Coca-Cola Femsa SAB de CV

NYSE:KOF

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, everyone, and welcome to Coca-Cola FEMSA's First Quarter 2020 Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] At the request of the company, we will open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.

At this time, I will now turn the conference over to Mr. John Santa Maria, Coca-Cola FEMSA's Chief Executive Officer. Please go ahead, Mr. Santa Maria.

[John Santa Maria Otazua, executive]

Thank you. Good morning, everyone. Thank you for joining us today for our First Quarter 2020 Conference Call. Constantino Spas, our Chief Financial Officer; and Jorge Collazo, Head of Investor Relations, are also on the call today.

First and foremost, on behalf of all of us at Coca-Cola FEMSA, we hope you and your families are safe and well. In these challenging times, I would like to express the solidarity with the many people who have been affected by the COVID-19 pandemic, as well as offer our utmost recognition to the health care community.

I would also like to thank all of Coca-Cola FEMSA's employees across our operations for their outstanding job ensuring our business continuity and product supply in the face of these unprecedented times. We enjoy a robust business ecosystem, and on top -- and our top priority remains the health and well-being of our clients, consumers and overall employees. We are implementing measures to ensure we successfully navigate these challenging environments and emerge a stronger company.

During today's call, I will briefly address our first quarter results and trends across our markets. I will also outline the strategies and mitigation actions that we have been implementing across our territories. Finally, Constantino will guide you through the steps we have taken to strengthen our liquidity and overall financial position as well as our approach to cash flow and CapEx for the forthcoming months.

Despite headwinds, our first quarter results reflect our positive underlying operating performance. Importantly, we continue to increase our consumer base and improve our competitive position, validating our business strategies and reflecting our leaner, more agile organization, which is better positioned to face today's dynamic market environments.

Notwithstanding our steady overall performance for the quarter, we started to face the first effects of the pandemic over the last 2 weeks of March, as social distancing measures were gradually implemented across our territories. Additionally, during this period, we saw accelerating currency devaluation headwinds, both to COVID-19 and added market complexity from greater trading oil prices.

Our consolidated volumes remained flat for the quarter. Volume growth in Colombia, Argentina and Central America was offset by low single-digit declines in Brazil and Uruguay and relatively stable performance in Mexico. Our top line declined 1.9% driven mainly by unfavorable currency translation effects for most of our operating currencies partially offset by pricing initiatives in key markets. On a comparable basis, meaning the currency translation effects, our top line would have increased 3.6%.

Despite higher concentrate costs in Mexico, reduced tax credits of common concentrate in Brazil and increased dollar-denominated raw material costs, due to depreciation in most of our operating currencies, our operating income remained flat for the quarter driven mainly by declining PET cost and operating expense efficiencies. On a comparable basis, our operating income would have increased 6.3% and our operating cash flow would have increased 12.2%. To give you a sense of the currency headwinds faced during the quarter, foreign exchange impacts accounted for more than MXN 580 million at the operating income level.

Finally, our controlling net income decreased 1.5% year-over-year driven mainly by a onetime increase in our interest expense related to our successful debt refinancing strategies during the quarter. By normalizing our controlling net income, excluding currency headwinds, onetime tax reclaims in Brazil and the extraordinary increase in interest expense, our earnings per share would have increased 21%.

During the quarter, the country began implementing restrictive measures at different bases and levels. Brazil was the first country in Latin America with a confirmed COVID case, on February 26. A few weeks later, the government started to implement restrictive measures, and by March 24, did announce a quarantine with a full lockdown in major states. As of April 16, certain states started to transition to partial lockdowns.

Shortly after Brazil, Mexico confirmed its first case of COVID-19 on February 28. On March 14, the government announced social distancing measures such as the cancellation of concerts and sporting events. And by March 22, Mexico City's government announced closures of movie theaters, bars and museums. By March 30, the government announced the suspension of all nonessential activities for the month of April, which was later extended for the month of May.

Countries like Argentina, Colombia and Panama, took more strict measures, closing borders, suspending flights, enforcing lockdowns and temporary closures of restaurants, cafeterias and bars, starting March 15. Across our territories, we had seen channel, category and package mix shifts driven by consumers adapting -- adopting the behaviors to comply with the new social distancing realities.

Consequently, we have seen declines in our on-premise channel partially offset by increases in the modern trade and home delivery channels. The traditional trade channel comprises mainly of mom-and-pop stores and has proved relatively resilient, offering convenient proximity for consumers across our markets. Importantly, since most of our volumes are distributed through the traditional trade channel, our exposure to the on-premise channel is relatively low, representing approximately 50% of our consolidated volumes.

With regards to our beverage categories, we saw an increase in jug water during the beginning of the pandemic, driving pantry loading in the initial days, an effect that has been generally gradually normalizing over the past couple of weeks. In addition, we have seen brilliant performance from our stock and beverage category, with the brand Coca-Cola growing in key markets during the quarter.

Understandably, we are also seeing the decline in on-the-go consumption, resulting in an increased mix of multi-serve and returnable presentations across our markets. As many of the countries where we operate internally, a stricter phase of staying-at-home measures during April, our consolidated volumes for the month is reflecting a mid-teens contraction. Markets like Argentina and Colombia have been more significantly affected, while Mexico and Guatemala remained more resilient. Although there is still a high level of uncertainty at this point, based on current trends, we expect our second quarter results to be most affected by the pandemic.

