Earnings Call Transcript - KOF Q1 2020

Operator, Operator

Good morning, everyone, and welcome to Coca-Cola FEMSA First Quarter 2020 conference call. As a reminder, today’s conference is being recorded, and all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions-and-answers after the presentation. During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA’s future performance, and should be considered as good faith estimates made by the company. These forward-looking statements reflect management’s expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which can materially impact the company’s actual performance. At this time, I will now turn the conference over to Mr. John Santa María, Coca-Cola FEMSA’s Chief Executive Officer. Please go ahead, Mr. Santa María.

John Santa Maria, CEO

Thank you. Good morning, everyone. Thank you for joining us today for our first quarter 2020 conference call. Constantino Spas, our Chief Financial Officer; and Jorge Collazo, our Head of Investor Relations, are also on the call today. First and foremost, on behalf of all of us at Coca-Cola FEMSA, we hope you and your families are safe and well. In these challenging times, I would like to express solidarity with the many people who have been affected by the COVID-19 pandemic, as well as offer our utmost recognition to the healthcare community. I would also like to thank all of Coca-Cola FEMSA’s employees across our operations for their outstanding job ensuring our business continuity and product supply in the face of these unprecedented times. We enjoy a robust business ecosystem, and our top priority remains the health and well-being of our clients, consumers, and overall employees. We are implementing measures to ensure we successfully navigate these challenging environments and emerge a stronger company. During today’s call, I will briefly address our first quarter results and trends across our markets. I will also outline the strategies and mitigation actions that we have been implementing across our territories. Finally, Constantino will guide you through the steps we have taken to strengthen our liquidity and overall financial position as well as our approach to cash flow in CapEx for the forthcoming months. Despite headwinds, our first quarter results reflect our positive underlying operating performance. Importantly, we continue to increase our consumer base and improve our competitive position, validating our business strategies and reflecting our leaner, more agile organization which is better positioned to face today’s dynamic market environments. Notwithstanding our steady overall performance for the quarter, we started to face the first effects of the pandemic over the last two weeks of March, and social distancing measures were gradually implemented across our territories. Additionally, during this period, we started accelerating currency devaluation headwinds due to both COVID-19 and added market complexity from trading oil prices. Our consolidated volumes remained flat for the quarter. Volume growth in Colombia, Argentina, and Central America was offset by low single-digit declines in Brazil and Uruguay and relatively stable performance in Mexico. Our top line declined 1.9% driven mainly by unfavorable currency translation effects for most of our operating currencies, partially offset by pricing initiatives in key markets. On a comparable basis, excluding currency translation effects, our top line would have increased 3.6%. Despite higher concentrate costs in Mexico, reduced tax credits and concentrate in Brazil, and increased dollar-denominated raw material costs due to the appreciation of most of our operating currencies. Our operating income remained flat for the quarter, driven mainly by declining PET costs and operating expense efficiencies. On a comparable basis, our operating income would have increased 6.3%, and our operating cash flow would have increased to 12.2%. To give you a sense of the currency headwinds faced during the quarter, foreign exchange impacts accounted for more than MXN 580 million at the operating income level. Finally, our controlling net income decreased 1.5% year-over-year, driven mainly by a one-time increase in our interest expense related to our successful debt refinancing strategies during the quarter. By normalizing our controlling net income excluding currency headwinds, one-time tax-free claims in Brazil, and the extraordinary increase in interest expense, our earnings per share would have increased 21%. During the quarter, the country began implementing restrictive measures at different paces and levels. Brazil was the first country in Latin America with a confirmed COVID case on February 26; a few weeks later, the government started to implement restrictive measures, and by March 24, it announced a quarantine with a full lockdown in major states. As of April 16, certain states started to transition to partial lockdowns. Shortly after Brazil, Mexico confirmed its first case of COVID-19 on February 28. On March 14, the government announced social distancing measures such as the cancellation of concerts and sporting events. By March 22, Mexico City's government announced closures of movie theaters, bars, and museums. By March 30, the government announced a suspension of all non-essential activities for the month of April, which was later extended for the month of May. Countries like Argentina, Colombia, and Panama took more strict measures, closing borders, suspending flights, enforcing lockdowns, and temporarily closing restaurants, cafeterias, and bars starting March 15. Across our territories, we have seen channel category and package mix shifts driven by consumers adapting their behaviors to comply with these new social distancing realities. Consequently, we have seen declines in our on-premise channel, partially offset by increases in modern trade and home delivery times. The traditional trade channel, comprised of mom-and-pop stores, has proved relatively resilient, offering convenient proximity for consumers across our markets, which is important since most of our volumes are distributed through the traditional trade channel. Our exposure to the on-premise channel is relatively low, representing approximately 50% of our consolidated volumes. With regards to our beverage categories, we saw an increase in jug water during the beginning of the pandemic, driving pantry loading in the initial days, and in fact, it has been generally gradually normalizing for the past couple of weeks. In addition, we have seen resilient performance from our sparkling beverage category, with the Coca-Cola brand growing in key markets during the quarter. Understandably, we are also seeing a decline in on-the-go consumption, resulting in an increased mix of multi-serve and returnable presentations across our markets as many other countries where we operate entered a stricter phase of staying at home measures during April. Our consolidated volumes for the month show mid-teens contraction. Markets like Argentina and Colombia have been more significantly affected, while Mexico and Guatemala have remained more resilient. Although there is still a high level of uncertainty at this