Earnings Call Transcript - KOF Q3 2025

Operator, Operator

Hello and welcome to the Coca-Cola FEMSA Third Quarter 2025 Conference Call. My name is Sophia and I'll be your moderator for today's event. Please note that this conference is being recorded. I would now like to hand the call over to Jorge Colazzo, Investor Relations Director at Coca-Cola FEMSA. Jorge, please go ahead.

Jorge Alejandro Pereda, Investor Relations Director

Good morning and welcome to this webinar to review our third quarter 2025 results. Joining me this morning are Ian Craig, our Chief Executive Officer; Gerardo Cruz, our Chief Financial Officer; and the rest of the Investor Relations team. Before I hand the call over to Ian, let me remind all participants that this conference call may include forward-looking statements 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 that can materially impact the company's performance. For more details, please refer to the full disclaimer in the earnings release that went out this morning. As previously mentioned, after our management's prepared remarks, we will open the call for Q&A. With that, let me turn the call over to our CEO to begin our presentation. Ian, please go ahead.

Ian Marcel Craig García, CEO

Thank you, Jorge. Good morning, everyone. Thank you for joining us today. Before reviewing our third quarter results, I would like to take a moment to express our sincere support for all of those affected by the recent storms in Mexico. This year's Tropical Storm Raymond brought torrential rain during the first weeks of October, impacting Central and Northeast Mexico. In accordance with our principles and protocols, we're taking action to prioritize the well-being of our teams and their families while also supporting local communities. We're working hand-in-hand with FEMSA and the Coca-Cola Company on several community relief initiatives as we always do during these unfortunate natural disasters. We are hopeful that with everyone's support, the affected communities may soon be back on their feet. Also, we are deeply saddened by the recent passing of our esteemed Board member, Ricardo Guajardo Touché. Ricardo was a member of Coca-Cola FEMSA's Board since 1993, sharing his valued insights in its finance committee and was committed to advancing economic, educational and social development in his community and throughout the country. We offer our condolences and prayers to the Guajardo family. Now moving on to discuss our results. During the third quarter, Mexico continued facing a soft macro background, impacting consumer preferences and demand. On the other hand, South America enjoyed a more resilient macro and consumer environment, which supported positive volume performance. Despite this environment, our consolidated results improved sequentially as we implemented cost control and productivity initiatives. As we look beyond this year, we will leverage Coca-Cola FEMSA's ability to adapt to challenging operating conditions, including the impact of the recent beverage excise tax increase in Mexico. We are confident that focusing on our sustainable growth model, combined with RGM affordability initiatives, short-term productivity and cost control measures and the revised CapEx investment level is the best way to navigate these conditions, while maximizing value for our stakeholders. Now let me expand on our consolidated results for the third quarter. Our consolidated volume declined 0.6% to reach 1.04 billion unit cases, a sequential improvement versus the second quarter, which is partially explained by a softer comparison base in Mexico than the one we faced during the first half of the year. In particular, the quarterly volume decline was driven by contractions in Mexico and Panama that were partially offset by the growth achieved in the rest of our territories. Total revenues for the quarter grew 3.3% to MXN 71.9 billion, led by revenue management initiatives that were partially offset by a volume decline, promotional activity and unfavorable currency translation effects from the depreciation of the Argentine peso and most currencies in Central America. On a currency-neutral basis, our total revenues increased 4.7%. Gross profit increased 0.9% to MXN 32.4 billion, leading to a margin contraction of 100 basis points to 45.1%. This margin performance was driven mainly by an unfavorable mix, increased promotional activity and fixed costs such as labor and depreciation, partially offset by a better sweetener and PET cost. Our operating income increased 6.8% to reach MXN 10.3 billion, with operating margin expanding 50 basis points to 14.3%. This operating margin expansion is explained by expense efficiencies such as freight and marketing across our operations, coupled with an operating foreign exchange gain. These effects were partially offset by higher depreciation, labor and IT expenses. It is important to consider the recognition of a one-time income of MXN 218 million of insurance claims recovered in Brazil, net of expenses during the third quarter of 2025. Adjusted EBITDA for the quarter increased 3.2% to MXN 14.4 billion, and EBITDA margin remained flat at 20.1%. Finally, our majority net income increased slightly to reach MXN 5.9 billion, driven mainly by operating income growth that was partially offset by an increase in our comprehensive financial results. Now diving deeper on our key markets performance for the quarter. In Mexico, our volumes declined 3.7% as we continued facing a soft macroeconomic backdrop. For instance, consumption drivers such as remittances and formal job creation have declined year-on-year. In this environment, consumers are looking for the best value equation and our strategy remains clear, implement top line initiatives to incentivize demand by focusing on providing affordability and attractive price points, allowing us to capture share opportunities. To achieve this, we have made adjustments throughout the year to our promotional grid and product offerings across formats and channels. As I mentioned during our previous call, these initiatives have led us not only to recover share in the modern channel but also to surpass previous year's levels, achieving now more than 6 percentage points of recovery, which positions us at a record level in this important modern channel. In the traditional trade, promotions and execution are also contributing to share recovery, especially by leveraging refillable multi-serve packs. The adjustments we have made to our price pack architecture in multi-serve refillable packs from July to September are showing encouraging initial results, reversing volume declines in this segment of the portfolio. Moreover, Coca-Cola Zero continues delivering positive results, growing 23% versus the previous year, with plans to increase connection with consumers using the right communication and execution. Indeed, Coca-Cola Zero has grown more than 40% compared to 2022. In addition, our flavor sparkling portfolio is also ahead of previous year's share levels, driven by the recovery achieved in the modern and on-premise channels. To achieve this, we are combining global strategies in core brands such as Fanta and Sprite with local heroes such as Mundet and other heritage regional brands. These top line initiatives are supported by our ambition to install a new record of 125,000 coolers during the year. In digital, we are encouraged to share that we are now rolling out our state-of-the-art salesforce tool, Juntos+ Advisor in Mexico. This digital tool has been fundamental in supporting share improvements and service levels in Brazil and we expect to see its positive impact in Mexico in the upcoming quarters as adoption matures. Now I would like to discuss recent developments in Mexico. As you know, last week, the House of Representatives approved a federal revenue law presented by the executive branch, which includes