Coca-Cola Femsa SAB de CV

NYSE:KOF

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to the Coca-Cola FEMSA's First Quarter 2022 Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions]

During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as a good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based on 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 to discuss Coca-Cola FEMSA's first quarter 2020 results. With me on the call today are Constantino Spas, our Chief Financial Officer; and Jorge Collazo, Head of Investor Relations.

Against the backdrop of what is still a volatile environment, we are building on last year's positive momentum to deliver a solid start to the year. Our volumes increased across all of our markets, while our consolidated revenues and operating cash flow grew double digits.

Importantly, we continue delivering accelerated results across all our strategic fronts. We are leveraging the strength of our enhanced cooperation framework with the Coca-Cola Company to align and execute ambitious growth plans and investments, while we opened new revenue streams and significantly advanced our digital strategy.

During today's call, I will first review our consolidated results. Then I will expand on our renewed strategy, which is based on 6 strategic corridors, with a special emphasis on our portfolio and omnichannel digital initiatives, providing examples of how we are implementing this strategy across our diverse footprint.

Before our Q&A session, Constantino will walk you through our division's performance and our hedging strategies, closing with an update on the use of our green bond proceeds as we continued progressing towards our sustainability commitments.

Before discussing our consolidated results, it is important to remind you that our recent acquisition of CVI in Brazil is included as of February 1, 2022. For this reason, we will refer to certain figures as comparable which is the year-on-year comparison, excluding the effects of M&A and currency translation.

Moving on to the first quarter results. Our consolidated volumes increased 10.1% year-on-year and 9.3% on a comparable basis. This growth was driven mainly by double-digit growth in Brazil, Colombia, Uruguay and most of our territories in Central America, coupled with solid performance in Mexico, Guatemala and Argentina.

It is important to highlight that all of our categories posted accelerated volume growth as compared with the previous year. Our core sparkling beverage category grew 7.4%, driven by 6.7% growth in brand Coca-Cola and 9.9% growth in flavors. Our still and personal water beverage categories grew 37% and 33% respectively, with an outstanding rate of growth across our territories.

Once again and despite the effects of Omicron during January, our on-premise trade channels volume accelerated, especially towards the end of the quarter. For example, in Brazil, our on-premise channel grew 25%, while the traditional trade increased 15% year-on-year, outperforming a resilient modern trade.

Importantly, our single-serve mix recovery continues across all our territories. Indeed, our single-serve mix recovered an additional 2 percentage points in Mexico and Brazil as compared with 2021.

Our consolidated total revenue growth accelerated, increasing 14.6% year-on-year and 13.4% on a comparable basis. This growth was driven by our solid volume performance, coupled with our pricing initiatives, revenue growth management, positive price mix and favorable currency translation effects.

Notably we achieved a solid performance despite the decline in beer revenues resulting from the transition of Heineken's beer portfolio in Brazil. Despite the volatility in supply chain and raw material environment, our gross profit increased 13.5% and our gross margin remained resilient, contracting only 50 basis points.

Our pricing initiatives, revenue growth management and favorable raw material hedging strategies substantially mitigated margin pressures, mostly from higher PET and sweetener costs across most of our territories. Our operating income growth accelerated sequentially with a solid 16% growth year-on-year, leading to an operating margin expansion of 20 basis points.

On a comparable basis, our operating income increased 13.9%. This performance reflects fixed and variable expense efficiencies across our operations as well as a reduction in other operating expenses, mostly related to contingencies recognized during the same period of 2021.

Our operating cash flow for the quarter increased 11.6% year-over-year, resulting in a resilient operating cash flow margin of 19.2% as we substantially protected our profitability to deliver solid operating cash flow growth.

Finally, our controlling net income declined 8.3% to reach MXN 2.9 billion, impacted mainly by noncash unfavorable effects in our comprehensive financing results such as market value loss on financial instruments related to mainly to increases in interest rates and a foreign exchange loss that resulted from the appreciation of the Mexican peso and the Brazilian real as applied to our U.S. denominated cash position.

I'll now take a moment to provide you with a strategic update. As we have mentioned in previous calls, over the past years, we have been adapting and reshaping our company to thrive in the new business environment.

In 2019, we began the implementation of our Fuel for Growth program, which is an efficiency program, allowing us to restructure and functionalize the company while delivering savings and the necessary agility to navigate the pandemic as a more resilient organization.

Building on this transformation during 2021, we announced a fundamental part of our future ambition, our enhanced cooperation framework with the Coca-Cola Company. This enhanced cooperation framework enables a model that is aligned for the long term, opening up the opportunity to work with the Coca-Cola Company to leverage the Coca-Cola portfolio, our combined capabilities and our deep customer relationships for accelerated long-term system growth.

