Earnings Call Transcript - KOF Q2 2021

Operator, Operator

Good morning, everyone, and welcome to Coca-Cola FEMSA's Second Quarter 2021 Conference Call. As a reminder, today's conference is being recorded. 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.

John Santa Maria Otazua, CEO

Thank you, operator, and good morning to everyone. Thank you for joining us today to discuss our second quarter 2021 results. We hope that you and your families are safe and well. With me today are Constantino Spas, our Chief Financial Officer; Matias Molina, our Strategic Planning Director; and Jorge Collazo, Head of Investor Relations. I am very encouraged by the meaningful improvements and solid results that we have achieved during the second quarter. Although the COVID-19 pandemic continues to weigh on daily life across the world, our company is gaining momentum. This is driven not only by mobility and economic recovery across our territories, but also by our ability to execute and deliver results on all of our strategic fronts. A year ago, we shared with you our 5C framework, which has guided our mitigation actions with a clear objective of protecting our employees, supporting our communities, reinforcing our cash flow, and ultimately, emerging as a stronger company. Before reviewing our results, I want to recognize the unwavering passion and commitment of our team to serve our clients and consumers through these unprecedented times. Their daily efforts are a cornerstone of our company, and we are tremendously proud of the entrepreneurial consumer-centric culture that we are building together. On today's call, I will walk you through the highlights of our second quarter results. I'll also take a moment to dive deep into the strategies we are implementing in our Mexican operation, before closing with some comments about the enhancement of our collaboration framework with The Coca-Cola Company. It is very positive news that we continue to bolster our successful and long-standing relationship for the long term with KOF. Before we open up the floor to take questions, I will then hand the call over to Constantino, who will guide you through the division's performance, our raw material hedging strategies, and our first green bond report. He will also discuss the steps we continue taking to ensure the company's solid cash flow generation, which enabled us to increase our cash position by 8% during the quarter as compared to year-end 2020, even after paying down debt and the first installment of our dividend. Moving on to our results for the quarter. Our consolidated volumes increased 9.1% year-over-year and 1.3% increase as compared to the same period of 2019. This increase was driven by volume growth across all of our markets. Notably, Brazil, Colombia, and Guatemala are all growing versus 2019, while we continue to see an acceleration in the sequential recoveries in the rest of our territories. As consumer behavior and channel performance normalize at an increasingly faster pace, we saw some strong performances across all our beverage categories. Our sparkling beverage category posted solid volumes in both Brand Coca-Cola and Flavors, while our stills and personal water categories achieved double-digit growth across all of our territories driven mainly by increases in mobility and the gradual recovery of the on-premise channel. Specifically, our sparkling beverage category grew 6.5% year-on-year, led by 5.3% volume growth in brand Coca-Cola and 11.5% growth in flavors. Most importantly, when compared to 2019, our sparkling beverage category grew 3%, driven mainly by the solid performance of Brazil, Colombia, and Guatemala. Another benefit from increased consumer mobility is the performance of on-the-go consumption occasions. Our still and personal waters volumes, which significantly over-indexed on these occasions, are recovering at an impressive pace. To give you a sense, our still beverage category volumes increased 35% year-on-year and 4.4% as compared to 2019. Our monthly average of active clients continues to recover, surpassing prepandemic levels, driven mainly by the resilient traditional trade and the reopening of the on-premise channel. In Mexico, on-premise volumes increased more than 50% year-on-year. While in Brazil, we achieved double-digit growth despite significant restrictions in the month of April. With regard to our mix, we saw significant recoveries in single-serve presentations as compared with the previous year. However, there is still a runway for additional mix recovery. To give you a sense of what is happening, in Mexico, our single-serve mix has recovered 6 out of 10 points of single-serve mix that has shifted during the pandemic era. So we're seeing a comeback, but we still have some runway for increased single-serve mix growth. Driven by volume growth, our revenue management initiatives and improvements in our price/mix, our consolidated total revenues increased 10.9% year-on-year. Notably, we achieved this growth in the face of continued unfavorable currency translation effects from all of our operating currencies into Mexican pesos. Excluding these headwinds, our comparable top line grew 19.2% year-on-year and remained flat compared to 2019. Regarding our gross profit, our raw material hedging strategies, coupled with our cost-cutting and savings initiatives, offset increases in raw materials cost, the depreciation of most of our operating currencies in Central America and Argentina, and the higher concentrate costs in Mexico. Importantly, as discussed in our earnings release, we are resuming the recognition of tax credits on concentrate purchased from Manaus Free Trade Zone in Brazil beginning in the second quarter. As a result, we registered an extraordinary MXN 1.083 billion in our cost of goods sold for the fourth quarter. This amount is equivalent to a cumulative credit suspended since 2019 and until the first quarter of 2021. Notably, this decision is supported by the recent developments and opinions from external advisers. Considering these effects and despite the gradual normalization of certain operating expenses, such as marketing and labor costs, our operating income increased 41.3% versus 2020 and 14.4% versus 2019. Additionally, our operating cash flow increased 21.7% year-over-year, 9% higher than our 2019 baseline despite a comparable that includes significant noncash effects related to currency fluctuations during the preceding year. Finally, our controlling net income increased 38.9%, driven mainly by our operating income growth coupled with a decline in other nonoperating expenses related to the impairments of MXN 903 million recognized during the same period of 2020. Now I will expand on the strategies behind resiliency and innovation that our position in Mexico – our Mexico operation for long-term growth and continued success. First, we are driving this market recovery through a consumer-centric and multi-category portfolio that is leveraging our execution capabilities and ability to provide affordability to our consumers. As a result of our initiatives and the