a significant 87% increase in the excise tax on soft drinks, taking it from MXN 1.64 per liter to MXN 3.08 per liter and installing a new excise tax on non-caloric formulas of MXN 1.5 per liter. The federal revenue law is currently pending approval by the Senate and once approved, it would take effect in January 2026. During the past month, we engaged with the government in conversations regarding the proposed excise taxes. As a result of these interactions, the Coca-Cola system in Mexico reaffirmed its commitment to continue incentivizing low and non-caloric products while maintaining an open and constructive dialogue with health authorities in Mexico. As we look to 2026, we expect another challenging year for volume performance in Mexico, with our customers and consumers dealing with the impact of the excise tax increase alongside an economy that is expected to grow a modest 1.5%. However, we anticipate a positive impact on brand equity due to the World Cup, as has been the case in host countries for these incredible assets. Taking all of these factors into consideration, we believe that the best course of action for our business in Mexico is to continue focusing on our sustainable long-term growth model while addressing the short-term headwinds with RGM initiatives, productivity and cost control measures and a revised CapEx investment. Moving on to Guatemala, our volumes increased 3.2% to reach 50.8 million unit cases. In this important market, we continue seeing a higher propensity from consumers to save. Amid this background, we continue outperforming the industry by gaining share in key categories such as sparkling beverages, water and energy. Notably, Coca-Cola Zero Sugar grew 16.9% year-on-year, while additional capacity is allowing us to strengthen our performance in flavors with Fanta and Sprite growing 8.8% and 3.8%, respectively. Commercial enablers are another area of focus, and I'm encouraged to report that Juntos+ and Juntos+ Premia continue growing at a fast pace. During the quarter, we surpassed 100,000 digital monthly active users in Juntos+, 25,000 more than the previous year, with more than 73% of these users active on the app. This is 23 percentage points more than in the first quarter of the year, underscoring our customers' fast adoption. In Juntos+ Premia, we have more than 46,000 clients redeeming points, which is more than double what we had in 2024. As we look towards the end of the year, we are adjusting our initiatives to continue optimizing our portfolio, capturing white spaces in key categories and executing rigorous cost control and productivity initiatives to grow sustainably and profitably. Moving on to our South America division. In Brazil, despite lower average temperatures than the previous year and a slower growth environment, we were able to increase our volumes by 2.6% year-on-year, driven by share gains. As has been the case throughout the year, additional capacity, coupled with the reopening of our plant in Porto Alegre, is supporting share gains in the non-alcoholic ready-to-drink segment. Notably, in the sparkling category, regions like Minas Gerais and São Paulo are more than 1 percentage point ahead of the previous year. And in Rio Grande do Sul, we have recovered approximately 5 percentage points of the total 8 points that were lost due to the temporary closure of our plant. Another highlight from our operation in Brazil remains the continuous growth from Coca-Cola Zero, which during the quarter grew volumes by 38%, supported by the Star Wars campaign that began last September for both Coca-Cola Original and Coke Zero. Regarding still beverages, we saw double-digit growth in juices and energy. In the case of Monster, we launched a new flavor with local Brazilian appeal, Monster Rio Punch, underscoring continuous innovation across the portfolio. Our monthly active user base in Juntos+ continues expanding with 18,000 additional customers and a 15.8% increase in average ticket size. Importantly, the Juntos+ Premia loyalty customer base increased 40% year-on-year. We remain encouraged by the results we are seeing from the nationwide rollout of Juntos+ Advisor, which is a game changer for our sales force and is supporting Brazil's positive share performance. Finally, in Brazil, we continue showing strong improvements in the supply chain front, which translates to increased customer satisfaction. For instance, order fulfillment during the quarter improved 1.9 percentage points compared with the previous year to reach 94.5%. Similarly, our delivery service metrics improved 1 percentage point to reach 94.6%, supported by declines in product unavailability. For the remainder of the year in Brazil, we will continue striving to outperform the industry, leveraging our digital initiatives and our customer-centric culture as we aim to continue improving our profitability by controlling expenses and increasing productivity. In Colombia, our volumes grew 2.9%, reflecting a gradually recovering economy, driven by improving sectors such as commerce, services, and agriculture. Notably, the consumption basket for fast-moving consumer goods has gradually recovered over the past 5 months, driven mainly by an increase in the average ticket. Our positive volume performance is supported by share gains in brand Coca-Cola, flavors, and water with clear opportunities for us to reverse the trend in stills. Regarding brand Coca-Cola's category growth, we are leveraging affordability initiatives and managing price gaps in both multi-serve and single-serve, while supporting the growth of Coca-Cola Zero Sugar. Additionally, in flavors, we're encouraged that for the first time in our Colombia franchise's history, Quatro, our grapefruit-flavored brand, is the number one flavored sparkling beverage in the country. On the digital front, we are enhancing adoption with monthly active buyers growing 27% year-on-year. We expect to continue leveraging the capabilities of our Premia loyalty plan to drive adoption and generate additional frequency. Finally, we're encouraged by the fact that the CapEx investments behind our supply chain have addressed key logistical pain points, allowing us to improve our cost-to-serve with reductions in primary freight costs and third-party warehouse expenses. Despite facing what is still a complex environment in Argentina, our volumes increased 2.9%. Our strategy during 2025 can be summarized in four key elements: enhancing the affordability of plans we implemented since 2024 during the sharp macro adjustment; accelerating the single-serve mix; leveraging digital with the rollout of Juntos+; and maintaining a lean and flexible cost structure. During the quarter, we continued delivering positive results across these elements of the strategy. For instance, we have consolidated the execution of what we call savings sections, which are attractive promotions and price points for our consumers. The savings sections are now present in more than 87% of our customers and growing. Regarding our single-serve mix, we reached 25.8%, which represents a 1.8 percentage point increase compared to the previous year, driven by an 11% recovery in the number of on-premise clients. In digital, we began the rollout of Juntos+ last June, and thanks to its rapid adoption, more than 40% of our client base are now monthly active buyers. Amid Argentina's complex context, we have and will continue emphasizing responsiveness in managing a flexible and lean cost and expense structure. As we look to the last chapter of 2025 and adjust our plan for 2026, we feel encouraged to be a part of a resilient beverage industry. We have a clear long-term strategy, supportive shareholders in FEMSA and the Coca-Cola Company, and a committed team focused on continuing to make Coca-Cola FEMSA a stronger and more adaptable organization. With that, I will hand the call over to Jerry.

