Earnings Call Transcript - KOF Q3 2020

Operator, Operator

Good morning, everyone, and welcome to Coca-Cola FEMSA's Third Quarter 2020 Conference Call. 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 on 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 will now turn the conference over to Mr. John Santa Maria, Coca-Cola FEMSA's Chief Executive Officer. Please go ahead, sir.

John Santa Maria Otazua, CEO

Thank you, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. We appreciate your interest in our company, and I hope you and your loved ones are safe and well. With me today are Constantino Spas, our Chief Financial Officer; Matias Molina, Strategic Planning Director; and Jorge Collazo, Head of Investor Relations. In the face of a complex operating environment, I am encouraged by the sequential recovery and overall improving trends that we saw during the third quarter. This positive momentum is driven mainly by gradual increases in consumer mobility, the effectiveness of our comeback strategies, and the resiliency of our business. Although our operating environments remain volatile and the pace and shape of the recovery is still difficult to predict, our outlook is cautiously optimistic. Notably, consolidated volumes improved from a double-digit decline in April to a low single-digit growth in September, the first month of consolidated volume growth since the start of the pandemic. Our key priorities have played an important role in bolstering our resilient profile. Protecting the safety and well-being of our employees, delivering outstanding value and service to our consumers and clients, relentlessly supporting our communities, ensuring a prudent use of cash while strengthening our balance sheet, and accelerating the rollout of our transformational initiatives. These priorities position us to emerge a stronger Coca-Cola FEMSA once the pandemic is over. On our call today, I will briefly review our third quarter results and provide you with an operating update. I will then give you more color on our strategic priorities to drive growth and fulfill our purpose. Importantly, I will discuss the significant strategy we have made to achieve our ambitious 2020 sustainability targets ahead of year-end. Finally, I will turn the call over to Constantino to review the results of each division and expand on our recent green bond, the Coca-Cola system's first granted green bond issued. Moving on to discuss our quarterly results. As was the case during the third quarter of 2019, following a favorable decision from the Brazilian tax authorities, Coca-Cola FEMSA has been entitled to reclaim tax payments made in prior years in Brazil. This resulted in an extraordinary positive effect for the quarter of MXN 470 million on our operating results income as compared to the previous year. As I summarize our quarterly results, I will refer to tax-related and other extraordinary effects. Our consolidated volumes declined 4.1%, a sequential improvement from a 7.3% decline during the second quarter. This improvement was driven mainly by the strong performance of Brazil and Guatemala, coupled with volume growth in Uruguay. In addition, we saw sequential improvements in both Argentina and Central America, while Colombia and Mexico were relatively stable as compared to the second quarter. In Mexico, the pace of recovery proceeded more slowly during the quarter than initially expected, mainly due to the relatively cautious consumer, reduced mobility, and unfavorable weather. However, across most of our markets, client reopenings accelerated and drove improved performance across categories, channels, and presentations. For example, while the traditional trade has remained relatively resilient, the modern trade channel improved from double-digit declines in the second quarter to low single-digit declines in September. Importantly, in Mexico, we see headwinds for upcoming recovery as we still are below the levels of reopenings and traffic that we have seen in other regions and countries. With regards to our categories, we continue to see performance from our sparkling beverage category. For example, our Brazilian operations sparkling brands grew 8%, driven by 5% growth in brand Coca-Cola and double-digit growth in our flavored sparkling beverage portfolio. Volumes of brand Coca-Cola also grew in Central America and Uruguay while remaining flat in Argentina, reflecting consumers' strong preference for this iconic brand. As a result of the affordability and diversity of our portfolio, combined with our relentless point-of-sale execution, we are gaining market share across the nonalcoholic ready-to-drink space in each of our territories, except Argentina. This growth is consistent with our strategy that focuses on winning during challenging times in order to excel during the forthcoming recovery. Moving on to our top line. Our total revenues declined 4%, impacted mainly by unfavorable currency translation and price/mix headwinds. These effects were partially offset by pricing and revenue management initiatives in key markets. It is worth noting that by removing currency translation effects, our top line would have remained flat, underscoring the significant currency headwinds our company faced during this quarter. Importantly, despite a decline in revenues, our operating income increased 1.5%, driven mainly by declining PET costs, favorable currency hedging initiatives, and our outstanding ability to generate savings and efficiencies. These factors were partially offset by unfavorable price/mix effects, the depreciation of most of our operating currencies as compared to the U.S. dollar, and higher concentrate costs. Removing currency translation effects, our operating income would have increased a solid 7% for the quarter. As well as in the case during the second quarter, our mitigation actions and favorable raw material costs enabled us to offset close to MXN 3 billion of COVID-19-related headwinds, effectively mitigating more than 90% of the gross impact. Thanks to these actions in a complex environment, our operating cash flow margin expanded by 90 basis points to 21.6%. Finally, our controlling net income decreased 38.8% year-over-year, driven by extraordinary other nonoperating expenses, impacted mainly by the sale of Estrella Azul