Coca-Cola FEMSA - Q1 2021

Transcript

Operator (participant)

Good morning, everyone, and welcome to the Coca-Cola FEMSA First Quarter 2021 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 for questions and answers after the presentation. During the conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered 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 would like to now turn the conference over to Mr. John Santa Maria, Coca-Cola FEMSA's Chief Executive Officer. Please go ahead, Mr. Santa Maria.

John Santa Maria Otazua (CEO)

Thank you, and good morning, everyone. Thank you for joining us today to discuss our first quarter twenty twenty-one results. With me are Constantino Spas, our Chief Financial Officer, Matias Molina, Strategic Planning Director, and Jorge Collazo, Head of Investor Relations. Let me begin by saying that I am encouraged by our first quarter results. The overall trends that we saw during the quarter provide promising signs of gradual recovery for the coming quarters. As we navigate what is still a very dynamic environment, marked by an increase in COVID-19 related lockdowns that mainly affected our performance during January, our mitigation actions and the passion of our team to serve our consumers enabled us to deliver the second consecutive quarter of consolidated volume growth since the start of the pandemic.

Once again, despite significant currency headwinds, our ability to adapt to complex operating environments and drive efficiencies across the entire organization enabled us to protect our profitability, leading to a consolidated operating margin expansion of sixty basis points. While 2020 was a year of resiliency and transformation for Coca-Cola FEMSA, we aim to make 2021 a year of capitalizing on opportunities across all of our strategic fronts. On today's call, I will briefly review our first quarter results, expanding on trends and our performance across key markets. Then I will hand the call over to Constantino, who will guide you through each division's results and expand on raw material trends, hedging strategies, and initiatives that we are implementing to ensure our solid cash flow generation and disciplined approach to capital allocation, including dividends and CapEx.

Reviewing our results, consolidated volumes increased 0.9% versus the first quarter of 2020. Notably, this also marked a 0.6% increase versus our volume for the first quarter of 2019. This increase was driven mainly by volume growth in Brazil, coupled with double-digit growth in Guatemala and Argentina, as well as significant sequential recoveries in Colombia, Costa Rica, and Nicaragua, which achieved positive year-over-year volume growth. As we better manage lockdowns and their effects on consumer demand, we continue to see improvement across beverage categories in most of our territories. The performance of our sparkling beverage category continued to accelerate and outperform our consolidated volumes. For the first quarter, this core category grew 3%, led by 1.4% volume growth in brand Coca-Cola and 9.9% growth in our flavor brands.

Both water and personal water volumes declined, driven by mobility restrictions and unfavorable weather. While our still beverage category increased 4.3% year-over-year, driven mainly by the solid performance of our South American division. With regards to our sales volumes and channels, the traditional trade remained very resilient with the on-premise channels recovery continued to be hindered by lockdown imposed during the quarter. We continue to see restrictions on on-premise channels. However, compared with the previous years, we have been able to offset the resulting reduction in our client base, as the monthly average of active clients has rebounded to pre-pandemic levels. Let me now expand on our performance in our core markets of Mexico and Brazil. In Mexico, after a challenging start to the year, we saw improving volume and channel trends in March.

January was especially tough due to the implementation of stringent social distancing measures and lockdowns in approximately 80% of our franchise territories, including Mexico City. By February, we started to see easing restrictions, and during March, with Mexico City still under partial restrictions, several states reopened, allowing mobility to recover significantly. This factor, combined with our commercial initiatives, enabled us to significantly reduce the year-over-year volume gap, closing the quarter with a low single-digit volume decline. To give you a sense of the restrictions impacting Mexico, our volume in states without lockdowns increased 2.1% during the quarter. We expect the current mobility projections and additional portfolio and commercial initiatives will enable us to reach our 2019 volume baseline for the full year of 2021. Brazil remains hard hit by the pandemic.

During January, we saw the implementation of stringent social distancing measures, which eased during February, only to become stricter by late March, mostly affecting the performance of on-premise channel. However, the traditional trade channel remained resilient and was able to grow versus the previous year. This allowed our sparkling beverage category, category to grow 3.8%, led by both brand Coca-Cola and flavors. Our dual pack strategy is paying off handsomely, as these presentations grew almost 7% versus the previous year. Notably, our low sugar portfolio grew double digits as well. Returning to our consolidated top line results, our total revenues declined 1.5%. Our pricing and revenue management initiatives continued to be offset mainly by unfavorable currency translations and easing price mix headwinds.

Notably, excluding currency translation effects, we would have generated comparable top line growth of 5.4% for the quarter. Importantly, our raw materials hedging strategies, coupled with our aggressive cost cutting and savings initiatives, enabled us to offset unfavorable price mix effects. The depreciation of most of our operating currencies was compared to the US dollar and higher concentrate costs in Mexico. Additionally, our first quarter 2020 included an extraordinary positive effect in Brazil of 455 million MXN, resulting from a favorable decision from the Brazilian authorities to reclaim tax payments. Despite this tough comparable base, our operating income increased 3% versus 2020 and 3.2% versus our 2019 baseline.