Gerardo Celaya, CFO

Thank you, Ian, and good morning, everyone. I will begin by summarizing our divisions' results for the quarter. In Mexico and Central America, volumes declined 2.7% to 612.1 million unit cases, driven by volume declines in Mexico and Panama that were partially offset by growth in Guatemala, Nicaragua, and Costa Rica. Revenues decreased 0.2% to MXP 42.5 billion, driven mainly by volume decline, unfavorable mix effects, and promotional activity. These effects were partially offset by our revenue management initiatives. On a currency-neutral basis, revenues remained flat. Gross profit decreased 2.6% to reach MXN 20.2 billion, resulting in a gross margin of 47.5%, a 110 basis point contraction year-on-year. This margin contraction was driven mainly by unfavorable mix effects and promotional activity, coupled with higher fixed costs such as labor. These effects were partially offset by lower sweetener costs and the appreciation of the Mexican peso as applied to our U.S. dollar-denominated raw material costs. Operating income increased 1.1% to MXN 6.8 billion, and our operating margin expanded 20 basis points to 16%. This expansion was driven mainly by a decrease in freight expenses and an operative foreign exchange gain of MXN 159 million as compared to a loss of MXN 298 million during the same period of the previous year. These effects were partially offset by an increase in expenses such as labor, IT, and depreciation. Finally, our adjusted EBITDA in the division declined 1.4% with a 20 basis point margin contraction to reach 21.9%. Moving on to South America, volumes increased 2.6% to 423 million unit cases. This increase was driven by positive volumes across the division. Our revenues in South America increased 8.7% to MXN 29.4 billion, driven mainly by our revenue management initiatives and favorable mix. These effects were partially offset by unfavorable currency translation effects into Mexican pesos. On a currency-neutral basis, total revenues in South America increased 12.5%. Gross profit in the division increased 7.2%, and gross margin contracted by 50 basis points to 41.6%, mainly driven by labor, restructuring, and maintenance costs. On a currency-neutral basis, gross profit increased 10.4%. Operating income in South America rose 19.7% to MXN 3.5 billion, with operating margin up 110 basis points to 11.9%. This improvement was driven by expense efficiencies such as freight and marketing and the recognition of one-time income, net of expenses of MXN 218 million related to insurance claims from the floods that impacted Brazil in May of 2024. Finally, adjusted EBITDA in the division increased 12.6% to MXN 5.1 billion for a margin expansion of 60 basis points to 17.6%. Now let me expand on our comprehensive financial results, which recorded an expense of MXN 1.2 billion as compared to an expense of MXN 823 million during the same period of the previous year. This increase was driven mainly by, first, a reduction in interest income as a result of a lower cash position and interest rates in Mexico and Argentina. Second, we recorded a foreign exchange loss of MXN 65 million as compared to a gain of MXN 49 million recorded during the same period of the previous year. And third, a loss in financial instruments of MXN 39 million as compared to a gain of MXN 86 million in the third quarter of 2024. These effects were partially offset by a higher gain in monetary positions and inflationary subsidiaries. Finally, I would like to take a moment to expand on the cost environment and commodity hedging strategies for the remainder of the year and into 2026. We feel confident about our ability to manage costs effectively. Although the trade environment may continue to generate some ongoing volatility, especially in aluminum prices, we are seeing more stability in the rest of our key commodities than in prior years, especially regarding sweeteners and PET. Additionally, our teams continue to focus on efficiency, productivity, and disciplined procurement, which should continue to help mitigate pressures to our margins. On the hedging side, our approach remains disciplined and proactive. For the remainder of the year, we have already locked in a solid portion of our main commodities, including more than 90% for sweeteners, 75% for PET resin, and 65% for aluminum, which gives us good visibility and comfort for the fourth quarter. As we move into 2026, we will keep a flexible stance, protecting against potential volatility while taking advantage of favorable market conditions in raw materials such as sweeteners and PET. For instance, given current market conditions, we have already hedged more than 90% of our needs for the year in sweeteners and 40% for PET. Regarding currencies for 2026, we have hedged approximately 70% in Colombia, 40% in Mexico, and 20% in Brazil at levels that are below 2025. Finally, I am pleased to report that our supply chain team has reached our savings commitment for the year ahead of time, generating $90 million year-to-date, approximately $43 million coming from primary distribution, $32.5 million from cost-to-serve, and $14.5 million from cost-to-make. With that, operator, we are ready to take questions.