in Panama and an impairment in our Leao and noncarbonated beverage joint venture in Brazil. By normalizing our controlling net income, our earnings per share would have increased 6.2%, reflecting our positive underlying operating performance. One of our key strengths is the mutually beneficial business relationship that we enjoy with the Coca-Cola Company. Despite short-term volatility, we remain focused on growth and on driving the system forward. Accordingly, considering long-term investments and profitability levels that are beneficial to both Coca-Cola Company and ourselves, we have agreed to an increase in the cost of concentrate for sparkling beverages in Mexico over our 1-year period, which began in July 2020. As a system, this commits us to continue strengthening our portfolio to capitalize on attractive consumption occasions in categories such as the recent launch of Topo Chico Hard Seltzer and to continue cooperating through the implementation of marketing and commercial strategies that ensure our business's long-term growth. We expect that these initiatives, coupled with our ability to drive efficiency and productivity, will continue to offset the effects of this increase as well as in the case during the quarter. We continue to leverage our strategy driven by our vision and mission to refresh the world anytime and anywhere, always finding the most efficient and sustainable way to put our consumers' preferred beverage in their hand. To this end, we must become an integrated commercial beverage platform that works seamlessly in real time to deliver our four strategic priorities that guide our transformational growth. First, build a portfolio for every occasion; second, enable an overall digital transformation; third, ensure business sustainability; and fourth, foster a collaborative culture. With regards to our portfolio, we have set the main drivers to further consolidate our leadership position in the beverage industry. Affordability remains a significant growth engine for our sparkling beverage category. Additionally, we must address new consumer occasions and preferences, with substantial innovation, and continue to capture market share in emerging categories such as hydration, nutrition, and energy, as well as our recent entry into the alcoholic ready-to-drink category. As consumers reshape their behavior, consumption at home and for leisure will continue to evolve, creating attractive opportunities for packaging innovations such as single-serve multipacks and returnable presentations, as well as tremendous opportunity to continue expanding our home delivery routes, which are growing double digits currently. The power of innovation and portfolio expansions is exemplified by the successful launch of Topo Chico sparkling Mineral Water in Mexico City. Growing at an impressive pace, Topo Chico complements our portfolio as a superb premium product. In the energy drink segment, we have successfully launched Predator, a valued brand from the Monster family that is complementing our energy portfolio across channels. Despite being launched in the middle of the pandemic, this attractive offering is allowing us to gain share in the attractive and emerging category. Moreover, the Coca-Cola system has taken its first steps into the alcoholic ready-to-drink space in the region by launching Topo Chico Hard Seltzers across selected cities in Mexico and Brazil. Other territories are expected to launch this premium offering before year-end and during 2021. We are excited for the growth potential that this new category represents for the system. Importantly, we continue to reduce complexity and drive agility by reducing the number of SKUs through our prioritization of growth and profitability, while consolidating local brands under global and regional brand headings. For instance, we have reduced close to 20% the number of SKUs in markets such as Colombia and Argentina. Our second strategic priority is to drive an overall digital transformation in order to fulfill our vision of becoming a fully digital, interconnected, agile, and flexible platform. On our second quarter conference call, we expanded on part of this strategy, our omnichannel capabilities. However, our vision goes further by deploying capabilities, not only for order-taking solutions in customer care but also evolving our route to market and logistics models while scaling and optimizing HR and finance processes through automation. This transformation is growing at a tremendous speed. To give you a sense, in just one quarter, the number of daily orders we are taking through WhatsApp in Brazil tripled, now reaching more than 13,000 per day. Our third strategic driver is ensuring business sustainability. With this in mind, I would like to update you on our endeavors to achieve our ambitious 2020 sustainability goals before year-end. First, we have significantly improved our water use ratio per liter of beverage produced to 1.5, a benchmark in the industry. Second, we have increased our use of recycled PET from 23.5% for the third quarter of 2019 to 29% at the end of this quarter, exceeding our 2020 target of 25%. Finally, an impressive 82% of our energy used in our bottling facilities comes from clean energy sources, a net increase of 16% over the 71% achieved at the end of 2019. Importantly, our sustainability goals are aligned with our financial objectives. For example, in packaging, we expect to save MXN 8 million through our lightweighting initiatives and our label standardization project, which focuses on optimizing the use of raw materials. As we build upon our sustainability performance, please expect more news on the achievement of our 2020 sustainability goals and our new commitments in the coming months. In summary, despite what is still a complicated environment, I am not only encouraged by our resiliency and underlying operating trends, but also very proud of the tremendous dedication from all the Coca-Cola FEMSA employees. We have a very clear agenda ahead of us, and I'm confident that we are taking the right steps to strengthen our portfolio, invest in digital platforms, and continue driving our sustainability strategy, creating key avenues for growth and value creation for years to come. With that, I will now hand over the call to Constantino.

