Coca-Cola Femsa SAB de CV

NYSE:KOF

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, everyone, and welcome to Coca-Cola FEMSA Second Quarter 2019 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 that are based on -- upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. And now at this time, I'd like to turn the conference over to Mr. John Santa Maria, Coca-Cola FEMSA's, Chief Executive Officer. Please go ahead, sir.

[John Santa Maria Otazua, executive]

Thank you. Good morning, everyone, and thank you for joining us to discuss our second quarter results. Constantino Spas, our CFO; and Maria Dyla Castro, our Investor Relations Director, are also with us today.

I am pleased to report solid second quarter results, showing our continuous progress and positive momentum. In Mexico and Central America, we generated strong top and bottom line growth driven by our steady, balanced revenue growth, a more stable raw material environment and cost and expense efficiencies. Despite currency headwinds, our South America division achieved positive top line performance driven by strong volume growth in Brazil and healthy pricing across the division. With better-than-expected buying in Colombia and early signs of macroeconomic stabilization in Argentina, we are encouraged as we enter the second half of the year.

For the quarter, we delivered solid consolidated top line growth of close to 8%, while our comparable revenues grew double digits, 11.6%. This growth was driven mainly by volume growth in Brazil, Colombia and Central America, pricing above inflation and positive mix trends across many of our operations.

Importantly, we delivered these strong results despite unfavorable translation effects from all of our operating currencies into Mexican pesos. Our operating income increased 6.5%, while our comparable operating income rose 13.8%. This growth was driven by healthy top line results, expense efficiencies in Mexico and Brazil and more stable sweetener PET cost environment overall. These effects were partially offset by higher a concentrate cost in Mexico, the reduction of tax credits on concentrates purchase from Manaus Free Trade Zone in Brazil, the depreciation of all of our operating currencies as applied to our U.S. dollar-denominated raw material costs, and restructuring severances of MXN 512 million during the quarter. These restructuring severances are related to the implementation of an efficiency program that I will refer to in just a minute.

Notably, our operating cash flow grew 5.2%, while our comparable operating cash flow increased 9.2% year-over-year.

Consequently, our controlling net income increased by more than 25% for earnings per share of MXN 0.21, and an equivalent of MXN 1.66 for earnings of KOF UBL Unit. Normalizing our controlling net income by removing restructuring severances and normalizing our tax rate, our controlling net income would have increased more than 28%.

Shifting gears to discuss our efficiency program. As you know, we have taken significant steps in the transformation of Coca-Cola FEMSA in recent years. When I look at our company today, I see a very different organization than only a couple of years ago. We are transforming our capabilities to new levels, using technology and big data analytics to drive our productivity and efficiency. However, the world of today is a world of uncertainties, rapid change and technological disruptions. For these reasons, we are defining and implementing fuel for growth, instead of ambitious productivity and efficiency initiatives to create an even leaner and more agile organization fully focused on our consumers. These initiatives consist on strengthening our organization through new ways of working, eliminating redundancies and leveraging on digital enablers to streamline our cost base, while generating the funds to support our strategic initiatives and reinvest in the same.

We have functionalized and redesigned the corporate structure with the main objective to align the whole organization is for our growth processes. The first to set off these initiatives -- the first set of initiatives resulted in restructuring severances in Argentina, Central America, Colombia and Mexico during the first half of 2019. Although restructuring decisions are always difficult, we are confident in these initiatives, which are based on increasing stands and eliminating redundancies and layers will unlock value, providing us with the required flexibility to continue driving growth in our businesses.

Overall, we carry on taking important steps across our strategic pillars. First, we continue to accelerate our winning portfolio build up by leveraging our innovation, affordability and the channel presentations to satisfy our consumer diverse mix. For example, to drive our sparkling beverage category yields with affordability, we launched a new 400 ml PET one-way presentation in our sparkling flavors in Mexico at a very attractive price point of MXN 7. Also in Mexico, we are leveraging our learnings from the Philippines, and we will be launching -- or have launched a Coca-Cola presentation of 235 ml in a returnable glass bottle at a MXN 5 price measured price point. We have 4 distribution centers rolled out with that currently. And importantly, to protect our consumer base in Argentina in this very complex environment, we launched a 1 liter returnable glass bottle at ARS 40 and have complemented that move with other tactical pricing to ensure that we continue to engage with our consumer base and grow within Argentina.

