Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) Q4 2023 Earnings Call Transcript
Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) Q4 2023 Earnings Call Transcript February 22, 2024
Coca-Cola FEMSA, S.A.B. de C.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to Coca-Cola FEMSA's Fourth Quarter 2023 Earnings Conference Call. My name is Melissa, and I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]. I'll now turn the call over to Jorge Collazo, Director of Investor Relations for Coca-Cola FEMSA. Please go ahead, sir.
Jorge Collazo: Good morning, everyone. Welcome to our conference call to review our fourth quarter and full year 2023 results. With me this morning is Ian Craig, our Chief Executive Officer; Gerardo Cruz, our Chief Financial Officer; and the rest of the Investor Relations team. After prepared remarks, we will open up the call to take your questions. We ask that in the interest of time, you make your most present question first, and then we enter the queue in case you have more than one question. Before we proceed, I'd like to remind all participants to take note of our cautionary statement included in our earnings release. This conference call may include forward-looking statements and should be considered as good faith estimates made by the company.
These forward-looking statements reflect management's expectations that are based upon currently available data. Actual results are subject to future events and uncertainties that can materially impact the company's performance. With that, let me turn the call over to our CEO. Please go ahead, Ian.
Ian Craig: Thank you, Jorge. Good morning, everyone. We appreciate you joining us today. 2023 was an outstanding year for Coca-Cola FEMSA. We not only achieved positive results but also laid the foundation for our company's sustainable long-term growth model. As we have discussed in previous calls, we defined and implemented 6 strategic priorities that guide us to capture the many opportunities that are ahead of us. I am confident that we are making important progress across these pillars, from accelerating the growth of our core business to the rollout of our B2B platform, Juntos+. We are also making significant progress regarding culture as we foster an empowered organization with the necessary customer centricity and the psychological safety that allows our teams to challenge the status quo while passionately serving our customers.
During today's call, I will review our fourth quarter results and recap key highlights of the year across our operations. I will also provide you with a brief outlook of our initiatives for 2024, as we remain confident in our short and long-term positive momentum. Finally, before taking your questions, I will pass the call on to Gery to expand on our quarterly results across our divisions and provide you with an adequate update on our savings initiatives. With that, let us begin by summarizing our consolidated results for the fourth quarter. Volume grew 6.1% year-on-year, reaching 1.26 billion unit cases. This increase was driven mainly by the positive performance achieved in our Mexico, Brazil, Guatemala, Colombia, and Central American territories, which offset a slight volume decline in Argentina and Uruguay.
Excluding the integration of the Crystal bulk water business in Mexico, consolidated volumes increased 5.1%. Regarding category performance, we are pleased to report growth across the board. Sparkling beverage volumes grew 4.6%, driven mainly by brand Coca-Cola, which achieved 6.2% growth. Still beverages grew 7.8%, and bottled water grew 10.3%. As the Coca-Cola Company highlighted during the recent earnings call, we strengthened our value share position during the year, driven by a turnaround in share trends in Mexico, as well as share gains across all of our other operations, except for Panama, as we leverage our growth of core pillar and joint marketing and execution capability. Total revenues for the quarter grew 8%, reaching MXN 66.1 billion, driven mainly by solid volume growth that offset unfavorable currency translation headwinds related to the appreciation of the Mexican peso.
On a currency-neutral basis, our total revenues increased a solid 15.7%. Gross profit increased 12.6% to MXN 3.5 billion, leading to a gross margin expansion of 190 basis points to reach 46.1%. This increase was driven mainly by our top line performance, declining packaging costs, and the appreciation of most of our operating currencies as compared with the U.S. dollar. These effects offset headwinds driven by higher sweetener costs across our operations. Our operating income increased 7.3% to MXN 9.7 billion, and operating margin contracted 10 basis points to 14.6%. This performance reflected strong top line growth, partially offset by increases in operating expenses, such as labor, marketing, and maintenance. We also registered a lower operating foreign exchange gain as compared with the previous year, which was driven by the significant appreciation of the Mexican peso during the previous year.
Importantly, during the quarter, we incurred temporary additional freight and other expenses related to the shipment of finished products into Guerrero, resulting from Hurricane Otis's impact on the region. Excluding these onetime expenses, our consolidated operating margin expanded 30 basis points. In relation to Guerrero, we announced an investment an 8 package worth MXN 575 million to support the region's recovery. As a result of well-established response protocols, we not only provided support to our team and communities in Acapulco, but also our regional production facility in Guerrero is now operating normally. We're confident that with accordinate support of the private sector, local and federal authorities, Acapulco, will continue its rapid recovery.