Constantino Montesinos, CFO

Thank you, John, and thank you all for joining us on today's earnings call. I will now expand on our division's highlights for the third quarter. Starting with Mexico. In this market, our top line decreased 6.7%, driven by volume declines and an unfavorable price/mix. These effects were partially offset by our revenue management initiatives. Importantly, and emphasizing the relevance of our affordability pillars, our multi-serve returnable presentations continue to grow double digits. While we also see an accelerated performance in brands such as Coca-Cola Zero Sugar and Topo Chico sparkling Mineral Water. As we enter the final stretch of the year, we are reinforcing our comeback plans in Mexico to complement our portfolio proposition and to improve our service levels through technology and new capabilities, particularly digital capabilities, and we are implementing all over the organization. In Central America, our volume declined 2.9%, impacted mainly by volume declines in Panama as a result of very stringent COVID-19 containment measures that were implemented in that market. These factors were partially offset by the continuous volume growth of our operation in Guatemala. On the pricing front, revenue management initiatives, coupled with a positive currency translation effect from the Central American currencies into Mexican pesos, partially mitigated unfavorable price/mix effects. As a result, our top line decreased 4.8% in the Mexico and Central American division. However, despite the effects of COVID-19, the concentrate cost increases and the depreciation of the Mexican peso, our operating margin for the division expanded 170 basis points while our operating cash flow margin expanded by 200 basis points. This increase was driven mainly by declining PET costs, currency hedging initiatives, and our team's outstanding job of generating operating expense efficiencies and savings, coupled with very solid results from a fuel-for-growth efficiency program that was implemented during 2019. Moving to our South American division. A low single-digit volume growth was driven mainly by a solid 6.5% volume growth in Brazil. In this particular territory, we observed rapid improvements in consumer sentiments, together with reduced lockdowns and favorable weather. Additionally, Uruguay delivered positive volumes while Argentina, which has been one of the most challenging operating environments for Coca-Cola FEMSA during the year, has started to stabilize. These encouraging trends were partially offset by volume declines in Colombia, a country that has continued to implement social distancing measures and very strict lockdowns for most of the quarter. As was the case for Mexico and Central American division, our pricing initiatives were offset mainly by currency headwinds. These headwinds, coupled with unfavorable price/mix effects, led to our top line decline of 3% in South America, including extraordinary other operating revenues related to an entitlement to retain tax payments in Brazil. Excluding currency translation effects, our top line would have increased 10.7% during this quarter. Despite profitability headwinds such as our decision to temporarily suspend tax credits and concentrate in Brazil, combined with unfavorable price/mix dynamics and the currency headwinds explained before, we were able to expand our gross margin in the division by 20 basis points. I will now expand on the financial results, which reflect our initiatives to strengthen our balance sheet and financial position. Our interest expense recorded a reduction as compared to the previous year, driven mainly by reliability management initiatives, including debt payments and the tender offer and make whole of the 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 in the face of the pandemic. As part of our comprehensive financial results, we recorded a foreign exchange loss of MXN 135 million as compared to a gain of MXN 38 million for the year earlier period. This loss was driven mainly by the appreciation of Mexican peso during the quarter as applied to a dollar-denominated cash position. Now let me expand on our successful green bond issuance, which was completed during the quarter. Consistent with our financial discipline, our strong credit profile, and the commitment to sustainability, we priced our first-ever green bond in the international capital markets. A successful public offering of USD 705 million principal amount of notes due 2032, which drives at U.S. Treasury plus 120 basis points, and at a coupon of 1.85%. This transaction is the largest ever green bond for a Latin American corporation and received very broad participation from investment-grade dedicated investors, confirming Coca-Cola FEMSA's financial discipline, strong credit profile, and a long-term commitment to sustainability. We expect this bond will enable us to achieve our environmental targets in areas such as climate action, water stewardship, and a circular economy. For additional details on our use of the proceeds and our alignment with the United Nations Sustainable Development Goals, you can find a copy of the green bond framework on our website. Finally, I want to underscore Coca-Cola FEMSA's strength and resiliency, reflected in our strong balance sheet. As of September 30, 2020, our net debt-to-EBITDA ratio closed at 1.05x, while our cash position is more than MXN 58 billion. Notably, we have a very disciplined approach to capital allocation and very clear priorities. First is to reinvest constantly in the business; second, to remain opportunistic about potential M&A opportunities that are value-accretive for our company. Another important priority is dividends. In line with that, and as a reminder, the second installment of the dividend will be paid on November 3, 2020, with a 37% increase versus the previous year's dividend. Overall, our solid cash flow generation and balance sheet are proofs of the company's resilience and the outcome of a very prudent financial discipline. Further expectation is that the second quarter will be the most impacted by the pandemic. Given the signs of recovery that we're seeing today, we remain confident that this conservative profile will enable us to continue a path towards the long-term objectives. Thank you very much. And with that, I will hand the call back to John for his final remarks.