Second on innovation, for the recent launch of Coca-Cola Coffee in Mexico, we have leveraged OXXO to reach the on-the-go consumers in convenience stores. Our consumer reaction to Coca-Cola Coffee has been very impressive. To give you a sense, just in 2 months, Coca-Cola Coffee already represents 60% of Coca-Cola original 355 ml can daily transactions at OXXO. And is 3x the daily transactions of Coca-Cola Sin Az�car in the same format.

In addition, the recent life -- launch of [ Izo Vipe ] is going well, expanding our entrance into the enhanced hydration category. And as previously mentioned, we are excited to be launching Coca-Cola Energy in some of our markets during the third quarter of this year.

Moreover, our strategy to reactivate transactions and improve mix is showing encouraging results. In Mexico, we keep investing in the market, as we are installing more than 25,000 dedicated single-serve coolers to support our single-serve presentations. We are also -- we also continue driving scale and profitability improvements in the still beverage category as we gain positive momentum. Noteworthy, in Brazil, we continue to see double-digit growth year-on-year, driven by our del Valle juice portfolio and Monster energy drink.

In Mexico, our Santa Clara dairy portfolio continues its double-digit growth. While our Fuse Tea brand gains traction, growing double digits year-over-year as well. We continue taking on operating model transformation -- taking our operating model transformation even further, setting new frontiers with cost cutting of it -- pardon me, cutting-edge technology.

Following the successful roll out of KOF commercial digital platform, or KDP, across our territories in our traditional channels, we are currently testing omnichannel capabilities for order taking for platforms in Brazil and Argentina. These initiatives provide our customers with the multiple interfaces for order taking and customer engagement, which will be connected to our transactional system, we expect these tests to mature throughout 2019 and be rolled out to our key markets in 2020. This will give us the ability for our customers to order any place any time, and we'll be connecting with our customers on a real-time basis and with a single point of contact.

Additionally, we are now rolling out KDP throughout the modern channel in Brazil and Mexico, what we did in the traditional is now being replicated for the modern channels in Brazil and Mexico. This platform that uses end-to-end diagnostics analytics to serve our monetary plans, we'll be improving our execution and volumes at the point of sale.

Third, consistent with our goal of evolving into a more efficient organization, we continue to leverage and develop our KOF global business services or what we call GBS. Best-in-class support teams to enable our company's process simplification and automation in the finance, procurement and human resource fronts are all underway.

Let me take a couple of minutes to talk about sustainability. Additionally, aligned with our commitment to generating economic and social value for our stakeholders, sustainability is one of the foundations on which we build our overall corporate strategy. To this end, we already surpassed our 2020 goal of benefiting 5 million people through our healthy habit initiatives. We improved our water-use ratio by more than 20% over the last 10 years. We achieved more than 50% coverage of our bottling operations energy requirements from clean energy sources. And in Mexico, we used 30% recycled resin in our PVC packaging, putting us on track to reach the Coca-Cola company's World Without Waste goals.

In addition, in line with our commitment of collecting and recycling bottle or can for each hungry soul, we are focused on leveraging and replicating successful PET collection and recycling models like the ECOCE and IMER the first grade -- the first food-grade PET recycling facilities in Latin America to our other important -- or all of our territories in Latin America starting off by our biggest markets.

Finally, I am very pleased with the successful integration of our recent acquisition in Guatemala and Uruguay. We are celebrating a year of consolidation of these territories, which happened in May 1 and July 1, 2018, respectively. Synergies and performance are better than we expected, highlighting Coca-Cola FEMSA with the capability to acquire a core franchise and enhance business value.

We are very encouraged by the growth that we envision for both these markets and years to come. We are committed with the -- with creation of value. For this reason, improving our return on invested capital is a top priority and a company-wide effort. We are investing and managing each of our operations with an increased focus on ROIC as a key metric over the long term as well as profit growth. We are moving the necessary levers to increase our after-tax operating profit, such as improving price mix, profitability across categories, digitizing our processes, driving cost and expense efficiencies and productivity across all our organizations. Early trends are encouraging, and our commitment is for the long term. This quarter, I believe, starts to reflect that.