To give you a sense of substantial currency headwinds we faced during the quarter, excluding currency translation effects, our operating income would have increased 10.6% as compared with the first quarter of 2020. While our operating cash flow declined 3.1% year-over-year, it is 3.1% higher than our 2019 baseline. Finally, our controlling net income increased 23.7% year-over-year, driven mainly by operating income growth, coupled with a decline in interest expenses. Importantly, this included a one-time expense of MXN 1.5 billion during the first quarter of 2020, related to our successful debt liability initiatives. Altogether, these results reflect the story of consistent proven execution, delivering positive numbers while navigating very challenging and overall environments.

We are confident that we are positioning our company for long-term success, guided by our clear strategic priorities. First, execute our comeback plans and successful COVID-19 mitigation actions that we rolled out during 2020. Second, build a portfolio for every occasion, leveraging affordability to continue strengthening our competitive position across markets and channels. Third, our overall digital transformation, accelerating the deployment of our strategies across all of our digital fronts. Fourth, foster a collaborative culture that attracts and develops the best talent, enabling the right set of organizational capabilities to achieve our purpose vision. Finally, we continue to assess potential inorganic opportunities, growing our company while maintaining our disciplined approach to capital allocation. For the remainder of the year, we aim to continue recovering ahead of the overall economy and the industry.

To this end, we are rolling out a set of initiatives across our territories to sustain our momentum, capture at-home consumption, and leverage our affordability and digital initiatives. On our previous conference call, we expanded on our strategies for Mexico, capitalizing on affordability and home delivery to regain growth. Our recent home delivery results show this strategy is working. For example, we launched more than 100 new routes during the quarter, reaching more than 1,000 routes in Mexico, and we increased our home delivery volumes by 9% and our revenues by 19% year-on-year. Our home delivery routes are rapidly increasing their productivity, average ticket, and sales. For the rest of the year, we plan to continue seizing home delivery potential with the new routes and digital enablers to accelerate home household recruitment and top line growth.

As we carry on building an affordable portfolio for every occasion, we are on track with the rollout of 2.5-liter returnable Universal Bottle, or Botella Única, and we expect to begin the rollout of 500 mL returnable glass bottle in the Universal Bottle format very soon. On the digital front, our chatbots-enabled business WhatsApp platform is currently serving more than 300,000 clients in Mexico, Brazil, and Guatemala. This platform is enabling seamless order taking with an enhanced customer experience and lower level of cost to serve. Through these initiatives, we expect to increase sales by expanding customer service window to 24/7, improve their value offer and customer experience while enhancing our overall efficiency and productivity. Now, let me update you on two markets that are achieving remarkable performance and outstanding results, Guatemala and Colombia.

Beginning this quarter, in our earnings release, you will see a breakdown of volumes, transactions, and revenues separating Guatemala from our Central America South territories. Today, Guatemala represents our fourth largest market in terms of revenues, and its volumes grew 19% versus the previous year, despite the effects of the COVID-19 pandemic. This growth reflects our focus on developing a winning portfolio, driving affordability to better serve consumers' demands, and as part of the strategy, we rolled out our flagship two-liter refillable PET bottle, as well as an expanded coverage of 12-ounce returnable glass. This resulted in substantial market share gains that enabled us to achieve market leadership in the non-alcoholic, ready-to-drink beverage category during 2020.

By capitalizing on our fundamentals, excellence in execution, affordability, portfolio innovation, and route to market transformation, Guatemala has delivered a compound annual volume growth rate of more than 10% over the last three years, while increasing our share of sales by over 10 percentage points, and the Coca-Cola Company's Execution Index score by more than four to 15 percentage points. These fundamentals are also driving our solid results in Colombia. Specifically, we are rolling out a strategy that is focused on, first, enhancing our point of sale execution. Secondly, building a solid, affordable portfolio. And third, strengthening our route to market, all of which is based on a sustainable approach to business and a collaborative culture. Our point of sale execution is focused on increasing the number of clients with a customer-oriented plan to maximize our cooler base.

With regards to portfolio, we are driving returnable presentations through the rollout of our universal bottle and one liter returnable glass bottle. Additionally, we are strengthening our position in juices, flavored water, and tonic waters through over 20 new launches in these attractive categories. As a result, we have gained share in colors, flavors, and juices in this competitive market. Finally, we are increasing our service level and frequency through innovative route to market models and digital platforms, resulting in a significant reduction of our out-of-stocks. On the digital front, we are beginning the rollout of our chatbot-enabled business WhatsApp app platform, and we already serve over 9,000 home delivery clients. As a result of these initiatives, our Colombia operation is achieving an inflection point for both its top and bottom lines after navigating very challenging years.