John Santa Maria Otazua, CEO

Thank you, Constantino. Against the backdrop of the complex and dynamic environment, we have continued to effectively execute and perform our strategy, and we are encouraged to carry on navigating the road to recovery. Our third quarter results and trends strengthen our ambition to achieve our vision of refreshing the world anytime, everywhere. Thank you for your continued support. Operator, I would like to open the call for questions.

Operator, Operator

Thank you, Constantino. In light of the complex and changing environment, we have been able to effectively implement our strategy, and we feel optimistic about continuing our path to recovery. Our results and trends from the third quarter reinforce our goal to refresh the world anytime, anywhere. Thank you for your ongoing support. Now, I'd like to open the call for questions.

Benjamin Theurer, Analyst

Yes. First of all, congratulations on the results. My one question would be, if you could elaborate a little more on the dynamics throughout the quarter and what you're seeing into the fourth quarter in Mexico, and the differences between the traditional channel and the modern channel and how that recovery is currently playing out? Just to get a little bit of sense of what is needed to get you back into hopefully flattish to positive territory on the volume side in Mexico?

John Santa Maria Otazua, CEO

Sure. Thanks. Obviously, what we're seeing is - during the quarter, we saw a better July, a downturn in August because of the weather in Mexico, and then a rebound in September. And all that combined, however, gave us - during September, gave us a full month of growth, the first month of growth we've had since the beginning of the pandemic. Sequentially, what we're seeing going forward in October is continued improvement upon that. So we're very encouraged to see that more and more markets are starting to go positive. I think in terms of performance by channel, what we're seeing is the consolidated cup is traditional trade starting to pick up and go positive for us during the August and September period. And modern trade bouncing back during September from what was double-digit declines - mid-teen declines during June, July, August. So it's both encouraging for the traditional trade and for the modern trade. I think one of the concerning factors is still - well, not concerning, but it's just a slow factor that's recovering, is the on-premise channel in Mexico, the traditional on-premise channel in Mexico. We still see north of 60,000 accounts closed. And although they've been gaining little by little, that opening has been slow compared to the rest of the channels. In packages, I would say that our multi-serve packages continue to boom. We continue to grow at high single-digit rates. And what's encouraging as well is single-serve packages were starting to have less deep of a decline as compared to during June, July, and August. So sequentially, the traditional trade channel is doing better. The on-premise channel is opening up, and supermarket channels are going back to normal. And what is very encouraging is also to see single-serve starting to have less decline sequentially month-to-month. And like I said, October seems to be doing a lot better than September. So we're seeing sequential declines and sequential improvements as we go forward. I'm very encouraged by that.

Benjamin Theurer, Analyst

Okay. Perfect. That was very good. Just one quick follow-up on the commentary. So basically, what we've been seeing on the transaction side, which obviously was still high teens negative during the quarter. That is something you will also expect to slowly improve because of the commentary you just made around the single-serve packages and the reopening, correct?