With that, I will now hand this over to Constantino.

[Constantino Montesinos, executive]

Thank you, John, and thank you all for your interest in our earnings call. Our commitment to disclosure and transparency and continuous improvement led us to redesign our earnings release as of the first quarter of 2019. Additionally, on our website, you can find an excel version of the financial information included in our quarterly earnings releases since the first quarter of 2018.

I will now briefly summarize the 4 main factors that affect the comparability of our financial and operating results for the second quarter of 2019 as compared to the same period of 2018. First, volumes and financial results of our recently acquired territories in Guatemala and Uruguay were consolidated as of May 1 and July 1, 2018, respectively.

With our sale of Philippines operations on December 13, 2018, according to IFRS 5, our consolidated financial statements were re-presented to exclude the Philippines figures. Consequently, the company's consolidated financial results are not comparable to the consolidated financial statements published in the second quarter of 2018. Third, as of July 1, 2018, our Argentina operation is reported as a hyperinflationary subsidiary. And fourth, starting January 1, 2019, we adopted the new standard of IFRS 16 leases, which introduces a unique accounting lease model for tenants. To better describe our business performance, for certain information, we present comparable figures, excluding the effects of: first, mergers and acquisitions; second, translation effects resulting from exchange rate movements; and third, the results of Argentina because this operation has become hyperinflationary subsidiary. For the first half of 2019, more than 50% of the negative effect on our reported results resulted from currency translation effects.

Moving on to our consolidated second quarter results. Our sales volume increased 2.2% to more than 840 million unit cases with our transactions growing even more at 2.7%. Our comparable sales volume grew 0.7% with the comparable transactions growing 1.4%. Our revenues grew 7.6%, while gross profit and operating income increased 6% and 6.5%, respectively. On a comparable basis, revenues grew 11.6%, gross profit and operating income increased 10.1% and 13.8%, respectively. Finally, our operating cash flow increased 5.2%, while with comparable operating cash flow increased 9.2%. Excluding the adoption of IFRS 16 leases, our operating cash flow margin would have been 18.9%, 20 basis points less than our reported operating cash flow margin for the quarter.

Now I will briefly discuss each of our operations highlights for the quarter. Starting off with Mexico. In Mexico, resilient business and commercial strategies enabled us to post strong revenue growth of 9.1%. This growth was mainly driven by pricing ahead of inflation and a 3% volume growth in May, however, a softer-than-expected April led to a slight volume contraction of 0.8% during the quarter. Our portfolio initiatives based on affordability, returnable presentations and magic price points are accelerating our refillable and single-serve packages growth. We're confident that with the right portfolio strategy, with options for every consumer and an ambitious single-serve cooler strategy, we will continue to drive our healthy top line results.

In Central America, we continue to report positive volumes and revenues, driven by solid pricing initiatives and targeted volumes in Costa Rica, organically in Guatemala and in Panama. For the quarter, we recorded 12.6% volume growth, driven by the consolidation of our new acquisitions in Guatemala as of May 1, 2018. Excluding these acquisitions, organic volumes in the region would have increased 2%. As most of our operation posted positive volumes. While Nicaragua continues to operate in a very challenging environment. Our positive top line results in Central America were driven mainly by strong sparkling beverage performance, particularly in the traditional trade channel. We're encouraged by the solid performance of our Mexico and Central America division. Our top line growth and expense control strategies enabled us to increase our operating income by close to 20%, while expanding our margins despite incurring and restructuring severances, as mentioned by John before, for MXN 436 million. On a comparable basis, our operating income and operating cash flow would also have increased double digits.

Moving to South America. Our division's top line results were once again highlighted by the positive volume trend in Brazil. Marked by our Brazilian operations, seventh consecutive quarter of volume growth, the division's volume grew 7.2% for the quarter thanks to our portfolio initiatives focused on single-serve and returnable multi-serve presentations. Affordability is key in the recovery of Brazil, and our unmatched capabilities in this front are leading our operation's share gains across categories, with record highs for sparkling beverages. We're very encouraged by our Brazilian operation's solid top line performance, the improved efficiency and the evolving digital capabilities, which, by the way, Brazil is leading this particular front for the rest of our operations. While we increased prices in April in Mexican pesos terms, our revenue was affected by a negative currency translation effect. In local currency terms, our prices are ahead of inflation year-over-year.