gradual normalization of mobility, our volumes during the second quarter grew across all our beverage categories. Volumes, excluding bulk water, increased 3.9%, driven mainly by 19% growth in still beverages and solid 47.5% growth in personal water. This recovery is only low single digits below our 2019 baseline. Indeed, in June, we closed the quarter flat compared with 2019 despite unfavorable weather in Mexico. Notably, during the quarter, we successfully launched the new formula and visual identity of Coca-Cola Sin Azúcar or Zero Sugar, with a great reception from our consumers as we continue to incentivize growth of our nonsugar portfolio. We are convinced that affordability will remain an important growth driver in Mexico. For this reason, we continue investing behind this core capability. During 2020 and 2021, we have invested more than MXN 140 million in production lines and returnable bottles and cases. Additionally, the launch of our Universal Bottle, or Botella única, which enables us to use the same refillable bottle for Brand Coca-Cola, flavors, and even noncarbonated beverages, such as Valle Frut is delivering better-than-expected results. It has allowed us to gain up to 3 percentage points of share in our flavored sparkling category, and its success in noncarbonated beverages has also been outstanding. We are also working on complementary distribution models to increase our service levels, reflected in double-digit growth in emerging channels such as distributors and wholesalers. Speaking of complementary channels, our home delivery routes continue to achieve double-digit revenue growth. We have already introduced 266 additional routes that are enabling us to better serve our consumers' needs directly to their homes. We are implementing these top line growth initiatives simultaneously with initiatives that enable us to operate as a leaner, more profitable Mexico operation. These strategies, which began in 2019 with the implementation of our Fuel for Growth program, have allowed us to generate savings of approximately MXN 250 million. As we move into 2020, our Mexican operation redoubled its effort to generate cost and expense efficiencies, achieving an impressive MXN 4 billion of additional savings. Most importantly, our ability to generate efficiencies freed up resources that became sustainable savings for us to reinvest in the market, our collaborators, and our infrastructure. Our cost and expense efficiencies over the past 2 years have allowed us to consistently increase our operating income and operating cash flow in the face of an uncertain and volatile environment. Today, our Mexican operations profitability is ahead of 2019, and we maintain a significant amount of savings that we generated during 2020. Finally, we must underscore the acceleration of our digital initiatives in Mexico. Notably, we are now serving more than 100,000 clients through our WhatsApp omnichannel platform, and we began to pilot test our B2B URL-based platform called Juntos. Looking ahead, we are confident that we are positioning our Mexico operation for long-term continued success. Our team is guided by clear strategic priorities to continue building solid capabilities while also generating the necessary efficiencies that enable us to invest behind our growth and transformation. Now let me shift gears to provide you with an update on the rollout of our omnichannel digital platforms. During our previous conference call, we noted that our chat box-enabled business WhatsApp platform, which enables seamless order taking with an enhanced customer experience and lower cost to serve, was serving more than 300,000 active clients in Mexico, Brazil, and Guatemala. To give you a sense of our rapid rollout, during the second quarter alone, we increased the number of clients served by an additional 50,000. Notably, in Brazil, our most advanced market in this rollout, volumes sold through our WhatsApp platform represent more than 5% of our total volumes sold in the country and are growing. Finally, we are ecstatic to announce that we have enhanced our cooperation framework with The Coca-Cola Company. Over the years, our companies have continuously worked together to build a very successful long-standing relationship. This solid relationship has enabled us to successfully navigate ever-changing macroeconomic and industry dynamics by driving a consumer-centric mindset and a fundamental transformation in the way we operate and go to market. In order to continue strengthening this relationship and to adapt it to new times and opportunities, our company has recently concluded conversations that resulted in an enhancement of our cooperation framework announced previously, ensuring the necessary alignment to guide our business relationship in the long term. This enhancement is designed to ensure long-term alignment in the following key areas. First, growth plans. We have agreed to build and align long-term strategies and business plans to ensure a coordinated execution. These growth plans aim to increase our operating income via top-line growth and volume expansion, cost and expense efficiencies, and the implementation of marketing and commercial strategies and productivity programs. Second, relationship economics. This is to ensure that the economics of our business and management incentives are fully aligned towards long-term system value creation. This provides additional certainty on the levers that regulate concentrate pricing going forward, fully directing our focus towards our shared objectives, always considering investments and profitability levels that are beneficial to both Coca-Cola Company and Coca-Cola FEMSA. Third, potential new businesses and ventures. As the system continues to evolve, we agreed to explore potential new businesses and ventures such as the distribution of beer, spirits, and other consumer goods. Lastly, through a joint general framework of digital initiatives, we acknowledge the great opportunity to develop a joint digital strategy across strategic quarters. The above is consistent with James Quincey's comments during The Coca-Cola Company's earnings call last week, and I quote, "We are working together to improve distribution economics and open new revenue streams by providing other CPG brands access through our deep customer relationships and distribution." This new relationship model is great news for both of our companies. It further strengthens our relationships, ensuring long-term alignment, partnership, and certainty, positioning us to accelerate further towards our shared purpose of refreshing the world. In summary, we continue to deliver on all of our strategic fronts, from strengthening our relationship with our partners to building a solid portfolio while accelerating our digital initiatives, all while continuing to successfully navigate still a complex dynamic environment. Once again, we are confident that our mitigation actions and our positive momentum position us on the right path to continue achieving our targets for the year. With that, I will now hand over the call to Constantino.