John Santa Maria Otazua, CEO

Absolutely. Yes. So as you see the traditional trade on-premise accounts start leveling out and people start moving and having higher mobility levels, in general, we will start seeing more convenience packaging and more single-serve packaging being transacted.

Operator, Operator

We can go ahead and take our next question from Álvaro García with BTG.

Alvaro Garcia, Analyst

My question - I have several questions, but I'll keep it to one. On Coke's restructuring, I think that's probably pretty important to address sort of what are your implications - what are the implications for Coke specifically of this sort of larger, more networked model? What do you think some of the benefits are and maybe some disadvantages? I'd love to hear your thoughts on that.

John Santa Maria Otazua, CEO

Sure. Thank you, Alvaro. I think Coke's restructuring is something that is extremely positive for us and for the system as a whole. I think one of the things that it does is it starts streamlining the organization and making it much more agile in terms of decision-making, eliminating brands that are not performing, and also bringing new brands to the market. For example, we collaborated on the Topo Chico Hard Seltzers. From conception to time to market, we took three months to get it out, which is extraordinarily quick for any company, let alone the Coca-Cola Company. The new organization has a lot more agility to it. We're going to have a lot more capability to drive innovation, given the speed of implementation this requires for a good result. We're going to start seeing much clearer verticals on categories as they'll be coming down from Atlanta with a specific strategy in mind. So there's - those are the goods. The bads, I think, are that you can have a little less say in terms of what can get treated and what cannot at the operating level or the country level. There will be less customization for markets. But I think we're going to be betting on bigger and bolder brand initiatives, focusing on taking out a lot of the smaller brands that are not adding much to our system other than complexity. I truly think that it’s an exciting time for the system. With that, I think we can do a lot more, a lot faster. Constantino, do you care to comment on the platform services piece?

Constantino Montesinos, CFO

Yes. I think that apart from the frontline focus that John was mentioning, there's also a huge opportunity in terms of the backend processes that we have throughout the system. As Coca-Cola FEMSA, we have been working very aggressively to expand and enhance our shared services business model, but there's a clear opportunity to collaborate with the Coca-Cola Company and across potentially other participants in the Coca-Cola system in that front. And at the same time, there's also a huge opportunity in data sharing across the Coca-Cola Company and ourselves in order to generate a much more robust analytics capability to have a much better and more informed decision-making across the countries. So overall, I think it's a holistic benefit for the system, not only in the commercial capabilities, innovation, speed to market such as Topo Chico, but also on the backend side where we have a long way to go and where both companies and the system have been working very adamantly to get much better in that process. So there's definitely huge benefits here to continue to collaborate more to enhance our capabilities to drive much more efficiency across the system.

Operator, Operator

We can go ahead and take our next question from Marcella Recchia with Crédit Suisse.

Marcella Recchia Focaccia, Analyst

I have two quick questions here. The first one is about your comment about the concentrate price increase. Could you elaborate a little bit more? I couldn't hear you well. You mentioned that you agreed another year of increase effect July this year. So it would be helpful if you just elaborate a little bit more on this topic. And my second question is related to Brazil. Basically, just to understand, with the federal government fixing the IPI tax rate at 8% for the term period of time. Can we think about the company resuming the tax collection in Brazil as of next year? And if that is the case, what would be the impact that you are expecting for next year's operation?

Constantino Montesinos, CFO

Sure. I can take that. Thank you for your question. In the case of the concentrate increase, as John mentioned during the call, we had a concentrate increase this quarter. The concentrate increase is in line with previous adjustments, so it's manageable. We expect to continue to expand margins during 2020 and to protect them during 2021. So to give you an idea of different dynamics that we're handling within the company. Just to give you a sense, we expect savings in Mexico during the full year 2020 to reach approximately about $180 million, which much more than fully offsets the increase. So it's in line with previous increases and it's part of our corporation framework at the end of the 3-year increase that we mentioned before. The future increases like the ones that we had depend on investment and profitability levels that are beneficial for both in the long term. As you know, our concentrate conversations have a long-term approach. We continue to work together with the Coca-Cola Company to navigate short-term disruptions but also position ourselves for long-term growth as we have done during 2020. Overall, it's a manageable increase that we shouldn't overly think about. In the case of Brazil, we continue to take a very conservative approach on the IPI tax spreads. We continuously evaluate the situation. As you mentioned, there have been recent developments in the market, but we take a much more conservative profile when it comes to tax issues in Brazil. For now, it's still convenient to be conservative. However, we have never renounced our rights on the credits. The dynamics of tax matters in Brazil are very fluid. So we may use these tax credits in the future. A change in our approach would be positive for our business in Brazil, and it would positively impact our results. However, we do not share exact amounts.