In Colombia, after a slow start to the year, resulting from price increases and the implementation of our fiscal reform that changed the way VAT is applied to sugar beverages, we're encouraged to post better-than-expected volumes for the quarter with volume growth of 0.6%. We achieved this performance in the face of a volatile macroeconomic environment driven by pressured currency, high unemployment and low consumer confidence. To successfully navigate this environment, we focused on restructuring our operation and protecting our profitability by controlling and reducing expenses, redeveloping our route to market and supply chain network, and refocusing our portfolio on profitable SKUs and also resizing our operation. Although we still face a challenging consumer environment in Argentina, we're beginning to see signs of stabilization. Our currency has appreciated over the last months, inflation seems to be reaching an inflection point, allowing disposable income to slightly recover. For the quarter, our volumes contracted 17.2%. However, we have redoubled our efforts to offer affordability solutions to our consumers, and we expect to regain consumption in the months ahead. Coupled with that impressive effort by our local team to control costs and expenses, we continue to increase prices ahead of inflation to protect our profitability. We expect volatility to remain for the second half of the year, driven mainly by the electoral calendar in Argentina. However, we are implementing the right portfolio and strategies to successfully navigate this challenging environment.

In the recently acquired operation of Uruguay, we reported sales volumes of 9.4 million unit cases for the second quarter with pricing ahead of inflation. We have enjoyed a smooth and efficient integration, successfully implementing our back-office systems and viewing positive trends in our main supply chain indicators. Importantly, we are encouraged by an improved competitive position highlighted by the share gains in flavors, led by the Schweppes Grapefruit, Pomelo and Spanish brand.

In summary, despite significant currency headwinds, our South America division top line is growing in Mexican peso terms with revenue growth 4.4%, driven mainly by Brazil. Our divisions made profitability headwinds were a top line decline in Argentina, the depreciation of the average exchange rate of our operating currencies, mainly the Argentine peso, as applied to U.S. dollar-denominated raw material costs, higher concentrate cost in Brazil related to the reduction of tax credits on concentrate, and restructuring severances for MXN 76 million in Argentina and Colombia. However, our operations were able to partially offset these headwinds thanks to favorable sweetener prices, freight efficiencies in Brazil and expense control strategies. On a comparable basis, our operating income grew 2.4%, and our operating cash flow increased 4.1%.

Now with regards to our financial results. Below the operating income line, our financing expenses net recorded a reduction of 12% resulting from a decline in interest expense, a net interest expense and a reduction in other financial expenses. These effects were partially offset by a foreign exchange loss as the cash exposure in U.S. dollar was negatively impacted by the appreciation of the Mexican peso during the second quarter.

As we continue strengthening our balance sheet, our net leverage ratio ended the second quarter at 0.39x. Our company's weighted average cost of debt for the quarter, including the effect of debt swap to Brazilian reais and Mexican pesos was 8%. During the second quarter, we reported income tax as a percentage of income before taxes of 24.7% compared with 30.7% last year. This decrease was driven mainly by the increase in the relative rate of Mexico's profits in our consolidated results, which has a lower tax rate, coupled with certain tax efficiencies and ongoing efforts to reduce nondeductible items across our operations. We expect that our normalized rate for the rest of the year will be closer to 30%. Finally, our controlling net income for the quarter increased 25.4% 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]

We are encouraged by our progress during the first half of the year, and more importantly, the abundant opportunities we see across our markets. We are on track to deliver on our strategy from our continued portfolio innovation, affordability and category expansion through our ongoing development of our superior capabilities. Our culture is strong, igniting and enabling our organizational transformation. Moving forward, we remain committed to delivering superior economic, social and environmental value for our -- all our stakeholders. We are confident that our ongoing initiatives will allow us to unlock additional value, increase our operating efficiency. And free up resources to reinvest in our markets. Thank you for your continued trust and support. Operator, I would like to open the call for questions.

[Operator]

[Operator Instructions] We'll take our first question from �lvaro Garc�a with BTG.