As we announced on our previous conference call, we are very encouraged by our redesigned distribution partnership with Heineken Brazil. As the approval process progressed, we now expect the new distribution agreement with Heineken Brazil to become valid as of next Friday, April thirtieth. However, although initially we expected to begin the transition during May, given that Brazil has continued to face a more challenging COVID-19 environment, said transition may experience a slight delay and could be expected to begin during the third quarter.

We will continue to provide any updates on this transaction as more information becomes available. In summary, we continue to successfully navigate a complex, dynamic environment. Guided by our shared purpose of refreshing the world anytime, anywhere, we're taking the right steps to create key avenues for growth and value creation for years to come across our territories. With that, I will now hand the call over to Mr. Constantino Spas.

Constantino Spas (CFO)

Thank you, John, and thank you all for joining us on today's earnings call. I will now expand on our division's first quarter highlights. In Mexico, our top line remained flat, driven mainly by a 2.7 volume decline, as pandemic-related lockdowns were still impacting this market, as John previously described. These factors were offset by average price increases resulting from headline pricing and our revenue management initiatives. Our ongoing cost and expense management initiatives continued to drive efficiencies and savings, helping us to expand our operating margin. We believe that many of these savings are sustainable and will help us to continue protecting our margins in this market during 2021. Importantly, in Mexico, we continue to focus on our capabilities on returnable, multi-serve presentations, which continue to achieve double-digit growth in this market.

Moreover, we will continue to boost profitability through our Magic Price Points and our expanding refillable presentations and digital capabilities. For the coming months, we expect a sequential recovery, particularly in the second and third quarter, where we will cycle easier comparables. We're confident that we remain on the right path to continue protecting our margins while delivering top line growth in a positive way. In Central America, our volumes increased 19% in Guatemala, as John mentioned, and 3.6% in our Central American South territories. Growth in Nicaragua and Costa Rica was partially offset by a decline in Panama that continued to be, during the quarter, very affected by lockdowns and the impact of COVID-19.

On the pricing front, our average price remained flat, as our revenue management initiatives were partially offset by the negative currency translation effect from the translation of our Central American currencies into Mexican pesos. We're very encouraged by the solid top-line growth achieved in the region, and we will continue to monitor, you know, both the lockdowns that are occurring in Panama as well as Costa Rica and Nicaragua, as they tend to offset our great performance in Guatemala recently in the past few months. So consequently, our quarterly revenues increased 1.8% in the Mexico and Central American division in consolidated terms. Despite a still challenging environment and volume contractions in Mexico, our operating income in the Mexico and Central American division increased a solid 27%, and our operating margin expanded by 330 basis points.

While our operating cash flow expanded by 170 basis points. This expansion was driven mainly by our focus on driving cost savings and operating expense efficiencies, coupled with successful raw material hedging strategy. Now we move on to our South American division. Our 3.8 volume growth was driven mainly by volume increases in Brazil and Colombia, together with an outstanding volume increase of 20.9% in Argentina, while our volume in Uruguay reported a slight contraction. In addition, despite a much more restrictive environment and reinforced lockdowns in Brazil, we were able to continue delivering positive volumes and gaining market share. Our revenue management initiatives and volume growth in this division were offset mainly by currency headwinds, driven primarily by a 16.6% unfavorable translation effect from the Brazilian real.

These headwinds, coupled with unfavorable price mix effects and a comparison base that included approximately 275 million MXN of tax reclaims in our other revenue line, led to our top line decline of 5.6% in South America. If we would exclude the currency translation effects, our top line would have increased 11% during the quarter. We continue working to improve our point of sale execution, enhance affordability, and increase our low sugar offer to drive our top line growth. Despite the volume growth in South America, our gross margin contracted 1,050 basis points, mainly driven by currency headwinds across our operations, coupled with unfavorable price mix dynamics. Our operating income for the division declined 33% by normalizing the extraordinary effect.

However, by normalizing the extraordinary tax effects of MXN 455 million that were included in the first quarter of 2020, our operating income would have declined 16.4%, mainly affected by these currency translation effects. For 2021, we expect to redouble our efforts to protect the margins through efficiencies and our successful raw material hedging strategies. To give you a sense of these strategies, we have to hedge 100% of our PET needs and more than 85% of our aluminum needs in Mexico at prices that are below what we paid in 2020. We have also hedged more than 65% of our sugar necessities in Brazil at more attractive prices. We believe these strategies will help us to partially offset raw material volatility across our markets.

I will now expand on our financial results, which reflect our initiatives to strengthen our balance sheet and financial position. On our interest expense, we recorded a significant reduction as compared to the previous year, driven mainly by the effect of a one-time interest expense related to the debt prepayment of a U.S. dollar-denominated bond performed during the first quarter of 2020. This reduction was partially offset by a reduction in the foreign exchange gain, as our net debt exposure in U.S. dollars significantly benefited from the depreciation of the Mexican peso during the first quarter of 2020. In addition, we recorded a reduction in our interest income related to a lower gain in our financial instruments related to a decline in interest rates. Finally, I want to underscore Coca-Cola FEMSA's strength as reflected in a strong balance sheet.