This framework adds new areas to our business relationship, including the alignment of ambitious growth plans, digital initiatives and the exploration of potential new revenue streams such as the distribution of beer, spirits and other products. Importantly, we have aligned the economics of our business and management incentives as to which investments and profit split levels are mutually beneficial for our -- for both parties. Thus providing us with the long-term certainty and the right incentives to invest and align behind our business growth and market development capabilities towards long-term system value creation.

Aligned with this framework, on April 19th, we announced a new distribution agreement with the Campari Group in Brazil, another step to strengthen and consolidate our multi-category platform with high potential leading brands.

Now in conjunction with the release of our 2021 annual integrated report, we have renewed our strategy under a new concept that we call RE-EVOLUTION. This strategy is based on 6 strategic corridors.

First, we are rapidly building and rolling out an omnichannel multi-category commercial platform that encompasses our business-to-business and direct-to-consumer channels. Second, we are developing a consumer-centric winning portfolio with the options for every consumer taste and lifestyle. Third, we are fostering an agile digital-savvy, people-centric culture, reshaping our company through talent, enabling key organization capabilities.

Fourth, we have further deepened our company's commitment to sustainable development by placing sustainability at the heart of our organization and every decision. Fifth, we are digitizing our core IT capabilities with an improved architecture to facilitate the scale and integration of our omnichannel strategy. This is critical as we are undergoing a significant digital transformation, not just in the front line, but enabled by the implementation of a robust backbone in systems. And finally, we plan to actively pursue value-enhancing acquisitions.

We are not only exploring traditional opportunities to shape our Company's future footprint, but also prioritizing adjacent categories for portfolio expansion and capabilities to complement our value proposition.

Now let me share a few end highlights of the strategy implementation across our markets. In Mexico, our portfolio initiatives focused mainly on affordability, multipacks and innovation, which has enabling us to grow the sparkling beverage category and to accelerate our momentum in still beverage category, including on Hydration, Energy and Nutrition segments.

To give you a sense, we have now reached 85% coverage in our territory with our 2.5-liter universal returnable bottle, up 7 percentage points as compared with the end of 2021. Regarding innovation, our new formula of Coca-Cola Zero sin azucar continues to outperform the sparkling category, growing double-digits as compared with the previous year.

On the omnichannel front, to show you the speed at which we are escalating our platform, in just the first quarter of the year, we have increased the number of active monthly purchases by more than 80% in Mexico, to reach approximately 220,000 by the end of the first quarter. This means we added more than 100,000 monthly buyers in just a quarter.

In other words, 30% of our total client bases in Mexico is now active monthly buyers. We continue to increase the number of routes and households we serve with our direct-to-consumer Coca-Cola and [indiscernible] model and home delivery routes.

During the first quarter, we added more than 120 new routes and implemented strategies to increase the number of monthly buyers while continued improving our delivery effectiveness and net promoter scores.

In summary, in Mexico, we are progressing across our strategic initiatives, increasing execution, bolstering affordability and advancing on both the B2B omnichannel and direct-to-consumer home delivery fronts.

Moving on to Brazil. Despite a relatively challenging January, we saw sequential improvements in February and an important acceleration in March to deliver an outstanding quarter. All of our categories posted double-digit growth, highlighted by a solid 15% growth in brand Coca-Cola and 11.4% growth in flavors during the quarter.

We are also -- we also continue to strengthen our competitive position, gaining share in the sparkling, teas, soft drinks, energy sport drinks and energy category. Aligned with our omnichannel platform corridor, we now have more than 160,000 monthly buyers, enabling us to increase the percentage of digital orders to 40% by the end of the first quarter, up from 30% at the end of 2021.

Looking ahead, we are optimistic that we have the right capabilities to continue growing in Brazil. We expect to continue strengthening our portfolio, bolstering our affordability capacity and delivering outstanding market execution to provide the right pack at the right place for our Brazilian consumers as we continue expanding our multi-category omnichannel platform.

In other markets such as Colombia, Panama and Uruguay, we are bolstering the affordability of our portfolio. For example, the rollout of our universal bottle, which allows us to provide affordability not only in brand Coca-Cola, but also in flavors and still beverages, is providing positive results. Indeed, in Colombia, this initiative is growing more than 50% as compared with the previous year.

Similarly, in Argentina, Colombia and Panama, we are capitalizing on the reopening of the on-premise channel and the strength of our multipack strategy to recover our single-serve mix, which has increased by more than 6 percentage points in these key markets.

