Coca-Cola FEMSA - Q2 2023

Transcript

Operator (participant)

Good day. Welcome to the Coca-Cola FEMSA second quarter 2023 conference call. Please note this conference is being recorded, and for the duration of the call, your line will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. I would now like to hand the call over to Jorge Collazo, Coca-Cola FEMSA, Investor Relations. Please go ahead.

Jorge Collazo (Director of Investor Relations)

Thank you. Good morning, everyone. Welcome to our conference call to review our second quarter 2023 results. I am here with Ian Craig, our Chief Executive Officer, and Gerardo Cruz, our Chief Financial Officer. As usual, after prepared remarks, we will open the call up to take your questions. Please keep in mind that this conference call may include 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 that can materially impact the company's performance. With that, let me hand the call over to our CEO. Please go ahead, Ian.

Ian Craig (CEO)

Thank you, Jorge. Good morning, everyone. We appreciate you joining us today. Coca-Cola FEMSA delivered another set of solid results for the second quarter. We continue to demonstrate our positive momentum with solid volume performance, resulting from growth across all of our markets. Notably, we continued improving our execution, redoubling our focus on our customers and our consumers, and increasing investments to continue supporting our growth. The first six months of the year have also been important for the Coca-Cola FEMSA senior leadership team to complete our listening tour and set the strategic priorities of our business going forward. As I have mentioned on our previous calls, as part of this process, we have walked our markets, met with key stakeholders, and identified the pain points and the many opportunities that are ahead for us.

We are convinced that we are very well positioned to accelerate the growth of our core business and become our customers' preferred commercial platform. With that, let's review our consolidated results for the 2nd quarter. Our consolidated volumes increased 7% year-over-year, surpassing 1 billion unit cases. This marks the 1st time that our company surpassed 1 billion unit cases in a single quarter. Our volume growth was driven mainly by solid performance in key markets such as Mexico, Brazil, and Guatemala. As was the case during the 1st quarter of the year, these volumes include the integration of Cristal, a bulk water business that we acquired at the end of last year in the southeast region of Mexico. Excluding this integration, consolidated volumes increased 5.2%. Performance across our beverage categories remained strong.

Sparkling beverage volumes grew 4%, while our still beverage and bottled water portfolios grew 7% and 18%, respectively. Our consolidated total revenues grew 7.2% to reach MXN 61.4 billion, driven mainly by volume growth. We achieved this performance despite significant currency translation headwinds, driven by the appreciation of the Mexican peso. To give you a sense, excluding currency translation effects, our total revenues increased 16.9%, underscoring how strong our underlying performance is. Our gross profit increased 7.9% to reach MXN 27.3 billion, leading our gross margin to expand 30 basis points. This expansion was driven mainly by our top-line performance, easing PET costs, and favorable raw material hedging initiatives. These effects were partially offset by an increase in sugar prices across most of our territories.

Our operating income increased 11.9%, reaching MXN 8.6 billion, and our operating margin expanded 50 basis points. Our positive top line, favorable mix effect, and non-cash operating foreign exchange gain related to the appreciation of the Mexican peso, drove this growth. Our EBITDA for the quarter increased 7.8%, reaching MXN 11.4 billion, resulting in an EBITDA margin of 18.6%. Our top-line growth and cost efficiencies drove this performance, which was partially offset by increases in operating expenses such as labor, marketing, and maintenance. I will now move on to expand on key highlights during the first half of the year. In Mexico, our solid performance included record volumes during the months of May and June. A resilient consumer environment, our focus in execution, and favorable weather conditions supported this growth.

Importantly, all of our beverage categories are growing, driven mainly by brand Coca-Cola and our personal water category. We are driving portfolio innovation as well, with two recent launches in the flavored sparkling category: Del Valle Fizz, a low carbonation sparkling orangeade and lemonade, and Fresca Fusión, combining grapefruit and lime with a salty touch that makes it ideal for mixing. Notably, our non-caloric portfolio, led by Coca-Cola Sin Azúcar, grew a solid 14.3% versus the previous year. We also continued to see double-digit growth in the modern trade channel, outperforming what remains a resilient traditional trade. Digitalization in Mexico continues evolving with JUNTOS+, our digital B2B omnichannel plus. As a result of this rollout, 30% of the orders in the traditional trade are now digital.

In Brazil, our volumes continue growing at a solid pace, driven by growth across all of our categories and channels. Aligned with our priorities, we continue accelerating our non-caloric portfolio, with Coca-Cola Sem Açúcar growing 32% versus the previous year. In categories such as energy and water, we continue consolidating our market leadership by strengthening our portfolio with new flavors. With Powerade, our sports drink volume is also growing in the double digits versus the previous year. On the digital front, Brazil continues increasing its JUNTOS+ user base month-over-month. We now reach 237,000 active monthly purchasers. Notably, 60% of our orders in the traditional trade channel are digital in Brazil. In Guatemala, we continue seeing an impressive performance. Our volumes have consistently grown in the double digits, driven by our focus on the fundamentals of the business.