Moving on to our strategies and mitigation actions. Coca-Cola FEMSA has faced crisis before, demonstrating the ability to successfully adapt to and capitalize on dynamic environments to emerge a stronger company. Being part of the global Coca-Cola system is an advantage, and we work collaboratively with the Coca-Cola Company and the rest of the system to share and adopt best practices from other geographies. I am proud of the swift actions that our operators are taking across our markets. We are working as a cohesive unit, developing a comprehensive management framework designed to protect our short-term results while maintaining our long-term goals. As part of this framework, we are focusing our actions on key 5 areas to ensure our business continuity. This is what I call the 5 Cs. We focus on collaborators, clients, consumers, community and cash flow.

First, the health and well-being of our employees is of utmost importance. Therefore, we are implementing additional measures to support their everyday work. We have reinforced health, sanitation and hygiene protocols across our facilities. And we are providing additional equipment to our manufacturing, commercial and distribution teams, such as masks, gloves and sanitizing gel. Since March 16, most of our office-based employees are working from home, representing more than 6,000 employees.

We have implemented daily monitoring and communication protocols across our organization, and we are extending health recommendations to our employees' home environment as well. Second, we want to make sure our clients remain open for business in a safe manner. Our technological initiatives are enabling us to maintain frequent contact with our customers while reducing physical exposure. Among our initiatives, we are leveraging our digital capabilities, including our multichannel strategy to take orders via our B2B platforms, contact centers and WhatsApp initiatives. Due -- to give you a sense, in Brazil, we are taking more than 6,000 orders weekly via WhatsApp with a very encouraging repurchase rate.

Moreover, we are extending preventive measures to our clients. For example, we are delivering more than 25,000 protective screens for our counters, it's a plastic that we put in front of the related counters in Mexico; and 100,000 [ masks ] to our traditional trade clients in Mexico. Third, we are leveraging digital and direct-to-consumer channels. Our first move advantage across digital trade channels has increased significantly. For example, in Mexico, we are growing our volume by more than 30% in Amazon and Rappi and by 60% in Cornershop. Moreover, in Brazil, we are growing our volume to more than 70% across food aggregators.

Importantly, we are adapting our portfolio, leveraging our affordability and returnable platforms as well as our single-serve multipacks, while prioritizing and simplifying our portfolio to protect profitability. Thanks to our initiatives, returnable formats are growing double digits across all markets.

Fourth, we are supporting our communities. Across our markets, we have donated more than 1.5 million liters of beverages as well as transporting and donating medical supplies. Moreover, in Mexico, we teamed up with the Coca-Cola Company and other organizations in Mexico to set up a temporary medical facility with 854 beds and 36 intensive care units for COVID purposes only. Furthermore, in Brazil, we teamed up with the sugarcane industry to deliver more than 250,000 liters of sanitizing alcohol to hospitals in São Paulo. Importantly, together with our Brazilian institutions, we are donating more than 26,000 COVID-19 tests, focused on frontline health care professions.

Fifth, we are focusing strongly on cash flow management and further strengthening our balance sheet. We developed additional cash control towers to optimize our cash sources and uses. We are aggressively targeting savings and selectively prioritizing CapEx across our operations. As we previously disclosed during the quarter, we successfully refinanced and took on short-term credits to solidify our cash position, ending the quarter with a cash position of more than MXN 39 billion, overall that we have maintained to date.

Across our territories, we have been working closely with the governments and public health authorities complying with preventive measures, reinforcing our protocols, ensuring our team safety and leveraging our end-to-end supply chain planning to ensure the availability of products, while providing essential hydration to our consumers and communities. Given the essential nature of our products and our preventive care protocols, governments across all territories have allowed us to continue operating. And thanks to the relentless work of our team, we do not anticipate material disruptions to our supply chain at this point.

Consistent with our previously discussed capability of building strategies on the commercial, manufacturing and supply chain fronts, our digitalization optimization efforts make more sense than ever in the light of the current dynamic. Accordingly, we have reprioritized projects and accelerated the rollout of initiatives designed to intensify our digital commercial capabilities as well as to enhance our efficiency and overall productivity. To strengthen our customer connections, we are accelerating the rollout of our online omnichannel capabilities.

In the last quarter, we discussed encouraging signs from pilots that are now being aggressively rolled out. For instance, our enterprise WhatsApp in Brazil is now expected to reach more than 260,000 customers by the year-end. While our B2B platforms in Brazil and Argentina are expected to reach more than 100,000 customers. Moreover, we are exploring integration of digital payment options into our B2B platforms, strengthening our value proposition for consumers and customers.

Aligned with our customer-centric vision, we strive to enable better contact with our clients in direct-to-consumer channels. Consequently, we continue developing capabilities, process inertias with aggregators, peer players and e-retailers across all our operations. Our ambition is to continue capitalizing on these capabilities during this crisis, and most importantly, to give us a sustained competitive advantage during the post-crisis conditions.