Finally, on the omnichannel front, we continue to see positive results in Colombia, Panama, Nicaragua and Costa Rica. We have increased the number of clients with monthly purchases by more than 30% as we continue enhancing and accelerating our client onboarding and purchase conversion to our digital systems.

So summarizing the progress and speed at which we are building our omnichannel platform. On a consolidated level, at Coca-Cola FEMSA, we have reached more than 400,000 active monthly buyers. Just to give you a sense of this space, the number of active monthly buyers increased close to 25% in March as compared to February. And we achieved more than 1 million digital transactions just last month.

Importantly, our digital revenues in March amounted to $80 million, more than 7% of our total revenues. In other words, digital revenues in 1 month accounted for more than 20% of the digital revenues we achieved during the entire year of 2021.

I want to also emphasize the significant investments we are making to continue bolstering our affordability, capacity, especially behind returnable bottles. During the last 2 years, we have invested more than $500 million in returnable production lines and in bottles and cases. And now for 2022, we expect to install 10 new state-of-the-art production lines, 3 of them especially focused for return on capacity in Mexico.

Our positive momentum shows that we are executing and delivering against our strategic agenda. Looking forward, we will continue building a consumer-centric multi-category portfolio, accelerate the rollout of our digital B2B and direct-to-consumer omnichannel platforms and continue to play sustainability at the center of everything we do, while fostering an agile, people-centric culture across all of our markets and organization.

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

[Constantino Montesinos, executive]

Thank you, John, and Good morning, everyone. I will now expand on our division's first quarter results. In Mexico, our volumes increased 3.7%, while our total revenues increased 10.6%, driven by a very solid performance in most of our channels, pricing initiatives, revenue growth management and a favorable price mix.

Moving into Central America, in that region, our operations continued to deliver strong performance with 11.8% volume growth and 15.8% revenue growth as compared to the first quarter of 2021.

Remarkably, our volumes in Guatemala continued to show significant volume growth even when considering a high comparable baseline. As a result of this, our quarterly revenues increased 11.4% in the Mexico and Central America division.

On the profitability front, our gross profit increased 7.1%, which resulted in a gross profit margin of 48.4%, representing a margin decrease of 190 basis points as compared to the first quarter of 2021.

This contraction was driven mainly by increases in commodity prices, which were partially mitigated by revenue management and raw material hedging strategies.

As we have previously mentioned, although we continue to see the normalization of certain operating expenses during the quarter, we were able to double down on savings and efficiencies. As a result, and despite a tough comparable baseline, we're able to increase our operating income by 13.4% and to expand our operating margin by 30 basis points in the Mexico and Central American region.

As we continue to see a dynamic raw material and supply chain environment, we expect to continue to protect our profitability through a very disciplined raw material hedging strategy and focus on driving expense efficiencies. Our operating cash flow margin for the quarter was 23.2%, which represents a slight contraction of 50 basis points.

If we move on to South America, this division delivered a solid 17.7% volume growth as compared to 2021. This increase was driven mainly by the strong volume growth of 20.2% in Brazil, which includes the consolidation of CVI and 18.8% in Colombia, while Argentina and Uruguay also delivered strong volume performance.

Despite facing tough weather conditions and the new COVID-related constraints by the beginning of the year in Brazil, we were able to deliver a very solid quarter, punctuated by an outstanding performance and strong consumer demand during March that also was helped by very good weather, particularly in March.

On a comparable basis, excluding volumes of CVI in Brazil, volume in the division would have increased a solid 15.7%. Our revenues for the division grew 19% as the revenue management initiatives, pricing and volume growth were partially offset by the transition of our beer portfolio in Brazil.

If we exclude the currency translation and M&A effects, our top line would have increased a solid 16.1% during the quarter. On the profitability front, our gross profit in South America increased 25.5%, expanding our margins by 200 basis points. This increase was driven mainly by the operating leverage resulting from volume growth, favorable price mix effects and raw material hedging strategies, coupled with the resumption of tax credits on concentrate purchased from the Manaus Free Trade Zone in Brazil. These effects were partially offset by increases in raw material costs.

Our operating income for the division increased 23.2%, while our operating income margin expanded 30 basis points as compared to the first quarter of 2021, driven mainly by higher gross profit and an increase in operating leverage resulting from volume growth and expense efficiencies.

These effects were partially offset by the transition of our beer portfolio in Brazil and higher freight and labor costs. Finally, our operating cash flow in South America increased by 17.4%, resulting in an operating cash flow margin contraction of 20 basis points.

Now moving onto a comprehensive financing results which recorded an expense of MXN 2.2 billion. This is an increase of 93.9% as compared to the previous year, mainly by the following noncash effects.