[Alvaro Garcia, analyst]

My question is on your top line in Mexico. We saw very strong pricing in the quarter, similar to last quarter. As we think about pricing into the second half of this year and into next year, how defensive do you want to position your portfolio? How are you thinking about affordability? And if you could make a quick comment on performance in the south and southeast of the country, that would be great.

[Constantino Montesinos, executive]

I'll take that one. I mean as we mentioned, overall, we see very -- a steady and resilient Mexico business, despite the uncertainties that we're facing in an overall slowing growth rates. And as you mentioned, we're seeing -- we saw in the second quarter, actually, a sequential improvement in the volume performance. What we've done is, as you mentioned, drive our affordability through a lot of revenue management and a focus on execution, particularly behind our single-serve portfolio. I mean we are definitely focusing a lot on our single-serve strategy. And with that, allowing the consumer to have favorable and affordable price points today. And going forward, as John mentioned in the call, we have recently launched, based on the learnings that we gathered from our Philippines previous experience, a 235 ml returnable glass bottle at a Magic Price Point of MXN 5, which has been gaining tremendous traction in a very short period of time, giving us good signs that this is the right strategy to go forward. And at the same time, supporting that with the infrastructure necessary for the consumers to have the availability -- and cold availability of those products. I mean we're installing 35,000 single-serve coolers to boost our mix. So that is one front that we're attacking. And with our analytics capabilities, we continue to look at optimizing our price architecture going forward and being able to surpass the margin pressures that we have. And the -- as I said, slowdown of the economy with intelligent pricing going forward, which we will continue to do. At the same time, the price increases are not only headline pricing to the consumer, but also leveraging our analytics capabilities on reducing discounts. And at the same time, being much more efficient in the trade promotion strategies that we have. So that is one of the great benefits of the investment that we've been putting behind our analytics capabilities. So that is something that we continue to press on and we continue to actually improve day by day by the use of analytics capabilities. So for example, we have reduced significantly discounts in personal water. In the case of our value-through products, we have also increased -- decreased our discounts, but at the same time, this has not necessarily impacted volumes in a significant way, but definitely enhancing our overall profitability. So that's a little bit of the approach that we have going forward. In the case of the southeast of Mexico, I mean, we have not seen any, I would say, abnormal type of behavior, pretty similar and in line with what we're seeing so far in the rest of our territory in Mexico. And we continue to wait and expect the Southeast region of Mexico to reactivate on the economic front based on the agenda that the administration has put forward. But we still need to wait to see the impact of that going forward. I don't know if that answers your question, extended a little bit, I wanted to give you a full picture of it.

[Alvaro Garcia, analyst]

It's very clear. One quick follow-up. Would it be fair to assume perhaps less rate increases in Mexico going forward just maybe on a softer consumer environment? Or do you expect to see similar rate increases into next year?

[Constantino Montesinos, executive]

I think that we will continue to, as I said, we will optimize our architecture. I think that you could expect a -- more impact on the mix trying to compensate for headline pricing, working on our mix, focusing reserve. And as you mentioned, we're trying to minimize the headline pricing during the softer economic environment. So that is something that we work on every day. I'm going to hand it over to John, also he wants to comment on that particularly.

[John Santa Maria Otazua, executive]

Thanks for the question. I think the way I would think about is, we are giving returnability, both at single-serve and multi-serve levels, a very, very important role even in a more enhanced role than what we have today. That 235 that we just rolled out or we're rolling out has -- is backed up by tremendous execution on our level so it feels that it becomes incremental. And It does not become cannibalized. And I think that's a unique proposition that we have as a company that other people don't have because of their ability to control execution at the point of sale. I think the other thing to think about going forward is that we are looking for more transaction growth than volume growth. And therefore, what we're looking for is a mix rate, if -- that is positive, and that's how we're pricing the portfolio today as well. So we're going to favor returnables, and single serves in terms of lower pricing. Probably take some low rate on higher-priced multi serves, and allowing competitive space between both these segments to allow for more transaction growth.

[Operator]

We will now take our next question Luca Cipiccia with Goldman Sachs.