point, based on current trends, we expect our second quarter results to be most affected by the pandemic. Moving on to our strategies and mitigation actions, Coca-Cola FEMSA has faced crises before, demonstrating the ability to successfully adapt to and capitalize on dynamic environments to emerge a stronger company. Being part of the global Coca-Cola system is an advantage as we work collaboratively with the Coca-Cola Company and the rest of their system to share and adopt best practices from other geographies. I am proud of the swift actions that our operators are taking across our markets. We are working as a cohesive unit, developing a comprehensive management framework designed to protect our short-term results while maintaining our long-term goals. As part of this framework, we are focusing our actions on five key areas to ensure our business continuity, which I call the 5Cs: collaborators, clients, consumers, community, and cash flow. First, the health and well-being of our employees is of utmost importance. Therefore, we are implementing additional measures to support their everyday work. We have reinforced our health, sanitation, and hygiene protocols across our facilities, and we are providing additional equipment to our manufacturing, commercial, and distribution teams, such as masks, gloves, and sanitizing gel. Since March 16, most of our office-based employees are working from home, representing more than 6,000 employees. We have implemented daily monitoring and communication protocols across our organization, and we are extending health recommendations to our employees' home environments. Second, we want to make sure our clients remain open for business in a safe manner. Our technological initiatives are enabling us to maintain frequent contact with our customers while reducing physical exposure. Among our initiatives, we are leveraging our digital capabilities, including our multichannel strategy to take orders via our B2B platforms, contact centers, and WhatsApp initiatives. To give you a sense of the results, we are taking more than 6,000 orders weekly via WhatsApp with a very encouraging repurchase rate. Moreover, we are extending preventive measures to our clients. For example, we are delivering more than 25,000 protective screens for counters; it's plastic that we put in front of the counters in Mexico, and 100,000 mats to our traditional trade clients in Mexico. Third, we are leveraging digital and direct-to-consumer channels. Our first new advantage for our digital trade channels has increased significantly. For example, in Mexico, we are growing our volume by more than 30% in Amazon and Rappi and by 60% in corner shops. Moreover, in Brazil, we are growing our volume by more than 70% through the aggregators. Importantly, we are adapting our portfolio, leveraging our affordability and returnable platforms, as well as our single-serve multi-bags by prioritizing and simplifying our portfolio to protect profitability. Thanks to our initiatives, returnable formats are growing double digits across all markets. Fourth, we are supporting our communities across our markets. We have donated more than 1.5 million liters of beverages as well as transporting and donating medical supplies. Moreover, in Mexico, we teamed up with the Coca-Cola Company and other organizations to set up a temporary medical facility with 854 beds and 36 intensive care units for COVID-19 purposes. Furthermore, in Brazil, we teamed up with the sugar cane industry to deliver more than 250,000 liters of sanitizing alcohol to hospitals in Sao Paulo. Importantly, together with Brazilian institutions, we are donating more than 26,000 COVID-19 tests focused on frontline healthcare professionals. Fifth, we are focusing more strongly on cash flow management and further strengthening our balance sheet. We developed additional task control towers to optimize our cash sources and uses. We are aggressively targeting savings and selectively prioritizing CapEx across our operations. As we previously disclosed, during the quarter, we successfully refinanced and took on short-term credits to solidify our cash position, ending the quarter with a cash position of more than MXN 39 billion, a level that we have maintained to date. Across our territories, we have been working closely with governments and public health authorities, complying with preventive measures, reinforcing our protocols, assuring our safety, and leveraging our end-to-end supply chain plan to ensure the availability of products while providing essential hydration to our consumers and communities. Given the essential nature of our products and our preventive measures, governments across all territories have allowed us to continue operating, and thanks to the relentless work of our team, we do not anticipate material disruptions to our supply chain at this point. Consistent with our previously discussed capability-building strategies on the commercial, manufacturing, and supply chain fronts, our digitalization optimization efforts make more sense than ever in light of the current pandemic. Accordingly, we have reprioritized projects and accelerated the rollout of initiatives designed to intensify our digital commercial capabilities as well as to enhance our efficiency and overall productivity. To strengthen our customer connections, we are accelerating the rollout of our omni-channel capabilities. Last quarter, we discussed encouraging signs from players that are now being aggressively rolled out. For instance, our enterprise WhatsApp in Brazil is now expected to reach more than 260,000 customers by year-end while our B2B platforms in Brazil and Argentina are expected to reach more than 100,000 customers. Moreover, we are exploring integration and digital payment options into our B2B platforms, particularly enhancing our value proposition for consumers and customers. Aligned with our customer-centric vision, we strive to enable better contact with our clients in direct consumer channels. Consequently, we continue developing capabilities, processes, and opportunities with aggregators, peer players, and e-retailers across all our operations. Our ambition is to continue capitalizing on these capabilities during this crisis, and most importantly, to give us a sustained competitive advantage during the post-crisis conditions. Finally, underscoring the strength of our cash flow generation, our confidence level, and our confidence in Coca-Cola FEMSA’s solid financial position. On March 17, at our annual shareholders meeting, our shareholders approved the proposed ordinary dividend of MXN 4.86 per unit. This dividend represents an increase of 37% year-over-year, with its first installment to be paid on May 5. At Coca-Cola FEMSA, we embark on a deep transformation to create a leaner, more agile organization. We developed and rolled out digital initiatives across our value chain, and then we reinforced a collaborative culture across the organization. Working together, we have achieved meaningful progress, strengthening our resilience and positioning our organization to navigate short-term challenges and achieve long-term success. With that, I will now hand over the call to Constantino.