As of March 31, 2021, our net debt to EBITDA ratio closed at 1.01 times, compared to 1.13 times by the end of 2020, while our cash position was more than 48 billion MXN by the end of the first quarter. Additionally, highlighting the strength of our cash flow generation and our confidence in Coca-Cola FEMSA's solid financial position, at our annual shareholders' meeting on March 19, our shareholders approved the proposed ordinary dividend of 5.06 MXN per unit. 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 its first installment to be paid on May 4, 2021.

With regards to CapEx, we expect a normalization of our investments as compared to the previous year. We have budgeted a ratio of 6.5% to revenues for the year as we continue to focus on increasing our affordability capabilities across markets. Importantly, we'll take a very disciplined approach to CapEx, using our cash control tower methodology to ensure solid cash flow generation for the year. Finally, I am very encouraged by our ability to deliver solid volume growth in markets where pandemic-related lockdowns have decreased.

Although it is still an uncertain environment, we're very well positioned to drive the recovery during 2021. We will further focus on identifying efficiencies and improving our operating performance to deliver positive results, and continue positioning our company as a market leader in the countries where we operate. With that, I will hand now the call back to John for his final remarks. Thank you very much.

John Santa Maria Otazua (CEO)

Thank you, Constantino. Our company has undertaken profound transformation over the past years, renewing its purpose, culture, and strategy. We are confident that we have the right talent, capabilities, and initiatives to deliver long-term growth and shareholder value.... Although the overall operating environment remains very dynamic, we are encouraged by the overall trends and strategies that we will be continuing to roll out in the upcoming quarters. Once again, our top priority is to protect our employees, ensuring a safe work environment while supporting our clients and communities. Additionally, we are especially encouraged that all of our territories delivered volume growth in March, and we are seeing consolidated double-digit growth in April. This positive trend reinforces our confidence that we are on the right track to continue our business recovery. Thank you for your continued trust and support. Operator, I would like to open up the call for questions.

Operator (participant)

Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signals to reach our equipment. Again, you may press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Isabella Simonato with Bank of America.

Isabella Simonato (Equity Research Director)

Hi, good morning, everyone. Thank you for the call and the questions. My question is more related to the mix, right? We saw that affected top line dynamics pretty much across the board and most importantly in South America. I'm wondering how you're seeing the evolution of it, right? Considering that in terms of the rollout, right, of vaccination things are relatively slow, right? How can we think about the mix of channels and the mix of presentations, right, throughout the year?

And in that sense, how what's the pricing strategy, right, to offset the cost pressure? I understand you are relatively well hedged in the main commodities, but I understand that given the currency and the rally in commodities in general, you will face cost pressure, not only this year, but also in two thousand and twenty-two. So how you're seeing pricing and actually real price increases to consumers to improve profitability? Thank you.

John Santa Maria Otazua (CEO)

Hi, Isabella, it's John. I think, you know, in terms of the package mix, it's very telling. What we've been seeing during the quarter is growth in our multi-serve one-way packages, and we've also seen significant growth in our multi-serve returnable packages. Single serves, both non-returnable, and returnable packages, have been coming up month after month from double digit declines to very low single digit declines in the multi-serve, and pardon me, in the single serve one-way packages, and mid-single digit range in the single serve returnable packages, which is just a reflection of continuing opening of our client base. As of today, and when we look back to last year, our client base is probably only 1% less than what we had last year.

It basically shows a tremendous development of how all our customers have been reopening and how the pandemic has been receding over time. If we think about the mix going forward or looking back, we still have about four to five points of incremental single serve mix that we should see coming through both Mexico and Brazil as we go forward, as these channels continue to open going forward. In terms of pricing, we've always been thinking, and we always have established pricing in line with inflation. We have been taking those prices in Mexico. Mexico has just price increased, took a price increase during the beginning part of April, late part of March. We continue to see volumes recover in Mexico as well.

So, you know, we continue to see, you know, encouraging signs of channel recovery on the on-premise channel, single serve recovery on our package mix, which is our most profitable package, and also continued growth in our average price, you know, average, you know, pack size price. So the mix going forward should be very significant in terms of the improvement we see. Constantino, I don't know if you'd like to add something.

Constantino Spas (CFO)

No, I would add that on top of all that. We're continuing, I mean, to rely much more on our end-to-end analytics platform that allows us to, on top of headline pricing and the price pack architecture that John just mentioned, also continue to optimize with discounts and promotions. In that case, that's very relevant as the consumer behavior is changing every day given the impacts of the pandemic. So we need to continue to rely on our analytics piece in order to be more efficient in the deployment of discounts and promotions, and that evidently translates into pricing also.

Isabella Simonato (Equity Research Director)

No, that's, that's very clear. But just a quick follow-up. But I mean, when we think about even the prices in line with inflation and the mix picking up... Is that enough to pass through the cost pressure across the board, especially when Coca-Cola is also increasing concentrate prices? Overall, do you think margins can this year, and especially in South America, be similar or even higher than what we saw last year?