Operator, Operator

Our first question comes from Ricardo Alves with Morgan Stanley.

Ricardo Alves, Analyst

I have a couple of questions. The main surprise for us this quarter was the profitability in Mexico and Central America. When we look at the adjusted margin, excluding last year’s insurance gains, it appears that the margins in Mexico and Central America have improved by about 50 to 60 basis points, if I'm correct. This is a significant improvement compared to the 200 basis points decline we experienced in the second quarter. We find this to be a notable enhancement. Looking ahead, I'm curious whether this improvement is primarily due to better operational leverage from increased volumes, or if it stems more from internal initiatives and cost-cutting measures implemented in response to changing volume realities. I’d like to delve deeper into the efficiencies being explored within KOF in Mexico and perhaps Central America since we lack a detailed breakdown. That’s my first question regarding the profitability improvement. My second question is about Central America, Argentina, and Colombia. Typically, we focus a lot on Mexico and Brazil, but I think it would be beneficial to revisit these other markets. For instance, a couple of years ago, we discussed per capita opportunities in Guatemala when you took over. Given that Argentina has exceeded expectations and Coke FEMSA seems to be outperforming some other bottlers in the region while Colombia is recovering, it's been some time since we discussed Guatemala in detail. I’d like to hear your thoughts on the strategies that have been effective in these three key markets outside of Brazil and Mexico and any areas that could still present opportunities. I wanted to take a moment to reflect on the strategies for these so-called secondary markets outside of Brazil and Mexico as it appears progress is being made.

Gerardo Celaya, CFO

Thank you, Ricardo. I'll jump on the first one, first on profitability on Mexico and Central America. And there's a few parts to this question. So starting first on gross profit. We are continuing to see pressure on gross profit, even though we see volumes performing better versus last year, that's mostly related to having a lower base from the third quarter of last year. But we are seeing some gross profit pressures coming from mix that are affecting at the gross profit level. But going further down the P&L, the main reason for us turning around our profitability are savings initiatives. We're working all across our P&L to identify and execute savings initiatives starting from raw materials cost and expenses that has been a tailwind for us this quarter. We're optimizing marketing spending. We went through also restructuring in our teams to adapt to our current volume conditions, also preparing for what we're expecting for next year and the supply chain initiatives and other smaller savings initiatives that we are working on. And also, there's a virtual effect that you see in EBIT margins also that we are benefiting from. This is related to operating expenses, accounts payable denominated in foreign currency with a strong peso that is providing also relief to our EBIT margin as well.

Ian Marcel Craig García, CEO

Jerry provided a thorough explanation. Regarding strategy, the main focus has been to realign our productivity, which was primarily driven by Ricardo. As I mentioned, our business is robust, allowing us to achieve positive results even amidst challenging volumes, provided our structure is suited for that environment. This was a significant issue in the first and second quarters, where it was difficult to gauge consumer reactions. By April, we began to understand the situation better and made rapid adjustments in May. Now, our productivity is aligned, and we have a leaner structure, which explains the improvement in Mexico. The three markets you referred to—Argentina, Colombia, and Guatemala—are all part of the same strategy but require different approaches. Our aim is to establish a sustainable long-term growth model, which is essential in a scale business. It's crucial to enhance our competitive position; failing to do so complicates matters, especially when price differences with competitors become more pronounced. In Argentina, facing a severe recession, we chose not to pass on all the initial inflation increases to households to maintain market penetration, which impacted our financials. However, when recovery began, we were better positioned, and our volumes and results are significantly improved compared to two years prior to the crisis. This strategy helped us retain our relative scale. While all strategies can be effective, ours ultimately proved successful. In Colombia, we learned valuable lessons, especially with the substantial tax increase upcoming in Mexico that mirrors what we experienced in Colombia. This tax situation effectively extends our growth timeline, pushing planned growth for 2026 out by two years. In Guatemala, we're experiencing market potential with its young, urbanizing population and rising disposable incomes. Recent turbulence due to concerns over remittances, which have not actually declined but slowed, has led consumers to save more. Nonetheless, this is likely a temporary adjustment, and we've streamlined our operations to prepare for growth in Guatemala, where our market position continues to benefit us significantly. Overall, we've made necessary adjustments and are poised for progress. I hope this overview was helpful, Ricardo.

Operator, Operator

Next question from Alejandro Fuchs with Itaú.

Alejandro Fuchs, Analyst

Congratulations on the results. I have just one very brief one related to CapEx. I saw the comments Ian here and on the release about kind of rethinking CapEx a little bit for next year. We have seen at least 3 years of high investments. I wanted to see if you can share a little more color on what your initial thoughts are, right? Where would the savings come from in CapEx? Is this just a delaying of the CapEx, as you were saying with volume recovery probably in 2027? So if you could give us a little bit more detail, that would be very helpful.