Constantino Spas, CFO

Thank you, John. And thank you all for your interest in today's call. As John noted, we hope you and your loved ones are safe and well. I’ll briefly discuss each of our divisions’ highlights for the quarter. In Mexico, our top line increased 2.4% driven by pricing and revenue management initiatives, partially offset by a slight volume contraction and an unfavorable price mix as a result of the effects of COVID-19. We continue to reinforce our competitive position and expand the consumer base, allowing us to continue to gain market share. In Central America, our volume growth continues to be driven mainly by Guatemala and was partially offset by Nicaragua and Panama. As a result, our top line in the Mexico and Central American division increased 2.8%. Importantly, and despite concentrate cost increases and the depreciation of the Mexican peso, our operating income increased 11.7%, driven mainly by declining PET costs coupled with operating expense efficiencies driven by these factors. Our division's EBITDA margin expanded by 280 basis points to reach 22%. In South America, despite a strong start to the year mainly driven by volume growth in Colombia and Argentina, the effects of COVID-19 started affecting our operation volumes in March. Additionally, the depreciation of all our operating currencies impacted our top line, leading to a 7.5% decline during the quarter. With regards to profitability, we faced currency headwinds coupled with a decision to temporarily suspend tax credits on concentrate in Brazil. However, these effects were mitigated by favorable PET prices. Our ability to drive cost and expense controls, savings from restructurings performed during 2019, and the tax reclaims in Brazil recognized during the quarter. I will now expand on our company's preparedness going forward. Specifically, I will focus on the actions we have taken in the finance function in light of the current situation. As we discussed during our last conference call and consistent with our financial discipline, we successfully completed debt refinancing strategies in the US and Mexican markets by issuing an aggregate of $1.5 billion. These transactions provide us with a very manageable debt maturity profile. Specifically, we extended the average life of our debt from seven to approximately ten years while reducing our average interest rate. Today, more than 70% of our debt matures beyond 2025. Additionally, it's important to emphasize that we completed our liability management transactions before COVID-19 became a global pandemic, underscoring our conservative profile and prudent approach to debt under all circumstances. As you saw in today's earnings release, our interest expense recorded an increase of 77% versus the previous year. This increase was driven by an extraordinary MXN 1.5 billion related to refinancing strategies, for which we prepaid via a tender offer and made our 2023 Yankee bond. For this reason, you can expect a normalization of interest expense as of the second quarter. As part of the comprehensive financial result, we recorded a foreign exchange gain of MXN 486 million as our cash position in US dollars benefited from the depreciation of the Mexican peso during the quarter. It is very important to underscore that we continue to have a policy of zero net debt exposure to US dollars. Coca-Cola FEMSA’s liquidity position is robust, and our cash flow is stable. Nonetheless, we're taking additional measures to strengthen our cash position and adequately forecast and control inflows and outflows. First, we took on additional short-term mainly Mexican peso-denominated debt of more than MXN 11 billion as of March 31. The cash position reached more than MXN 39 million, and our net debt to EBITDA ratio closed the quarter at 1.2 times. Second, although very prudent cash management is part of our culture, we're reinforcing our cash flow through the implementation of cash control towers using nerve centers that are focused on optimizing sources and uses of cash. These control towers utilize an iterative process to periodically update which we do weekly for all of our forecasting. There is no other way to successfully manage a dynamic environment than by analyzing and reacting with agility to optimize our cash cycle. As part of this initiative, we're setting the right priorities to manage our working capital, expenses, and CapEx for the remainder of the year. All of our operators are doing a tremendous job in generating cost, expense controls, and efficiencies. Although we had budgeted close to $650 million of consolidated CapEx at the end of 2019, in light of the current environment, we are reevaluating and reprioritizing immediate needs while also deferring projects. This gives us an important lever to manage our cash flow for the year. We’re fully confident that we're taking the right steps at the right moment. Coca-Cola FEMSA’s conservative profile, resilient business model, continued investments in digital capabilities, and strong balance sheet are assets that become even more valuable in times like these. And with that, I will now hand the call back to John for his final remarks. Thank you very much.