Operator, Operator

We'll go ahead and take our next question from Felipe Ucros with Scotiabank.

Felipe Ucros Nunez, Analyst

Yes. Maybe if I can do a follow-up on the concentrate price increase. If you could give us a little bit of the rationale behind the increase, especially in the context of the timing, right? Very tough timing with COVID. And especially in Mexico, a lot of attention from the government towards labeling, banning sales to minors. A lot of moves in the President's party very active on restrictions on food and beverage. So maybe if you could talk a little bit about the context of doing it in this timing because in the past, the increases were not done every year, and sometimes we had half a decade or more without increases. And it seems that it's just probably an appropriate time for a break from the Coca-Cola Company. And obviously, increases are not a great time for the industry. And maybe on a follow-up, you mentioned market shares, which are doing very well. Traditionally, they do very well during these times for you guys. Maybe you can give us an idea of how you expect to come out of this, especially in the context of affordability and the penetration you're getting there?

Constantino Montesinos, CFO

Sure. As I said before, the relationship we have with the Coca-Cola Company has a long-term view. There are conversations, plans, and strategies that have a longer horizon than just one year. It is clear that we had a very complex year in 2020, as you mentioned. The concentrate price increase is part of how the system works. I don’t think we should overemphasize this as an issue that could signal relationship problems. We have a planning cycle with the Coca-Cola Company that spans five years. As I mentioned, the current increase was manageable, and we believe the remainings will be manageable as well based on the work we are doing within our portfolio and the efficiency programs we have in place. We have been growing market share across all of our markets, mostly in all of our core categories. The only market where we have seen a flattish performance is in Argentina. However, there have been very particular issues in terms of market share tracking in Argentina due to all the restrictions and lockdowns. If we see other sources, such as modern trade scanning data, we're also seeing an increase in Argentina, which is extremely encouraging. In Brazil, we continue to have increases in all of our categories. The core competence of our business is our ability to execute very well in traditional trade. Under dire circumstances such as those we’re facing, that advantage plays strongly in our favor. The digital capabilities we've been enhancing for a long time have shown power and effectiveness, and I believe that in an 18-month period, we will be able to deploy that across most of our core markets. This will enhance our value proposition to our customers and continue to have a positive impact on market share.

John Santa Maria Otazua, CEO

Yes. Felipe, the only thing I would like to add is, we are seeing share gains across all categories in all countries, the exception being Argentina. I’d like to point out that we continue to gain share in affordability. In most of our countries, we are the only ones in the returnable segment, which is highly affordable compared to one-way packages, and that is the segment that is growing. In this context, we believe that this is sustainable and will enhance growth, especially as consumers are coming out of the COVID situation. We will be there for them with attractive value propositions and enhanced capabilities in returnable packaging formats.

Operator, Operator

We'll go ahead and take our next question from Alan Alanis with Santander.

Alan Alanis, Analyst

John, Constantino, Matias, and Jorge, hope you and your families are well. Congratulations on the results, very clear. I mean, pretty impressive flat revenues and mid- to high single-digit EBIT and EPS growth in this environment with market share gains that deserves a congrats. So my questions are more related to different topics that are nonoperational more. Specifically, M&A, and secondly, alcoholic categories. Today is kind of a symbolic day, I guess, because you lost the #1 ranking as the largest Coke bottler in the system worldwide with Coca-Cola European partners closing on the acquisition of Amatil, $6.6 billion. I just realized you have 40% of that amount in cash. So I'm glad that you were very disciplined. It would have been very, very dilutive. My question has to do with the valuation in your view globally of the system. I mean CCAP is acquiring Amatil at more than twice the EBITDA multiple at which you are trading and even much more than that on a PE basis. What are your views in terms of what's happening? How does this transaction affect, if at all, your strategic thinking in the long term?

John Santa Maria Otazua, CEO

Constantino, you want to take a crack at that, and I'll add to it?