Finally, underscoring the strength of our cash flow generation, our confidence -- and our confidence puts us in a solid financial position. On March 17, at our Annual Shareholders Meeting, our shareholders approved a proposed ordinary dividend of MXN 4.86 per unit. This dividend represents an increase of 37% year-over-year with its first installment to be paid on May 5.

At Coca-Cola FEMSA, we embark on a deep transformation to create a leaner, more agile organization. We developed and then rolled out digital initiatives across our value chain, and we reinforced a collaborative culture across our organization. Working together, we have achieved meaningful progress, more strengthening our resilient profile, and positioning our organization to navigate short-term challenges and achieve long-term success.

With that, I will now hand over the call to Constantino.

[Constantino Montesinos, executive]

Thank you, John, and thank you all for your interest in today's call. As John noted, we hope you and your loved ones are safe and well.

I'll briefly discuss each of our division's highlights for the quarter. In Mexico, our top line increased 2.4% driven by pricing and revenue management initiatives partially offset by a slight volume contraction and an unfavorable price/mix as a result of the effects of COVID-19. We continue to reinforce our competitive position and expand our consumer base, allowing us to continue gaining market share.

In Central America, our volume growth continues to be driven mainly by Guatemala, and was partially offset by Nicaragua and Panama. As a result, our top line in the Mexico and Central American division increased 2.8%. Importantly, and despite concentrate cost increases and the depreciation of the Mexican peso, our operating income increased 11.7% driven mainly by declining PET costs, coupled with operating expense efficiencies. Driven by these factors, our division's EBITDA margin expanded by 280 basis points to reach 22%.

In South America, despite a strong start of the year, mainly driven by volume growth in Colombia and Argentina, the effects of COVID-19 started affecting our operation volumes in March. Additionally, the depreciation of all of our operating currencies in the division led our top line to decline 7.5% during the quarter.

With regards to profitability, we faced currency headwinds, coupled with our decision to temporarily suspend tax credits on concentrates in Brazil. However, these effects were mitigated by favorable PET prices, our ability to drive cost and expense controls, savings from restructurings performed during 2019 and the tax reclaims in Brazil recognized during the quarter.

I will now expand on our company's preparedness going forward. Specifically, I will focus on the actions we have taken in the finance function in the light of the current situation. As we discussed during our last conference call and consistent with our financial discipline, we successfully completed debt refinancing strategies in the U.S. and Mexican markets by issuing an aggregate of $1.5 billion. These transactions provide us with a very manageable debt to maturity profile. Specifically, we extended the average life of our debt from 7 to approximately 10 years while reducing our average interest rate. Today, more than 70% of our debt matures beyond 2025.

Additionally, it's important to emphasize that we completed our liability management transactions before COVID-19 became a global pandemic, underscoring our conservative profile and prudent approach to debt under all circumstances. As you saw in today's earnings release, our interest expense recorded an increase of 77% versus the previous year. This increase was driven by an extraordinarily MXN 1.5 billion related to our refinancing strategies in which we prepaid the tender offer and made whole, our 2023 Yankee bond. For this reason, you can expect the normalization of interest expense as of the second quarter.

Part of our comprehensive financial result, we recorded a foreign exchange gain of MXN 486 million, as the cash position in U.S. dollars benefited from the depreciation of the Mexican peso during the quarter. It is very important to underscore that we continue to have a policy of 0 net debt exposure to U.S. dollars.

Coca-Cola FEMSA's liquidity position is robust, and our cash flow is stable. Nonetheless, we're taking additional measures to strengthen our cash position and adequately forecast and control inflows and outflows. First, we took an additional short-term, mainly Mexican peso-denominated, debt of more than MXN 11 billion. As of March 31, our cash position reached more than MXN 39 billion. And our net debt-to-EBITDA ratio closed the quarter at 1.2x.

Second, although very prudent cash management is part of our culture, we're reinforcing our cash flow through the implementation of cash control towers. The merged centers that are focused on optimizing sources and uses of cash. These control towers utilize an iterative process to periodically update, which we do, by the way, weekly, all of our forecasting. There is no other way to successfully manage dynamic environments when analyzing and reacting with agility to optimize our cash cycle.

As part of this initiative, we're setting the right priorities to manage our working capital, expenses and CapEx for the remainder of the year. All of our operators are doing a tremendous job in generating cost, expense controls and efficiencies. Although we had budgeted close to $650 million of consolidated CapEx at the end of 2019, in the light of the current environment, we reevaluated and reprioritized immediate needs while also different projects.

This gives us an important lever to manage our cash flow for the year. We're fully confident that we're taking the right steps at the right moment. Coca-Cola FEMSA's conservative profile, resilient business model, continuous investments in digital capabilities and strong balance sheet are assets that become even more valuable in times like these.

And with that, I will now hand the call back to John for his final remarks. Thank you very much.

[John Santa Maria Otazua, executive]

Thank you, Constantino. All crises put our strength and resiliency to the test. But I'm convinced, as was the case for our company before, the challenging times also bring opportunities for the long term. The measures we are taking are consistent with our clear strategic and long term priorities, taking care of our people, satisfying our clients and consumers and continue to create shareholder value through a very disciplined approach to capital allocation and a solid financial position.