Ian Marcel Craig García, CEO

It's exactly that, Alex. So let me give you an example. And it's mostly in Mexico but it's in a couple of other countries where volumes weren't as high as we expected, for example, Guatemala. Let me give you the example of Mexico. We were putting in a couple of new lines and three new distribution centers. The lines are going ahead as planned but the distribution centers, for example, we've taken the land site but we're not going ahead with the construction. Because the worst thing that we can do is if we're going to have a low to mid-single digits volume decline next year due to the tax is to put in three new distribution centers and have those distribution centers be unproductive. You just get the extra depreciation, labor cost, and you don't need it if our volumes are going to be facing that contraction from the tax. So it's really pushing out Mexico 2 years out. That's basically it.

Operator, Operator

Next question from Lucas Ferreira with JPMorgan.

Lucas Ferreira, Analyst

Ian, I want to follow up on your earlier comment regarding a low single digits decline in Mexico. Was that just an example, or is that the figure you expect for Mexico next year? That wasn't my only question. Regarding the tax situation, how quickly are you planning to implement the 30% reduction in calories for sugary drinks? Do you anticipate any impact on flavor or consumer adoption, and what risks do you foresee with this 30% reduction? Additionally, how close are we to achieving a new, leaner structure for Mexico? You mentioned capital expenditures; is there anything else in terms of expenses or costs that you could clarify to help us model Mexico for next year? Also, I need clarification on Brazil. In regions outside of Rio Grande do Sul with the ramp-up of the plants, how is the business performing? You mentioned gaining market share. Is that a result of a better go-to-market strategy or pricing and execution? I'm trying to understand how operations are doing, excluding the effects of the Rio Grande do Sul ramp-up, especially regarding bad weather or consumer dynamics. Other consumer companies have noted slowing consumption in Brazil, so I'm curious if you've observed this as well.

Ian Marcel Craig García, CEO

There were several points to address, and I'll ask Jorge to assist. Generally, in Mexico, the key issue was the decision to downsize our operational structure starting in May. We still need to make some adjustments regarding productivity to align with the expected volume impact from the tax increase. When analyzing the 2026 projections, it’s crucial to account for the internal effects of the backlash. The impact of the tax increase appears slightly worse, but it’s somewhat concealed because we no longer have the backlash we experienced after last year. Taking all these factors into account, we anticipate low to mid-single-digit growth, but there's considerable uncertainty around that. We need to assess the first quarter's impact to determine if further adjustments are necessary and the extent of those adjustments. We have a substantial plan in place to achieve savings in response to this heavy excise tax impact. As we transition consumers to low or non-caloric options, we'll implement this through our promotional strategy and modifications to our formulas, always ensuring we remain the preferred choice for consumers. However, we don’t expect significant savings from sweeteners, as we must respect consumer preferences and allow the mix to evolve organically without being overly forceful. It’s a gradual process. In Brazil, we are noticing a softening in consumption. However, we are benefiting from a challenging comparison due to last year's plant closure. Therefore, when we normalize the situation, the share gains we are experiencing outside of the Southern region have been significant. Even though consumption is softer, we anticipate resilience in the Brazilian market for the remainder of this year and into 2026, especially with the upcoming election cycle. It's essential to note that we are concerned about 2027, when a selective tax on soft drinks is expected to take effect, and there may be a post-election slump, similar to what we saw in Mexico. Thus, while we recognize the softness in consumer sentiment in Brazil, we do not view it as a contraction, and we remain cautiously optimistic about 2026, keeping a watchful eye on 2027. I don’t know if Jorge has anything to add.

Jorge Alejandro Pereda, Investor Relations Director

Perhaps the only thing I would add, Lucas, the first part of your question; you referred to Ian's comment on volume outlook for next year. So of course, this is a very preliminary early take. Now we have to put everything into consideration. We have to think about the implications of course of the excise tax. So I would say, like a very early preliminary take on that, where we expect volumes to decline in the low to mid-single digits range for Mexico, of course, yes.

Operator, Operator

Next question from Benjamin Theurer with Barclays.

Benjamin Theurer, Analyst

Just coming back to that point on the volume outlook. And obviously, you tend to have a lot of flexibility as it relates to packaging mix and trying to offset and help profitability. So I would like to understand, in first place, what has been driving over the last couple of quarters, actually in Mexico but to a degree as well in Central America in contrast to South America transactions being somewhat even weaker than volume. So kind of like that relationship would like to dig into that. And as we look into next year, the way to offset maybe some of that with different packaging or trying to drive transactions, what strategies can you implement to kind of boost the transactions at least into next year, even if volume might be under pressure, as you've just said, low to mid-single digits?

Ian Marcel Craig García, CEO

I'll let Jorge elaborate on that, Ben. The key takeaway is that in challenging economic conditions where consumers have less disposable income, single-serve options typically decline, leading consumers to switch to multi-serve products, and then to multi-serve returnables. This trend is driven by the search for a lower price per liter and strongly relates to transaction levels. Our primary focus is on identifying key price points. While transaction volume is important, the primary concern is maintaining our volume base and household reach. In Mexico, our competitive analysis shows the largest gap lies in the traditional channel for refillables, and we're addressing this with our 1.25-liter glass option at MXN 20, which competes directly with Pepsi's 1.75-liter and 2-liter Red Cola at the same price. We previously lacked a product in this space, but now we have the 1.25-liter glass, which is significant for driving transactions in the multi-serve category. We're also upsizing our 2.5-liter products to 3 liters, priced around MXN 33-34, to compete with 3-liter offerings from Pepsi and Red Cola. Our strong brand equity enables us to offer returnable packages that consumers are willing to carry, facilitating our revenue management strategy. Our main emphasis will be on maintaining household penetration and volume, especially with the upcoming excise tax increase, as the transaction growth, like in Argentina, will rebound with the economy.