John Santa Maria, CEO

Thank you, Constantino. All crises put our strength and resiliency to the test. But I am convinced, as was the case for our company before, that challenging times also bring opportunities for the long term. The measures we are taking are consistent with our clear strategic and long-term priorities, taking care of our people, satisfying our clients and consumers, and continuing to create shareholder value through a very disciplined approach to capital allocation and a solid financial position. Thank you for your interest in our earnings call and for your continued trust and support of Coca-Cola FEMSA. Operator, I would like to now open the call for questions.

Operator, Operator

Thank you. The question-and-answer session will be conducted electronically. Our first question will come from Ben Theurer with Barclays.

Ben Theurer, Analyst

Yeah. Good morning, John, Constantino. First of all, thanks for taking my questions and congratulations on all the refinancing you were able to do, I guess, right in time. Now, just a quick accounting question, you're showing a significant increase in Mexico in amortization operated non-cash charges, which basically drives up your EBITDA in Mexico by approximately MXN 500 million. Is that somewhat related to the refinancing you've been doing or what's behind that increase, which also obviously, that's been reflected on a consolidated basis?

John Santa Maria, CEO

Constantino?

Constantino Spas, CFO

Sorry. The MXN 500 million difference is principally explained by the virtual effects that are negatively affecting operating income, written back to EBITDA. From that MXN 500 million difference, around 67% is due to the loss of the operating exchange fluctuation, which is about MXN 360 million, and the other 20% is basically related to an equity method for two of our subsidiaries, and we did an impairment on a joint venture of about MXN 100 million with our joint venture in Brazil. That's where that difference comes from. And does that address your question, Benjamin?

Ben Theurer, Analyst

Yeah. So, part of that is most likely going to be reflected as well in Q2 just because of the additional FX headwinds we're seeing in Q2 compared to Q1 on the operating side, correct?

Constantino Spas, CFO

Yes, I would expect some impact, although not to the same extent. The situation is highly dynamic and there's considerable volatility, so it will definitely have an effect.

Ben Theurer, Analyst

Okay. And then one for you, John, you've elaborated on all the strategies you're implementing to deal with the current situation, but also looking a little bit ahead, and obviously we're seeing significant downward revisions on different economies, GDP growth expectations. Among the strategies you've been working on, being it on the digital platform, be it on your sales through online channels, rationalization of products, what would you say is the most relevant piece or what you can still improve in your operation to prepare for what is likely going to be a more severe economic slowdown, and what investments would be needed to basically achieve that strategy?

Constantino Spas, CFO

Certainly. Thanks.

John Santa Maria, CEO

I think we're focused on two items. One is ensuring that we have an affordable portfolio, and that affordable portfolio has enough capacity to be able to satisfy demand, and that is really based on returnables, and we've been pushing hard on that. As I mentioned on the call, we're seeing continued growth in those packages, not only because everybody is moving to the home but because of the affordability involved. Secondly, there is still a lot of efficiency that we can pull out of our markets in two ways. One is through the further systematization of processes and procedures, and the second is, and more importantly, because you know, changing our routes to market; in a lot of places we have opportunities to shift our route to market to a leaner third-party structure. We have done that, for example, in Costa Rica, where we're now something like 60% or 70% of our volumes are running through third-party distributors. We practice and understood what we learn, and we probably have that has applicability for other major countries we have, Mexico and Colombia being two of the main ones. So I think there are a lot of levers still yet to be pulled in terms of operating efficiency and turnover. Secondly, I think when we start looking forward I know it's probably a question you or somebody else asked, I think we can maintain our pricing within inflation terms. So that will give us the top-line revenue, really, that I think that consumers can accept primarily through the different package mixes that we have. So I think there's still a lot of work to be done. I think if we look forward and we see the revisions going forward, most of it comes from the second-quarter economic downturn and relief coming in the third and fourth quarters. We think it's a similar situation for the open.

Ben Theurer, Analyst

Okay, perfect. Thank you very much.

Operator, Operator

And next we move to Lucas Ferreira with JPMorgan.

Lucas Ferreira, Analyst

Hi, gentlemen. My first question is regarding the relationship between new and KO with Coca-Cola. How has the relationship evolved now in this time of crisis? Is there any sort of flexibility in the relationship and price of concentrate? Could you actually see some sort of support from KO? That would be my first question. And the second question is regarding the financial health of some of your channels, especially more of the traditional or mom-and-pop stores. During this time, you mentioned in the beginning some supports, even in terms of providing equipment, etc., but what about in terms of working capital? Can you talk a little bit about the sustainability of this channel during this crisis and how can you help keep them operating? Thank you.

Constantino Spas, CFO

Do you want to take that, John?

