings resulting from primary freight efficiency as well as reductions in our cost to serve and cost to make. Driven by similar initiatives into 2023, we have identified more than $60 million in potential savings and efficiencies in our operations. Now let me close by sharing with you an initial set of insights and priorities. As I have previously mentioned, we are operating with momentum. We have exciting growth opportunities in the markets we serve and the initiatives in place to capture them. Additionally, we have a clear ambition to build our customers' preferred commercial platform and unmatched rights to win in the B2B space. Let me proceed to list a few of these rights to win. First, we have the largest user base in Latin America, serving more than 2 million clients, with whom we have developed a relationship of trust over the years through consistent customer focus. This is a user base that we grow every year and we deliver to, on average, 1.8 times a week. Second, we have unmatched scale and distribution capability with leading-edge enablers. This gives us the capacity, not only to reach the most remote places in our territory but allows us to do it profitably while delivering differentiated customer service levels. Third, we carry consumers' preferred brands leveraged by the Coca-Cola Company's beverage portfolio with leading market positions in most categories. This gives us relevance at the point of sale and opens the door to serve our user base. Fourth, we have a talented team that has a growth mindset and is used to winning in the market. Our team prides itself in executing with excellence at the point of sale. Fifth, we have 2 shareholders in FEMSA and the Coca-Cola Company that have a growth bias, a long-term vision, and are committed to invest behind the business. And finally, we have a strong culture that is focused on generating economic, social, and environmental value for our shareholders, our communities, and our people. All these strengths uniquely position us to enter a new chapter of growth. I have spent the first months of my tenure on a listening tour, visiting our markets and operations and engaging in conversations with key stakeholders. These visits and conversations are allowing Coca-Cola FEMSA's senior leadership team and myself to learn about the local reality of our teams on the ground and complement our views. After finalizing the listening tour, we have set up an offsite for KOF's senior leadership team, where we will review market trends and developments in the B2B sphere. Later in the year, we will have another offsite, where we will refresh our strategy, vision, and purpose. I am confident that this process will provide the senior leadership team at Coca-Cola FEMSA and myself with a clear picture of the environment we are operating in and the path to capture the many opportunities that lie ahead of us. As initial insights from this process, I can point to the following set of priorities to chart our next growth chapter. First, grow our core business. We see more runway to grow the core via a focus on capturing the fair share of the Coca-Cola trademark in all markets and channels; accelerating the growth of Coca-Cola Zero Sugar across our territories; developing growth opportunities in low per capita markets; and achieving the full potential of profitable noncarbonated beverage categories. Second, become our customers' preferred omnichannel commercial platform with Juntos+. We will work to grow our total and digital client base across our markets. We will continue to enhance our value proposition, leveraging a curated portfolio of our customers' and consumers' favorite brands together with the Coca-Cola Company and our multi-category partners. This will enable us to continue generating network effects, further strengthening our platform. Third, we will adjust our culture and reorganize the way we work. We will place our customer needs at the center of every decision. We will promote a growth mindset, building a multiplier leadership style, empowering leaders to develop our people, and foster a workplace that provides psychological safety within our teams. We will redesign Coca-Cola FEMSA's structure into a more insights-driven, agile, and effective organization. Fourth, we will continue to build a purpose-led organization, making sure we are on the right path to achieving our environmental, social, and governance targets. We aim not only to reinforce our industry-leading environmental initiatives but also bolster our social and governance agenda, including community development programs and diversity and inclusion initiatives. Finally, we will continue building on and strengthening the relationship we have with both FEMSA and the Coca-Cola Company, pursuing opportunities to accelerate our growth. I am confident that we are entering a new chapter of growth for our company and sustainable value creation. With that, I will hand the call over to Gerry. Gerry?