Benjamin Theurer, Analyst

And real quick on pricing. I mean, obviously, you need to pass through the tax. Are you planning to anticipate some of the pricing already in the fourth quarter to kind of get the consumer used to a new price point because of that? Or are you simply just going to wait and do the regular pricing as we move into next year, coupled with the tax as it might have to be applied?

Ian Marcel Craig García, CEO

The base plan basically is maybe at the very end of the curve but it's really preparing and passing through the excise tax that will commence in January. There are certain times that you have to give, especially the modern trade, to process that change in the pricing lists. So it's basically going to be that. It's the pass-through of the excise tax, getting ready by giving the modern channel enough time to have that ready to start in January.

Operator, Operator

Next question from Ulises Argote with Santander.

Ulises Argote Bolio, Analyst

Sorry, I was having some technical issues here. This is kind of a follow-up question that I had on the pricing side of the equation. But given those changes in taxes and the differentiation there between sugar and nonsugar products, we wanted to get some color on how you're thinking about the price gaps on the two going forward, right? Any color there on how you're thinking about the strategy? And maybe if there's any major shift there happening on pricing on one versus the other, that would be really helpful.

Ian Marcel Craig García, CEO

Well, one of the things that we've committed to is to incentivize a move towards non-caloric options. And in that sense, be it through differentials in baseline prices on the aisle or through a more intense promotional grid or both, a combination of both, we expect in the end to have that sort of differential above the size of the tax between those two to try to incentivize a move in the mix. That being said, like I said, we are very respectful of being pro choice, offering the consumers what they want and we'll always have the full original formulas and the zero-calorie formulas and we'll let the consumer choose. It's just how do we nudge them with either increased promotional grids or different baseline prices, okay? We do expect, in the end, a lower effective price by either of those two measures.

Ulises Argote Bolio, Analyst

Okay. No, that's super clear. Yes. And maybe a quick follow-up, if I may, just looking there a little bit on the capital structure side of things. I mean, net debt-to-EBITDA is below 0.8x. Obviously, you've made those comments on lowering the CapEx. You don't have any major debt commitments in the short term. So how should we think about the capital allocation priorities kind of for the next couple of years?

Gerardo Celaya, CFO

Ulises, as we've been talking to the market throughout the past few quarters, we certainly are aware of our inefficient capital structure and are looking to address it. In 2026, obviously, with the excise tax coming into play, we will evaluate how we start the year and what implications it has. As Ian mentioned regarding our previous question, this results in a delay of a couple of years to cycle the impact of the tax in Mexico, which in turn will have some impact in our cash flow projections for the year. So we'll evaluate that further and let you know of any news starting next year.

Operator, Operator

Next question from Thiago Bortoluci with Goldman Sachs.

Thiago Bortoluci, Analyst

I have also 2, right. And those are follow-ups in Mexico. The first one and I think this is for Ian. Just to understand, Ian, how you see your company position versus the state of the consumers, right? If I can summarize what we saw in the quarter, you obviously declined volumes a little bit more than apparently where the industry is, while you keep pricing growing with inflation but decelerating the pace versus the first six months of the year, right? In your comments, you alluded to the need of promotional activity to keep demand somehow healthy. But going forward and imagining that macro shouldn't improve that much in the near term, at least, how you think about the fit of your pricing on a like-for-like basis versus the demand sentiment that you're getting from consumers? So how you're seeing your average price list and effective pricing to accommodate the current situation? I think this is the first question. And then the second one related to this topic but now on the excise tax, to the extent that you can comment, how much and, or how at all would the new rate fit in your discussions with Coca-Cola Corporation for the concentrate prices going forward?

Ian Marcel Craig García, CEO

Thank you, Thiago. Let me put things into perspective. Remember that this year, January started strong. And then in February, we had the backlash, which we exited by the end of May, June. So Mexico is a very big country, not as big as Brazil or the U.S., but it's a very big country, and it has different economic performance in different regions. The remittance impact, the different intensity of the backlash that we faced was different along the regions, mostly impacting our region, which is where most migrants have family members in the U.S. So I think when you look at and break out that effect, you see our share, if you look at our monthly chart, taking a big hit in February and then recovering month over month over month. Well, today, if you look at September, for example, the point data in share of value versus September of last year, in flavors, stills, fruit drinks, teas, water, energy, sports drinks, ARTDs, we're above last year. So we had value and we're above last year. In colas, we still have about 0.6 points to recover. And that has is really what explains the increased promotional grid. And really, the point that we have missing is, like I said, traditional trade multi-serve refillables. That's the share point that we have left. And with the latest adjustments that we've done, eventually, we're hoping or thinking that we should get to cover that gap and we'll be above last year and having cycled everything. So I would caution that we are doing well versus the industry. But, like I said, we took a big impact that other competitors didn't take in February, right, Thiago? So you have to normalize with that. So we took that impact, but we're every month getting back to where we need to be. And we're back in every single segment and only missing 0.6 points in colas still. So that's the context. I think your question is very pertinent going forward because when you have a region that is with soft macros and now we have a large excise tax increase, obviously, our pricing power, we believe, is going to be limited. So we're not expecting anything above inflation because our customers, it's also a big impact for customers and consumers are going to be dealing with that excise tax. So to assume that we're going to have real pricing above that, I don't think is very realistic. It's already going to be a lot for customers and consumers to digest just with the excise tax impact.