John Santa Maria, CEO

Let me start by discussing our relationship with Coca-Cola. It's become much closer and more collaborative due to the crisis, particularly regarding our marketing efforts and actions. In many ways, crises can reveal both the best and worst in people, and in this case, I believe it has led to a very positive outcome. I have only good things to say about the Coca-Cola Company, as they have shared valuable insights from various regions in Latin America and beyond. We have gained an understanding of the situation in China and prepared accordingly, although you can never be fully ready for such a crisis. Comprehending these dynamics has been crucial for us. Additionally, we hold weekly conference calls with Coca-Cola to share insights, assess current situations, and discover new best practices. The relationship has evolved significantly over the past month or so, and I do not view our partnership with Coca-Cola as an exception; rather, it reflects a broader trend. As for your question about concentrate and potential relief, it's a structural aspect of our relationship that we haven't delved into. However, we have discussed upcoming marketing plans to implement in the coming months and quarters to ensure we maintain the flexibility we need in our profit and loss while making appropriate investments in marketing to ensure adequate returns. Currently, I am concerned about channels that serve as large social gathering points. We have well-capitalized companies in Mexico, and we will see how that evolves since it may have an impact. I'm unsure if Constantino has any additional points to make.

Constantino Spas, CFO

Yeah. Absolutely. I think the most important piece of information that I want to share is first of all our exposure. I mean, this is a phenomenon that, at least at this stage, has affected much more in the initial stages beyond the on-premise, beyond trade accounts, and our exposure to the on-premise is much lower than in other parts of the world. So when you look at our total portfolio, it's about 15%, and that includes both the key accounts on-premise, the QSRs, and also, I would say, more traditional on-premise accounts. So the exposure of Coca-Cola FEMSA to the on-premise is lower than probably the other bottlers in other parts of the world, so that’s one big element. Apart from that, we’re offering factoring solutions to our customers across the board, particularly our traditional trade and small customers, which is helping them with the working capital, and we have not seen significant issues around these customers. And at the same time, what I would say is the fact that the broadness and depth of our portfolio, particularly for our traditional trade, which, at the end of the day, is the most important channel in Latin America—it's the essence of retail in Latin America, whatever you look at it overall—but the portfolio we're able to put forward to deploy to retailers is so broad and capable of attending the dynamics in consumer locations and in consumption, has allowed them to serve the demand quite well. We have seen shifts from single-serve packaging into multi-serve packaging, and we're able to have on that the debt portfolio as well as returnable packaging, which offers affordability solutions for our consumers right now. So our portfolio, per se, is a great advantage for traditional trade. Our granularity and reach to the traditional trade is also a significant value to our retailers because we have not disrupted our service. At the same time, the enabling of our sales force and route-to-market solution with the digital capabilities that John mentioned a few minutes ago, the WhatsApp solution, or our B2B solutions, have been able to continue to serve our customers even in the cases where we could not have face-to-face contact. So, you know—the combination of our portfolio, our route to market, digital investments that we've been doing for a long time—this does not happen overnight. We don't serve 260,000 customers overnight on enterprise through WhatsApp just because COVID-19 hit; we've been working on this for quite a long time. I mean, we've been working on this for quite a long time. Our working capital help that we're giving to our customers through some of the factoring solutions, when we combine all of these things on the portfolio, we have been able to mitigate the impact from that end, but it's also been of significant help on our retail customers. So far, I think we're weathering the storm quite well, and we're helping our retail customers do it too. And at the same time, as I mentioned, our exposure to the on-trade, which is definitely the channel that has been hit the most initially, is quite low compared to other places in the world. I don’t know if that answers the question.

John Santa Maria, CEO

Let me just add something, Lucas. There are a couple of things. You know, in the case of Mexico, our route-to-market portfolio also includes home routes. In home routes, we have over 1,000, I think it’s 1,200 routes from Mexico, and those volumes are up at 30-some-odd percent. So the diversification in how we go to market is also very important. And the other point is, you know, we're looking at what do we do the day after. And we're focusing very much on understanding what our route to market is going to be—not our route to market but our support for traditional small trade to ensure that those segments of the market have enough trade fuel, if you wish, to come back soon.

Operator, Operator

And next, I’ll move to Carlos Laboy with HSBC.

Carlos Laboy, Analyst

Yes. Good morning, everyone. John, thanks for sharing some of the near-term measures you're taking and then some of the digital things that you're doing. But I want to ask my question in this way. You know, if I look at your business three years, four years after the tequila crisis, it was almost unrecognizable. It’s vastly different because of the measures that you took. After the 2008 financial crisis, it was also vastly improved three years or four years later. How will this business be different and look different three years from now, four years from now, because of your actions? Can you share with us on a longer-term kind of visionary basis where you see this landing three years, four years from now because of these actions that you're taking, in particular because of the digital evolution?

John Santa Maria, CEO

Constantino, do you want to take a crack at?