Constantino Montesinos, CFO

Thank you, John, and thank you all for joining us on today's earnings call. I will now expand on our division's second quarter highlights. Beginning with Mexico. Our top line increased a solid 12% driven mainly by pricing initiatives and the gradual recovery of our price/mix. On profitability, our successful raw material hedging strategies have enabled us to expand our gross margin despite increases in commodity prices and the higher concentrate cost in Mexico. Specifically, we can confirm an increase in concentrate cost for sparkling beverages in Mexico, which is effective this month of July. This increase not only is in line with previous adjustments, but also is part of our mutually beneficial long-term relationship. Moving on to the expenses front. During this quarter, we began to see the expected normalization of certain operating expenses, such as marketing, labor, and maintenance, while we maintained a disciplined approach to savings and efficiency. We move to Central America. Our operations delivered another solid quarter. We have seen double-digit volumes driven mainly by a 15.9% volume growth in Guatemala, which continues to grow consistently over time, as well as solid performances in Panama and in Nicaragua as these markets continue to recover from the very strict lockdowns and distancing measures they have experienced. On the pricing front, average price declined as the revenue management initiatives were offset by the negative currency translation effect of Central American currencies into Mexican pesos. Exemplifying our operational excellence in the region, we're extremely proud that The Coca-Cola Company recognized the Guatemala operations as the best in Latin America in terms of execution, reflecting our relentless focus on operational excellence. As a result of all this, our quarterly revenues increased 10.5% in the Mexico and Central American division and 4.3% if we compare them to the same period of 2019. Our operating income in the Mexico and Central American division increased 9.3%. Finally, our operating cash flow increased by 5.2%. As John previously mentioned, we will continue to focus on driving our cost savings and operating expense efficiencies that, coupled with the raw material hedging strategies, make us confident in our ability to protect margins for the remainder of the year. We move on to our South American division. We're encouraged by 17.9% volume growth, which was driven by double-digit growth in all the markets. In Brazil, we again delivered a solid performance, with volumes increasing 15% in the face of significant lockdowns at the beginning of the quarter. Moreover, in Colombia and Argentina, where volumes increased by 23% and 29%, respectively, while Uruguay reported a 14% increase. Comparing this volume performance with the second quarter of 2019, our South American division's volume increased 6.8%. Our revenue management initiatives, recovery in price/mix, and volume growth in the division were partially offset by currency headwinds, driven primarily by a 12.6% unfavorable translation effect from the Brazilian real. Despite these headwinds, our top line increased by 11.7%. If we exclude the currency translation effects, our top line would have increased 29.9% during this quarter. We work continuously to enhance our affordability through our returnable presentations and continue gaining share across our territories to ensure sustainable business growth. Despite all of these currency translation effects, our gross profit in South America increased 32%, representing a margin expansion of 650 basis points. This increase was driven mainly by our favorable raw material hedging initiatives, cost efficiencies, and the recognition of MXN 1.083 billion related to the resumption of tax credits on concentrate purchased from the Manaus Free Trade Zone in Brazil. Our operating income for the division increased significantly, even with the normalization of these extraordinary tax effects recognized during the quarter, as we cycle through a low comparable base in 2020, resulting from the effects of the pandemic across our South American division. Now let me expand on the raw material hedging strategies. We have hedged all of our PET needs for the remainder of 2021, and we have hedged almost 50% of our 2022 needs at prices that are slightly below those for 2021. Notably, for 2021, we have also hedged around 75% of our aluminum needs in Mexico and almost 80% in Brazil. On the sugar front, we have covered around 70% of our sugar needs for the year and almost 50% for 2022 at very attractive prices. We're confident that these strategies will continue to allow us to protect our profitability in the upcoming quarters as we move into 2022. Now I'd like to expand on the financial results, which reflect our initiatives to strengthen our balance sheet and our financial position. Our comprehensive financial results recorded a slight increase compared to the previous year, driven mainly by a foreign exchange loss as net debt exposure in U.S. dollars was negatively impacted by the appreciation of the Mexican peso. This effect was partially offset by lower interest expenses, driven mainly by the payment of short-term financing incurred during the first quarter of 2020 and the payment at maturity of a Mexican peso-denominated bond for MXN 2.5 billion. I want to underscore Coca-Cola FEMSA's financial strength, which is once again reflected in a strong balance sheet and solid cash flow generation. As of June 30, 2021, our net debt-to-EBITDA ratio closed below 1x compared to the 1.13x at the end of 2020, while we closed the quarter with a cash position of more than MXN 46 billion. Additionally, highlighting the strength of our cash flow generation and confidence in Coca-Cola FEMSA's solid financial position, on May 4, we paid the first installment of the 2020 dividend in the amount of MXN 0.63 per share with a total cash distribution of approximately MXN 5.3 billion. This dividend represents an increase of 3.7% compared to the dividend paid during 2020 and a 42.4% increase compared to the dividend paid during 2019. With regards to CapEx, as we mentioned on our last call, we have budgeted a ratio of approximately 6.5% through revenues for the year as we continue to focus on increasing our affordability capabilities across the markets. Importantly, we will continue to take a very disciplined approach to capital allocation, which is customary in the way we do business at Coca-Cola FEMSA, using our cash control tower methodology to ensure that we maintain solid cash flow generation for the remainder of the year. I am very encouraged to see solid recovery trends in our business. Even as we continue to operate under volatility and uncertainty, our ability to navigate challenging environments and the success of our mitigation actions bolster our confidence in Coca-Cola FEMSA now and into the future. We will continue to focus on generating efficiency and maintaining a conservative approach to capital allocation, while we continue to explore different avenues for growth to continue creating value for our stakeholders. Talking a little bit more about beer, I would like to move on to Brazil and provide you with an update on a redesigned distribution partnership with Heineken in this market. The approval process progressed as fast as we expected, and the new distribution agreement became valid as of May. However, as we discussed during our previous conference call, given the challenging COVID-19 environment, the transition has experienced slight delays. We now expect to begin the transition during the upcoming weeks in the third quarter of the year. It's important to mention that we have been working together with Heineken and The Coca-Cola Company in all the necessary preparations to ensure a very smooth transition for all of the clients and customers. Additionally, good news, Tiger, one of Heineken's top global brands, has been launched in Brazil. We're already distributing this product in our South Brazil territories, and we see a great potential. It really complements our beer portfolio in the high-growth, mainstream, pure malt segment, a fantastic product and fantastic brand. Finally, and equally important, sustainability plays a fundamental role in our corporate strategy. With this in mind, I encourage you to visit our first green bond report, which was published on June 30 of this year. In this report, we provide you with an update on the allocation of the use of proceeds from the green bond issued last year, focused on three main categories that we believe we can create the most positive impact with: circular economy, water stewardship, and climate action. As it's customary with these bonds in light of best practices, we reported on the use of proceeds for the period from 2018 to 2020, allocating $235 million or more than 33% of the proceeds from the green bond. And with that, I will now hand the call back to John for his final remarks. Thank you very much.