First of all, a loss of MXN 936 million in the market value of financial instruments, a foreign exchange loss of MXN 165 million and a lower gain on a monetary position on inflationary subsidiaries related to Argentina. These effects were partially offset by a decline in our interest expense net, driven by an increase in interest income.

Notably underscoring the strength of our balance sheet and cash flow generation, we were able to finish the quarter with a cash position of more than MXN 49 billion, representing a 5% increase as compared with the end of 2021.

Now let me provide you with an update on our raw material hedging position for the remainder of 2022. In Mexico, we have hedged approximately 75% of our PET needs for 2022 and more than 90% of our high-fructose corn syrup needs. Notably we have also hedged more than 35% of our aluminum needs in the country while in Brazil, we had hedged more than 75% of the sugar needs for the year.

We're confident that with these hedges, coupled with our ability to segment our consumers and revenue growth management capabilities, we will continue to enable our sustainable growth and mitigating margin pressures and protect our profitability during 2022.

Highlighting the strength of our cash flow generation and our commitment to total shareholder return, at our Annual Shareholders Meeting on March 28, our shareholders approved the proposed ordinary dividend of MXN 5.43 per unit with its first installment to be paid on May 3, 2022.

As John previously mentioned, one of our strategic corridor is placing sustainability at the heart of our organization. And consistent with this, I want to touch on our approach to sustainable financing and provide you with an update on our progress towards key sustainability targets.

First of all, an update on our allocation of our green bond proceeds. As you know, we issued our first ever green bond in September 2020, valued at USD 705 million, at the time the largest for a Latin American corporation and a first for the Coca-Cola system.

We're pleased to report that as of December 31, 2021, we had already allocated USD 350 million of green bond net proceeds to eligible green projects. The total investment so far represents 49.7% of the net proceeds and includes investments in all of the 3 main categories: climate action, water stewardship and circular economy.

Now let me provide you with an update on our progress on key sustainability targets. First, regarding circular economy, we have a target of achieving 50% of recycled resin in our PET bottles by 2030. During 2021, we achieved 31% recycled resin as compared to 29% in 2020.

Second, we are well underway to achieve our water efficiency commitments, which are 1.36 liters of water per liter of beverage produced by 2024 and 1.26 by 2026. By the end of this year, we have achieved an industry-leading 1.47 liters in water use ratio improving from 1.49 in 2020.

As part of our commitment with the science-based target initiatives, we committed to reduce 50% our Scope 1 and 2 absolute greenhouse gas emissions from our operations by 2030 as compared with our 2015 baseline.

Notably, we have already reduced these emissions by 28%. Additionally, we have increased the use of clean energy in our operations to 85%. You can find more information on this on a recently published annual integrated report, which is available in our website.

And finally, I want to mention that we continued making significant progress with regards to our pilot tests for distribution of other products and categories from leading companies and brands.

For example, in Mexico, we're expanding the pilot test we have for personal care products with Procter & Gamble and for spirits with the Azure to more territories in the country. Additionally, last month, we began a pilot program with Kellogg's in the Toluca region.

In the case of P&G, we already began tests in the city of Veracruz, while with Diageo, we began in Puebla. In both cases, we're now expanding these pilot tests to more territories as we continue increasing our value proposition for our customers and for our partners, gathering valuable learnings and insights.

And with that, I will hand the call back to John for his final remarks. And thank you very much for attending the call today. John?

[John Santa Maria Otazua, executive]

Thanks, Constantino. Although the beginning of 2022 has enjoyed its fair share of volatility, we remain ambitious about our ability to continue delivering accelerated results across all of our strategic fronts. We are convinced that we have the right capabilities to continue growing our top line while substantially mitigating margin pressures for the remainder of the year.

I'm encouraged by our renewed strategy and by the speed at which we are implementing Coca-Cola FEMSA's transformation. We remain committed to continue accelerating our digital edge while building a customer-centric multi-category portfolio together with our partner, the Coca-Cola Company.

Thank you for your continued trust and support and for joining us today. Operator, I'd like to open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Alan Alanis at Santander.

[Alan Alanis, analyst]

Congratulations for the results. I guess you left the most interesting news to ask a question at the very end. So now to get it clear, you have a pilot program with the Azure in Mexico with Kellogg's and with Procter & Gamble in Mexico. Well, congratulations for that keep us posted. I mean I think we can ask a lot of questions in terms of how far those agreements can go, John.

I don't want to -- I don't know if you want to comment a little bit about that, but your -- what's the vision there? That will be the first question. And then I have a couple of financial quests for Constantino.