Thank you for your interest in our earnings call, and for your continued trust and support in Coca-Cola FEMSA. Operator, I would like to now open the call for questions.

[Operator]

[Operator Instructions] And our first question, we'll hear from Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

Congratulations on all the refinancing you were able to do, I guess, right in time. Now I have one just quick accounting question. So you're showing a significant increase in Mexico on amortization, operated noncash charges, which basically drives up your EBITDA in Mexico by approximately MXN 500 million. Is that somewhat related to the refinancing you've been doing? Or what's behind that increase, which also obviously has been reflected on a consolidated basis?

[John Santa Maria Otazua, executive]

Constantino. You're on mute.

[Constantino Montesinos, executive]

Sorry. The MXN 500 million difference is principally explained by the virtual effects that have negatively affected operating income and the added back to our EBITDA. So from that MXN 500 million difference, around 67% is due to the loss of the operating exchange fluctuation, which is about MXN 360 million. And the other 20% is basically related to an equity method for 2 of our subsidiaries. We did an impairment in our Leão JV, about -- around MXN 100 million with the JV -- NCB and at the JV in Brazil. So that's where that difference comes from. Does that address your question, Benjamin?

[Benjamin Theurer, analyst]

Yes. So part of that is most likely going to be reflected as well in 2Q just because of the additional FX headwind we're seeing in 2Q compared to 1Q on the operating side, correct?

[Constantino Montesinos, executive]

Yes. That would -- I mean, yes, definitely. I would not expect that in the same magnitude, I would assume. But I mean, the situation is extremely dynamic and the volatility is huge. So there definitely will be some impact in that regard.

[Benjamin Theurer, analyst]

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

[John Santa Maria Otazua, executive]

Sure, Ben. Thanks. I think we're focused on 2 items. One is ensuring that we have an affordable portfolio. And that affordable portfolio has enough capacity to be able to suffice demand. And that is really based on returnables. And we've been pushing hard on that. And as I mentioned in the call, we're seeing continued growth in those packages, not only because everybody is moving to home, just because the affordability involved. And secondly, there is still a lot of efficiency that we can pull out of our markets in 2 ways. One is through further systematization of processes and procedures. And secondly, is -- and more importantly, is probably changing our routes to market. In a lot of places, we have opportunities to shift our route to market to a leaner third-party structure. We've done that. For example, in Costa Rica, we're now something like 60% or 70% of our volumes are running through third-party distributors.

We've practiced and understood what is it needed there. And we thought that has applicability towards other main countries we have and Mexico, Colombia, being 2 of the main ones. So I think there's a lot of levers still yet to be pulled in terms of the operating efficiencies and turnover. Secondly, I think when you start looking going forward, it's probably a question you or somebody else has, I think we can maintain our pricing within inflation terms. So that would give us a top line revenue relief that I think the consumers can accept, primarily through the different package mixes that we have.

So I think there's still a lot of work to be done. I think, and when you look forward and you see the revisions going forward, most of it comes from a second quarter economic downturn and what will be coming in the third and fourth quarter. We think it's a similar situation for Coca-Cola FEMSA.

[Operator]

And next, we'll move to Lucas Ferreira with JPMorgan.

[Lucas Ferreira, analyst]

My first question is regarding the relationship between you and KOF with Coca-Cola. How has been the relationship now in this time of crisis? If there's any sort of flexibility in the relationship and price of concentrate that you can -- the bottlers could ask -- could actually see as a service support from KOF. That would be my first question. And the second question is regarding the kind of the financial health of some of your channels, especially the more of the traditional or the mom-and-pops, now during the time and also the food service and special items since they were most impacted. If you're -- I think you mentioned in the beginning some support you're giving them in terms of helping to provide equipment, et cetera. But what about in terms of, let's say, working capital? Can you talk a little bit about the service sustainability of this channel during this crisis? And how can you help keeping them operating?

[Constantino Montesinos, executive]

You want to take that, John?

[John Santa Maria Otazua, executive]

Let me just start off with the relationship, and maybe you could probably add some more color on the investment capital.

[Constantino Montesinos, executive]

All right.

[John Santa Maria Otazua, executive]

Lucas, thank you for the question. I think our relationship with KOF has been -- it's much closer because of the crisis, and much more collaborative in terms of how we're going to market, how -- what actions we're taking. And I think the crisis brings out sometimes the worst and the best in everyone. And in this sense, I think it's been very, very positive.

And so I have absolutely nothing to say about the Coca-Cola Company but great things because they have shared learnings from other parts of Latin America. And they've shared learnings from other parts of the world. We've understood what is going on and what has happened in China. And been able to prepare for it, although you cannot fully prepare for such a crisis. But understanding the dynamics has been very, very important for us.

Secondly, we have -- every week, we have conference calls for function with the Coca-Cola company sharing our learnings, understanding what things are and also applying new best practices. So the nearness of the relationship, and I don't think Coca-Cola FEMSA is an exception. I think it's part of a broader pattern. But the units of the relationship that we have with the company has grown dramatically over the last 4 to 5 weeks, okay?