John Santa Maria Otazua, CEO

Thanks, Constantino. We have a clear vision for Coca-Cola FEMSA. With our renewed purpose, culture, and strategy, we are confident that we are taking the right steps to develop future digital capabilities as we accelerate to deliver sustainable long-term growth and shareholder value. Importantly, through our enhanced cooperation framework with our partner, The Coca-Cola Company, we have strengthened our long-standing successful relationship that remains one of our key strengths. Although the overall operating environment remains uncertain, we are confident in our capabilities to continue delivering on our targets for the year as we continue to protect our employees, ensure a safe work environment while supporting our clients and communities. In short, we are confident that we are on the right path to emerge as an even stronger Coca-Cola FEMSA. Thank you for your continued trust and support and for being with us today. Operator, I'd like to open up the call for questions.

Operator, Operator

Our first question comes from Felipe Ucros with Scotiabank.

Felipe Ucros Nunez, Analyst

Congrats on the results. No questions on that front. But maybe I was wondering if you could give us an update on the Diageo pilot in Brazil. Any updates you can give us? More importantly than the status, maybe if you could tell us about the lessons that you've learned so far from the spirits pilot and what you expect from that going forward. And then maybe in second place, if you could also give us an update on the JV in Colombia. Just wondering if there's any developments on the regulators front.

Constantino Montesinos, CFO

Felipe, this is Constantino. Go ahead, John.

John Santa Maria Otazua, CEO

I was just going to say on the Colombia piece, there is no news. We're in the same situation we were last quarter. We continue to have very strong relationships with ABI, and we're talking about how we proceed going forward, but we do not have anything concrete yet to announce. And on the Diageo piece, I'll let Constantino talk about that.

Constantino Montesinos, CFO

Yes. Thank you, John. Felipe, thanks for the question. Yes, as you mentioned, we continue to evolve our relationship and pilots with Diageo in Brazil. I think there's a series of interest payments. So that's very straightforward with that particular piece. We're moving on and expanding our footprint within a pilot environment and framework. Having said that, yes, we've done some interesting analysis on the performance. It's positive. Once you have segmented properly the channels and the portfolio, we're seeing an overall benefit across all of the portfolio. So we are seeing upticks in our core portfolio, where we go with the total beverage solution, which I think is the most relevant highlight. There’s definitely complexity in this market as the arrangement of the current distribution footprint in the spirits category is very complex. It has many players involved, and controlling the execution is always something that's complex. In our case, that's I think one of the biggest benefits, being able to go directly and call directly on the stores and the on-premise accounts and being able to control execution. So that also delivers a significant benefit to the portfolio. And all in all, we're also learning a lot from promotions, cross-promotions with our portfolio and Diageo's portfolio, and we're starting to identify interesting opportunities not only on the promotion side and co-execution but also on the innovation side. So there's a lot of learning on that end, and we continue to be very optimistic about that development. I hope that clarifies and provides some color to your question, Felipe.

Felipe Ucros Nunez, Analyst

Very clear. Maybe if I can do a short follow-up on market shares. I'm just wondering if at this point, are you seeing any signs that your ability to adapt during the pandemic and provide affordability options is translating into share gains on the way out of the pandemic.

John Santa Maria Otazua, CEO

Yes, we are. As we discussed, I think one of the bigger things that we're looking at is initiatives and delivering affordability through returnable presentations, whether it be single-serve sizes or multi-serve sizes. And as we complement our portfolios in many different ways, either through returnable and refillable multi-serve plastic, refillable bottles or glass refillables, we're seeing enhanced share gains in the categories. But what's really exciting is that we're continuing to roll out the universal bottle. And where we're replacing that, we're having not only Coca-Cola products placed into our bottle, but also flavored products being placed into that bottle. And so when we launched that in Mexico, for example, where we have the most experience with it, we are seeing a 1 to 3 points share gain in flavors in the CSD side. But the incredible growth is also coming from noncarbonated as we put Valle Frut in it. So the share gains that we're seeing across NARTD in general, given affordability, are very large. We start talking about plus 1, plus 2 in NARTD, that's huge. And this is something we're doing all over our territories. So I think our ability to maintain and grow share is something that I feel very confident about.