Gerardo Celaya, CFO

Thank you, Ian, and good morning, everyone. It is a pleasure to speak with you today. Before reviewing the division's results for the quarter, let me begin by saying that I feel privileged to take this new role as CFO of Coca-Cola FEMSA. I have spent 20 years at the company serving in different financial positions, and I look forward to maintaining close and open dialogues with you going forward. With that in mind, let me begin by briefly summarizing our division results for the quarter. In Mexico and Central America, volumes increased 3% driven by growth across all our territories in the division. The unfavorable translation effect of all Central American currencies into Mexican pesos had an impact on revenue performance in this division. As a result, our quarterly revenues increased 9.7%. On the profitability front, gross profit increased 5.1%, resulting in a gross profit margin of 46.4% and a margin compression of 200 basis points year-on-year. As was the case during most of the year, our gross margin contraction was driven mainly by increases in raw material costs, such as PET and sweeteners, that were partially mitigated by our revenue management and raw material hedging strategies. Our operating income for the division increased 2.6%, resulting in an operating margin compression of 110 basis points. Our teams were able to leverage savings and efficiencies to partially mitigate pressures. Finally, our operating cash flow margin for the division declined 180 basis points, driven by pressures from raw materials that were offset by a noncash operating foreign exchange gain. Moving on to South America, where the division volumes increased 6.6%. This performance was driven by 8.7% growth in Brazil, 7.9% growth in Argentina, and 5.1% growth in Uruguay, which were partially offset by a slight volume decline in Colombia. On a comparable basis, excluding volumes from CVI in Brazil, the division's volume would have increased 4.4%. Our revenues for the South America division grew a solid 22%, driven by volume growth and revenue management initiatives. These effects were partially offset by the unfavorable currency translation effect into Mexican pesos from most of our operating currencies in the division. This is particularly clear when excluding currency translation and M&A effects, as our comparable top line would have increased a solid 30.9% during the quarter. Gross profit in South America increased 25.6%, expanding margins by 120 basis points. As was the case for the third quarter, this increase was driven mainly by the operating leverage resulting from volume growth, favorable mix effects, and raw material hedging strategies that were partially offset by an increase in raw material costs. Operating income for the division increased 41%, and operating income margin expanded 190 basis points compared to the fourth quarter of 2021. This was driven mainly by the combination of positive operating leverage, coupled with tight expense controls across our operations. Finally, operating cash flow in South America increased 32.5%, resulting in a cash flow margin expansion of 140 basis points. Moving on, the quarterly comprehensive financing results recorded an increase of 45.9% compared with the previous year. This increase was driven mainly by: first, a foreign exchange loss of MXN 281 million as compared to a gain of MXN 79 million recorded during the previous year. This loss resulted from the appreciation of the Mexican peso during the period as applied to our dollar-denominated cash position. Second, we recorded a higher interest expense compared to the same period of the previous year, mainly driven by increases in interest rates. Third, we recognized a lower gain in monetary position in inflationary subsidiaries as compared to the fourth quarter of 2021. Finally, we recognized a lower gain in the market value of financial instruments. These effects were partially offset by higher interest income recognized during the quarter as compared to the same period of the previous year, resulting from increases in interest rates. Finally, controlling net income increased 23% to reach MXN 7.1 billion, resulting in a MXN 0.43 earnings per share. Before we open the call to take your questions, I want to take a moment to share our financial objectives and priorities. First, we will continue prioritizing financial discipline, underscoring our focus on an efficient financial position and our commitment to shareholder return. Second, we will double down on productivity and efficiencies across our P&L. And third, we will allocate capital towards organic growth. Our CapEx for 2022 amounted to MXN 19.7 billion. Given the outperformance of our top line, we need to accelerate investments to better serve our markets, customers, and consumers. We expect to maintain a similar level of CapEx for 2023 as we continue to invest behind this positive momentum. With that, operator, we are ready to open the call for questions.

Operator, Operator

We'll take our first question from Alvaro Garcia.

Alvaro Garcia, Analyst

A couple of questions on my end. Firstly, Ian, you mentioned sort of developing growth in low per capita markets. I was wondering if maybe you could expand on some initiatives there. And second, 2 questions for Gerardo. First, we've seen a lot of noise on interest on equity in Brazil. And I was just wondering if that had anything to do with your abnormally low tax rate this quarter and maybe breaking down why the tax rate was so low. You mentioned deferred tax assets. You have a bunch of those there. And then just on how the cash on your balance sheet. I think you generated $40 million worth of interest income alone this quarter, whether or not you expect sort of a more efficient balance sheet with less cash on it going forward.