Constantino Spas, CFO

Sure. I also want to complement. I think, Carlos, the digital capabilities that we are building will not only be able to drive much more efficiency in our system, which is a significant improvement, but will become structural in our business on one hand. But on the other hand, we will be able to serve our customers better, and the connectivity, the omni-channel capabilities that we have today are capable of serving our customers better, and that will definitely become an edge that is structural in our business. So I would say that that is another shaping aspect of Coca-Cola FEMSA going forward. I think at the same time we’re doing enormous progress in terms of our portfolio, which is for sure something that has absolutely nothing to do with the current circumstances. But we're not undermining that effort because of what we're facing right now. So there is a—I mean, we foresee a region where the affordability play will become a more important element of the consumer value proposition, and we're working strongly with that, with our returnable initiatives. So I think that is something that is also structural in nature and continues to be there. And then, maybe I've never renounced our organic growth strategy. I think that definitely, these types of crises for sure reshape industries going forward, and we have continuously stated that we can see in our financials our capability to execute inorganic transactions at the right value and at the right time, either through our equity firepower or through a balance sheet. So I think that is definitely on the table. We continue to monitor that. And then we need to understand how the system and how the industry is going to come out of this crisis. I mean, we do not underestimate the reshaping power of a crisis of this magnitude too, but it's very difficult to anticipate how that looks going forward six months from now. But we’re definitely well equipped, well prepared, we have very solid financials, and we have a very robust liquidity position, and we're preserving that significantly. So I think that will become an asset for Coca-Cola FEMSA going forward to face the reshaping of the industry. So I think those are the big issues: digital capabilities and how that drives efficiency and better customer service, improving our top-line, creating more opportunities for growth in that regard; portfolio on one hand; and on the other end, the robustness of our financial position and our expertise, financial discipline, and history, and track record of very good M&A capabilities that we have had in the past. So I think those have positioned us quite well going forward as a company in this system. I don't know, John, if you have any additional thoughts?

John Santa Maria, CEO

I believe there are a few key points to highlight, Carlos. When we discuss omni-channel, we are making significant progress in connecting our transactional sales systems with various sales notes, including those from third parties. This integration presents a considerable challenge, but we are beginning to see success in places like Brazil and Argentina. This foundation will make it easier to introduce more consumer channels, such as direct delivery options. In a couple of years, our operations will be much more digitized, allowing for a wider market reach than we currently have. Additionally, as we mentioned previously, we have streamlined our operations and are experiencing improved efficiency across all areas, including finance and supply chain. The ongoing savings from these efforts are substantial. The result will be a highly focused market operation with an efficient backend, generating significant synergies in the next two to three years. Moreover, we are focused on strengthening our channel capabilities. Considering the affordability concerns for consumers, we aim to maintain our Coca-Cola portable pack presence while expanding our offerings to include other brands and categories, ensuring availability of non-carbonated options along with re-carbonated products through Universal bottles. This strategy will support our growth and encourage consumer loyalty across both soft drinks and non-carbonated beverages. Does that clarify our direction?

Operator, Operator

And next, we’ll move to Miguel Tortolero with GBM.

Miguel Tortolero, Analyst

Hi, good morning, everyone. Thanks for the questions. The first one is regarding Brazil, as it was mostly enormous part of the year with the initial end of the quarter. Given one of the reasons where you have been marked, let’s say, the GE business, could you share with us how was the second quarter? How has the second quarter evolved so far? What are your expectations ahead for the region? And the second one moving to Mexico, could you give us some color on your present strategy ahead, especially considering current FX levels and your actual hedging position? It would also be helpful if you could share with us your general views in terms of raw materials.

John Santa Maria, CEO

Okay, Miguel. Let me jump into this one. Brazil—let me give you a little bit of an overview of Brazil. I mean, as we mentioned previously, Brazil was the first country in LATAM to confirm a case, but with social distancing measures being taken in March and being very restricted in São Paulo in the beginning, it hurt the volumes for the month of March. The coal channels definitely suffered the largest impact, particularly on-premise, as I mentioned. And in addition, it's fair to say that while we faced tougher weather conditions, more rain during the quarter compared to last year, which was a drier and warmer summer. During April, to directly answer your question, the social distancing measures are still affecting our volumes. However, some states will be transitioning to a partial lockdown from a very tough lockdown. Volume appears to be recovering after the Easter holiday as some plants have gradually started reopening. All in all, we saw Brazil volumes in April decrease around 20%, and based on that, we're adjusting our portfolio towards more affordability in multipacks and returnables, as the new shopping habits are being shaped by this phenomenon, at least temporarily. We’re optimizing our digital presence in that regard. So that's a little bit of a picture of what Brazil looks like. In the case of Mexico, Mexico has been, despite the fact that we're in a very volatile environment, and it's very difficult, honestly very difficult to predict going forward, we're seeing that Mexico has been a little bit more resilient so far, and the volumes have been better than the average of the total portfolio of KOF, contraction around the mid-single digits. However, it's also important to say that we are entering the worst case of the epidemic in the upcoming weeks, as the government has stated that their projections are about to peak during the week of May 8. We're there—and in the worst phase of the epidemic—that might definitely change the way the volumes are behaving. But there have definitely been resilience. I've seen declines in the on-premise channel, as I mentioned before, and the single-serve mix, but that has definitely been compensated by an increase in multi-serve presentations. So I think that is a big element of how the demand is behaving right now in Mexico, and we're implementing operating and portfolio measures to successfully navigate this environment. Our hedging strategy, I think, has been proven to be successful as part of your question, and I would say that about 65% of our dollar-denominated materials that are impacting your COGS have been hedged at around MXN 20 per dollar, which I think is good in light...