For instance, during the first half of the year, we've added more than 9,000 clients and installed more than 13,000 coolers. All this as we continue to leverage our portfolio's affordability and superior execution to continue gaining share across all of our beverage categories. Aligned with our strategic pillar to remove infrastructure bottlenecks and to satisfy our Guatemalan consumers' growing demand, we are installing a new one-way PET line this year, as well as new returnable bottling lines during the first quarter of 2024. I want to comment on Colombia. After a historic volume year in 2022, a tougher than anticipated macro and consumer environment has slowed our volume space during the first half of the year, being flattish at 0.5% growth.

Nonetheless, despite this challenging environment, we are outperforming the industry as we strengthen our competitive position by gaining share in the sparkling, personal water, and non-carbonated categories. As I previously mentioned, our first half results are in line with our plans, and we are encouraged to enter the second half of the year with positive momentum. Our teams across all of our operations are well-equipped to continue accelerating across all of our strategic objectives, delivering on the growth strategy that we have set as an organization. Speaking of our team and our talent, I want to take the opportunity to comment on our culture, a topic that is very dear to me. As I previously shared with you, one of our six strategic corridors focuses on strengthening our customer-centric culture. This is critical to be our customers' preferred commercial platform.

Aligned with this priority, we are identifying opportunities to, 1, better understand our customers' needs, 2, improve customers' experience, and 3, empower our organization towards a more customer-oriented culture. We are convinced that by measuring the right KPI, as well as empowering and aligning our organizations toward these objectives, we will continue improving our customer centricity, which is a common feature of high-growth organizations. Finally, I want to take a moment to recognize our team in Argentina. Last week, Coca-Cola FEMSA Argentina was awarded by The Coca-Cola Company with the Candler Cup for 2022. The Candler Cup, named after Asa Candler, founder of The Coca-Cola Company and the person who granted the first Coca-Cola franchise, is an important award given to a bottler in recognition for his excellence in execution, coupled with its investments behind its people's development, training, and culture.

Congratulations to the Coca-Cola FEMSA Argentina team, who, working together as one single team with our colleagues from The Coca-Cola Company in Argentina, have made this recognition possible. In summary, we are confident that we're on the right track to achieve our objectives for 2023, as we continue winning in the market and progressing on our key strategic priorities across our operations. With that, I will hand the call over to Gerry to expand on each division's results, as well as progress on our saving initiatives.

Gerardo Cruz (CFO)

Thank you, Ian. Good morning, everyone. Expanding on our division's results for the quarter. In Mexico and Central America, volumes increased 8.9%, maintaining the solid pace of the first quarter. Growth across all of our territories in the division drove this performance. Excluding the integration of Cristal's bulk water business, our volume in the division increased 6.6%. Revenues in Mexico and Central America increased 13.4%, driven by our volume growth and revenue management initiatives. These effects were partially offset by the unfavorable translation effects from most Central American currencies into Mexican pesos. Our gross profit increased 13%, resulting in a gross margin of 47.7%, a compression of 10 basis points year-over-year. This is a sequential improvement from the first quarter of the year.

Top-line growth, raw material hedging initiatives, and the appreciation of the Mexican peso helped to partially offset cost of goods sold pressures. Operating income growth for the division accelerated by 13.7%. This resulted in a slight margin expansion of 10 basis points, driven mainly by our top-line performance, coupled with a non-cash operating foreign exchange gain related to the appreciation of the Mexican peso. Our EBITDA grew 9.2%, with margin declining 80 basis points due to an increase in operating expenses, mainly related to labor, marketing, and maintenance. Moving on to South America division, volumes increased 3.8%, in line with the pace of the first quarter. Low to mid-single digit growth in Brazil and double-digit growth in Uruguay primarily drove this performance.

Our revenue for the South America division declined 2.2%, as unfavorable currency translation effects into Mexican pesos more than offset our volume growth and revenue management initiatives. Notably, when excluding currency translation effects, our comparable total revenues in South America increased a solid 20.3% during the quarter. Gross profit in South America declined 1.6%, mainly due to a currency translation effect, resulting in a 20 basis point margin expansion. This expansion was driven mainly by volume growth, hedging initiatives, and favorable mix. These effects were mainly offset by increases in raw materials costs, such as sweeteners and the depreciation of the Colombian and the Argentine peso. Operating income for the division increased 6.6%, and operating margin expanded 80 basis points as compared to the previous year.

As was the case during the first quarter of the year, our positive top line, coupled with tight expense control across our operations, more than offset higher fixed costs and expenses. EBITDA in South America increased 4.4%, resulting in an EBITDA margin expansion of 90 basis points. Moving on to our financial results, the quarterly comprehensive financing results recorded a significant increase as compared to the previous year. This is explained mainly by an unfavorable comparison base that included a one-off market value gain in financial instruments of 355 million MXN recorded during the second quarter of last year. During the quarter, we recognized a foreign exchange loss of 437 million MXN, driven by the appreciation of the Mexican peso as applied to our US dollar cash position and a lower gain in hyperinflationary subsidiaries.