[John Santa Maria Otazua, executive]

Thanks, Alan. Thank you very much. At this point in time, what we are doing with those -- our 3 partners, Diageo, Kellogg's and [indiscernible] are we're basically into pilot tests right now. And so, depending on how the results go and what have you, I would say that that will be determining what kind of arrangements we're coming into.

So today, it's a -- and it is what it is. As its name says, it's a pilot test. And we're expanding those to understand what the further learning are. But so far, all the results we've gotten are very, very encouraging for both parts, okay? And what we are seeing throughout -- and the underlying is we're selling more per point of sale of the total portfolio, but also more items per store of the Coca-Cola portfolio that we have. So the synergies on this are very, very good. Thanks. You had some other questions for Constantino?

[Alan Alanis, analyst]

Yes. The other one really quickly. I mean they are much more financial questions. I mean, regarding -- we're seeing a big discrepancy in the move of the operating income and the EBITDA this quarter. What were the changes that you're doing there in the depreciation? And if you could just expand more -- a little bit more on the financial losses below the operating line, just to confirm that these are like non-recurrent and then they have anything to do with your hedges, congratulations also for having all the hedges for the remaining of the year. It seems 30% of sugar in Mexico, 75% in in Brazil and so forth. But just to understand a little bit more the moves on the depreciation and the extraordinary financial charge for the operating line.

[Constantino Montesinos, executive]

Yes. Thank you, Alan. I'm going to have Jorge answer this one, he's eager to answer. So I'm going to give -- I'm going to give this question to Jorge and then I can add some more color, if necessary. Jorge, can you jump in please?

[Jorge Alejandro Pereda, executive]

Sure. Yes, Alan. So basically, the main effect is related to exchange rate actually Alan. There's -- as you know, we are having this virtual effect because of foreign exchange related to the zone.

So it's not really changes on the depreciation. That's what I mean, it's coming mainly from a benefit from the appreciation of our currencies that we saw during the quarter, so that they don't actually impact the EBITDA. It's only on the operating income line.

[Constantino Montesinos, executive]

Alan, and actually, on your question on the pilot programs, I wouldn't wanted to add some more color and context on the initial remarks. This is evidently not only focused on Mexico.

We're running different pilot programs in different regions; in Brazil, in Colombia and in Panama as of today, on top of Mexico with different partners. And particularly in Brazil, I think that we announced recently an agreement with Campari. And this is very exciting too because as John mentioned, the synergies that we're getting with some of these key partners that are fantastic brands by the way. And I think that's a commonality that we're picking up in this approach to partnership. In the case of Campari, we believe it's an ideal partner. It's got excellent brands. It's got great potential to grow by leveraging the brands in our distribution network. And we're taking them to much more points of sale than what they reach today.

That is something that is key. I mean, particularly partners that don't have a strong DSD model as part of their core route to market are getting enormous benefits when we look at the pilots, not only in distribution but also in execution. So in the case of Campari in particular, it's a distribution contract that brings additional branded products and in the case of Spirit to our portfolio in Brazil.

And in general, in terms of this agreement just represents one more step further goal to continue offering, as John mentioned, a winning portfolio and proves that our capabilities are working successfully. So approaches like the one with Campari in this case, which go as a multiyear long-term agreement for 5 years, will allow us to work for strategies in different channels and regions with different emphasis.

And that is something that will become I think over time a commonality on the type of approach that we take while we scale up these pilots into larger agreements throughout the different markets where we're operating. So I wanted to make sure that we made the point across that it's great in Mexico as of today with these partners. But we're also scaling up other agreements with different FMCG in this case spirit players in all of the different markets. I hope that helps and provides enough information for the question.

[Jorge Alejandro Pereda, executive]

And Alan, I know you asked as well around the comprehensive financing results. And that is mostly related to the mark-to-market of derivatives that we have related to interest rates. And so when the U.S. rates moved up, that created this noncash effect of close to MXN 1 billion that we have this quarter.

[Constantino Montesinos, executive]

Yes. So they're all noncash FX.

[Operator]

We'll move to our next question with Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

Just along the lines of what we've been talking around these pilot projects, and thanks for clarifying that you're also doing that in other regions. So can you help us understand what ultimately -- how you think about the mix going forward? And what's like a kind of the preferred product? Because obviously, you're running tests with spirits companies like Azure, you turned Campari into a deal. But you also have mentioned P&G, Kellogg.

So what's like the perfect target for you? And is there any conflict of interest that you may have to manage at some point when it comes down to deciding what you want to put on the truck or not? Just to understand a little bit the drivers of these different potential partnerships.

[John Santa Maria Otazua, executive]

Sure. Thank you for the question. Let me answer it this way. Let me see if I can give you more color. What we're looking for is a portfolio of products that gives us a much better approach to our customer base depending on the channels and occasions that we serve.