The other question you asked on concentrate, whether this is something that you're going to have relief on or not relief on, that we haven't discussed, okay? I think that's something that is structural in nature for our relationship. But what have -- we have discussed with the Coca-Cola Company is the level of marketing funds that we're putting into the markets over the next months and quarters to be able to ensure that we have enough flexibility in our P&L. But also, and more importantly, making sure we're making the right type of investments in markets -- in marketing and trade that ensures the paybacks that we require.

I think in terms of channels, concerned right now with those type of channels that our large social gathering plans. I think we have very well-capitalized companies in Mexico until that end. But we'll see because it definitely takes its toll. I don't know, Constantino, if you have a point to make?

[Constantino Montesinos, executive]

Yes, absolutely. I think the most important piece of information that I would want to share is, first of all, our exposure -- I mean this is a phenomenon that at least to this stage, has affected much more in the initial stages beyond premise, beyond trade accounts. And our exposure to the on-trade accounts is much lower than in other parts of the world. So when you look at our trading portfolio, it's about 15%. And that includes both the key account, on-premises, the QSRs and also the, I would say, more traditional on-premise accounts. So the exposure of Coca-Cola FEMSA to the on-premise is lower, probably than other bottlers in other parts of the world. So that's one big element.

Apart from that, we're offering factoring solutions to our customers across the board, particularly our traditional trade and small customers, which is helping them with the working capital, and we have not seen significant issues around these customers. At the same time, what I would say is the fact that the broadness and the depth of our portfolio, particularly for our traditional trade, which at the end of the day, is the most important channel in Latin America, and it's the essence of retail in Latin America when you look at it overall, but the portfolio that we're able to put forward to our retailers. It's so broad and it's capable of attending the -- I would say, the dynamic in consumer occasions and consumption has allowed them to be able to serve the demand quite well.

We have seen shifts from single-serve packaging into multi-serve packaging, and we're able to have that depth in our portfolio as well as returnable packaging, which offers affordability solutions for consumers right now. So our portfolio per se is a great advantage for traditional trade. Our granularity and reach to the traditional trade is also of significant value to our retailers because we have not disrupted our service. And at the same time, the enabling of our sales force and our route-to-market solution with the digital capabilities that John mentioned a few minutes ago, the WhatsApp solution, or URL B2B solutions have been able to continue to serve our customers even in the cases where we cannot have face-to-face contact. So the combination of our portfolio, our route-to-market, digital investment that we've been doing for a long time, and this does not happen overnight. You don't serve 260,000 customers overnight on enterprise WhatsApp just because COVID-19 hit you. I mean we've been working on this for quite a long time.

Our working capital, help that we're giving our customers through some of the factoring solutions. When you combine all of these things in the portfolio, we have been able to mitigate the impact from that end, but it's also been of significant help for our customers. So far, I think we're weathering the storm quite well, and we're helping the retailers -- our retail customers do it too. And at the same time, as I mentioned, our exposure to the on-trade, which is definitely -- the channel has been hit the most initially. This is quite low compared to other places in the world. I don't know if that in a couple of months’ time will enhance.

[John Santa Maria Otazua, executive]

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

[Operator]

And next, we'll move to Carlos Laboy with HSBC.

[Carlos Alberto Laboy, analyst]

John, thanks for sharing some of the near-term measures you're taking and then some of the digital things that you're doing. But I want to ask my question this way. If I look at your business 3, 4 years after the Tequila crisis, it was almost unrecognizable. It was vastly different because of the measures that you took. And after the '08 financial crisis, it was also vastly improved 3 or 4 years later. How will this business be different and look different 3 years from now, 4 years from now because of your actions? Can you share with us, on a longer-term kind of visionary basis, where you see this landing 3, 4 years from now because of these actions that you're taking in particular because of the digital evolution?

[John Santa Maria Otazua, executive]

Constantino, do you want to take a crack at it, till I get back?

[Constantino Montesinos, executive]

Sure. I'll start off and then I'll let John complement this. I think, Carlos, with the digital capabilities that we are building, we'll be able not only to drive much more efficiency in our system, which is a significant improvement that will become structural in our business on one hand. But on the other hand, we will be able to serve better our customers. I mean the connectivity, the omnichannel capabilities that we have today are capable to serve better our customers, and that will definitely become an edge that is structural in our business.

So I would say that, that is another shaping aspect of Coca-Cola FEMSA going forward. I think that, at the same time, we're doing enormous progress in terms of portfolio, which is, for sure, something that has absolutely nothing to do with the current circumstance, but we're not undermining that effort because of what we're facing right now. So there's a -- I mean we foresee a region where affordability play will definitely become a more important element of the consumer value proposition, and we're working strongly with that, with our returnable initiatives. So I think that is something that is also of structural nature and continue to be there. And then, I mean, we have never renounced our inorganic growth strategy. I think that definitely these type of crises for sure, reshape industries going forward. And we have continuously stated, and you can see in our financials, our capability to execute inorganic transactions at the right value and at the right time, either through our equity firepower or through our balance sheet. So I think that is definitely on the table. But we continue to monitor that. But even then, we need to understand how the system and how the industry is going to come out of this crisis. I mean we cannot underestimate the reshaping power of the crisis of this magnitude, too. But it's very difficult to anticipate, how does that look going forward 6 months from now.