These effects were partially offset by a decrease in our net interest expense, mainly because of an increase in interest income that was driven by higher interest rates. Our controlling net income increased 6.5% to reach MXN 4.9 billion, resulting in earnings per share of MXN 0.29. It is important to note that our controlling net income for the first six months of the year increased 17.3%, underscoring our positive underlying operations performance in the face of significant currency translation headwinds. As part of our initiatives to generate savings and efficiency, at the beginning of the year, we shared with you a target of more than $60 million in savings to be driven by our supply chain team.

We are encouraged by our progress year to date, as we have achieved savings of more than $35 million during the first half of the year, driven mainly by initiatives to reduce our cost to make and our cost to serve, which exceeded our expectations for the first half of the year. With that, operator, we are ready to open the call for questions.

Operator (participant)

Thank you. As a reminder, if you do have a question, please signal by pressing star one on your telephone keypad. The first question today comes from Ricardo Alves of Morgan Stanley.

Ricardo Alves (Associate)

Hello, gentlemen. Thanks so much for the call. Had a question on the competitive backdrop in Mexico. On an ex Cristal basis, I believe your volume is up 5% or so in the quarter. How do you think that that's comparing to the industry in Mexico? Do you think it's fair to say you're gaining back some share here already, in this first half of the year? Perhaps on that point, if you can expand a little bit, you know, perhaps on your commercial approach, depending on the channel or packs, whatever color you can give on how you're dealing with competition in Mexico, that would be helpful.

My second question, typically, and obviously we tend to focus on the bigger markets, but when you take Guatemala, the other Central America region, Colombia together, it starts to build up, and particularly in Central America, the growth has been pretty impressive. Just wondering if you can talk a little bit about that. I missed the early remarks you made, you guys made, but more interested, particularly in what you're doing in Guatemala, and maybe more important, what is the prospect for this market? What Coke FEMSA can do to further develop the market? Then in Colombia, whatever color you can give, if this is a market where you see big prospects for growth as well. A little bit outside of the Brazil and Mexico questions.

Thank you so much, gentlemen.

Gerardo Cruz (CFO)

Hello, Ricardo. How are you? Thanks for the question. In Mexico, as just a little background, we have been in an environment where we have had about five years of a deteriorating competitive position. As I stated when we started at the beginning of the year, that we needed to stabilize that and start to take a new trajectory, a growth trajectory. We've been able to accomplish that. We've stabilized our competitive position. There's a lot that we're doing. I don't think it's difficult to go into the specifics. In general, it revolves around multi-serve, one way.

Ian Craig (CEO)

... packs, where we're working with a better OBPC, more focused and targeted calendar initiatives. Also, there's work to be done on certain pricing strategies between channels. The brand is so strong, our multipacks are there, our, our flavors are there, and so far, with very targeted adjustments that we're doing, it's responding very quickly. I think the news on Mexico, on the competitive position front, is very positive. We will stabilize that. By year-end, we expect a slight gain, and that's the trajectory that we're going to look into maintaining. When you look at Guatemala is a jewel for us, as well as the rest of Central America. They're a highly profitable market.

In the case of Guatemala, I think I mentioned before, this is a 17 million population country, 17 million-18 million, where our per caps are around 207. It's growing double digits. There's no reason that in the medium term, we cannot take per caps up to 250. We have enough of a differential in share, where there's still a lot of share to capture, as well as organic volume. The story there has been, you know, fantastic. We've grown shares almost 8 points in the last 5 years. Our margins keep expanding, as well as our return on investment capital.

It's a nice little secret that's very within the very large Coca-Cola FEMSA numbers, but now it's already the third largest country in terms of profits for us, and it should continue gaining in importance. I don't know if that covers the points, Ricardo. Colombia, on Colombia, if I may expand, Ricardo, we, as Ian mentioned during the call, we are performing on top of our record volume year, which was 2022, basically in line, a little bit above last year, even considering the slowdown in macroeconomic activity in the country. We do expect some headwinds at the end of the year with the coming out into effect of the sugar added beverage tax that will come into effect in November.

We certainly continue to be very bullish on the prospects of growth in Colombia going forward. We are operating basically at maximum capacity in both manufacturing and distribution capacity, and we are investing importantly for the following years to build up on that capacity because we certainly think that those two are the biggest engines for growth going forward, Colombia and Guatemala.

Ricardo Alves (Associate)

Very helpful call. I appreciate the time.

Ian Craig (CEO)

Thanks, Ricardo.

Operator (participant)

The next question comes from Thiago Bortoluci of Goldman Sachs.

Thiago Bortoluci (Equity Research Analyst)

Yes. Hey, good morning, everyone. Thanks for the call and for taking the questions. Well, actually, to double click, following you up on Ricardo's question on Mexico, right? When I try to break down the top-line drivers, I see strong volumes, but a slight sequential price deceleration, right? How are we seeing the outlook for demand going forward, specifically if you're seeing any slowdown related to the Mexican peso appreciation, the impact on remittances, and how your overall price strategy should behave in a context where your cost inflation is much really decelerating? This is the first question.

The second one, I guess, is a more long-term strategic update on what are the sources of synergies that you are identifying and might be able to explore under this new FEMSA Forward backdrop and joint effort to try to execute and monetize the B2B and the capability that both platforms might have with the traditional trade. Those are the questions. Thanks.