Constantino Spas (CFO)

In the case of South America, I mean, let's understand one thing. You know, the main headwind during the quarter was a very tough comparison versus the first quarter of 2020, that included a tax benefit of approximately MXN 455 million. That's significant, right? Coupled with the unfavorable currency translation and price mix effects that we just expanded on. I think that we're optimistic, to your question, about the outlook, that we're able to protect the profitability for the year. If we exclude the extraordinary effects, we have hedged our main raw materials to protect those margins. Currently, we're hedging most of our sugar needs at prices that are around 12% below what we paid in 2020.

And the currency, in currency terms, we have hedged approximately 27% of our needs at around 5.4 reais per dollar. If you add to that the effect of the beer transition, that should be less than 50 basis points at the consolidated level that we initially guided for the year, I think that we were very well positioned to protect those margins in the case of Brazil. And also, if you look at Mexico, first of all, raw material hedging strategies, I think, have been quite successful. Despite the increasing oil prices, our PET needs are fully hedged at a very attractive price that are even lower than what we paid in 2020.

In addition, our teams have done an impressive job in implementing cost and expense efficiencies, mainly in maintenance, marketing, and freight costs. We believe that a significant part of these efficiencies are sustainable for the future. If you look at PET and aluminum, we're hedged at prices that are around 5%-10% below what we paid in 2020. If you couple that with what John expanded on pricing in Mexico, slightly above the inflation, considering all the discounts and promotional efficiencies that I mentioned, and in line with inflation in South America, I think we're confident that we're capable of protecting our profitability during the year. I don't know if that adds some more color to your concern, but I think that we're pretty confident that we're capable of protecting the profitability.

Isabella Simonato (Equity Research Director)

Sure. No, that's super helpful. Thank you very much.

Operator (participant)

Thank you. Our next question comes from Carlos Laboy with HSBC.

Carlos Laboy (Managing Director)

Yes, thank you. Good morning, everyone. John, Constantino, could you please expand on the adoption of your B2B platforms in Mexico and Brazil, and also maybe shed some more light into where you stand, what stage of development you're at in terms of your digital capabilities in Colombia?

Jorge Collazo Pereda (Head of Investor Relations)

John, Constantino, you want to take a crack at it?

Constantino Spas (CFO)

I think you're very passionate about it. But yeah, sure. I mean, let's... I'll start, and then I'll let John comment on some aspects of it. If we look at it from a digital initiative perspective overall, let me give you some interesting, you know, highlights. I think, first of all, we're working very hard on the pure digital player fronts, right? And we're growing triple digits versus previous year, for example, in Mexico. And these include, you know, all the pure players, the Amazons, the brick-and-click, like Walmart, the aggregators, like Cornershop, and the food service aggregators, like Rappi and Uber Eats, right? So on that front, we're growing triple digits.

We're very, you know, we're very focused on continuing to develop this channel, which is a reality and channel where we need to continue to improve and get more sophisticated in the way we handle the channel. And that is something that has been rolled out in all of the markets, particularly Mexico, Brazil, and Colombia, to your question. On the other hand, in our trade omni-channel capability, we've been implementing WhatsApp with business as a contactless selling method, as you all know. In the case of a chatbot-enabled WhatsApp platform, it's currently serving more than three hundred thousand customers, of which two hundred and twenty thousand customers are in Brazil, and growing very rapidly, eighty thousand in Mexico, with a very ambitious plan to grow to a hundred and fifty thousand customers in Mexico very, very quickly.

We have been managing over 15,000 orders daily, which is equivalent to 200 presellers in terms of order entry. So today, that is, you know, about the size of a very relevant region in terms of presellers, when you compare the amount of orders that we're experiencing through our platforms. And during the pandemic, we have also improved our value offer by adding options and expanding the time window to place an order for customers with our B2B web and app developments. And on the other hand, it's not only about WhatsApp.

There are some customers that continue to rely on URLs or a platform that's called Juntos. It's a real-time customer development relationship portal, where we have price, promotion, segmentation capabilities, and that has been rolled out in basically most other markets with a couple of exceptions, such as Nicaragua and other markets in Central America, but we will eventually roll that out.

And then we have also sped up the development of an omni-channel platform as a response of the pandemic, combining trade and at-home solutions to capture the full value of the market. On the home delivery front, Carlos, we've also been, as John mentioned in the initial remarks, expanding our home delivery channels in Mexico. And a key element of that expansion and yet the, I would say, improved performance, is also the digitalization of the home delivery routes, which is another element that's very significant in terms of our technological developments. And all of these developments, as we have mentioned before, sometimes we test them in one lead market, but at the same time, those tests inform the deployments in other markets. So far, Brazil has been on the cutting edge of that, but it is not only limited to Brazil.