Adjusted EBITDA for the quarter increased 10% to reach MXN 13.1 billion, and EBITDA margin expanded 40 basis points to reach 19.9%. Finally, our majority net income declined 24.5% to reach MXN 5.4 billion. This decrease was driven mainly by a base effect of a lower effective tax rate during the same period of the previous year. By normalizing this effect, our majority net income increased 8.6%. In summary, our 2023 results were outstanding. Full year volumes increased across all of our territories, surpassing the milestone of 4.05 billion NARTD unit cases for the first time in Coca-Cola FEMSA's history. The volume growth achieved this year represented 44% of the Coca-Cola systems worldwide volume growth in 2023. Our full year top line of MXN 245.1 billion, operating income of MXN 34.2 billion and adjusted EBITDA of MXN 46.4 billion also represented new benchmarks for our company.
To support these results, we invested a record CapEx of MXN 21.4 billion, representing 8.7% of revenues. These investments will enable us to continue adding the necessary capacity to support our growth ambition. Now let me expand on our operations highlights for 2023. In Mexico, we continue to see a resilient consumer environment. The macroeconomic backdrop for consumption remains favorable as evidenced by the number of jobs registered with the Mexican Social Security Institute reaching a new record of 22.1 million jobs. Additionally, the average base salary registered an annual increase of 10.4%, the second highest in the last 23 years. Our volumes for the full year in Mexico increased 8.7%, reaching 2.05 billion unit cases, a historic record for our Mexico operation.
Our focus on growing the core business, expanding our customer base, mainly drove this growth. To give you a sense of the magnitude, our team in Mexico added more than 47,000 new customers during the year, expanding our traditional trade customer base by 7% year-on-year to reach more than 720,000 clients. Consistent with our priorities for Mexico in 2023, we achieved positive share performance across nearly all our nonalcoholic ready-to-drink categories, driven mainly by gains in the sparkling energy and sports drinks categories. Additionally, aligned with our efforts to measure and standardize customer service KPIs across our operations, Mexico improved both its customer service and delivery service metrics. Finally, we closed the year serving more than 512,000 monthly active purchasers through Juntos+, our digital B2B platform, reaching 70% of our traditional trade customers in Mexico.
Importantly, we began the rollout of Version 4.0 of Juntos+ during the first quarter of 2024, adding new features and significantly improving customer experience and performance. Moving on to Guatemala. Our volumes for the year grew a solid 18.4%, reaching 174 million unit cases. This marks the sixth consecutive year of double-digit volume growth. To give you a sense of the magnitude on a comparable basis, volume in Guatemala is 2x the volume of 2017. We see plenty of opportunities for continuous growth in Guatemala, driven by our initiatives to grow the core, expand the customer base, and tap into opportunities in profitable still beverage categories. Notably, the country remains a fertile ground for these strategies as it enjoys a stable macro environment and favorable demographics, marked by the youngest population in Latin America with a median age of 24.4 years.
Moving further down south to South America. In Brazil, our team continues to deliver solid results. We have consistently grown our volumes and strengthened our competitive position over the past 5 years. Our initiatives to grow the core continue to exceed expectations. For instance, Coca-Cola Zero Sugar grew 28% versus the previous year, while we increased our single-serve mix by 1 percentage point to reach 24.3%. Our focus on capitalizing on profitable emerging beverage categories led energy to grow 19%, sports drinks 28%, and juices 16% year-on-year. Aligned with our strategic priority of debottlenecking our infrastructure, our supply chain team installed 4 new lines in Brazil, representing an additional 75 million unit cases of capacity per year.
That will enable our operation to reduce fixed costs, minimize on availability, and optimize service levels. Additionally, in 2023, Coca-Cola FEMSA Brazil was awarded first place in the Advantage survey as a top modern trade supplier to ABRAS, the Brazilian Supermarket Association. This award reflects the unwavering commitment of our team to service our customers with excellence. Finally, our team in Brazil did an outstanding job in scaling version 4.0 the Juntos+ app. As we mentioned in our previous call, this enhanced version significantly improves customer experience and performance. In Colombia, our customer centricity enabled us to successfully navigate a dynamic environment. During the year, our volume increased 5.3% year-on-year to reach 347 million unit cases, a new record for this operation.
Notably, our team expanded our customer base by 17,000 customers, a 4% increase versus the previous year, reaching 480,000 clients. We also improved service and availability to record levels and accelerate the rollout of our digital platform. Today, Juntos+ serves more than 223,000 active monthly purchases in Colombia with 20% of total orders now being done digitally. Finally, despite the uncertain environment, our volumes in Argentina increased 2.7% during 2023. Aligned with our expectations, we saw a challenging consumer environment during the fourth quarter that ultimately led to a 1% volume decline in said period. However, throughout the year, our team in Argentina was able to leverage our single-serve mix and affordability to achieve 2.6% growth in single-serve mix and a 2 percentage point increase in household penetration of returnable presentations.
We remain confident that we have the right team, joint capabilities with a Coca-Cola Company, and a resilient business model to manage our operation in Argentina under difficult conditions. As we move on to 2024, we remain confident in our team's ability to continue executing our strategy, leveraging growth drivers across our rights to win in our footprint. In particular, we expect to focus on 3 key drivers in 2024. First, build on the growth momentum of our core business. Second, take Juntos+ version 4.0 to the next level with the deployment of advanced AI capabilities, and third, continue fostering a customer-centric and psychologically safe culture for Coca-Cola FEMSA. For instance, regarding the momentum in our core business, we have laid out robust plans across our operations to continue strengthening our competitive position, tapping into per capita opportunities, and continue exploring white spaces in profitable noncarbonated beverages.