But we're definitely well equipped, well prepared. We have very solid financial. We have a very robust liquidity position, and we're preserving that significantly. So I think that, that will become also an asset for Coca-Cola FEMSA going forward to face the reshaping of the industry. I think those are the, I mean, for me, the big issues. Digital capabilities and how will that drive efficiency and better customer service, improving our top line, creating more opportunities for growth in that regard, portfolio on one end and on the other end, the robustness of our financial position and our expertise and financial discipline and history and track record of very good M&A capabilities that we have had in the past. I think that those have positioned us quite well going forward as a company, of this system.

I don't know, John, if you have to -- do you want to add into this.

[John Santa Maria Otazua, executive]

Yes. I think there's a couple of things, Carlos. We talked about omnichannel, and really the amount of work that we're doing to make sure that our transactional sales systems are clearly fully linked to all sorts of sales modes plus third-party sales modes, I think, is enormously battles, an enormous amount of complexity in there. But we're starting to see that. We're starting to see that come true in Brazil. We're starting to see that come true with the [ URL ] in Argentina. And from there, it becomes very easy to start dropping in additional channels, if you will, with consumers, direct-to-consumers, home delivery routes, et cetera. So really, the backbone in 2 or 3 years, is going to be much further digitized given this a portfolio route like in [ 1913 ] and much broader than what we have today. That's first. Secondly, what we're doing is, as we spoke about this yet the last year or last quarter, we have functionalized the operation. And we're seeing enhanced efficiency in all processes that we're putting through the functionalization of channel resources. That is finance, that is supply chain. And really, with the amount of savings that keeps on coming out on a recurring basis are very high.

So the end product of this is going to be a very, very focused market-facing operation with a very efficient back end. And there's going to be an enormous amount of synergy put out for us over the next 2 to 3 years. And another piece that we're probably not making enough about the evens. We're continuing to invest in terms of capability. And given where the affordability issue is going to be with consumers, we're not only going to be able to stick with Coca-Cola in an affordable pack, but we'll also be broadening that out to other brands and categories to allow for availability along the noncarbs as well as in carbonated products. That's through the universal bottle, okay? Those are going to continue to be rolled out. And that's, I think, is going to make a significant evolution in making sure that people stay in our franchise, not only in carbon and soft drinks but in noncarbs as well.

Does that give you a picture of where things are going?

[Carlos Alberto Laboy, analyst]

Yes. Wonderful.

[Operator]

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

[Miguel Angel Tortolero, analyst]

The first one is regarding Brazil. It was mostly a normal start of the year with initial end of quarter, I would say. So considering that this is one of the regions where you are the most, let's say, vulnerable due to your partial foodservice and the beverages. Could you share with us how was your second quarter -- how has your second quarter evolved so far? And what will be the expectations ahead for this region? And the second one, moving to Mexico. Could you give us some color on your pricing strategy ahead, especially considering current FX levels and your actual hedging position? And also in this regard, it would be helpful if you could share with us also your general views in terms of raw materials.

[Constantino Montesinos, executive]

Okay. Miguel, let me jump into this. Brazil, let me give you a little bit of an overview of Brazil. I mean, as we mentioned previously, Brazil was the first country in Lat Am to confirm a case. So the social differencing measures were taken on as of March. And being very restricted in São Paulo in the beginning, which is one of the big markets in Brazil. So hurting the volumes for the month of March. The cold channels definitely suffered the largest impacts, particularly on-premise, as I mentioned. And in addition, it's fair to say that as well as we face special weather conditions, more rain during the quarter compared to last year, which was a drier warmer summer.

During April, directly to your question, the social distancing measures are still affecting our volumes. However, some states will be transitioning from a partial lockdown -- I mean, 2-way partial lockdown, from a very tough lockdown to the partial one. And volumes seem to be recovering after the Easter holiday. Because some of the clients have gradually started reopening. All in all, we see -- we saw Brazil volumes in April decrease around 20%. And based on that, we're adjusting our portfolio towards more affordability, multipacks and returnables as the new shopping habits are being shaped by this phenomenon, at least temporarily, and we're upping our digital presence in that regard. So that's a little bit a picture of what Brazil looks like.

In the case of Mexico, Mexico has been -- despite the fact that we're in a very volatile environment, and it's very difficult, honestly, very difficult to predict, going forward, we're seeing that Mexico has been a little bit more resilient so far. And the volumes have been better than the average of the total portfolio of KOF, contraction around the mid-single digits. However, it is also important to say that we are entering the worst phase of the epidemic in the upcoming weeks. And the government has stated, their projections are about to peak during the week of May 8. So we're there in the worst phase of the epidemic. And that might change definitely the way the volumes are behaving. I mean -- but they've definitely been resilient, and we have seen declines in the on-premise channel, as I mentioned before. And the single-serve mix is definitely been compensated by an increase in multi-serve presentations.

So I think that is a big element of how the demand is behaving right now in Mexico. And we're definitely implementing operating and portfolio measures to successfully navigate this environment. Our hedging strategy, I think, has been -- proven to be successful, a part of your question. And I would say that about 65% of our dollar-denominated materials that impact your COGS have been hedged at around $20 per peso, which I think is good in the light of the volatility...