Constantino Montesinos, CFO

Sure. I mean, we're here to discuss Coca-Cola FEMSA's third quarter results, right? I would love to spend more time on that than having an opinion on somebody else. However, we believe that based on the information that was provided yesterday by other companies, I think it's an interesting transaction. We are firm believers that if there is value to be captured within the consolidation of the system, that's a great thing. Portfolio and geographical diversification as well as developing better capabilities and scale across the system are always something that is positive in our view. We have, for over 26 years, demonstrated our ability to develop capabilities in emerging markets. Scale is definitely an enabler for that. Does this change your point of view? Definitely not. I mean, we're committed to our M&A strategy, which is very disciplined. We always emphasize that we look at opportunities that must make sense strategically and the price has to be right to unlock value for our shareholders. Scale for the sake of scale or geographical expansion for the sake of geographical expansion is not part of our strategy. But we definitely believe that there is a dynamic and volatile environment right now, and we are extremely well-prepared not only from a balance sheet perspective but also from a capabilities perspective to add value whenever that makes sense to our company. We continue to screen opportunities across the world, not necessarily only in Latin America, but for the time being, we have not seen anything that makes strategic and financial sense for our business and our shareholders. So if that is the case, we stay put. If not, we act upon it. I don’t know, John, if you want to follow up on this.

John Santa Maria Otazua, CEO

Yes. Alan, good to hear from you. I guess the first thing I would say is, in terms of the ranking, the largest is not necessarily commensurate with the best, okay? In terms of valuations, it really depends on where you're buying and the perspective of stability, volatility in currencies as opposed to the ability to go out there and grow. I think we're currently solidly undervalued in Latin America, particularly because of the outlook for the region. The only thing we can do to change this perception is to grow faster, which I think we're doing on a relative basis with the gains we're achieving in share. As soon as the markets come back, we should be growing faster than the market. I think, going forward, we can expect to see further consolidation opportunities. First, the system is gravitating toward larger, well-funded capitalized, and probably public players. Secondly, the cost of staying in the business, the investments required to maintain digital capabilities and operating models will be significant. Those who are able to invest in those areas will succeed, and that has nothing to do with size; it has to do with capability. We're making significant progress in that area, and I think that, over time, we will be in a very conservative situation, maintaining liquidity and being ready to jump on any opportunities that arise at reasonable prices for value delivery.

Alan Alanis, Analyst

No. That's very useful. They’re very useful. And to Constantino's point, I mean, very fair. It's more of a strategic question rather than the quarter. I really, really appreciate both answers; they're very useful. One last quick follow-up, more operational. It has to do with alcoholic beverages. You saw obviously better than us what happened in Chile and all the pilots that you're doing in Brazil by delivering spirits and beer. What are the different scenarios and what are the economics in putting - I can think about the future of the Coke system in Latin America, specifically, Coca-Cola FEMSA, venturing into the alcoholic category? And what are the probability of you distributing beer in other places besides Brazil and Argentina?

John Santa Maria Otazua, CEO

Sure. Good question. Listen, I am very excited about the Coca-Cola Company’s entry into low-grade alcohols. It's a rapidly growing market with margins higher than traditional beverage offerings, and any growth in those categories brings immediate incremental value. We will have competition from various players in the marketplace, but we think we have an extraordinarily strong system and brands to capitalize on this trend in the next two to three years. Additionally, Topo Chico Seltzer is not our only product in that category. There are many products to come. The vector of growth in this category excites me as it marks a new market definition for the Coca-Cola Company. Regarding beer distribution in other markets, both Coca-Cola Company and bottlers are realizing enormous potential synergies. We are continuing experimentation with Diageo in Brazil, which is going well. I think we have tremendous avenues for growth in our sparkling core businesses. Our NCD business continues to offer significant upside potential, and our ability to offer affordability through returnable packaging will provide consumers with increased access.

Isabella Simonato, Analyst

I have two questions. First, if you could elaborate on Mexico? How are you seeing the new labeling impacting performance of volumes or mix or if at this point since it's been only a month. It's hard to tell. And the second question is on South America. We understand that there is some gradual improvement, right, on volumes and also on margins. But how are you seeing performance in the coming quarters for that division, specifically, assuming that certain mobility restrictions will remain in place? How can we think about profitability in South America?