Operator, Operator

Our next question comes from Marcella Recchia with Credit Suisse.

Marcella Recchia Focaccia, Analyst

I have two questions, if I may. The first one is about Mexico. You mentioned the concentrate cost increase and also the normalization of operating expense. So my question is, going forward, how can we reconcile both of them with respect to the evolution of your margins in the region? And my second question is if you can share with us, what are your expectations in terms of EBITDA margin paths in Brazil from retaking IPI tax credits again?

Constantino Montesinos, CFO

Jorge, do you want to take that one?

Jorge Alejandro Pereda, Analyst

Sure, Constantino. Yes, yes, absolutely. Yes, it's Jorge here. So I would say first on the Mexico piece. In Mexico, I would say that yes, there is an increase on the cost of concentrate that as we flagged before, it was likely to happen. It was in line with previous adjustments and for that reason is manageable, right? And then we have the piece about the raw material hedging strategies that Constantino also mentioned during the remarks and the normalization of certain operating expenses such as marketing, labor, and maintenance. If we put all these together, what we're thinking, Marcella, is that we're very confident in our ability to protect margins during the remainder of the year, right? We have price/mix improving as well. So that's the piece on the expectation, I would say, for Mexico going forward.

Marcella Recchia Focaccia, Analyst

Perfect. And my second question is if you can share with us, in terms of margin impact, what are you expecting as tailwinds from retaking IPI tax credits again?

Jorge Alejandro Pereda, Analyst

Yes, Marcella. I would say that for the quarterly normalized amount of IPI tax credits going forward, you should consider around MXN 120 million. This figure should represent approximately 100 basis points more for our South America division expectations this year. This includes the one-time income recognized during the quarter, and this estimate of MXN 120 million will depend on seasonality and timing of inventories. However, I believe this is a reasonable estimate to consider for the future.

Constantino Montesinos, CFO

Based on the 8% that we have in the IPI in Brazil right now.

Operator, Operator

Our next question comes from Ricardo Alves with Morgan Stanley.

Ricardo Alves, Analyst

I apologize if I missed any points in my earlier comments, but I have a quick question regarding the volumes in Brazil. We were pleasantly surprised by your performance in Brazil, which is significantly higher than in 2019. Could you provide some more details on the key factors driving this? I understand it's a combination of elements, but are there a few that you believe are particularly noteworthy? For instance, how are your competitors performing, how do you compare to them, and is there anything boosting demand now that might not be sustainable in the coming quarters? That’s my first question.

John Santa Maria Otazua, CEO

You want to get that, Constantino?

Constantino Montesinos, CFO

Sure. Ricardo, I would say the key factor is consistency. Brazil exemplifies how Coca-Cola FEMSA operates by maintaining steady value and growth drivers across all our operations. A significant aspect of this is our focus on making our portfolio more affordable, which involves multipacks and returnable products. Additionally, our strong digital presence is driving growth in digitally native channels at an accelerated pace. We are adapting to new shopping habits that have been reinforced during the pandemic. We're also rolling out our WhatsApp for business platform, which John mentioned. Over 200,000 customers, or roughly 50% of our total customer base, are using it for engagement. This has allowed us to capture orders we previously lost due to various circumstances. The result of these initiatives is an increase in market share, which we have observed in Brazil. We are seeing significant growth across all categories, a trend that has continued for the last few quarters, thanks to our consistency and strong execution. We expect this success to persist as it has become ingrained in how we operate. We're experiencing growth in carbonated soft drinks, teas, energy drinks, and juices, reaching record market shares in colas, energy drinks, and teas. Altogether, these factors demonstrate our consistency and operational excellence in the commercial sector.

John Santa Maria Otazua, CEO

No, Ricardo. I think I'm really, really very pleased to see what Brazil is doing. And first of all, as Constantino said, it is a result of many things, but first of all, it continues to have excellent execution. And taking that execution not only from a physical world to a virtual world, where we're doing a lot with the WhatsApp platform and getting our customers the customer journey experience that they require. And secondly, I think there's a focus on affordability through returnables and multi-packing. And multi-packing, we continue to expand our multi-packing on multi-serve, that capability continues to grow. But we will also be focusing and continue to focus on single-serve multi-packing expansion. So there is a combination of things that are going on there that are just continuous builds on efficiency, on focus, and on execution that allows Brazil to be where it is. And I think we'll continue to gain momentum. And what is very encouraging, too, is to see that although we are taking a little bit longer with the transition from beer, there are strong brands coming in from Heineken to continue to build our momentum in Brazil. Overall, we see a very consistent growing strategy in Brazil. That is now clear. The tax effects were a little bit of an overhang, and the beer dilemma was there or not, and I think that has softened. So we're very confident going forward with the Brazilian operation.

Ricardo Alves, Analyst

Yes, indeed, quite impressive. Thanks for such a detailed answer. And second, I mean, I think that, John, you kind of already touched on that second question which was on Brazil beer. And a couple of questions on that. Just if you could repeat, I think I missed when exactly you think you guys are going to be able to roll out the new agreement over the coming months. And then maybe we've discussed Tiger in the past. You touched on that as well. But is there anything more at this juncture that you can share with us in terms of what would be the next steps? Just as an example, I mean, given the higher flexibility that this contract is providing you, do you actually think that there could be other avenues of growth within beer at this point?