So ultimately, what we would like to do is focus on not so much a single brand, but have the partnerships in place that allow us to have a significant share of wallet of each one of our clients.

So if you think about this in terms of what we can deliver through the Coca-Cola system and Coca-Cola FEMSA towards each one of our either small shops or bars in Brazil, et cetera. We're looking to go between -- from a starting point of about 20% share of wallet being of what that bar or store basically consumes to about 40% share of wallet, okay, to be able to become a very, very customer-centric and preferred supplier.

And with that, we can build other types of products and services on top of that platform as we go forward. Does that help?

[Constantino Montesinos, executive]

In addition, there's also some considerations that we take into the analysis that are more related to our internal processes, right? How synergistic or how much complexity does this add to our logistical supply chain network?

I mean, is it -- is it congruent with the type of processes that we have internally so that we don't affect our execution. So there's all other considerations. I mean, definitely, this is very focused on a consumer and customer-centric portfolio definition. But we also take into account the fact that we are a very efficient operation.

And we tend to look at it from an angle also of the least disruption possible in our supply chain. So that's also something that we need to take into consideration. And obviously, as you can pick up from the type of partners that we -- the network and partner that we're putting together, there's also an interest in companies and brands that are great brands, and at the same time, companies that are very focused on investing behind these brands on consumer insights that can provide us with the tools. So that we can transform those insights into executional capabilities that ends up driving more growth, not only for the partners and for the customer, but also, as John mentioned, for the Coca-Cola portfolio.

Those are interesting analysis that we're learning actually. And we're incorporating as we learn and we progress in this journey.

[Operator]

We'll move next to Isabella Simonato with Bank of America.

[Isabella Simonato, analyst]

So following up on the distinct partnership, right? It's interesting that you mentioned this dimension right of share of wallet that you have and then potentially wanted to be. How do you think when you think about the category, right, that you plan to partnerships with brands, how do you think about creating value and volume, right, during the portfolio that a borrower eventually carries and points in general, how strategically you think about that equation? That would be the first question.

And just switching gears a little bit to consumption and volume performance, especially in Brazil, I think, was a very same quarter -- and 2 questions, if you first give us a color of how you're seeing consumption environment post March, right, and this involvement throughout the quarter? And second, specifically on the still beverage, if there was a specific driver there for that 70-plus percent growth year-over-year or that was just the comp just put a bit more color on to that.

[John Santa Maria Otazua, executive]

Yes. Isabella, thank you very much for the question. Let me see there's a lot of questions there. The first one is we have in terms of where we're going, we have a clear roadmap about what are the categories that we want to do kind of embrace to put on our omnichannel multi-category platform.

And those would give us a preferential -- it would be preferred in terms of both customer and at the same time value as what Constantino would say. And it would fit pretty well in terms of our supply chain. And those -- as we start going forward are being executed. We're trying to look at pilots with them in each one of the countries.

So it's not only a volume issue. It's more about how do we go out there and get the right categories and the right margins into our business to make sure that they become ROIC accretive. And therefore, as we go -- as we move forward, that is the focus of that roadmap that we're putting into place.

Again, we think the share of wallet that we're talking about is something that would allow us to become very sticky in terms of a platform for the trade, but obviously, in a very synergistic way with the customer, consumer and the Coca-Cola portfolio.

Going forward in Brazil, I think we had a very good quarter as you said. But the underlying growth trends that we're seeing in our business are very strong. Even as we go forward in April, April is continuing to have very strong volume performance, not as much as in March. March is probably affected a little bit by weather.

But we have the right strategies in place of affordability, multi-packing, single-serve multi-packing, dual packing, ensuring that we have category enhancements with growing categories such as energy. And underlying, we see continued consumer activity, good macroeconomic trends throughout the year. And we think we're going to have a very solid growth year in Brazil.

It's not something that we're just seeing as a first quarter event. But it's gaining momentum also in terms of execution in terms of refrigeration penetration. And overall, we're seeing our business in Brazil improve quarter-by-quarter-by-quarter. Constantino, if you add?

[Constantino Montesinos, executive]

Yes. And in the case of stills, Isabella, it's a combination of definitely of comparables. But at the same time, when you look at categories like tea, energy drinks with the Monster brand and sports drink, they're growing phenomenally.

I mean they have gained great traction with consumers or execution is fantastic. And actually, we have achieved record market share for those categories in this quarter. So it's a combination of the comparable, but also consumer trends and macro environment and executional capabilities overall.

But particularly in these 3 categories, there's also a specific trend that's accelerating in terms of performance in the market. So the combination of all those effects has delivered an excellent result for the stills category in business this year.