Ian Craig (CEO)

Thank you, Gerry. I think the first point, if I remember correctly, was top line on Mexico and how that is going so far. Right now, our volumes in Mexico are growing around 8%. If you take out the bulk water business, it's 5% growth. So far so good. We don't see any slowdown at all. Volumes are strong. I think we're going into an election year. There's a lot of inflows coming in from Mexico as a whole due to the nearshoring. We're very positive on Mexico. I don't foresee any deceleration or pressure on the top line.

On the contrary, I think the way we've managed to set the new competitive landscape and strategy, our top line and volumes should continue along this pace, barring any unforeseen, you know, climate or adversity. So far so good, and that seems to be going along nicely. In terms of the synergies with FEMSA Forward, like I told you before in another call, there are two very concrete cases where we are collaborating, and it's the case of the JUNTOS+ platform in Mexico, where we are tying in working to tie in FEMSA's or Spin fintech solution. On the payments front, we will be rolling out that as a feature for our trade partners in JUNTOS+, and also in the loyalty plan.

Spin Premia has a very large and robust loyalty plan, and we, what we aim to do is when we roll out the app for version for Mexico in the end of the fourth quarter, our loyalty plan will have a link to the Spin loyalty plan, so the Spin Premia loyalty plan. That only makes it more attractive both for us and for the Spin plan, which it's very simple. The points will be exchangeable not only for products that we manage, both of The Coca-Cola Company and of our third-party portfolio, but also interchangeable for Spin Premia rewards, which have a much wider catalog. It just gives it a lot of added value for our trade clients. That's basically the two large areas or where the largest impact that we have right now, yeah.

I don't know, Thiago, did I cover all points though? Yes.

Thiago Bortoluci (Equity Research Analyst)

Yes, clear. Thank you very much. Thank you very much, Ian.

Ian Craig (CEO)

Thank you.

Operator (participant)

The next question comes from Sergio Matsumoto of Citigroup.

Sergio Matsumoto (Senior Equity Research Analyst of Food and Beverage)

Yes, hi. Good morning. Thank you for taking my question. Ian, you mentioned just now on the JUNTOS+ and you also on your prepared remark about improving customer experience. There's some, you know, nice uptick on the traditional trade adapting the JUNTOS+. Can you give us some anecdotes on how they have improved their experience with you through this platform? That's my first question. The second one is on Argentina, having won the Candler Cup, very impressive. Can you share what do you think were the aspects of your team's performance in Argentina that was most recognized by The Coca-Cola Company?

Given that they operate in Argentina, they have particular challenges, and if there's, if there are any best practices that you can transfer into Brazil or Mexico. Thanks.

Ian Craig (CEO)

Thank you, Sergio. I think, on the first question on JUNTOS+, what we're seeing is, and this I think applies in general to well-established platforms, is when the client has time on his hands, he has the possibility of ordering more items. For us, what is happening is, when we are allowing the client to place an order in the time and channel of their choosing, they're no longer hampered to take the order only when the preseller comes and visits. As you know, our JUNTOS+ model is omnichannel. That's a big difference to our main competitors. What that means is we have kept the preseller visits, and on top of that, we offer the order on the app or WhatsApp chatbot.

Whenever the client enter via our WhatsApp chatbot or our app, they're usually doing that when they have a specific need that wasn't met at the preseller visit and/or when they have more time on their hands. It ends up that our items per store on those orders are larger. What we see is an uptick for us when they're ordering online and an increase on average frequency. They're able to manage, you know, their working capital in a better way. Since we have either flexible deliveries in Brazil, which is, you know, next-day delivery basically across 70% of our territory, or where we have a lot of delivery frequency, such as in Mexico, it's an uptick for them to be able to plan and take their order when they have a time.

We're seeing very positive results on that front, and steadily, more and more of the orders are coming in digitally, Sergio. In regards to Argentina, the Candler Cup recognized three aspects that stood out in Argentina, and this is, you know, as you know, Argentina, it's always a VUCA context. However, they managed to ensure growth and consumption occasions. First of all, they had very high growth on the core, high growth on single serve, good plans on segmentations and returnables, the growth of women in leadership, Coke No Sugar. There were several aspects, so it's not only execution, but there are several minor points such as...

Not minor points, several special points such as single serve, Coke No Sugar, women in leadership that stood out, you know, female talent and inclusion, customer centricity that stood out. All of those practices we share in the commercial forums across Coca-Cola FEMSA. As you know, we have a new position that reports to me, that's the Chief Growth Officer, and they create communities or forums across Coca-Cola FEMSA's commercial and marketing team, where these initiatives are shared. We were very happy and proud for the Argentina team to be recognized with this cup. It's the first time anyone from Latin America has been recognized with this worldwide award from Coca-Cola.

Sergio Matsumoto (Senior Equity Research Analyst of Food and Beverage)

Great. Thanks for the call.

Ian Craig (CEO)

Thank you, sir.

Operator (participant)

The next question comes from Fernando Olvera of Bank of America.