John Santa Maria Otazua, CEO

Matias, do you want to take a crack at this? I guess not, Matias.

Jorge Alejandro Pereda, Analyst

Let me address the first part of Ricardo's question. The timing of the transition, as Constantino mentioned, is expected to begin in the upcoming weeks during the third quarter, likely around August or September, though the final date is yet to be determined. It's also important to note that we are currently working on all aspects related to the back office, including coordination with Heineken and The Coca-Cola Company, to ensure that this transition goes as smoothly as possible for our clients.

Matias Molina, Strategic Planning Director

I was on mute.

Jorge Alejandro Pereda, Analyst

Yes. I would just add, we were saying that Tiger in the call is already launched in the south of Brazil, and we are going to complement the launch, as Jorge was mentioning, in this quarter in all our territories. And in addition to that, we're working for new launches with the operation to launch and complement our beer portfolio in Brazil. And initiatives like that, we're constantly evaluating, and we'll have news soon.

Operator, Operator

Our next question comes from Álvaro García with BTG.

Alvaro Garcia, Analyst

I have a couple of questions as well. My first one is on the new cooperation framework. I was wondering if there was anything to say specifically about the economics of distributing things like beer that maybe weren't set in stone in the past. So any specific comments on how the economics might have changed or maybe how much more fixed they might be than the past with this new agreement. That's my first question.

Constantino Montesinos, CFO

Do you want to take that one, John? Or do you want me?

John Santa Maria Otazua, CEO

Sure. First of all, the economics moving forward really revolve around the brand owner. It depends on whether we’re looking at premium or non-premium products, but they’re generally in line with what we had previously. Our approach is to either swap out brands or replenish existing ones. Additionally, our agreement allows us to introduce other international brands, which can help us improve margins over time. Overall, it is similar to before, but the agreement provides us with much greater flexibility to enhance our portfolio and improve margins.

Constantino Montesinos, CFO

Yes, I think that's in regards to our current Heineken setup, as John mentioned. In regards with The Coca-Cola Company, we have, as John mentioned in his remarks, we definitely developed a new framework that allows for us to work on other non-KOF portfolio of products, which include beer in the rest of our markets wherever this makes sense for the business. We have sorted out some economical framework around that, but it is definitely something that we want to keep to ourselves. It's confidential, so we'll maintain that reserve within The Coca-Cola Company and us. But it will definitely give us the ability to continue to develop a much more expanded portfolio that goes beyond Coca-Cola products, particularly once more beer and spirits wherever we believe that makes sense for the system in order to enhance a customer-centric value proposition that allows for the expansion of our Coca-Cola portfolio, which includes alcoholic and non-alcoholic beverages as of today. Does that answer your question?

Alvaro Garcia, Analyst

Yes. Yes, it seems like more of the same sort of in line with what we had discussed in the past. So that's very helpful. Thought maybe there'd be something new as per this new agreement.

John Santa Maria Otazua, CEO

My second question is more of a clarification more than anything else. You mentioned in your prepared remarks that on the mix front in Mexico, you've recovered 6 out of 10 points. I was wondering if you can clarify that, maybe give us a bit more color as to how you see mix recovering in the second half. I don't know if that was 6 out of 10 percentage points or if that was a 6 out of 10 index. If you can clarify that, that would be great.

Jorge Alejandro Pereda, Analyst

Yes, Álvaro. It's Jorge. I can respond to your question about the mix. To give you an overview, single-serve in Mexico was typically around 35% of the mix prior to the pandemic. Last year, in the second quarter of 2020, that shifted towards multi-serve, reducing single-serve to about 25% of the mix. We have since recovered approximately 6% of that mix, which means we still need to recover about 4 percentage points to return to pre-pandemic levels. I hope that answers your question, Álvaro.

Constantino Montesinos, CFO

This is Constantino. And the drivers behind that there is an external factor, which is mobility. The more mobility, the more impulse and on-the-go consumption, so that helps. And on the other hand, is also the adjustment of our brand price pack architecture and the revenue growth management initiatives. So the combination of both elements is driving that recuperation of the single serve.

John Santa Maria Otazua, CEO

Right. And Álvaro, the most impacted channel we had last year was the on-premise traditional channel. So the small mom-and-pop restaurant, they just went out of business. It was a tremendous impact for us and a major one for them. So as they start coming back online, we're seeing that recovery. And we're seeing more and more openings as store openings as we go forward. So I would say that as a trend would show, we've recovered 6 points of those 10, and probably by the balance of the year, we can cover most of that.

Operator, Operator

Our next question comes from Carlos Laboy with HSBC.

Carlos Alberto Laboy, Analyst

John, could you elaborate on the changes in the relationship between Coke and Coke FEMSA that seem to foster greater trust? It appears this trust goes beyond personal dynamics and is rooted in something more institutional that can endure beyond individual leaders. In light of this emerging trust and shared values, are you at a stage where discussions about eliminating redundancies from both sides can begin? This has always been a sensitive and somewhat challenging topic.