[Operator]

We'll go to our next question with Lucas Ferreira at JPMorgan.

[Lucas Ferreira, analyst]

I have also 2 questions. One is regarding multi-category. If you can give us a sense how big you think this sort of a total addressable market could be for you in Mexico and Brazil, when you identify the categories, right, are synergic to your business, so how big this addressable market could be in each of the countries. If you have an idea or sort or what's the fair share of this market you could have in say, in the midterm?

And the second question is regarding the consumption environment in Mexico, especially talking about price elasticity, how comfortable you are to kind of continue to face cost pressures going forward. There are talks the government trying to sort of limit inflation. I don't think you're directly impacted if you can discuss this or how the government -- these initiatives to potentially curb in price hikes in some categories, if this could be directly or indirectly impacting you at some point?

[John Santa Maria Otazua, executive]

Constantino, do you want to take the first one? I'll take the second one.

[Constantino Montesinos, executive]

Sure. In the case of the multi-category, I mean, it's still very early days. We're in experiment patient phase. That's why as we're mentioning most of these initiatives are at the pilot level right now. So we're working on the analysis of how much -- what's the actual attainable size that we can achieve.

We have some hypothesis. But I think it's not -- it's not proper to share those at this point in time as we need to have a little more information on that. Having said that, as John mentioned, we're looking at -- and we believe we had some hypothesis around attainable share of wallet in some particular channels.

And depending on the market, depending on the channel, there is -- we have this underlying hypothesis that we can achieve anywhere between 30% to 40% of share of wallet of the store, in the fragmented trade store. That varies evidently between on-trade and off-trade.

But I think that we can put together a platform that delivers against a very solid piece of business with our fragmented trade 3 pillars around that 30% to 40% share of wallet. That is the underlying hypothesis. We need to prove that we can deliver against that. And there's -- that's why we're working on all of these pilots.

So I hope that helps. Probably in the upcoming months, we'll have more information. And we will definitely be sharing the dimension of what we're trying to achieve on the multi-category front.

[John Santa Maria Otazua, executive]

Yes. And just going back, Lucas on the Mexico consumer environment, I think is that, yes, there are some preliminary discussions between the Mexican Government of trying to elaborate a program of trying to reduce inflationary impact across a lot of different sectors.

Of which we have not been part of as of today. We don't anticipate being part of that either. I think the other issue that you mentioned was the inflation outlook in Mexico. And I think what we can anticipate is yes, probably slightly growing inflation from this level here.

But our revenue growth management strategies are in place that we think that we can cover that and continue with positive elasticity in terms of maintaining our volume growth. We have been growing in an environment that is -- that it has had high inflation. And we are seeing growing volumes and accelerating volumes in Mexico over the last quarters.

And we think that we can maintain that. Now we have the portfolio in place to do that, the initiatives in place to do that. And we think that we have a variety of consumer price points and package choices that allows us to move in and out of a consumer when they have different pain points.

So just kind of wrapping up with the question that you asked was, is there a very, very formal program that has been elaborated in Mexico. I think there is something that the government is starting to work with different sectors of the public sector -- private sector in Mexico for price controls.

The extent -- and I wouldn't call it price control, I would think it's just inflation minimization impacts for certain products. And we don't see this as being broad spread, price controls as it could be perceived someplace else.

[Operator]

We'll go next to Sergio Matsumoto with Citi.

[Sergio Matsumoto, analyst]

I wanted to kind of deeper into this pricing and inflation question. The pricing in Mexico appears to be at least for this quarter, sort of like in line with inflation, like that high single-digit number.

Now historically, your category has grown more robust pricing often above the inflation. So I'm wondering if you could give us some color on what you have in mind in terms of how you're seeing this revenue growth management that you just mentioned because there might be some mix effect of perhaps more returnable or maybe you have some -- these hedges that Constantino mentioned.

So perhaps you don't have to do a step up pricing right now. But maybe there's more coming later in the year, but perhaps in the summer. So if you could kind of give us some color there, that would be great.

[Jorge Alejandro Pereda, executive]

Sure.

[John Santa Maria Otazua, executive]

Sorry, Constantino, go ahead.

[Constantino Montesinos, executive]

No, go ahead, Jorge. Go ahead. Go ahead, please.

[Jorge Alejandro Pereda, executive]

Just some initial comments on that and Constantino please complement. But I would say, Sergio that what we are leveraging on is on our revenue management capabilities. And so, we are leveraging on a lot of affordability.

As John mentioned in the prepared remarks, we are investing on returnable more paybacks and execution to drive top line. So far, during the year, we have increased prices basically by the end of the quarter during March.