Ian Marcel Craig García, CEO

Alvaro, thank you for your question. Regarding the initiatives that we have in place in the low per capita market, just think of it this way. In Mexico, we serve around 65 million consumers in our territories. Guatemala, which is very, very similar to Mexico, we serve 20 million consumers. So there is a lot of runway there. Colombia, 117.5 per capita with 50 million consumers, almost the size of our Mexico franchise in terms of population. Brazil, still at 220 per capita versus 250 for Argentina, and 400 for Mexico, talking about carbonated soft drinks. So the strategies we are putting in place there include affordability, targeting meals, increasing single-serves as well as on-premise channels. There is a lot of headroom there, Alvaro. And we expect these territories to continue contributing positively with high growth for us. We have these strategies to try to capture and grow per capita there.

Gerardo Celaya, CFO

With regards to your question about deferred taxes, Alvaro, it is not related to Brazil. It's a corporate effect. So it is not related to Brazil. And going to your question regarding balance sheet optimization, let me give you a sense of what we're thinking. We obviously have large interest income this year because we have a large cash position. In this process of review, we are looking into our business needs in terms of investments, what we need to do to reinvest. We are increasing CapEx, as you saw in 2022, and we expect this moving forward to the next couple of years to maintain a level of investment between 7% to 8% of revenues to fund our ambitious growth plan. We are also assessing inorganic growth opportunities with the disciplined approach that we've always had throughout the years. We think we have a very solid financial position and firepower to pursue opportunities. Finally, taking into account this flexibility, we will be assessing alternatives before year-end to distribute excess cash.

Operator, Operator

We will take our next question from Ben Theurer from Barclays.

Benjamin Theurer, Analyst

Congrats on the results. Just a quick one following up on some of the pilot projects and the execution here. Can you share a little more insight as to the success rate, the turnout, and the repeat rates with some of your customers as you now show up with a broader portfolio? And how should we think about the rollout of these programs into the territory where you're not testing right now, but then also go forward into territory, such as maybe Guatemala, etc.

Ian Marcel Craig García, CEO

Hello, Benjamin. I would tell you that the most advanced markets in terms of the multi-category strategy are Brazil, Mexico, and Colombia. We are taking a lot of care to ensure that we are able to deliver to the customers the goods of our partners that we are partnering with. It’s a complicated process where you have to manage the supply chain, making sure everything is aligned. Many of these industries and partners, especially last year, have been pressured with supply issues. Aligning all of the supply chain has taken time. We want to be recognized for excellence in our delivery, so we roll out these territories carefully, learning, and adjusting how we go to market. I can tell you that most of these categories experienced a relevant increase in coverage and in revenues. The partners that we have are very happy with us. We continue rolling them out, but it's a process that takes time. Brazil has been at this for a while; it is almost at 2% of revenues on multi-category outside of beer. So, it's a process that has taken us 1.5 years to reach around 1.5% to 2% of revenues in Brazil. It will take 3 to 5 years to reach a relevant level, such as 5% of revenues on these multi-category offerings. We need to do it in a very disciplined way, learning how it leverages our core non-alcoholic ready-to-drink business. There's a lot of value to market initiatives that are helping us. I want to caution that it is a process that will take 3 to 5 years to gain relevance because, at the same time, we are growing our core and doing so at a high clip. So to become relevant while we are still growing our core business, it will take around 3 to 5 years in our vision. Regarding the other territories, it just has been a natural progression of focusing on the largest markets. During this year, we expect a catch-up from the Latin American territories.

Operator, Operator

We will take our next question from Sergio Matsumoto from Citigroup.

Sergio Matsumoto, Analyst

And Ian and Gerry, I'm looking forward to working with you. Ian, you had the leadership position in South America division. And now that you are on a new regional level, what examples or opportunities do you see of bringing products or best practices into Mexico and other regions? An obvious example that I can think of historically is the rollout of AdeS from Argentina back in a day. Do you see other examples in today's context that are not so obvious to us?

Ian Marcel Craig García, CEO

Thank you, Sergio. I think we have great teams in place in different territories. The good thing about this is, during this listening tour, I am visiting the operations. I see opportunities to share practices and initiatives from Brazil, but I've also discovered many opportunities to go the other way. We are bringing from Brazil and Mexico, accelerating quickly regarding digital and multi-category, working the on-premise channels, alcohol. But we are also seeing in Mexico what they have done with the universal bottle, reducing drinks in family sizes in the universal bottle, something that was not being done in Brazil. From the business in Central America, we see ample headroom for profitable non-carbonated beverages. There is practically a wide space there outside of Costa Rica that we haven't targeted. We expect many smiles to come from those initiatives. So I can pinpoint several, but these initiatives will flow in all directions. A lot of good things in Mexico and many good things in the Latin American territories that we will be cross-fertilizing, as you suggested.