Constantino Spas, CFO

MXN 20 per dollar, exactly. So in the light of the volatility we're facing right now, we have designed pricing strategies around that. So we're being very conscious of our pricing, very conscious of the way we manage our portfolio, and we have once more the benefit of a broad and deep portfolio that addresses quite well, I think better than anyone in the beverage industry and in the non-alcohol beverage industry, the needs of the consumer in these dire times. So I think we're very well-prepared considering the circumstances in the case of Mexico, and the resiliency of the market in April is showing us that. Hope that addresses your question.

Operator, Operator

And next we’ll move to Ron with MUFG.

Unidentified Analyst, Analyst

Yes. Hello. Good morning, everyone. My main question is can you give us an idea as to what percentage of your volumes come from bars, restaurants, food service areas, etc.? And the social distancing measures likely to continue in the future—overall lifestyle changes, which everyone will have to make—do you expect a long-term drop in volume, or over time, do you think that the drop in volumes from bars, restaurants, stadiums, etc., will be ultimately absorbed by the retail channel?

John Santa Maria, CEO

Our on-trade—or on-premise, whatever you want to call it—exposure is about 15%. I mean, they vary anywhere between 10% to around 18% in the case of Brazil. We also serve more bars and restaurants due to our Heineken portfolio—our beer distribution agreement that we have. But once more, it is not significantly material in terms of the impact it has across KOF’s business. So roughly 15% to 16% has definitely been significantly impacted, as you all know. To be able to forecast how this will continue to be in the long term, it could be a very, very difficult exercise to do right now, considering that this has been a very, I will say, quick and profound disruption in the market. Honestly, we believe that the structural changes are not going to be as significant in the on-trade channel, but with the information that we have right now and the analysis that we are running right now, we believe that once some of those social distancing measures—and the governmental measures that have been put in place—go back to normal progressively, we will see a comeback of the on-premise channel. Let’s also remember that we are not a spirits company. So a lot of our on-premise accounts are traditional popular, you know, restaurants where every day—every day consumables are, you know, those are for lunch and breakfast, etc. I don't think that will go away, honestly, in my opinion. But we will have to understand how, you know, how the channels are behaving in the long term. But predicting the structural changes right now will be more than irresponsible from our side. That's the way we do it, and we think we’ll see a return to normality progressively. Thank you, Ron. I think just reinforcing what Constantino said, I think what you’re going to have is a very, very small residual consumer behavior change from this crisis. But I do think that you're going to see a return from normalcy on the channel mix. But you will have the impact of whatever economic pull down, you may see, you know, unemployment and whatever. But I don't think it's going to be related to any shifts in buying. It’s not going to be related to consumer behaviors other than the economic residual of this crisis.

Operator, Operator

And next, I’ll move to Christopher.

Unidentified Analyst, Analyst

My questions are already been answered.

Operator, Operator

Thank you. We’ll move to Alvaro Garcia with BTG Pactual.

Alvaro Garcia, Analyst

I hope you guys are well and your families are well. I wanted to go back to Brazil, actually. I was wondering, John, if you could sort of compare—I’m very interested in hearing your thoughts on the discretionary nature of your products in Brazil and sort of how you expect your performance in this year's forthcoming economic crisis to compare to what we saw in 2016 in terms of, you know, the depth of your portfolio, the robustness of the operation, and so forth. Just we clearly saw a shift change, you know, at home consumption of the substitute risk related to—in 2016. I’m trying to get a better sense of how you're better equipped this time around to take that on what's going on.

John Santa Maria, CEO

Okay. Well, I'm trying to picture in my mind what happened in 2016 just to be well uncertain. I mean, so I think what we've done in Brazil over the last couple of years has been spectacular, because we did offer a returnable portfolio that we not necessarily had before. We developed Coca-Cola in flavors like Fanta. I think what we've also had is that we've been putting into the marketplace an enormous amount of cold drink equipment. Over the last three to four years, we've consistently been investing between 40,000 and more than 50,000 pieces of equipment in the marketplace. I believe that now, with the amount of digital capability that we've been developing down there along with the team, we have a significant amount of capability to go out there and participate in the need in our emerging digital channels. When you start looking at the amount of incidents that we're getting on beverages going through the aggregators, we’ve had enormous jumps in share, and not only that but also in volume. So when you start looking at everything that we've put together—the occasion base that we're launching with consumer launches—we've been attacking whether it's on-premise, with increased pressurization, and increased portfolio home delivery by aggregators, coupled with putting together a significant portfolio of relative market mechanisms made near digitalization that allows us to hit a series of segmented consumers in a much more cost-efficient manner. So, you know, right now, like we talked about, we're going to have 260,000 accounts being serviced with WhatsApp or the capability of putting in with WhatsApp and some other form of upselling, whether that be physical or phone or whatever. So that alters your economics in a big way, and there’s also a frequency with which a consumer can go out and a customer can go out and can call or order. So I think we are going to have much higher customer centricity or we have much higher customer centricity approval ratings, much more focus on that. Our service level to the trade has increased dramatically, and all our surveys say that we have jumped in terms of customer satisfaction to a level that we haven't seen before. So I think we put it all together, and I think, you know, in this troubling economy is what’s going to drive our performance in Brazil.