John Santa Maria Otazua, CEO

Sure. Let me take the labeling piece first. The labeling has come into effect as of October 1st, and we have 90% compliance. We are working with the government to find a solution to label our returnable packages. We are fully compliant, and there hasn't been any noticeable impact on the sale of our category as a result of the new labeling. We view this as an opportunity to provide better consumer information without negative effects on our sales. In South America, specifically in Brazil, we're doing great. We have positive momentum, and Uruguay is starting to rebound. Argentina is stabilizing, but price controls present challenges. Colombia, on the other hand, is beginning to show signs of recovery. Overall, South America is performing well and should continue to do so in the fourth quarter.

Carlos Laboy, Analyst

Yes. Constantino, given that you have this long-term plan with Coke, can you give us some more color on, first, the scope of the increase, but really, most importantly, as you look out over the next two to three years, are we done with these adjustments? Are we likely to see more of these concentrate adjustments? If they are, are they likely to be very minor? What can you tell us about the long-term outlook of these? And then on the operating side, John, if you could expand on refillables and the potential with single-serve packages, right? I know with COVID, it's obviously hard and interrupted. The universal bottle and a lot of these measures are multi-serve initiatives. But do you see a surge of innovation coming through on single serves over the next couple, three years?

Constantino Montesinos, CFO

So I'll take your first question, Carlos. I think that we could expect a similar increase to the one of this year in the next year if and only if market conditions do not change significantly or deteriorate. We need to understand how macroeconomic conditions develop. In line with those, we will plan with the Coca-Cola Company a potential increase in concentrates. If there is an increase, it might be similar to the current one. However, we have cost-containment measures in place that will allow us to mitigate any such changes. We expect to see manageable increases while maintaining a good margin.

John Santa Maria Otazua, CEO

Yes. And with respect to refillables, we are focusing on returning multi-serve returnable purchases while also adjusting our price architecture to make single-serves more accessible. Over the next few years, we plan to incorporate universal packaging towards 12-ounce and half-liter propositions as soon as we obtain the necessary equipment. This project will take about three to five years but will lead to greater packing flexibility for consumers, expanding access to varied beverage choices.

Operator, Operator

Yes. Regarding refillables, we are concentrating on promoting multi-serve returnable purchases, while also revising our pricing structure to make single-serve options more affordable. In the coming years, we aim to implement universal packaging for 12-ounce and half-liter products as soon as we acquire the needed equipment. This initiative will take approximately three to five years but will result in increased packaging flexibility for consumers, broadening the range of beverage options available.

Miguel Tortolero, Analyst

My question will be on the regulatory environment in Mexico. The industry has been exposed to so much noise this year. First was the new labeling rules just entering the course a couple weeks ago, the ban on sales of sugary drinks to minors in Oaxaca and Tabasco, and proposals to increase taxes on sugary drinks from MXN 1.25 to MXN 0.65 per liter. What would be your view on this regard? And also, thoughts on the recent state-level ban to minors?

John Santa Maria Otazua, CEO

Sure. Let me address it as follows. The two laws that passed at the state level restrict sales of carbonated soft drinks and processed foods to minors in Tabasco and Oaxaca. We're working with both state legislatures and executives to find efficient implementation. It's tricky since we can't stop servicing accounts, so we're collaborating with them. The President has expressed that he does not favor prohibition. We're planning a comprehensive approach to enhance nutritional education, promote physical activity, and reformulate our beverages, which we have already begun. Regarding the tax issue, I sense there will be not only a tax reform that will affect our business but an overall reform that affects various industries. The approach will not solely target the beverage industry. So we are anticipating a deeper and broader tax reform later next year. It might affect us, both in extent and form, but I do not underestimate the possibility that it could be comprehensive and affect the industry less than anticipated. Does that help you, Miguel?

Operator, Operator

All right. It appears there are no further questions at this time. I'd like to turn the conference back to the speakers for any additional or closing remarks.

John Santa Maria Otazua, CEO

I guess one of the things we did not talk about too much in our conversation today was how well we are doing with digital and our digital transformation. As pointed out by Constantino, we have come up with a very efficient platform on WhatsApp in Brazil reaching close to 200,000 clients. We're starting to roll and test it in Mexico and Colombia. Our objective for next year is going to be 500,000 accounts by the end of next year. What we've seen is that this is increasing our frequency and transaction size, especially with smaller clients. We continue to have a strong quarter. We’re starting to see a rebound in volumes and are optimistic about the fourth quarter doing better than the third quarter. Thank you for your confidence and interest in Coca-Cola FEMSA. I hope you and your families are safe and well. As always, our team is available to answer any remaining questions offline. Thanks a lot.

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.