John Santa Maria Otazua, CEO

Okay. Thanks for the question, Carlos. I think there are a significant number of major structural concepts that have changed. Let me start by saying that the first one and the one that has moved a lot has been The Coca-Cola Company. And in our opinion, their ability to approach consumers and customer needs has led them to think and has led us to think together about how we need to serve customers. This has taken us from a single point of contact between the Coca-Cola system and the client to a platform mentality so that we can eliminate and solve friction points for the trade. I think that's a huge mindset shift. You saw that in the quote that James had in his earnings release. Also, it's about what we have agreed upon in our new cooperation framework moving forward. So, I think the first thing is there is this understanding and realization that technology is driving change and the way we compete, and we have to change along with that. I think we're going to become more and more of a platform solution for customers, and Coca-Cola is definitely on top of that. And another thing is that secondly, it is a partnership. We can't do it alone. This new economic framework we established with The Coca-Cola Company gives us certainty on several aspects, including growth opportunities, investment, and return perspectives. We're excited about the potential for trust and shared values as we measure together our online and offline capabilities so that we can reduce redundancies and work more seamlessly. The foundations for trust are definitely there, and the capabilities that we're developing are extremely powerful. Our relationship with The Coca-Cola Company along those lines is excellent, and we're working together very strongly on a very shared vision going forward.

Operator, Operator

We'll move to our next question. Our next question comes from Isabella Simonato with Bank of America.

Isabella Simonato, Analyst

I have two quick questions. First of all, regarding the new framework with Coke, right? And you mentioned the diversification of the portfolio, right, the potential to diversify the portfolio in different markets. This is just to make sure I understood correctly. This is only on distribution? Or as it's happening with the new Heineken agreement in Brazil, eventually, you're pursuing production of other types of beverages in other markets? Just to make it clear that I got it correctly.

John Santa Maria Otazua, CEO

Sure. Isabella, thanks for the question. Let me clarify this. The framework we have in place right now with The Coca-Cola Company is basically something that is based on customer centricity. What we're trying to do is to find, through a correlated manner, a portfolio of either products or services that would allow us to enhance the relationship of the Coca-Cola portfolio with the retailer. In that sense, the objective is not to sell other things, okay, which is a by-product. It is to sell more of the Coca-Cola portfolio alongside other things that satisfy our customers. The point being is that what we are looking for is distribution and enhancing distribution at this point. When we start thinking about beer and the Heineken experience that you're talking about in Brazil, it is not in our thinking to become brewers. What we would want to do is complement the portfolio of beers that we distribute if there is a customer and consumer need for it. But it's not our vision to become brewers in Brazil or elsewhere.

Constantino Montesinos, CFO

Yes. Just to emphasize what John is saying. I think we are quite proficient in distribution and creating a great commercial platform in all the markets where we're present. In the case of Brazil, we think that we're working together not only with The Coca-Cola Company, which is a fantastic brand builder, but also with a great beer partner in Heineken. We believe that by coupling our great execution with excellent brand building, we have a phenomenal opportunity to grow, which also holds true for the pilots we're conducting with Diageo and other potential partners. So that's the idea at the end of the day: to leverage our thinking around the consumer and customer in mind with a customer-centric platform on distribution and commercial engagement.

Operator, Operator

Our next question comes from Luis Willard with GBM.

Luis Willard Alonso, Analyst

Kind of on your results, maybe another follow-up on the agreement with Coca-Cola. My question is, what have you learned so far from your experience in beer in Brazil? Do you think that can be applied to the rest of the territories, given this Coca-Cola agreement? That will be the question.

Constantino Montesinos, CFO

Sure. Luis, thanks for the question. I mean, the distribution of beer in Brazil has been ongoing for a long time. We've had, what we call our first stage relationship with Heineken, and then this renewed relationship is now coming into full effect. So, first of all, once more, there was a previous question around that, more on the Diageo and spirit angle. There are definitely synergies we need to identify with particular channels and markets to drive those synergies operationally and with a customer-centric value proposition in mind. That's one big learning. The other one is that innovation is a must. Consumer trends and changes are continuous in the beer category. We need to have beer partners that adapt to the circumstances. That's why I mentioned a great partnership on our end with Heineken in Brazil. So the ability to create great brands while being adaptive to marketplace changes is vital. Lastly, execution remains a key driver of growth and service level for customers. Our digital initiatives that we have rolled out across all of Coca-Cola FEMSA reflect that. We're not minimizing physical sales calls; that remains at the center of everything for us. We just enhance that with digital tools that drive execution and growth in the beer category.

John Santa Maria Otazua, CEO

So I think those are the three key learnings that I could share with you all in all. I hope that helps.

Operator, Operator

Our next question comes from Antonio Hernández with Barclays.

Antonio Hernández Vélez Leija, Analyst

You've already mentioned your expected ability to maintain margins in Mexico given price/mix and the different strategies. I just wanted to see if you could quantify a little bit more on what was the impact from concentrate costs and also from the higher marketing labor and maintenance expenses and if you are expecting this going forward and maybe at what amount?

Constantino Montesinos, CFO

Jorge, do you want to take that one?

Jorge Alejandro Pereda, Analyst

Sure. Yes. Antonio, yes, on the margin piece, I would say first on the concentrate; it's an amount of around $35 million. So when I say minimum, I refer to this guidance that we have previously provided and that we can offset with other savings and price and mix and the initiatives that we are implementing. So I mean that the adjustment is there, of course, but I wouldn't flag that as a bigger piece. The second piece around marketing and labor in Mexico to give you a sense, marketing, we are cycling, of course, the second quarter of the previous year when, obviously, the pandemic started, and we focused on efficiency. So the increase in marketing that we're looking at right now is around 50%, but it's getting to more normalized levels, which would be around 3% to sales. And on the labor, it's similar. What we have seen an increase year-on-year would be something around the 10% range because we delayed certain bonuses and compensations and then we pay them. So we have that comparable effect, okay? So does that clarify your question, Antonio?