So the effect of that price adjustment is not fully reflected yet on the figures now. But what we're looking at is on a combination, Sergio, offering this affordability to our consumers while at the same time we have this segmentation capabilities to drive top line growth.

And of course, that should be also put together with volume growth. So that's what we are looking at. Yes, we are looking to leverage on these revenue management capabilities, which we believe that at the end of the year, we should have a pricing, an average price that could be slightly above inflation.

But as I said, it's not full headline pricing is more of a leveraging on these revenue management and price pack architecture that we have in Mexico.

[Constantino Montesinos, executive]

Yes, that's exactly it, Sergio. What I would add is, as Jorge mentioned, we don't focus primarily on headline pricing, but we do it through our RGM strategy.

And in that regard, I mean, we use a lot, particularly in Mexico, which is the most developed market. We use a lot of big data analytics to try to understand what's the best price-packed architecture for the market? And in line with that, take particular pricing in a very sequenced manner throughout the year.

So all in all, at the end of the year, just to reemphasize, I think that as Jorge mentioned, you will see most likely an outcome of pricing ahead, slightly ahead of inflation in Mexico and in Central America and in line with inflation in South America.

That would be my expectation based on all the pricing architecture and RGM strategy that we have put in place for the year.

And they're better part of everyday business and processes within Coca-Cola FEMSA.

[Operator]

And due to time constraints, we'll take our final question from Alvaro Garcia at BTG.

[Alvaro Garcia, analyst]

John, Constantino, thanks for the call. Two questions for me. The first one on the 6 corridors, thanks for that update.

And on the first sort of corridor that you highlighted, John, you mentioned omnichannel, integrating D2C into -- I'm just curious if there's sort of -- sort of more integration across your different omni businesses and if there's any sort of overhaul an organization that you might want to highlight? That's my first question.

[John Santa Maria Otazua, executive]

Okay. Now right now, what we have done is -- when I was talking about the omnichannel businesses, we're basically looking at an omnichannel strategy that is B2B directly for our traditional trade.

And there, we have a lot of initiatives to be able to make that an omnichannel seamless order taking delivery system.

Separately, you have and primarily in Mexico, the direct-to-consumer piece, which is Coca-Cola and Tonicorp and that's where we have the most developed business. And what we are doing there is basically, first, digitizing our businesses. And we were going -- taking it from a traditional knock on the door.

Let me give you a jug of water plus milk, et cetera, piece to a digitized sales force. And now the second component of that would become the development of an application that would allow you to order from home without having the truck come to your door.

So it's really a change in the dilemma that -- or the paradigm that we're looking at in terms of our business. So we can actually going to go from there out. So at this point in time, no, we do not anticipate any types of organization changes. We do continue to look at digitizing our direct-to-consumer platform. We do look at going out there and making it a better and we have better applications or have more multi-category platforms on the truck as we go forward.

And as I said, we're growing that business by additional routes by digitizing the business and by going out there and creating a digital application that will allow for us virtue to pull it all together.

[Alvaro Garcia, analyst]

Great, so same quarter but still 2 separate businesses between D2C?

[John Santa Maria Otazua, executive]

Right.

[Alvaro Garcia, analyst]

Okay, great. And then just one last one, a bit of a nerdy question. But I noticed in the -- and there might not be anything here. But I noticed on the 20th when it comes to your cash-generating units, sort of how you value your distribution rights and your goodwill, you have these volume growth numbers through 2031 and there were significant increases for places like Colombia and Brazil.

And I was wondering if there was anything to that at all or what we should think of those very steep increases?

[Constantino Montesinos, executive]

Alvaro, this is Constantino. Yes, it's actually a combination of a couple of things. One is definitely there is a change in methodology in the way we are projecting going forward.

And the other one is also we -- as John mentioned, we are also aligning more ambitious growth plans and expectations going forward.

So part of that is also an update and a reflection of that. So it's a combination of those 2 things. This projection changed also the timeframe. For example, first, we used to project in 10 years. And now we are changing the methodology to project 5 years.

And then, we have the long-term projections from that. So it's a combination of those 2 big spending either.

[Operator]

And that will conclude the question-and-answer session. I'll turn the conference back for any additional or closing comments.

[John Santa Maria Otazua, executive]

Thank you, operator, and thank you all for attending the call today and for your confidence and interest in Coca-Cola FEMSA.

I believe we're starting off the year with a very strong performance. We feel that we have the momentum in the business to maintain a very, very solid year for Coca-Cola FEMSA in 2022.

And as always, our Investor Relations team is available to answer any of your remaining questions. So thank you very, very much and have a good day and good weekend.

[Operator]

Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time.