Fernando Olvera (Equity Research Analyst)

Hi, good morning. Thanks for taking my question. My first question is, starting on a consolidated basis, regarding the MXN 1 billion in digital sales that you reached in the first half of the year, if you can comment with the breakdown by country and where you see the main opportunities. My second question is related to Mexico. If you can share your thoughts of how they are performing the different pilot projects that you are doing in their traditional channel, as well as in the B2C and D2C platforms. Thank you.

Jorge Collazo (Director of Investor Relations)

Hello, Fer. It's Jorge here. On your first question regarding the sales on the digital revenues, basically what we have seen there, Fernando, is to reach to those $1 billion sales, we've seen a high level of growth coming from Mexico. Mexico, to give you a little bit of the sense of the breakdown, basically represents about $360 million out of those $1 billion in sales, no? That's a very rapid increase. Mexico has been increasing, as we have been speaking before, no, very fast in the rollout of JUNTOS+. There is a very similar number coming out of Brazil, approximately $370 million in digital sales coming from Brazil. The rest, Fernando, is split between the rest of the countries.

We have, we have Colombia catching up as well with around MXN 30 million, and the rest is split between the rest of the countries. As you can see, most of this is coming from the level of growth because of the rollout of Juntos Plus that we're having with Mexico and Brazil. Yes, and this has been the big focus, the two large markets. That's where we're focusing on for the version four and then the rest of Latam. I think for us, next year, the rest of Latam will be a nice upside for our Juntos Plus platform, and we want to concentrate the rest of this year, and I would say the first quarter of next year on both Mexico and Brazil, which are the biggest countries for us so far.

Fernando Olvera (Equity Research Analyst)

Great. Regarding your pilot projects in Mexico?

Jorge Collazo (Director of Investor Relations)

Sorry, Fer, I think the line is breaking up a little bit. We couldn't hear the second question. Can you repeat, please?

Fernando Olvera (Equity Research Analyst)

Oh, sure. If you can share your thoughts of how they are performing the different pilot projects that you are implementing in Mexico...

Jorge Collazo (Director of Investor Relations)

You know.

Fernando Olvera (Equity Research Analyst)

... channel, as well as in the B2C and D2C platforms.

Jorge Collazo (Director of Investor Relations)

You know, so far, so good, Fernando Olvera. We're adding more partners every day. I think Brazil, we're around 14 partners. I don't remember the amount of partners that we have in Mexico so far, but, in Mexico, our footprint is so much larger than any other competitive platform, than I know we're signing up the largest players, well ahead of our competition. We're very positive on that. As you know, I have mentioned that for these offerings to be of scale, we will need at least five to six years for this to be, you know, around 5% of revenues. As we're growing our core business, year-over-year, and we expect to be in growth mode, it's always a challenge for this to become relevant.

You know, in Brazil, this gets to around almost 2% of revenues because we're growing as well. In Mexico, we're going to be hitting 1% of revenue. They're still small, but when you look at that multi-category piece, it's doubling its size every year, just that we're growing the base business as well. You guys need to have some patience until we reach, you know, that ambition that we have to get to 5% of our revenues. At the rate that we're growing our core business, even though this is accelerating as well, it's gonna take its time.

Fernando Olvera (Equity Research Analyst)

Great. Thank you so much for the call.

Jorge Collazo (Director of Investor Relations)

Thank you.

Operator (participant)

Our next question comes from Alan Alanis of Santander.

Alan Alanis (Managing Director)

Thank you very much, and congratulations on the results, Ian, Fernando, Jorge. A couple of questions. One of them is regarding the lower price of the commodities, sugar, aluminum, and so forth, and the strength of the peso. Could you expand a bit more in terms of how much hedges? Are you expanding your hedges beyond what you usually do, and how much you have already taken advantage of these lower prices of commodities and the strength, particularly on the Mexican peso? That would be the first question. The second question is regarding Argentina, is could you remind us what exchange rate do you use, on the consolidation of Argentina into your balance sheet and ABC, and your risk there, given the depreciation of the Argentine peso that we have seen in the last year? Two very different questions.

Thank you so much.

Jorge Collazo (Director of Investor Relations)

Hi, Alan. Thank you very much for your questions. Regarding commodities for 2023, we are with a very healthy hedging position on PET, basically across all of our operations. We're starting to build a little bit of position of hedging PET for next year.

Gerardo Cruz (CFO)

... We are expecting a benign outlook for PET and aluminum, so we're being careful to stay within the low end of the range of our hedging objective, but starting to see good opportunities to build a little bit more on those positions. On sweeteners, we're basically hedged for HFCS in Mexico, which is an important component of our sweetener expense. Sugar, there's a few alternatives that we have, but in Brazil, we also have a good position, as well as in Uruguay. Basically for 2023, we're a little bit above 50% our sugar needs hedged in 2023 in both countries. That's a little bit on the actual commodity price.

Hedging on the FX front, we have certainly seen a good opportunity in the peso to build up hedging positions. We're basically hedged at 80% of our dollar requirements in Mexico for 2023, and being a little bit more careful to start to build positions for 2024. Regarding your question of the range that we are able to hedge, we continue to look at a 12-month rolling period for hedging on both commodity prices and FX related to cost of goods sold. We haven't changed that, and we do not expect to change that in the near future.