[Luca Cipiccia, analyst]

I wanted to follow up actually on Mexico. I think the previous question about the south region, I think also -- I would assume comes from some comments that some of the companies have made in the second quarter of -- so the lower performance there. And similarly, there were other comments that highlighted the relative underperformance or relative weakness in the traditional channel compared to the convenience channel as well. So maybe to start, if you could even give us your feedback on that front just in terms of comparability from what we heard from other peers in this space?

[Constantino Montesinos, executive]

Luca, no, as I mentioned before, I mean, we have not seen any significant difference in behavior, in traditional trade in the southeast region versus the rest of our Mexican territory. I guess every category behaves differently in the different companies. But in our case, we have not seen, as I said, any abnormal behavior in the southeast region so far. I mean there is definitely in our category, whether it has relevant effect that might be different in other categories. And back in a particular month in a particular quarter, as you probably -- definitely know, might have a positive or negative impact. But in our case, we have not seen any material differences in the different regions in Mexico so far.

[Luca Cipiccia, analyst]

Perfect. Very clear. And so I think that's...

[Constantino Montesinos, executive]

Nothing different to what we see at swings that we see -- sorry?

[Luca Cipiccia, analyst]

No, no, I missed it. Sorry, if I missed it. I didn't catch your comment about the channel. So that's clear now specifically.

[John Santa Maria Otazua, executive]

Luca, I think what you're saying is our difference is not only territorially but by channels, right? The trends are the same as prior years and there is this year. So we don't see necessarily a channel mix differential or a shift in behavior amongst the channels that has been extraordinary and that hasn't been on trend already.

[Luca Cipiccia, analyst]

Okay. Very clear. Understood. And if I may, maybe just a follow-up on Brazil, which now -- there's been quite a few quarters as you've returned to positive volume growth quite consistently. So maybe as you look ahead, what -- can you separate maybe underlying consumer environment that seems to -- appears to be getting better, including Investor Day posted pretty good results in soft drinks and in beer in general. And combined with the investments that you made in the market over the last 2 years, affordability, price package architecture. So if you could spend maybe a couple of more minutes on what is sort of self help as compared to a general sort of consumer demand environment and maybe you're getting better, hopefully?

[John Santa Maria Otazua, executive]

Sure. I think one of the things to think about is that we've over the last 2 years, we've redefined our portfolio in a lot of different ways. And the most significant one is probably the last year's noncarbonated beverage portfolio redesign, which -- we redesigned everything. And I think we're starting to look at all the benefits of that. But I think more telling than not, we've been seeding and really looking at affordability in a major way in Brazil through small packs, single serves through rough cut in a lot of ways. And one of the things that is happening right now, we're detecting is the low socioeconomic levels in Brazil are returning to the category, okay? And that -- when you start looking at the e-consumers in the past 4 or 5 years, they left the category because of economics. And now they're returning to that -- to our categories in a big way. And so that's part of what's driving our volume as the -- and I think that's going to continue as Brazil continues to have itself in a more macro stabilized manner, okay? And the outlook becomes better, and the outlook for personal income becomes -- it's slightly more marginal. So it's encouraging to see that the consumer footprint in Brazil, the components of which are starting to come back for all consumers.

[Constantino Montesinos, executive]

And if I -- just to complement on what John was saying. I mean on your question on, well, is this riding the improved consumer trend in Brazil? Or this is internally driven? Definitely, it's a combination of both. But I think that the fact that in this particular quarter, for example, we have grown market share in every single relevant category that we compete in, gives you an idea of the impact of our strategic thinking, and that translated into our initiatives in the market driving significant growth for all of our categories. So I think that is very telling of what we're doing in the market. And we're also understanding the market better to continue to tailor our strategies for that. So when you see us -- the impressive growth that we've had with Coca-Cola Sin Az�car in Brazil. Through a purchase structure consumer understanding, we're seeing that the growth is bringing on new consumption occasions to the category without cannibalizing significantly the rest of the quota portfolio, 70%, 7-0 percent of that volume comes from other beverages, and mostly powdered beverages, juices and nectars. So we're tailoring our initiatives with deep consumer understanding to be able to drive better growth and a standard portfolio impact across Brazil. Any of the combination of those facts tell you that we're doing a lot in the market in a continuous way, a very focused way. And at the same time, we're definitely benefiting from a more favorable consumer environment overall in Brazil.