Thiago Bortoluci, Analyst

Anything you could share on the relation between Coke under the new excise tax?

Ian Marcel Craig García, CEO

Yes. Our model assesses how the system's profits behave and divides those profits accordingly. A tax impact will obviously affect our profitability, and that's factored into our model. We'll need to analyze both companies' relative performances to see what that leads to in terms of support or cost avoidance. We currently lack sufficient visibility on this. However, I can confirm that both positive performance and tax impacts are included in our model. The effect will be noted, but it’s too soon to determine its actual impact on us. We’ll need to observe how customers and consumers react to this excise tax in the first quarter.

Operator, Operator

Next question from Rodrigo Alcantara with UBS.

Rodrigo Alcantara, Analyst

I’d like to take a moment to delve into some interesting insights we received recently during a conference call related to the dairy category. It's noteworthy that the Coke system is currently a market share leader in terms of value, and we’ve observed a 13% volume growth in the third quarter. My question is about how this category is evolving for you and what factors are driving this strong performance, particularly regarding the Santa Clara brand and its significance in the dairy sector. Additionally, I would like to inquire about the situation in Costa Rica and Veracruz, as we’ve seen some unfortunate developments there. The weather conditions are not improving, and the macroeconomic environment remains weak. Do you have any preliminary insights on volume expectations for Mexico as we approach the fourth quarter? Furthermore, I would appreciate similar insights regarding Brazil, especially since you've mentioned gaining market share. Any comments on volume trends there for the fourth quarter would be beneficial.

Gerardo Celaya, CFO

Thank you, Rodrigo. I'll start with the dairy question. And indeed, Coke mentioned that we're now leaders in value-added dairy, which is great news. This is a main focus for us with Santa Clara. As you know, this is a great brand, a brand that we're very proud of that has grown amazingly since it was brought into the system. This year, as you mentioned, dairy has been an outperformer for us in the still business, growing at a rate of 20% for the year-to-date. So this is great growth, especially when you look at it in the context of macro weakness overall. We expect dairy to continue to be an outperformer. This is something that we're very excited about, and we can leverage the brand, the umbrella of the brand of Santa Clara to bring innovation and do all sorts of interesting things in this space. So that's good news for us. In terms of our fourth quarter, I think a good thing that we are seeing is, we see patterns of improvement in weather and we expect to see a little bit of an uptrend in volume performance for the remainder of the year as compared to what we've seen in the year-to-date.

Jorge Alejandro Pereda, Investor Relations Director

Yes, this is Jorge. Regarding the fourth quarter and weather expectations for Brazil, we noticed some unfavorable weather in parts of the South Cone and particularly in Brazil during the early weeks of October. However, as Jerry mentioned, it seems that this is finally coming to an end, and the weather is improving. In the third quarter, Brazil's average temperatures were about 1 degree Celsius lower than the previous year. The positive takeaway is that we expect this issue to be behind us. Concerning the unfortunate situation in Veracruz, Mexico, as Ian discussed during his remarks, we are collaborating closely with FEMSA and the Coca-Cola Company on various community support relief efforts. For our business, we have provided support to our teams in the affected area. The impact from that region is not significant for Coca-Cola FEMSA Mexico’s overall volumes. If you’re asking about the specific impact, it might be around 350,000 unit cases for the first 8 days of the disaster. So, it's not material. The key point is that we are focused on community support and relief efforts there.

Ian Marcel Craig García, CEO

Yes. The difference from last year is that previously we either lost a plant or equipment. This time, our infrastructure was mostly unaffected, aside from a few vehicles and routes, but no major issues. However, our clients were significantly affected. We have about 1,600 to 2,000 clients that we are checking to see if our coolers still function; if they are damaged, we will replace them. Unfortunately, for the first time, we also experienced some loss of life among our collaborators' families, which was the most distressing part. We are, of course, providing support to our collaborators who were affected by these unfortunate floods.

Operator, Operator

Next question from Renata Cabral with Citi.

Renata Fonseca Cabral Sturani, Analyst

I have two quick follow-ups. The first is about Mexico. You're currently discussing the improving weather, and I'm wondering if you could evaluate how much of the current performance is linked to the weather and the economic situation. I understand that making assumptions is challenging, but I would appreciate your best guess. Additionally, if you could provide some insights into monthly performance to help us correlate it to the weather, that would be very helpful. The second follow-up is regarding Argentina. We've noticed an improvement in volumes and margins compared to last year, which is promising. However, there is a slowdown in overall consumption, and I'm curious about the outlook for maintaining or even further improving the situation in the country.

Gerardo Celaya, CFO

Thank you, Renata, for your question. I'll start with weather patterns in Mexico. I think in this third quarter, weather was significantly less relevant as a comp effect versus last year. Even though we didn't have good weather, it wasn't consumption promoting weather, we had bad weather during the third quarter of last year as well. So when you see weather compared to this same period last year, it seems to be less of a factor. What has been playing out to be an important impact for consumption certainly has been overall macro development. I think for the first time this quarter, we saw the whole Nielsen basket underperforming or decreasing altogether. We had in previous moments seen consumption in certain industries underperforming versus others. But this quarter, we did see an outright underperformance in all consumption products. So I mean, macro has been, I think, the main driver of underperformance during the third quarter. Looking a little bit forward, I think we do see a little bit of better macro performance next year, although nothing exciting but certainly a marginal improvement from the base that we have in 2025.