Operator, Operator

We will take our next question from Marcela Recchia.

Marcella Recchia Focaccia, Analyst

I have 2 questions. The first one, after FEMSA's strategic review, KOF is now officially perceived as a core business, right? So can we expect any particular change in the relationship or influence from FEMSA going forward? That's the first question. And secondly, we also just heard regarding ground tour and the collaborative framework between KOF and OXXO from FEMSA's side, and I think it would be very interesting to hear from your side as well. The question is basically, to what extent can this collaborative platform in the traditional channel increase cost growth going forward? And also in terms of efficiency, if you can also collect something from that end as well.

Ian Marcel Craig García, CEO

Hello, Marcella. As you mentioned, I think this announcement from FEMSA forward vision is very positive and reflects FEMSA's confidence in the outlook and the opportunities that we have at Coca-Cola FEMSA to continue generating growth. This is very positive for us. It reflects the fact that the enhanced cooperation framework that we have with the Coca-Cola Company gives FEMSA and Coca-Cola FEMSA the confidence to invest to grow the business. There are many opportunities for KOF and for FEMSA in the digital ecosystem in the traditional channel. We can leverage the access that we provide. As I mentioned, we reached more than 850,000 clients in Mexico. I can tell you from our point of view, we have ongoing pilots with FEMSA digital, where we're understanding what we can leverage on digital payments on the point-of-sale terminal. There are also opportunities to enhance our Juntos+ loyalty offering. These pilots are still in very early stages. But I think we're both excited about what we can do and how we can enhance the offerings for the traditional trade, Marcella.

Operator, Operator

We will take our next question from Alan Alanis from Santander.

Alan Alanis, Analyst

Congratulations, Ian and Gerry. Best wishes for the new adventure. My question has to do with capital structure. The Coca-Cola FEMSA is under one-time net debt-to-EBITDA. What's the optimal capital structure that you envision going forward? And if you could give us any hint in terms of what you're thinking in terms of criteria for M&A regarding geographies, scale, product lines, and so forth.

Ian Marcel Craig García, CEO

Hello, Alan, how are you? I think it's a two-part question. As Gerry mentioned, in terms of our capital structure, you are right that we have an excess level of cash. Following up on Gerry's comments, we're going to be reinvesting in the business. We will be entering a 2- to 3-year period of growth, where our CapEx should be around the 7% to 8% of revenues level, and this is just organic growth. We will continue to assess inorganic growth opportunities with a very disciplined approach. The priority for us will be primarily in the Americas, and we can look outside of the Americas, but our first priority would be there. As the year progresses and before year-end, we will look to alternatives to distribute excess cash, but first covering the two other priorities.

Operator, Operator

We will take our next question from Rodrigo Alcantara from UBS.

Rodrigo Alcantara, Analyst

Congrats, Ian, for the appointment. My question is regarding the recovery observed in your distribution. Just wondering if you can comment a bit about trends in terms of volume and pricing in beer in Brazil which is expected to have a very strong pricing in the quarter. My sense is that the volume might continue to see some pressure for you guys. So just curious if you could comment on that? Any comments that you can also give us on performance by brands, Tiger, Eisenbahn has been the one that has been the one that performed the best, right? So any comment there would also be helpful, Ian.