FX hedging for other operations, Brazil, Colombia, and Uruguay, we have a little bit or very close to 50% of our dollar requirements hedged for 2023, and also as well as in Mexico, starting to build position for the first half of 2024, in line with that 12-month rolling period. Going into your second question, for Argentina results, we continue using the official exchange rate to consolidate Argentina. The exchange rate that we used for the consolidating of this quarter was 256.7. We really don't have any other alternatives, because we have to comply with the official exchange rate for purposes of consolidating that business.

We understand that a portion of the economy transacts at the parallel exchange rate. Most of our business, the raw materials that we require, as well as the capital assets that we require for our business, are still done at the official exchange rate. We understand that this represents a source of uncertainty, but that's the exchange rate that we have to use to consolidate that business.

Alan Alanis (Managing Director)

Well, that was a very precise and very comprehensive answer. I really appreciate it. Thank you so much.

Gerardo Cruz (CFO)

Thank you, Alan.

Operator (participant)

The next question today comes from Antonio Fernandez of Barclays.

Antonio Fernandez (Analyst)

Hi, good morning. Thanks for taking my question. Congrats on the results. My first question regarding pricing going forward and overall elasticities that you've been seeing in Mexico. Just a quick follow-up on the JUNTOS+ penetration in terms of customers. Thanks.

Gerardo Cruz (CFO)

Thank you, Antonio. First on your first question regarding pricing, we, as we talked about in the previous few calls, we're trying to focus on sustainable growth in basically in all our territories, and specifically in Mexico, as Ian mentioned during the script of the call. We have been facing share pressure in the past few years. We're trying to stop that share erosion and recover competitiveness in our portfolio. We understand that our main objective and the way that we will continue to improve performance and return of our business is through growth. I want to underscore the word sustainable growth.

In that sense, what we're looking at for the foreseeable future is to price basically in line, at least in line with inflation. Trying to recover that competitiveness, and we've seen very good data points in these first six months of the year regarding the performance of the share of our products. The second question was on JUNTOS+? Yes, I think when you talk about JUNTOS+, you look at it in percentage of orders, about a third of our orders are coming through JUNTOS+. When you look at that in revenues, as you know, this offering goes towards the traditional trade. It's around 16% of our total revenue.

When you look at traditional trade, revenues, Antonio, it's almost a quarter of our revenues of the traditional trade. If we do like a zoom in on Brazil, which is the country that first started with this platform, it's already 60% of traditional trade volumes.

Ian Craig (CEO)

I think the penetration is encouraging. Like I mentioned, Brazil is started with this, but Mexico is accelerating fast, and next year, we should have an uptick in the rest of LatAm market. So far so good with JUNTOS+ in terms of both the penetration and the partners that we are signing up.

Fernando Olvera (Equity Research Analyst)

Perfect. Thanks for the follow. Have a nice day.

Operator (participant)

The next question comes from Luis Willard of GBM.

Luis Willard (VP and Head of Consumer Goods)

Hi, guys. Good morning, and thanks for taking my question. First of all, congratulations on your win of the Candler Cup. My question is on the digital revenues. I apologize if this feels repetitive. As they accelerate, and they seem to be doing so nicely, my question is, at this point, are you seeing any material difference in unit economics from a digital purchase versus, a physical one or a traditional one? More importantly, is if you're seeing those difference already being reflected in your PNL on, more importantly, on the returns of your business? That would be my question. Thank you.

Ian Craig (CEO)

Hi, Luis. Thank you for the comment on the Candler. Like I mentioned, the unit. The driver for us is not a cheaper cost to serve. As you intuitively are pointing out in your question, it is, depending on the market, on the labor cost of the different market, it can be all the way, an average of 20% less cost to serve in the when it comes to the order entry. Sorry, a 20%, so 80% less cost to serve. You know, it's a big difference. However, this has not been our driver, Luis. What we're trying to do is be a higher growth company. We are intent on keeping the omni-channel model.

We're not reducing our feet on the street. The role of the preseller changes as far as the more penetration and orders are taken online, then we're freeing up these presellers to do more of the execution, the introduction of new products and launches, the bringing in of new partners. We want to, you know, we think it's a big advantage to us how we look in the point of sale versus our competition, and that stems from the fact that we are omni-channel. The digital portion of our platform allows us to bring in more business. Like I said, it's higher IPS, it's at a lower cost. Really, when it comes to execution at the point of sale, the having that relationship still makes a lot of difference.

For new product introductions as well, the new launches, entering into different categories, developing co-channels, it makes a lot of difference having those specialized structures and our presellers. We're not seeing a difference in the cost to serve because of that. We're maintaining the omni-channel structure. Like I mentioned, in terms of revenue, since it's still in the incipient stages, it's around 16% of total revenue. It hasn't made that big of an impact so far, but we measured those digital revenues, and you can see a larger ticket. In those digital revenues, when you compare them to the traditional or salesman controlled points of sale, when we look at those control points, we do have an uptick.