[John Santa Maria Otazua, executive]

I have something just to add, too.

[Constantino Montesinos, executive]

We get very excited about this. John why don't you...

[John Santa Maria Otazua, executive]

To add, I think if you look at where we were in Brazil 4, 5 years ago and we look at the portfolio is one thing. When you look at how our execution has improved in Brazil is another thing. And the other thing -- part, Luca, I would say, is also look at the capability of getting cold drink equipment in Brazil. Over the last 5 years, we've done a much better job, okay, at consistently addressing the needs of refrigeration for our customers.

[Luca Cipiccia, analyst]

And if mention the advantages too...

[John Santa Maria Otazua, executive]

Well, you add those all together and it becomes very powerful.

[Luca Cipiccia, analyst]

It sounds like -- when you say, as the consumers are coming back to the category you're a much better offer and price package architecture and portfolio and setup. But if I may say, what would you see as the big next step in Brazil looking ahead if this continues?

[John Santa Maria Otazua, executive]

Well, what I see is a big next step. But there is -- I think there is opportunities to continue to consolidate that market. There is some scalable plays in Brazil. And I think once we get a couple of resolutions out there as to certain adjacent categories, I think we can move forward and be aggressive on that.

[Operator]

We'll take our next question from Antonio Gonzalez with Credit Suisse.

[Antonio Gonzalez, analyst]

I just wanted to ask about these new efficiency initiatives that you described at the beginning of the conference call, John. Obviously, you've been talking about digital enablers for quite a few quarters now, how you've been able to optimize discounts, extract a better revenue per unit case, et cetera. But it seems that the tone at least in your prepared remarks this quarter, it seems like your taking this even a step further, right? And you called out new ways of working, changes at the corporate structure, et cetera. So I wanted to get a little bit -- if I take a step back, I guess, I wanted to get a little bit of context on, a, is this a fair assumption? Do you think you are taking it further? And what is the trigger for that? Is it the macro weakness that apparently is starting to emerge in Mexico? Some of the margin headwinds in Brazil, given the elimination of tax credits, a combination of all of these? And where are the buckets where you see the most upside? Because obviously, again, you've been working on this for quite some time already. Is it more on the corporate side? Are there still sizable opportunities on the commercial side? Any incremental color that you can add, John, would be very helpful.

[John Santa Maria Otazua, executive]

Sure. Listen, this is something I've we've been working on for at least 4, 5 years, okay? And it started off with the establishment of centers of excellence, where we started to put forth the development of capabilities for Coca-Cola company, okay? It's not something that is overnight. It's not something that has happened spontaneously. And it's something that we've been driving through our culture as an organization. What we have found over the last 2 years is -- and through that development of our products and centers of excellence is that we had a move and we had a very large -- we had a good opportunity to go and streamline our organization and functionalize our company as a first step, okay? And by functionalizing the company, we will eliminate a lot of redundancies that are in place today, given the facts that our organizations are more territorial in nature. And when you make it functional, you're eliminating a layer of the same activities at the country level. So what you're really doing as the next step here is that the centers of excellence become the areas that have the processes with all the capabilities, have the processes, have a single work in single systems. And therefore, you are allowed to go out and digitize in a manner that it becomes efficient for the whole organization. So -- and when you start looking at that, it allows us to bring down the amount of people that we brought down as first step. And I think it becomes sustainable. I do -- it does become sustainable. But it allows us to go out there and also reinvest it and continue to digitize each one of our processes, okay? And as well as reinvesting it in the marketplace because we do have an ample portfolio that needs to be further fueled. So when you look at this, it's not only about organization. It's about finding different ways of working in that organization, how we become more collaborative, it is as much about organization as it is about culture, okay? and how we're going to interact with the countries and the center offices. So there's a lot of components of that. And it starts the organization and the culture starts meeting the operating models and the digitized strategies at this point. So it's all coming together in a sustainable manner. Does that help you?

[Antonio Gonzalez, analyst]

This is very helpful. Yes. And just final, if I may, perhaps small detail on this conversation. Brazil is the only country where you didn't call out a severance cost strike? Do you think you can -- is it because the volume growth is just absorbing that much energy at the moment? And when do you think you can start these efforts in Brazil?