Regarding Juntos+, we are very encouraged by the early results that our tests have shown leveraging cutting-edge AI engines for recommendation systems, personalized promos, and dynamic pricing among others. We expect to deploy these capabilities in Mexico and Brazil during this first quarter and scale them throughout the year. Moreover, we expect to finish the rollout of version 4.0 of our app in Mexico, Central America, Colombia, and Guatemala, all during this year. Finally, regarding culture, we have refreshed our vision and established the leadership principles that will guide that culture, and we are working in our organization, which we are deploying across the company this year. With that, I will hand the call over to Gery.
Gerardo Cruz: Thank you, Ian, and good morning to you all. Expanding on our division's results for the quarter. In Mexico and Central America, volumes increased 6%, reaching 581 million unit cases as we continue to see solid volume performance across the division. Excluding the integration of Crystal's bulk water business, our volume in the division grew 4.2%. Revenues in Mexico and Central America increased 11.3% to MXN 37.6 billion, driven mainly by volume growth and partially offset by an unfavorable translation effects from most Central American currencies into Mexican pesos. Our gross profit increased 17.5% to reach MXN 18.4 billion, resulting in a gross margin of 49%, a 260 basis point expansion year-on-year. We continue to see sequential improvement in profitability as our top line growth, the appreciation of the Mexican peso, and declining packaging costs were partially offset by higher sugar prices in most territories in the division.
Operating income increased 7.8% to MXN 5.6 billion, driven mainly by solid gross profit performance. Our operating margin had a 50 basis point margin contraction to 14.9%, driven mainly by an increase in operating expenses, such as labor and maintenance, and marketing. This quarter, we also incurred temporary freight expenses to deliver finished product to Guerrero as a result of the impact of Hurricane Otis, as Ian previously mentioned. Excluding these effects, our operating margin would have expanded 10 basis points. Finally, our adjusted EBITDA in the division grew 11.6% with margin expanding 10 basis points to reach 20.5%. Now moving on to South America. Volumes for the quarter increased 6.2% to 475 million unit cases. During the quarter, we continued to see a solid performance in Brazil and Colombia with volume increasing 7.5% and 7.6%, respectively.
This growth was partially offset by a 1% volume decline in Argentina and a 2.1% decline in Uruguay. Our revenues for South America division increased 3.8% to MXN 28.5 billion as our volumes and revenue management initiatives were partially offset by unfavorable currency translation effects into Mexican pesos. To give you a sense of the magnitude of this currency headwind, when excluding currency translation, our total revenues in South America increased 19.5%. Gross profit in the division increased 5.8% or 24.3% on a currency-neutral basis, leading to a margin expansion of 90 basis points. Volume growth, favorable mix, and easing raw material costs mainly drove this increase, which was partially offset by increased sugar costs and the depreciation of the Argentine peso as applied to our U.S. dollar-denominated raw materials.
Operating income for the division increased 6.7% to MXN 4.1 billion. On a currency-neutral basis, operating income increased 23.6%, and operating margin expanded 40 basis points to 14.3%. This increase was driven mainly by our gross profit growth and operating expense efficiency. Finally, adjusted EBITDA in South America increased 7.8% to MXN 5.4 billion or 28.3% on a currency-neutral basis. Moving on. Our comprehensive financial results recorded an increase during the quarter. This was mainly driven by a lower gain in monetary position in inflationary subsidiaries and the decrease in our interest income. These 2 factors were mainly related to the significant depreciation of the Argentine peso during the quarter. Additionally, we recorded a higher foreign exchange loss as our net debt exposure in U.S. dollars was negatively impacted by the appreciation of the Mexican peso and the other operating currencies during the quarter.
These effects were partially offset by a higher gain in financial instruments and the decrease in our interest expense mainly related to the maturity of a MEX 7.5 billion denominated bond. Finally, aligned with the financial priorities that we announced at the beginning of 2023, throughout the year, we continue to focus on reinvesting in the business to support our long-term strategic vision to deliver sustainable growth. Aligned with this strategy, during 2023, we invested 8.7% of CapEx as a percentage of sales. As we previously mentioned, we expect to increase our production capacity by 15% and warehouse capacity by 30% over the next 3 years. Beyond these investments, we will continue to focus on increasing productivity and achieving significant savings across our supply chain.
These initiatives were fundamental during 2023 as our team exceeded supply chain savings to reach $80 million, significantly mitigating margin pressures that helped us achieve our target resilient margins for the year. For 2024, our teams targets at least an additional $60 million in cost to make cost-to-serve and primary freight efficiencies. With that, operator, we are ready to open the call for questions.
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