A portion of that, which is not irrelevant, is incremental for us when you do those analysis.

Luis Willard (VP and Head of Consumer Goods)

Thank you. I know you just gave me too much credit thinking about costs, I was looking for a ticket and higher orders. Thank you. Good day.

Ian Craig (CEO)

Thank you, Luis.

Operator (participant)

The next question comes from Felipe Ucros of Scotiabank.

Felipe Ucros (Director)

Thanks, operator. Hi, Ian, Gerardo, and team. Thanks for taking my question. Firstly, maybe I have an update on partnerships for Juntos. Obviously, you know, your partners in Mexico are pretty defined at this point with Spin and Premia, but just wondering if you have made any advancements on talking to partners for loyalty and payments in the other regions that you can give us an update on. Of course, you may not be able to give us an update on the conversations. Just looking for any updates there. Also a question on Argentina. Have you done or are you looking to make any repatriations of capital ahead of a possible devaluation after elections?

Ian Craig (CEO)

Hi, Felipe. In terms of our partnerships on multi-category, I think, you know, like I mentioned, Brazil is around 14 partners; Mexico, one, two, three, four, around 10 partners. These are partners all with contracts, you know, aligned. We're entering different categories. Jorge, you wanna comment? We're, we're happy, and when, and when this is, like, we want to have a curated portfolio. We do not.

Felipe Ucros (Director)

No, understood on the partners that are jumping on the platform. I was looking more for,

Ian Craig (CEO)

... company will help you on payments in the other countries, and the same as a partner to start the loyalty program, in countries outside of Mexico?

Jorge Collazo (Director of Investor Relations)

No, I was getting to that, you Felipe. On the services front, we're spearheading out of Mexico. The focus is getting that done in Mexico, and then we'll be testing that out in the rest of the market. No. So far, on the service portion, which includes both financial services and loyalty partner, Mexico is spearheading that effort.

Ian Craig (CEO)

Understood. Very clear. Thank you.

Jorge Collazo (Director of Investor Relations)

On the second part of your question regarding Argentina and our exposure there, it's certainly not an easy solution. The operation has been growing very importantly. As a first priority for using our capital generated in Argentina is to continue to build capacity to make front to that very healthy growth that we've been seeing. On second alternatives, we look for alternatives to invest in assets that where we can protect our cash to exposure of FX depreciation. We certainly continue to see or look for opportunities that we can materialize in as our last position in our excess cash to repatriate assets.

That is much more complex because there's no access to freely to dollars. We have a small position of our total cash. About 3% of our consolidated cash is concentrated in Argentina, so it's not a significant impact for the consolidated business. We certainly focus on looking for alternatives for using that cash.

Ian Craig (CEO)

Absolutely clear. Thanks a lot for the color on that one. Congrats on the results again, guys.

Jorge Collazo (Director of Investor Relations)

Thank you, Felipe.

Operator (participant)

Our next question is from Alvaro Garcia of BTG Pactual.

Alvaro Garcia (Executive Director)

Hi, gentlemen. Thanks, thanks for the call. Congrats on the results. A couple questions on my end. First, on beer in Brazil, we saw a nice sequential acceleration there. I was just wondering if you could maybe give us some color, if that was Heineken brands or maybe some of the other smaller brands that you've been ramping up there. Then my second question is on sort of capital allocation, a follow-up to what we've discussed on past calls in terms of, well, you know, what I sort of consider a suboptimal sort of cash balance and excess sort of cash balance. You know, what's been your thinking there? Is there any update with regard to, you know, a potential shift in how you're thinking about your dividends?

Any sort of color there would be greatly appreciated. Thank you.

Jorge Collazo (Director of Investor Relations)

Hi, Alvaro, it's Jorge here. On your first question regarding beer, yes, as you mentioned, we saw a sequential improvement as compared with the first quarter, it comes basically from a combination, no? We have been implementing some plans with Heineken as well together to accelerate the performance of the portfolio. You know, we have some plans that we have implemented there that are starting to show some results. Teresópolis as well, another brand that we have as well, it's accelerating, it's growing. To give you a sense there, in the first six months, it's growing, you know, 30 plus rate as compared versus the previous year, you know? That's a little bit of what we're seeing in beer.

Obviously, it takes time. We know that. The strategy is what we have to continue improving. We are improving versus the first quarter, that's for sure.

Ian Craig (CEO)

Alvaro, in terms of capital allocation, we continue to review what's the best structure for us. Like I mentioned, we want to first of all fund our growth and not look at other opportunities. There doesn't seem to be so far any, you know, relevant inorganic opportunities out there for us. Depending on how this continues to go, we should have a way to free up this cash. I wouldn't expect anything in the short term. I think that's a decision for next year, where we'll be taking that.

Alvaro Garcia (Executive Director)

Okay. Okay, just maybe one last follow-up on Coke Sin Azúcar. I was wondering if maybe you can walk through sort of penetration and how well that product has done. Thank you.