Ian Marcel Craig García, CEO

Hello, Rodrigo. Your question is very pertinent. Let me put it this way. Before the exit of Heineken, we had around 180 million cases of beer. With the exit of both the Heineken and Amstel brands, which were very important—it was the leading premium beer and an important mainstream beer—we went down to about 70 million cases or so. We should be, around last year, nearing 80 million unit cases. That gap we have to close is very large, and it’s going to take around 5 to 6 years. This means doubling the size of the beer portfolio we have now. Beer takes time. As you know, there are many offerings. I would say different things are happening in our beer portfolio. So going from the bottom up, we're gaining a lot of share in the economy segment, which is contracting. We are launching new beer, like Tiger, a mainstream beer designed for forward-looking consumers. It has a unique positioning with a beer bottle. We are learning how to communicate it to the target, and it is starting to gain repurchases. This is a project that takes time because it's a different type of presentation than the normal beer in Brazil. In the upper mainstream segment, Therezópolis is doing very well. It has been established as the second oldest brand in Brazil and has been revitalized on the shelves. We have in the premium category, Eisenbahn, which is performing exceptionally well, winning a gold medal at the World Beer Awards in 2022. It operates in a segment that is growing but very competitive. We are doing well and gaining share, but it will take 5 to 6 years to achieve our target of 80-100 million unit cases of beer. Does that clarify things, Rodrigo?

Rodrigo Alcantara, Analyst

Yes, that was actually more than I expected. Just a quick question: how are you reporting the additional revenue from the multi-category? Is it included in this line as well? I know it’s small, but I want to be sure.

Jorge Alejandro Pereda, Investor Relations Director

Rodrigo, it's Jorge here. Yes, we report that on the revenue line. So it's included in the total revenues.

Operator, Operator

We will take our next question from Ulises Argote from JPMorgan.

Ulises Argote Bolio, Analyst

So my question was mainly related here to the digital business and maybe trying to figure out how CapEx-intensive is part of the business, how much money are you putting into the Juntos+ initiatives that you're rolling out? Obviously, this is a key part of the strategy, and you're focusing a lot on this. How should we think about allocation on this side? And maybe if you can comment on any opportunity there on inorganic growth on this side as well? What could be the potential target for size dynamics, etc. across the markets?

Ian Marcel Craig García, CEO

Ulises, I can tell you, when we talk about the level of CapEx, it is primarily driven by our core business. The investments we are making behind our platform are relevant, but that's not the majority of our CapEx. We are ensuring we are very disciplined regarding our IT spend. There are many things we want to develop and accelerate but don’t necessarily justify upfront additional spending. We will be very disciplined about that, and that does not make up the lion's share of the total CapEx. That is driven by organic growth in the business.

Ulises Argote Bolio, Analyst

Okay. Yes. Super clear. Anything on inorganic there that you could comment?

Ian Marcel Craig García, CEO

We are assessing. As you know, with higher rates, many digital players that had deep pockets are beginning to face cash burn rates and high customer acquisition costs, which are two things we are not dealing with because we already have the largest user base profitably. Thus, we are looking for opportunities and technologies that can complement us. We will keep evaluating, but nothing more to share at this moment other than we are keeping our eyes open.

Ulises Argote Bolio, Analyst

All right. Perfect. Congrats on the results and on your appointment and Gerry's.

Ian Marcel Craig García, CEO

Thanks.

Gerardo Celaya, CFO

Thank you, Ulises.

Operator, Operator

We will take our next question from an unknown analyst.

Unknown Analyst, Analyst

So I wanted to touch base a little bit more on Brazil beer. You guys stated it will take about 5 to 6 years to recover volumes lost from the termination of the agreement with Heineken. What is the plan here going forward? Is it to invest in new plants, produce beer? Is it only to bring more brands, distribute more? Will it be more premium beer? Will it be more mainstream? Will you still be on economy and gain share in spite of the category being down? I ask this because another bottler player announced CapEx directed to producing beer in Brazil in the next couple of years. What is your view on the plan here going forward?

Ian Marcel Craig García, CEO

Lucas, in terms of our Coca-Cola FEMSA territories in Brazil, there is ample toll packing capacity that we're accessing, and our beer partners are accessing. Thus, there’s no immediate need for any beer capacity CapEx in the short to medium term. Our main partner is Heineken. They are investing in CapEx to suppliers. The relationship we have ensures we have the supply we need, and we are working very well with them. We are looking to grow in the segments we have. We will not deemphasize any of the three segments where we play.

Unknown Analyst, Analyst

Yes. Perfect. Thanks.

Operator, Operator

We will take our next question from Thiago Bortoluci from Goldman Sachs.

Thiago Bortoluci, Analyst

Yes. Hello, can you hear me? If you can hear me, guys.

Gerardo Celaya, CFO

Yes, Thiago.

Ian Marcel Craig García, CEO

Yes, Thiago. We hear you well. Hello.