[John Santa Maria Otazua, executive]

As you would note, this is a sequential event. We're starting off with Mexico and Colombia digitization in Latin America -- in Central America. And we will get to Brazil and Argentina by the second half of the year. Now I don't expect them there to be as much of a hit because Brazil has been through just a lot of pressure over the last 4 or 5 years. And by definition, has had to be a lot leaner. And what it is about Brazil or Argentina at this point is more about adapting to the model and making sure that we have the right model connections with our central offices or functions in our territories than it is about the cost savings there.

[Antonio Gonzalez, analyst]

And these are...

[John Santa Maria Otazua, executive]

And we should be done with that phase is -- and we should be done with that phase of the business by the end of the year.

[Constantino Montesinos, executive]

The end 2019. Yes.

[Operator]

And we'll now take our final question from Carlos Laboy with HSBC.

[Carlos Alberto Laboy, analyst]

Can you please expand on how you adapt your digital platforms in Brazil differently than in Mexico? What do they do differently for you there? Or what are you going to get out in Brazil differently than you get out of Mexico?

[John Santa Maria Otazua, executive]

So I think this is version 2.0 of what we have in Mexico, okay? And the power behind us is how we're getting -- if you want, let's talk about the traditional trade alone, okay? And there is 2 aspects of it, how we're enhancing our business-to-business capability and, going out there and offering different ways of becoming -- first, of connecting with the -- with our customer. And secondly, how we have that connection become omnichannel, so that the customer has a single view of his capability or his or her at any point of time. So there's a couple of things that we're doing there. First, we're using not only the mobile sales force, we're using all of the telesale. We're going with WhatsApp as a way of going out there and order entering as well, as well as getting on the web. So there is like -- there is 7 or 8 different ways of a route to market in Brazil for our customers that we're also replicating in Argentina. And we're testing in the beginning of September. And this is really powerful because at the end, what we're changing is the paradigm of the customer having to wait for us to order because of whenever we go there and call him or whatever to be able to connect to us whenever he wants. And how we connect that into our system for delivery is also a major, major transformation internally for us, and it requires a lot of the different systems platform. But secondly, when you start looking at the digitization at -- the Brazil team was bringing to the table. They know, as we know in Mexico, where each one of their trucks are. But they are not going out there and then giving the customer advance ship notice about when it will actually be getting there with their order within a couple of hours, so that they know and they can actually go out and give the customer a better customer experience. So it's starting to come together on an online B2B real data platform. And that gives you service to customer whenever, however, and how they want to do it. And it's starting to get really putting the customer at the center of what we do. And I think on the other side, we have enormous digital account tools that we're putting in place for the digital aggregators over there. That are allowing us to gain share in the growing digital economy and delivery for food aggregators. So it's really 3 things since talking about B2B. And then enhance B2B. We're looking at delivery -- with online delivery and guidance for customers, enhancing customer experience, and then also dealing with aggregators. And I think there, Mexico is a little behind what Brazil is doing. So those are the 3 things that we're doing that I think are really moving the needle forward for us in terms of customer satisfaction as well as cost. So let me just tell you what the implication of this is because when you have 7 or 8 different ways to get to the customer, then it allows you to go out there and restructure your -- not that you take your feet off the street, okay? But it allows you to put them in a more efficient manner into the different modes of order taking that are required by different customers. So you will become much more efficient and effective, okay? I think the effectiveness that is probably even more high, so if you reach the customer to be able to get them at the right time, right place for what he wants. So if that becomes a case where we have -- it's like a jigsaw puzzle of the component pieces that we have for route to market that are getting enhanced and getting to be in place for more customer satisfaction.

[Operator]

And that does conclude our question-and-answer session. I'd like to turn the conference back over to management for any additional or closing remarks.

[John Santa Maria Otazua, executive]

Well, thank you very much for your interest in Coca-Cola FEMSA. As always, our team is available to answer any of our -- your remaining questions through Maria Dyla and Jorge. But I think this has been a very, very satisfying quarter for us. And I think, as we go forward, we're encouraged to see that our efforts and strategies continue to build out appropriately in according to what we thought. Thank you very much.

[Constantino Montesinos, executive]

Thank you.

[Operator]

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.