Antonio Hernández Vélez Leija, Analyst

Yes. Perfect.

Operator, Operator

Our next question comes from Lucas Ferreira with JPMorgan.

Lucas Ferreira, Analyst

Two follow-ups on Brazil and agreement with Heineken. The first one, you mentioned in the fourth quarter earnings call that you expected beer volumes to drop by around 40%, and your margin is something like 50 bps for South America. Do you think the estimates now are conservative on so we're seeing strong volumes, and are you guys optimistic on the ramp-up of the agreement and bringing Tiger in? So my question is, do you think this is still valid or has it become conservative right now? Obviously, we've set aside the IPI number you just gave.

Constantino Montesinos, CFO

Lucas, let me take that before your second question, just to get it out of the way. It's definitely conservative. Those estimates were considering a transition beginning in May. Now we're looking at a transition and hopefully, around September. So I would think more around 20% rather than the 40% that we talked about in the fourth quarter call. Just to clarify, you mentioned volumes, but that guidance or expectation was for beer revenues.

John Santa Maria Otazua, CEO

Exactly.

Lucas Ferreira, Analyst

Okay. Yes, that's right. Sorry, I just wanted to clarify that. The second question was more about the strategy in Brazil now with this new agreement related to digital strategy. Mainly when we think about, let's say, the B2C and also the platform that, for instance, Heineken has with their own clients. My question is, if you guys are going to have similar digital strategies? Or in other words, can you compete when getting your own, let's say, delivery apps, delivery platforms straight to the final consumer? Or do you foresee that there might be another partnership, for instance, a single app where it can get delivered Heineken and Coke and all the brands? Or do you expect to maintain separated platforms to deal with your customers and with the end customers also?

Constantino Montesinos, CFO

John, do you want to take that one?

John Santa Maria Otazua, CEO

I heard every other word of it. So I didn't quite understand it. I'm sorry.

Lucas Ferreira, Analyst

Okay. Let me repeat the question, John.

Jorge Alejandro Pereda, Analyst

I can take that. I think the question was whether we're going to stay serving on the digital front mainly through WhatsApp or if we're thinking about a platform or an app that incorporates other categories as well. If that was the question, I would say yes. In our plans, we have an omni-channel strategy that contemplates a platform, a multi-category platform to serve customers with our entire portfolio. We're gradually implementing that today. The WhatsApp channel serves very well with considerable engagement and great results. So we're growing out of that, and that will eventually all communicate and flow to the preference of the clients.

John Santa Maria Otazua, CEO

Sorry, because I didn't quite understand the question. But yes, in that term, we are looking at not only an omni-channel platform, having a lot of different components. And obviously, the WhatsApp is one. The URL is another. We have this interconnected with our sales – mobile sales force automation system and our back office and our telesales system. So when you think about it, it is a whole platform that we are creating, okay, which will also be used to invite other CPG companies on to distribute other categories through there, whether it is through direct wholesaling or purchase and sale of the product or through an e-wholesaler model where they can plug into this platform and leverage the relationships that we have. So that's where we're going with.

Lucas Ferreira, Analyst

Just to clarify, will Heineken have its own strategy? Can you have your own strategy and will there be a connection between the two as a partnership? In other words, if I want to buy Heineken, but I also want to buy Tiger, will I have a single platform or will I need to use two different apps to get my beer delivered? Also, since you offer liquor, how will that fit in?

John Santa Maria Otazua, CEO

No, no. At this point in time, the portfolio we need to handle is the one we have on our site, on our application, our omnichannel platform. That doesn't mean that we could not cross-sell on each other's. But we haven't had those detailed discussions yet.

Constantino Montesinos, CFO

As of today, Lucas, just to clarify, to your point, yes, if a customer, an on-premise account wants to buy the Heineken brand, after the transition is in effect, they would have to go through the Heineken platform with route to market. And if they want to buy Tiger brand, they will go through our platform and our route to market.

Operator, Operator

Our next question comes from Sean King with UBS.

Sean King, Analyst

I apologize for belaboring this point, but I'm trying to understand the change to the relationship economics. Would it be wrong to interpret it as an adjustment to the incidence-based pricing model to allow for the sharing of the economics of the non-Coke brands, which were increasingly important to FEMSA's portfolio? Or is there really no change? This is really to drive customer synergies with an expanded portfolio to drive Coke system profits and that the concentrate pricing is sort of business as usual?

Constantino Montesinos, CFO

Matias, do you want to answer that one?

Matias Molina, Strategic Planning Director

We're not getting into the details of that level of the agreement, but I would say it's not the same, and it's not just helping within the portfolio. But clearly, that's the main focus of our strategy together with The Coca-Cola Company as incorporating other categories.

Operator, Operator

Thank you. This concludes today's Q&A. I would now like to turn the call back over for closing remarks.

John Santa Maria Otazua, CEO

Well, thank you all for your confidence and interest in Coca-Cola FEMSA. These are very interesting times, very changing, and dynamic times. We are executing on all our strategic fronts, and we're seeing increased momentum in all sides of our business. As always, our team is available to answer any of your questions, and I thank you for the confidence and interest always in KOF. Thank you very much.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.