So let me give you an example of something that we are implementing in Brazil, that we started testing in Colombia, which is our promotional push capabilities through WhatsApp. We have been able to test that in Colombia, has proven to be extremely successful, and now we're enhancing once more our most advanced digital platform in the company, which is the Brazilian WhatsApp deployments. So as you can see, we're working in a synergistic way across our markets. The intent is to continue to roll out in all of our markets, where the market conditions and the market structure permits. I don't know, John, if you want to expand on particular topics, since you're very familiar with this.

John Santa Maria Otazua (CEO)

I know. Carlos, how are you? Look, I think, you know, stepping back on this, today, we have, you know, a very significant capability on what I would call, you know, our B2B platform, our WhatsApp platform, which is conversational commerce, okay? And it's tied in directly to our transactional system. Today, we have three hundred thousand accounts on it. The important thing about this is that, you know, we have two hundred thousand accounts in Brazil, and that's probably about 40% of all our customer base. And what we're experiencing is an uplift in orders per month and a number of per month by putting and implying this service to our consumers and giving them twenty-four/seven capability.

But also we're looking at, you know, a higher, you know, ticket size, as well as expanding number of items per order. So we're getting it both vertically and horizontally in terms of development. In Mexico, we're out to about 80,000-90,000 accounts right now. But more importantly, I would say that we've been working very hard and diligently on making sure that we can scale this terrific platform across all of Coca-Cola FEMSA, and we'll be in a position to do so by the end of the second quarter. So we'll have that capability in all of our important markets, Guatemala, Colombia, et cetera, to be able to start conversational commerce with all our accounts. And I think that's really, really important.

By the end of the year, we should have integrated omni-channel capability in Brazil, and very shortly after that, in Mexico. And, we're also looking at rolling out digital payment systems also throughout, Brazil and shortly after in Mexico, towards the end of the second quarter. So I think, you know, we're moving fast and we're moving aggressively. And, we're also testing, along with the digital payment platforms, differentiated and increased categories, multi-categories in Brazil. As you know, in Brazil, we're looking at also not only doing beer, but we're also looking at doing spirits, and we're also looking at doing some other type of categories as we are testing some salty and sweet snack platforms that are working well for us.

So, you know, we're complementing, you know, our digital capabilities with expanding categories and distribution of categories throughout all Latin America. And so, you know, I'm excited about this, and Constantino talked about our home delivery sales in Mexico, and we're looking to increase that platform by about 40%. But what was really interesting, as we digitize with this platform, we're seeing a revenue increase of double-digit rates in each household that we go to. And doing this, you know, with a much... with a digital platform and digital payment systems, which allows us the analytical base to understand how and what we sell into at least a million homes in Mexico coming shortly. So you know, the developments across all the digital platforms are very significant. Am I still on the line?

Carlos Laboy (Managing Director)

Oh, that's really, that's really helpful. Thank you so much.

Constantino Spas (CFO)

Yep. You're welcome.

Operator (participant)

Thank you. Our next question comes from Marcella Recchia with Credit Suisse.

Marcella Recchia (Senior Equity Research Analyst)

Hi, John, Constantino. Hope you are well, and thank you for taking the questions. I have two questions. First, on Colombia, could you provide us an update on the status of the joint distribution agreement with ABI? And secondly, on Brazil Beer, if you can comment on the percentage of your last year's beer volumes that you expect to retain after the redesigned deal with Heineken starts to kick in, and which and when other brands are expected to be introduced? Thank you so much.

John Santa Maria Otazua (CEO)

Sure. Let me start with the first question about Colombia. As you saw last Friday, we have to go through the process of looking for approval with the SIC in Colombia for the joint distribution of ABI and Coca-Cola in Colombia. That distribution agreement was denied in the first instance. You know, the Colombian government has put up certain objections that we will be addressing, and we have a timetable to address those over the next two weeks. We fully intend to go back and work with the Colombian government to understand what their concerns are, but we fully are confident that we can, you know, we address those.

As there are many other companies that have joint distribution platforms throughout the country, and we think that the overwhelming benefit for the consumer and client in Colombia would be very beneficial. And I think it's just a matter of working with the Colombian government to be able to do so. Constantino, do you want to add something? I don't know if

Constantino Spas (CFO)

I think that covers it, John. We continue. You know, we're convinced that this could be positive for the industry, so we're gonna make sure that we exhaust all of our, you know, discussions with the authorities and put on the table a lot of points of view and the value that these type of associations could bring to the Colombian market and to the Colombian consumer. I think we still need a few more weeks up in front of us in order to have a final point of view and a final position on that from the authorities. This is just the initial stage.

John Santa Maria Otazua (CEO)

Yeah. And your second question on Brazil beer, I think, well, no, we expected the transition to start sooner, given the complications of COVID in Brazil. You know, this is obviously gonna drag out a couple of months. We still fully expect this will take place during the latter part of second quarter or the beginning of third quarter. As we had discussed before, there will be a little lag in volume given the disruption and the changeover between us and the Heineken platform. We thought, and we still project, that if it were at the same time, you know, we would have a margin hit consolidated of about fifty basis points.