Thiago Bortoluci, Analyst

Congratulations on the results. I apologize for changing the topic, but it's crucial to discuss the tax credits from the Manaus Free Trade Zone. Earlier this year, we received some reports from industry players questioning the validity of this. While the primary focus was on what we couldn't identify, the Coca-Cola system is also part of this conversation. Could you provide an update on our status regarding IPI tax credit recognition from the Manaus Free Trade Zone? Additionally, what potential contingencies are associated with this? How much of this is provisioned, and how much is not? What is your assessment of the risk involved?

Gerardo Celaya, CFO

Thiago, thanks for your question. Regarding tax-related issues IPI specifically, it is very important to mention that we always, everywhere we operate, follow all legal and accounting rules to calculate and account for tax credits. We also disclose tax disputes regarding KOF in our 20-F and all sorts of financial statements. These disputes may exist due to the interpretation of regulations. An unfavorable outcome has been classified as possible, which means the risk is less than probable, but not remote. Regarding tax contingencies in Brazil, as disclosed in our 20-F for 2021, we registered approximately MXN 30 billion equivalent as a contingency regarding IPI specifically.

Jorge Alejandro Pereda, Investor Relations Director

I think, Thiago, just to complement what Gerry said, we don’t see any changes on the tax dynamics. At this point, we do not see any changes that will affect our approach to IPI.

Operator, Operator

We will take our next question from Fernando Olvera from Bank of America.

Fernando Olvera Espinosa de los Monteros, Analyst

The first one is related to South America. What exactly explains the margin expansion seen during the quarter? If you can comment on which country was behind this improvement? Based on the guidance you just shared, how should we think about margins in this division this year? My second question relates to Argentina. This is the second year that the country registered strong volume growth. How are you thinking about volume performance this year compared with the guidance you provided? Do you think volume can return to levels seen in 2014 and 2015, approximately 230 million unit cases?

Gerardo Celaya, CFO

Fernando, with respect to your first question regarding margin expansion in South America division, it is explained mostly by Brazil and Argentina, which were able to absorb fixed expenses and dilute them. Top line performance, especially in Argentina, was quite strong in the fourth quarter. The team's ability to dilute fixed expenses is the main reason behind this margin expansion. Going forward, we expect stable margins. As Ian mentioned a couple of minutes ago, we foresee continued pressure, but I feel comfortable with our revenue management capabilities and hedging strategy to maintain margins moving forward.

Jorge Alejandro Pereda, Investor Relations Director

And Fernando, it’s Jorge here. Yes, regarding Argentina, the environment is dynamic. We manage the business day by day. That said, the business has been performing very well. In line with the guidance for Argentina, we expect something similar. We have seen robust traditional and on-premise channel performance. We expect that to continue. We also have initiatives regarding affordability strategies, the non-caloric portfolio, and a focus on single-serve mix growth in Argentina, which has been important. We expect these initiatives to continue to be effective in 2023. Overall, I would say that Argentina is in line with the guidance Ian mentioned before.

Operator, Operator

We will take our next question from Felipe Ucros from Scotia Bank.

Felipe Ucros Nunez, Analyst

Gerardo, good luck on this new journey. Most of my questions were addressed, but I wanted to follow up on Marcella's question. I am curious about the overlap of the portfolio that OXXO carries and what traditional stores carry. Do you already have some idea of the role that physical OXXO stores could play in distribution to traditional? Obviously, you’re just starting, and I’m sure a lot of testing still needs to happen. Do you envision a model that utilizes OXXO stores as small urban distribution centers?

Ian Marcel Craig García, CEO

Hello, Felipe. We are in very early stages of the pilot where we can jointly address the traditional trade. It's still too early to determine how the footprint or logistical network would be set up. We are exploring several avenues.

Operator, Operator

There are no further questions on the line. Please proceed for your closing remarks, sir.

Ian Marcel Craig García, CEO

Thank you all very much for your confidence and interest in Coca-Cola FEMSA. We look forward to meeting personally with you soon as we continue to engage in more interactions with the investment community throughout the year and throughout our tenure. In the meantime, our Investor Relations team, led by Jorge, is available to answer any of your remaining questions. Thank you.

Operator, Operator

Thank you for joining today's call. You may now disconnect.