Ian Marcel Craig García, CEO

Moving to Argentina, it's clear that things have started to slow down, particularly since the Buenos Aires province election. We have important legislative elections this weekend, which has contributed to a slowdown in consumption as we approach this election. Our advisers indicate that the outcome of this weekend's legislative elections is significant for the government, as it will determine whether their position is strengthened and if they can avoid legislative logjams regarding reforms. For now, we should wait and see what happens this weekend, as that will provide some guidance. While we do not expect a recession next year based on our advisers' insights, sluggish growth seems more likely instead of a continuous recovery. It's too early to make definitive conclusions, but this slowdown appears to be closely linked to the upcoming elections, and we'll observe the developments closely.

Operator, Operator

Next question from Antonio Hernandez with Actinver.

Antonio Hernandez, Analyst

This is Antonio. Just following up on those beverages sweetened with non-caloric sweeteners. I mean, you've already mentioned a couple of times during the call that there's not going to be a specific push from you towards the consumer. But just wanted to get a sense if you have a type of a target going forward of maybe how much they can represent as a percentage of total sales? And also, how do you see competition specifically in that segment?

Ian Marcel Craig García, CEO

We don't have a specific target at the moment. However, Coke Zero is extremely important to us and beneficial for the category. It's performing well under the Coca-Cola brand. We've already been concentrating on expanding Coke Zero and similar alternatives. For instance, in Brazil, we've increased the share of Coke Zero to 28%, and it's still growing significantly. In Mexico, we currently have about a 4% share, which indicates considerable growth potential for Coke Zero and other non-caloric alternatives like Sprite Zero. So while we don't have a specific target, this illustrates the difference in market potential, with Brazil already achieving a higher percentage compared to our initial efforts in Mexico, where there's a lot of room for growth.

Antonio Hernandez, Analyst

Okay. And in terms of competition in that space?

Ian Marcel Craig García, CEO

I would say we have a leadership position there. It's not really about share gains; it's more about expanding the mix and growing the total category. There are some share gain opportunities, but they are not the primary driver at all.

Operator, Operator

Next question from Felipe Ucros with Scotiabank.

Felipe Ucros Nunez, Analyst

Most of my questions were asked, but I had a few smaller ones. So Ian, you talked about Coke Zero in recent quarters, and you talked about being able to break the code finally in Mexico. So just wondering how your perception has changed, if at all, since obviously, there's an expectation that it's going to accelerate from the trend that it already had. Still feeling very confident about cracking that code? And the other two questions. One, on the World Cup, what kind of historical impacts have you guys seen in the portfolio when the World Cup is going on? And obviously, the occasions increase. Just to get a sense of what we expect for 2026 when it comes to KOF. And then in Brazil, obviously, your plant is back up and running and back up at capacity. Wanted to see if you could give us a sense of where the competition stands with regards to their capacity in that region. Are they also back up and running? Or did they not have disruptions? Just any color you can give us on that side would be great.

Ian Marcel Craig García, CEO

Thank you, Felipe. I would like to express our confidence in Coke Zero as I believe we are on the right path. The most significant indicator of this is that despite the consumer backlash earlier this year, Coke Zero has experienced double-digit growth and continues to do so even in this softer macro environment. Coke Zero is performing well and will also benefit from the World Cup, as it will be a key product featured in our promotional and marketing strategies. We are committed to maintaining the momentum for Coke Zero and focusing on the five key elements from our Brazil playbook for this brand. We view Coke Zero as a crucial product for us, and we are taking careful steps to support it. Regarding the World Cup, historical data shows a potential 5% increase in volumes during this period. While the volume impact may not be substantial, the boost to brand equity is significant. I recall during the Brazil World Cup that Coca-Cola was the most recalled and favored brand post-event, highlighting its tremendous value. We plan to fully leverage this for both the Coke brand, including Coke Zero, and Powerade. On the subject of our operations in Brazil's South region, only Coca-Cola FEMSA was affected by the floods, resulting in the loss of our largest production facility and distribution center, which caused us to lose 8 percentage points in market share. This was solely a Coca-Cola FEMSA issue. However, since midyear, we have returned to full production capacity and have recovered 500 basis points of the 800 basis points we lost. Regaining the remaining market share will be more challenging, but we have strategies in place to fully recover. The other competitors were not affected by this disruption. Additionally, we have initiated a remediation plan, which includes building containment walls and pumps to prepare for any future natural disasters. We are back to producing at full capacity but still have work to finish regarding the remediation for future flooding, which is expected to be completed by next year.

Felipe Ucros Nunez, Analyst

No, great color on that. If I can do a very small follow-up on that World Cup. When you talked about the low single-digit volume decline expectation in Mexico due to the tax, is that purely containing the effect of the tax? Or is that net of everything else that you have going on? So for example, is the World Cup impact included in that number?

Ian Marcel Craig García, CEO

It's net of everything else. Just the tax, it's a higher impact. But we are cycling a backlash that we no longer have, and we're including the World Cup. So that includes everything.

Operator, Operator

Thank you. This concludes the question-and-answer section. I would now like to hand the floor back to Coca-Cola's team for closing remarks.

Jorge Alejandro Pereda, Investor Relations Director

Thank you very much for your interest in Coca-Cola FEMSA and for joining us on today's call. As always, we are available to answer any of your remaining questions. Thank you and we wish you a great weekend.

Operator, Operator

Thank you. This does conclude today's presentation. You may disconnect now and have a nice day.

Jorge Alejandro Pereda, Investor Relations Director

Thank you, Sophia. Thank you, team.