That obviously, by this, by the delay, is going to be less affected for the year and it's going to give us more time to recover during this year, you know, or not have it as impacting this year and recover next year, in a faster manner. I don't have an expectation on the volume front, Constantino. I don't know if we

Constantino Spas (CFO)

Well,

John Santa Maria Otazua (CEO)

Discussed that before.

Constantino Spas (CFO)

No, I would focus more on your question around portfolio. And I would like to elaborate on that. I mean, we're clearly extremely happy with the portfolio that we are building with Heineken, not only on the current brand, but as we mentioned in our previous call, there are some interesting innovations and interesting brands and launches that we will put through our platform with the Heineken company. But at the same time, the way we're looking at this, and that's the way we look at business overall, it's consumer and customer centric, right? So when you focus on your portfolio from a customer-centric point of view, there are clearly some interesting spaces that are going to...

And we're working on it with other brewers in order to provide the best value proposition or a platform to our retailers, and at the same time for them to, you know, to be able to deliver the best value proposition to their consumers. We're currently ongoing conversations with a series of other international brewers, as well as some interesting ideas on local brands. This is ongoing, and we will be able to deploy this, no doubt, in the upcoming months. I think we're gonna end up with a very solid portfolio. A portfolio that covers, you know, all the way from economy to super premium segments in Brazil that are very relevant, with different type of beer offerings.

And at the same time, this is complemented by the work that we're doing in expanding the Diageo in Brazil on other categories, right? On spirits. So if you look at it from an on-premise, customer-centric value proposition delivery, I think that we, in the near future, are gonna have an extremely solid proposition for our customers. And that's where we would like to focus our attention. I don't know if that, you know, helps and provide some color for you.

Marcella Recchia (Senior Equity Research Analyst)

Sure, super helpful. Thank you very much.

Constantino Spas (CFO)

Thank you, Marcella.

Operator (participant)

Thank you. Our next question comes from Álvaro García with BTG.

Álvaro Garcia (Associate Partner)

Hey, good morning. Thanks for the space for questions. A couple questions. My first one's on gross margin in South America. I understand there's a specific one-off, but I was wondering if you could break down, Constantino, how much of the decline was Brazil and how much was Argentina? Sort of trying to break down the moving parts within that. And on the pressure in Brazil specifically, you know, how much is due to channel mix or how much is just the FX transaction headwind? That's my first question.

Constantino Spas (CFO)

Well, I'm gonna have Jorge answer that one.

Jorge Collazo Pereda (Head of Investor Relations)

Yes, yes. Thank you. Thank you, Constantinos. Yes, of course. So Álvaro, as you know, we don't disclose by country, but you can certainly consider that, you know, most of the decline at the gross margin level for South America this quarter came from Brazil, right? We approximately had for Brazil this quarter a decline on the gross profit of approximately 20%. But as you can see that this comes from the decline of having this one time of, that's, that's very important, right? So I would refer to the comments that Constantino mentioned on our expectations for profitability in South America going forward, right? I think we have this quarter a very tough comparison.

But as we move along to along the year, we will have easier comparison basis, and I think we are on stretching an inflection point on profitability in South America, right? As you know, the second piece that has an important effect on profitability in South America continues to be Argentina, right, where we continue to face a challenging raw material, a challenging decline in terms of both top line and, of course, in terms of currency.

Álvaro Garcia (Associate Partner)

Great, thanks for that. And then my second question is on Fuel for Growth. I was wondering if you could perhaps provide an update on what should we expect maybe in terms of further restructurings or further savings from Fuel for Growth? Just a general update there. Thank you.

Constantino Spas (CFO)

Our Fuel for Growth program continues, you know, as we have planned. Most of the efficiencies that were initially you know diagnosed and have a plan accordingly to the magnitude of the efficiency that we wanted to capture are either in place or there's slightly more there, but in terms of reorganization, although this is an ongoing, you know, dynamic in any organization, most of our major restructurings that we've done are already in place. We still need some small adjustments that are basically driven more by the operational dynamics, but overall most of the major restructuring continues, is already in place. We still have some improvements and some efficiencies to be captured in manufacturing in some plants.

But those are plants that are already been mostly executed. And so I feel very comfortable where we're at, and it's already part of our business culture. So it was initially a program, and today it's part of a continuous dynamic in terms of efficiency. At the same time, and in line with that, we have also starting to deliver and implement our zero-based budgeting initiative in the organization. And that is still incipient in the process of implementation, but we'll definitely provide some updates in the upcoming earnings call. So it's more comprehensive than just the restructuring that we did initially.

Now it's expanding into zero-based budgeting, where we have identified some interesting efficiencies that we can execute behind spend, most importantly, and a lot of learning from our COVID-19 pandemic. You know, these are times where some of your paradigms and some of your operating principles are stressed, and you have identified ways of doing this in a much more efficient and effective way, and those are learnings that will continue to be implemented through our, you know, day-to-day business going forward. I don't know, John, if you have a,

John Santa Maria Otazua (CEO)

Yeah. I'd like to just compliment a couple of things, John, but this is a process, and it's been a program that's been in place for the last three years. And at its heart, you know, is a change in the culture of the company, and one of the biggest components of which is the functionalization of the company. And obviously, we've targeted a series of restructurings back then, of which we are now complete. We don't foresee any further restructurings going forward. But we've seen some enormous progress, not only on the cost side, but on the cultural side.