[John Santa Maria Otazua, executive]

MXN 20 per $1.

[Constantino Montesinos, executive]

MXN 20 per $1. Exactly. Sorry. In the light of the volatility we're facing right now. And we have designed our pricing strategies around that. So we're being very conscious over pricing, very conscious of the way we manage our portfolio. And we have once more the benefit of a broad and deep portfolio that addresses quite well, I think, better than anyone in the beverage industry -- in the nonalcohol beverage industry, the needs of the consumer in these dire times. So I think we're very well prepared considering the circumstances in the case of Mexico. And the resiliency of the market in April is showing us that. I hope that addresses your question.

[Operator]

And next, we move to [ Ron Bambino ] with MUFG.

[Unknown Analyst]

My main question is can you give us an idea as to what percentage of your volumes come from bars, restaurants, foodservice areas, et cetera? And with the social distancing measures likely to continue in the future and the overall lifestyle changes, which everyone will have to make, do you expect a long-term drop in volumes? Or over time, do you think that the drop in volumes from bars, restaurants, stadiums, et cetera, will be ultimately absorbed by the retail channels?

[Constantino Montesinos, executive]

Ron. Our on-trade -- on-prem, or on-premise, we want to call it, exposure is about 15%. I mean it varies anywhere between 10% to around 18%. In the case of Brazil, we also serve more bars and restaurants due to our Heineken portfolio, beer distribution. That agreement that we have, but once more, it is not significantly material in terms of the impact it has across KOF's business. So it's roughly 15%, 16%. It's definitely been significantly impacted, as you all know. To be able to forecast how this will continue to be in the long term, it would be a very difficult exercise to do right now, considering that this has been a very, I'll say, quick and profound disruption in the market.

Honestly, we believe that the structural changes are not going to be as significant in the on-trade channel. But with the information that we have right now, and the analysis that we're running right now, and we believe that once some of these social distancing measures and the governmental measures that have been put in place are -- go back to normal progressively, we will see a comeback of the on-premise channel. Let's also remember that we're not a spirits company, right? So a lot of our on-premise accounts or traditional popular restaurants with the everyday consumer does their -- goes there for lunch and breakfast, et cetera. I don't think that will go away, honestly, in my opinion. But we'll have to understand how the channels are behaving in the long term. But predicting the structural changes right now will be more than irresponsible, at least from our side. That's the way we do it, and we think we're going to return to normality progressively.

[John Santa Maria Otazua, executive]

Thank you, Ron. I think just reinforcing what Constantino said. I think what we're going to have is a very, very small residual consumer behavior change from this crisis. But I do think that you're going to see a return from normalcy on the channel -- on channel mix. What you will have is the impact of whatever economic pull down you may see in employment and whatever. But I don't think it's going to be related, any shapes and volume is not going to be related to consumer behaviors other than the economic residual of this crisis.

[Operator]

And next, I'll move to [ Christopher Onorato ] with [ Voice Impact ].

[Unknown Analyst]

My questions have already been answered. So you can move to the next one.

[Operator]

We'll move to Ãlvaro GarcÃa with BTG.

[Alvaro Garcia, analyst]

I hope you're doing well, and your families are well. I wanted to go back to Brazil, actually. I was wondering, John, if you could sort of compare -- I'm very interested in your thoughts on the discretionary nature of your products in Brazil. And sort of how you expect your performance in this forthcoming economic crisis to compare to what we saw in 2016 in terms of the depth of your portfolio, the robustness of your operations and so forth. Just -- I think we clearly saw a shift to at-home consumption of the substitute risk, right, in 2016. I'm trying to get a better sense of how you're better equipped this time around to take that on, if any at all. So that's my question.

[John Santa Maria Otazua, executive]

Okay. Well, I'm trying to put a picture in my mind of what happened in 2016 just to give you an answer. Listen, I think what we've done in Brazil over the last couple of years has been spectacular, because we developed a returnable portfolio that we not necessarily had before, we returned and developed in Coca-Cola. We developed in flavors with Fanta. I think what we have also had is a depth in noncarbs that wasn't working over the last 2, 3 years. Last year, we redid the whole portfolio, and we've come out with the increased sales volume through that and profitability, more importantly. I think the other thing too that we're proud of in we've been putting into the marketplace an enormous amount of cold drink equipment. Over the last 3 or 4 years, we've consistently been investing between 40,000, 50,000 pieces, not 50 or more, 1,000 pieces of [ doors ], of the equipment in the marketplace. I believe that with the amount of digital capability that we've developed down there, along with the team, we have a significant amount of capability to go out there and participate and lead in our -- in the emerging digital channels. When you start looking at the amount of incidents that we're getting on beverages going through the aggregators, enormous jumps in share. And not only that, but enormous jumps in volume.

So when you start looking at everything that we put together, the occasion base that we -- that the consumer wants, we've been attacking, whether it's on-premise with increased refrigeration, increased portfolio, home delivery by aggregators. And more importantly, going out there and putting together a significant portfolio of route-the-market mechanisms via digitalization that allows us to hit a series of segmented consumers in a much more cost-efficient manner.