Operator, Operator

And next we’ll move to Alvaro Garcia with BTG.

John Santa Maria, CEO

Operator, we need to take one more question. Okay, and we’re not being able to contact you for the other controls. So please, appreciate that. Thank you.

Alvaro Garcia, Analyst

Actually, I just asked that question. So if you can move on to the next...

John Santa Maria, CEO

Yeah, Alvaro was the last one.

Operator, Operator

Yeah, Alan—sorry, we'll move to Alan Alanis with Santander.

Alan Alanis, Analyst

Thank you. So I know that John has been muted. May I hope, John, your family is well. Just two quick questions; regarding the changes that you said regarding affordability and the need for more returnable bottles and the need for more use of technology—do these changes affect your CapEx outlook this year and for the years to come? Are you looking to invest much more in returnable bottles and technology in order to come out stronger? That would be my first question.

Constantino Spas, CFO

Well, yeah, Alan. I mean, it has been part of our CapEx structurally for the last few years. We have been prioritizing digital investments on one hand and the buildup and development of our returnable portfolio. Despite the fact that we are reprioritizing our CapEx this year, I mean, in light of the current events, a lot of the returnable capability or the returnable investment is volumetric and totally variable. It’s basically bottles, cases, and coolers—additional coolers for returnable capabilities, as we don’t foresee, you know, significant high infrastructure investments in this year for returnables in that case. As we have put in place, as we mentioned in the call, we have put in place what we call cash control towers, which basically are a process where every Monday we see a 13-week outlook on how our cash flows are looking, and every single operation we compare against a portfolio of scenarios—more longer-term, meaning by the end of the year—that we have analyzed and compared with both these dynamics as well as continuous cash flow projections on a weekly basis and the scenarios that we have foreseen that are very different in nature. We are able, depending on how we see the cash flows coming, to activate or trigger more investments for our returnable capabilities in terms of bottles and cases and coolers. So either way, we're managing it. And at the same time, we have placed, as John has mentioned, a significant priority on our digital capabilities. We foresee that as a structural change that will continue to be part of our business, and we are—we’re protecting those investments going forward. John, do you want to complement that because I jumped in before you answered.

John Santa Maria, CEO

No problem. How are you? Hope everything's good. On the capital side, we have focused on ensuring that we have enough frozen plants to meet all our cash targets this year. We had approximately $650 million approved for capital, and we can definitely control about $250 million even in the worst-case scenario, possibly even more. In a challenging situation, we could cut that number in half, but we prefer not to. We are continuing our structural projects that enhance capacity, both in distribution and production. For example, we're still progressing with our Uruguayan plant, increasing capacity in Guatemala, and expanding distribution center capacities. We are also maintaining our returnable bottle capacity in Mexico for the short term. The key question is whether we will remain within the typical range for capital expenditures going forward and if any additional initiatives will push us outside that range. I firmly believe we will stay within that range while managing various layers of investments as we allocate capital back into the business.

Alan Alanis, Analyst

That's very clear. It seems that they're indicating a reallocation to meet those capital needs. My last question is about beer in Brazil. What you mentioned regarding Brazil shows a 20% decline in April, which isn’t a big surprise. When considering overall consumption across channels, is it accurate to say that your figures are significantly higher than that during April? So my question pertains to your fixed assets and the current state of beer, whether it is healthy or could become a greater burden for you in the second quarter and the rest of this year, and how soft drinks and Colas might influence beer consumption.

Constantino Spas, CFO

Well, we cannot comment too much on beer with respect to Heineken's position. They already mentioned in their earnings release that in Brazil the beer volume declined around low single digits, with the premium and mainstream portfolio performing better than the economy of the portfolio. That was for the initial part of the year. As you mentioned, definitely, I mean, it's just common sense that beer depends much more on the on-premise channel than what we have pointed out as KOF. They put in place their strategies to mitigate this development. We need to be—I guess I need to redirect your question to Heineken in this case.

Alan Alanis, Analyst

That’s okay. I'm sure they're very happy with the work which you’re doing, so congrats for that, and thank you so much for taking my questions.

Constantino Spas, CFO

Thank you so much.

John Santa Maria, CEO

And I hope you’re safe and your family too.

Operator, Operator

And at this time, I would like to turn the call back over to Mr. Santa María for any additional or closing remarks.

John Santa Maria, CEO

I want to just say that these are exceptional times, and I think what we’re seeing is an exceptional reaction by the company. The second quarter will be proving to be a very, very tough quarter. But yeah, I'm confident that the teams are taking the right actions. They're taking the actions that will allow us to come out faster from this pandemic as well. And I would just like to thank you for your confidence and continued interest in the Coca-Cola FEMSA business. Thank you.

Operator, Operator

And that will conclude today's call. We thank you for your participation.