You know, over the last year, you know, we had accumulated, we've taken out from this from our, you know, supply chain savings, probably $60 million in 2020 alone, and another $56 million before that. On the organization cost front, we had taken out about $80 million over a two-year combined or three-year combined total. Now, our total savings last year was about $160 million to $180 million worth of cost savings, given all this Fuel for Growth focus that we've had. But I think more importantly, is that we've now allowed for our functions to start, you know, working collaboratively across all our territories.

And we've instituted what we call, you know, our functional communities, which allow each community to participate in a program or a project that would increase our efficiencies across that particular function. And that's led to enhanced digitization, enhanced implementation of systems and increased efficiency across all of our processes. And I think that that's really, really important. And as we go forward, okay, you know, internally on our culture and our digitization process, what we have in place today are about 27 key projects, you know, that we're looking at for digitization, which we have 10 agile teams working on currently. And so the progress behind what we've seen in the past-...

Coupled with this new culture of functionalization, enhanced with agile process inside the company, makes it, I think, something that's gonna be sustainable and allow for increased capabilities and also increased continued margin support. So I think, you know, the transformation for Coca-Cola FEMSA continues from two years to today and is accelerating across a lot of different fronts.

Álvaro Garcia (Associate Partner)

It's great to hear, and certainly visible in results, in across the board on the S&A front. Thank you very much, John.

John Santa Maria Otazua (CEO)

Thank you, Álvaro.

Constantino Spas (CFO)

Thank you, Álvaro.

Operator (participant)

Thank you. Our next question comes from Ulises Argote with J.P. Morgan.

Ulises Argote (Analyst)

Hi, guys. Thanks for the space for questions here. A couple of kind of housekeeping items on my side, but maybe any comments you can make on the Mexico outsourcing bill changes that were approved and what kind of impact we can expect from this, maybe, if any? And the second on the CapEx you are guiding here for a slight increase versus the previous years. Can you share a bit on the details on what are the main investments and main projects you will have for this year, and how the CapEx breakdown looks across regions, maybe even in a very broad basis? Thank you.

John Santa Maria Otazua (CEO)

Yeah, thank you. Yeah. Well, this is in terms of outsourcing. You know, we don't see any major restructuring coming out of this new initiatives, and there's no law. I think we're gonna be fully compliant within the time frame established, and it will have some minor administrative adjustments. But we fully expect any of the incremental costs that are coming out of such, you know, new legislation or regulation to be minor, and we'll be able to cover that throughout the year. In terms of CapEx, you know, what we're doing is, I think, accelerating where we're seeing incremental volume and profit. A lot of our capital expenditures is gonna be going towards increasing our returnable footprint for universal bottles. We have an aggressive plan in Mexico. We have an aggressive plan in Colombia.

And we continue to see aggressive investment in Brazil also with increased both universal initiatives. A lot of this also has to do with our digital capability, but our two major focuses currently are, you know, in making sure our affordability portfolio is in place, and also that our sustainability initiatives, you know, turning or looking at recycling, particularly in Mexico, and PET collection capability throughout all of our countries are in place as well. Francisco, I don't know if you wanna add something to that?

I think that's a good summary, John. It's focusing on the market is our first priority, so that's returnables, bottles and cases, and evidently coolers, wherever that is a growth driver, right, in the market. So that's paramount for us. Returnable capability and serving the markets properly on that end. On the other end, digital capabilities, I think we expanded a lot with Carlos's question on that. And then in line with that, there's also an important bucket on IT infrastructure-

Ulises Argote (Analyst)

Mm-hmm.

And, at the same time, with cybersecurity investments that are, you know, they're very, very relevant for us, very important. And as, you know, in a point in time where a company is digitizing much more on an everyday basis, our cybersecurity capabilities need to continue to be enhanced, and we're very serious about it, and we're putting significant resources into, you know, relative terms of what we had to have in the past on those items. So I think that summarizes it.

Perfect. No, very, very clear, guys. Thank you very much for the call.

Constantino Spas (CFO)

Thank you.

Operator (participant)

Thank you. That's all the time we have for questions today. I would like to now turn the conference over to our presenters for closing remarks.

John Santa Maria Otazua (CEO)

Thank you for your confidence and interest in Coca-Cola FEMSA. As always, our team is available to answer any of your remaining questions. Jorge is always available with his team. I think what is very encouraging, again, just to point out, is the continued volume trends that are positive throughout all our markets that we've seen in March and April, and the continued opening of our client base as we go forward. Thank you again for your time and attention. Stay healthy, stay safe.

Constantino Spas (CFO)

Thank you.

Operator (participant)

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.