Jorge Collazo (Director of Investor Relations)

Yes, Alvaro. Yeah, it's doing very well. Actually, on the prepared remarks, Ian mentioned a couple of points regarding Coke Zero Sugar. For example, in Mexico, it's growing double digits year-to-date. When you look at the mix, it's still on the single digits, but it's growing. Now it's outperforming. In the case of Brazil, for example, is outstanding. I would also highlight that Ian mentioned also during the prepared remarks.

Ian Craig (CEO)

30 plus.

Jorge Collazo (Director of Investor Relations)

... 30+, 32%, if I remember correctly, as compared to the previous year on the first 6 months of the year. There, the mix is now reaching double digits, you know? It's a great product. Obviously, it's a great brand.

... and we are executing that and winning in the market. I think it's very encouraging to see what we're doing with Coca-Cola FEMSA across all markets.

Fernando Olvera (Equity Research Analyst)

Wonderful. Thank you very much, and congratulations.

Jorge Collazo (Director of Investor Relations)

Thank you.

Operator (participant)

The final question today comes from Rodrigo Alcantara of UBS.

Rodrigo Alcantara (Equity Research Director)

Hi, thanks for taking my question. Two quick ones. One for Ian, another for Gerry. For Ian, well, thank you very much for the comments on the competitive position in Mexico and what's expecting the pricing strategy over there. Maybe if you can replicate those on Brazil, and for the case of Brazil and the pricing strategy there, we saw a slight deceleration in the pricing there in Brazil, in real terms, talking about year-over-year growth rates. Just curious of, you know, what's driving that, what drove that deceleration? My second question would be for Gerry. You know, labor expenses concentration of being like a topic more for regional industry, but we have seen like, you know, being more relevant for bottlers, you know, pressuring margins.

like, let's just, you know, share, you know, this year, if you can come in to share with us, like in basis points, like how much of your margins have like been eroded by increasing labor expenses? If you can comment on that. Also, on the savings that you mentioned at the beginning of the call, you know, for next year, do you see room for, you know, more savings to come from logistics? Those would be my two questions. Thank you very much.

Jorge Collazo (Director of Investor Relations)

Thank you. Thank you, Rodrigo. Yeah, on your first question regarding pricing in Brazil, as Ian mentioned, now during the remarks as well, I think we can definitely see that we're leveraging on the pricing carryover that we have. Also, we're cycling pricing from last year that was very solid. We do expect that to moderate, you know? We're seeing inflation across most of our markets normalizing, and we have initiatives to continue to improve our mix, leveraging revenue growth management. You can expect that to moderate versus the pace that we had last year. As Ian mentioned, you know, to summarize this, the target is to be at least in line with inflation. Partly that reflects on what you're seeing in Brazil, you know?

On the other hand, we continue to see on the competitive position that we're gaining share in Brazil. Obviously, also on the margins front, we're seeing easing PET resin costs, we continue to see space, you know, to be able to be more or less aggressive on that front.

Gerardo Cruz (CFO)

Regarding Rodrigo, your question on margins in Mexico, basically, the whole explanation of margin impact in Mexico is related to fixed costs and expenses, and specifically, labor is one of the biggest impacts. I would say that of the total increase in fixed costs and expenses, about 20%, a little bit above 20% of the impact is related to labor. DME marketing expense is also playing an important role. That related to our tactic of recovering competitiveness and positioning our brands to recover share in the market is important. The third, I guess, big component there is IT expense.

As Ian was mentioning, in a previous question, right now we're investing importantly in digital capacity and technology. That represents an increase in IT expense, but it's related to our... one of our main pillars, strategic pillars for growth and the way that we're trying to become a preferred B2B platform in our markets.

Rodrigo Alcantara (Equity Research Director)

That's useful. Thank you very much. Gerry, for you to expect that QoQ OpEx growing at the same rates that we have seen in the last quarters, that is that a fair assumption? I mean, like 20% or something like that?

Jorge Collazo (Director of Investor Relations)

Yes, that's a good estimate. It's fair, Rodrigo.

Gerardo Cruz (CFO)

regarding your question.

Rodrigo Alcantara (Equity Research Director)

Thank you very much.

Gerardo Cruz (CFO)

... about savings, Rodrigo, we're very positive in what we've seen in our capacity to realize the savings that we were expecting for the year. Basically, these savings have been concentrated in both cost to serve and cost to make, most of them in cost to make, with efficiencies in our manufacturing facilities related to packaging, light weighting, in packaging, freight optimization, also the transformation from resin to bottle. We've seen important savings there. On cost to serve, we've invested importantly in route efficiencies, and that's provided important savings, operative savings for us.

Rodrigo Alcantara (Equity Research Director)

Okay, that's very clear. Thank you very much, Gerry. Thank you, Jorge.

Jorge Collazo (Director of Investor Relations)

Thanks. Thank you, Rodrigo.

Operator (participant)

As there are no further questions, I'd like to hand the call over to Gerardo Cruz, CFO, for closing or additional remarks.

Gerardo Cruz (CFO)

Thank you very much for your confidence and interest in Coca-Cola FEMSA, for joining us on today's earnings call. As always, our investor relations team is available to answer any of your remaining questions, and we look forward to speaking again soon.