So right now, like we talked about, you're going to have 260,000 accounts being serviced with WhatsApp or the capability of putting it in with WhatsApp in some other form of sales, whether that be physical or whether that be with a phone or whatever. So that alters your economics in a big way. And it alters also the frequency with which a consumer can go out there and -- a customer can go out there and can call, sell or order.

So I think we're going to have much higher customer centricity. What we've had is much higher customer centricity approval ratings, much more focused on that. Our service level to the trade has been increased dramatically. And a lot of surveys say that we have a jump in terms of customer satisfaction to a level that we haven't seen before. So I think when you put it all together, and I think that, in the recovering economy, is what's going to drive our performance in Brazil.

[Operator]

And next, we move to Ãlvaro GarcÃa with BTG.

[Constantino Montesinos, executive]

Operator, I think we need to take one more as John needs to leave. So -- and we're not being able to contact you through the other controls. So please, we appreciate that. Thank you.

[Operator]

Ãlvaro, please go ahead.

[Alvaro Garcia, analyst]

I just -- actually, I just asked my question. So if you can move on to the next...

[John Santa Maria Otazua, executive]

Yes. Ãlvaro was last one.

[Operator]

Sorry. We'll move to [ Alan. Alan is with Santander ].

[Unknown Analyst]

Just really 2 quick questions. I mean, regarding the changes that you said regarding affordability and the need for more returnable bottles, and the need for more use of technology. How does that change your CapEx outlook for this year and for the years to come? Is this the year to invest much more in returnable bottles and technology in order to come out stronger? That will be the first question. And then I'll have a quick follow up.

[John Santa Maria Otazua, executive]

Sure.

[Constantino Montesinos, executive]

Well, definitely, I think -- go ahead, John. Go ahead. No, no, no. Take it, take it.

[John Santa Maria Otazua, executive]

Sorry. You know I can't help. Go ahead, Constantino.

[Constantino Montesinos, executive]

So yes, [ Alan ], I mean, it has been part of our CapEx structurally for the last few years. So we have been prioritizing digital investments on one hand, and the buildup and development of our returnable portfolio. Despite the fact that we are reprioritizing our CapEx in this year. I mean in the light of the current events, a lot of the returnable capability or the returnable investment is volumetric and totally variable. It's basically bottles and cases and coolers, additional coolers for returnable capabilities, as we don't foresee significant high infrastructure investments in this year for returnables.

In that case, as we have put in -- as we mentioned in the call, I mean, we put in place what we call a cash control tower, which is basically in process. For every Monday, we see a 13-week outlook of how our cash flows are looking in every single operation. And we compare that to a portfolio of scenarios that are more longer term. Longer term, meaning by the end of the year that we have analyzed. And comparing both dynamics, the continuous cash flow projections on a weekly basis. And the scenarios that we have foreseen that are very different in nature, we're able, depending on how we see the cash flows coming, we're able to activate or trigger more investments for returnable capabilities in terms of bottles and cases and coolers.

So that's the way we're managing it. And at the same time, we have placed, as John has mentioned, a significant priority under our digital capabilities. We foresee that as a structural change that will continue to be part of our business, and we're protecting those investments going forward.

John, do you want to complement on that because I jumped in before you answered?

[John Santa Maria Otazua, executive]

Yes. No problem. Alan, listen, I think on the capital piece. What we've been focusing on this year is -- or what we've done right now is, ensure the fact that we have enough frozen funds prime initiatives to make sure that all our cash targets are met. So the $650-some-odd million that we had approved for capital this year, you can probably say, okay, there's probably $250 million that we can, for sure, control if it were the case and if not more is required. So you could probably if -- in the worst case, chop that number in half, okay? What we don't want to do, okay, and what that we're continuing today is those structural midterm projects that increase capacity, either in distribution or in production, such as we still continue to have our Uruguay plant referred for underway. We're not stopping that. We're not stopping our increase in Guatemala capacities. We're not starting -- stopping any of our distribution increased capacities in terms of distribution center capacities in -- there will be some though. And we're not looking at stopping any returnable bottle capacity in Mexico in the short term. I think the question is whether we would be really within the range of what our typical CapEx would be going forward. And whether any of these incremental initiatives that we're talking about, would make us get out of that range. And my strong belief and commitment to that is that we will be within that range, okay? And we'll manage through the different layers of investments both with a total percentage of CapEx that we are allocating back into the business.

[Unknown Analyst]

That's very clear, John. It seems [ the space ], you had reallocation to fulfill all those capital needs. My last question has to do with Brazil beer. I mean what you said regarding Brazil volumes coming down in April, whatever 20%, which I think is not a big of a surprise. When you think about consumption locations in channels, is it fair to say that beer has not much -- followed much more than that in the month of April. So I guess the question is regarding your fixed assets and how beer is right now helping or could be more of a headwind for you in the second quarter and the remaining of the year. And what [ we call ] set that's steeper than in soft drinks collapse in the consumption of beer.

[Constantino Montesinos, executive]

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

[Unknown Analyst]

That's okay. That's okay. I mean they've been gaining market share. So I'm sure they're very happy with the work that you're doing in the case. So congrats for that.

[Operator]

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

[John Santa Maria Otazua, executive]

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

[Operator]

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