Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q2 2023 Earnings Report, Transcript and Summary

Good day and welcome to the Coca Cola FEMSA Second Quarter 2023 Conference Call. Please note this conference is being recorded and for the duration of the call your line will be on listen to me. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions] I would now like to hand the call over to Jorge Collazo, Coca Cola FEMSA Investor Relations. Please go ahead.

Thank you and good morning, everyone. Welcome to our conference call to review our second quarter 2023 results. I am here with Ian Craig, our Chief Executive Officer and Gerardo Cruz, our Chief Financial Officer. As usual after prepared remarks, we will open the call up to take your questions. Please keep in mind that this conference call may include forward-looking statement concerning Coca Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties that can materially impact the company's performance. With that, let me hand the call over to our CEO. Please go ahead, Ian.

Thank you, Jorge. Good morning, everyone. We appreciate you joining us today. Coca Cola FEMSA delivered another set of solid results for the second quarter. We continue to demonstrate our positive momentum with solid volume performance resulting from growth across all of our markets. Notably, we continued improving our execution, redoubling our focus on our customers and our consumers and increasing investment to continue supporting our growth. The first six months of the year have also been important for the Coca Cola FEMSA senior leadership team to complete our listening tour and set the strategic priorities of our business going forward. As I have mentioned on our previous calls, as part of this process, we have worked our market met with key stakeholders and identify the pain points and the many opportunities ahead for us. We're convinced that we are very well positioned to accelerate the growth of our core business and become our customers with very commercial platform. With that, let's review our consolidated results for the second quarter. Our consolidated volumes increased 7% year-on-year surpassing 1 billion unique cases. This marks the first time that our company surpassed 1 billion-unit cases in a single quarter. Our volume growth was driven mainly by solid performance in key markets such as Mexico, Brazil and Guatemala. As was the case during the first quarter of the year, these volumes include the integration of Cristal, a bulk water business that we acquired at the end of last year in the southeast region of Mexico. Excluding these integration consolidated volumes increased 5.2%. Performance across our Beverage categories remained strong. Sparkling beverage volumes grew 4% while our steel beverage and bottled water portfolio grew 7% and 18% respectively. Our consolidated total revenues grew 7.2% to reach MXN61.4 billion, driven mainly by volume growth. We achieved this performance despite significant currency translation headwinds driven by the appreciation of the Mexican peso. To give you a sense, excluding currency translation effects, our total revenues increased 16.9% underscoring how strong our underlying performance is. Our gross profit increased 7.9% to reach MXN27.3 billion, leaving our gross margin to expand 30 basis points. This expansion was driven mainly by our top-line performance, easing the cost unfavorable raw material hedging initiatives. These effects were partially offset by an increase in sugar prices across most of our territories. Our operating income increased 11.9% reaching MXN8.6 billion and our operating margin expanded 50 basis points. Our positive top-line favorable mix effect, and non-cash operating foreign exchange gain related to the appreciation of the Mexican peso drove this growth. Finally, our EBITDA for the border increased 7.8% reaching MXN11.4 billion pesos, resulting in an EBIT da margin of 18.6%. Our top-line growth and cost efficiencies drove this performance, which was partially offset by increases in operating expenses such as labor, marketing and maintenance. I will now move on to expand on key highlights during the first half of the year. In Mexico, our solid performance included record volumes during the month of May and June. A resilient consumer environment, our focus in execution and favorable weather conditions supported this growth. Importantly, all of our beverage categories are growing, driven mainly by brand Coca Cola and our personal water category. We're driving portfolio innovation as well, with two recent launches in the flavored sparkling category. LYSP, [ph] our low carbonation, sparkling orangeade and lemonade and fresh infusion, combining grapefruit and lime with a salty touch that makes it ideal for mixing. Notably, our non-caloric portfolio led by Coca Cola Sin Azúca grew a solid 14.3% versus the previous year. We also continue to see double-digit growth in the marine trade channel outperforming what remains resilient traditional trade. Finally, digitalization in Mexico continuous evolving with Juntos+, our digital B2B omni channel platform. As a result of this rollout 30% of the orders in that traditional trade are now digital. In Brazil, our volumes continue growing at a solid pace room by growth across all of our categories and channel. Aligned with our priorities, we continue accelerating our non-caloric portfolio with Coca Cola Sin Azúca and growing 32% versus [indiscernible]. In categories such as energy and water, we continue consolidating our market leadership by strengthen your portfolio with new flavors. Finally, with Powerade our sports drink volume is also growing in the double-digit previous year. On the digital front, traffic continues increasing its Juntos+ user base month-over-month. We now reach 237,000 active monthly purchasers, notably 60% of our orders in the traditional trade channel are the digital emerging. In Guatemala, we continue seeing an impressive performance. Our volumes have consistently grown into double-digits, driven by our focus on the fundamentals of the business. For instance, during the first half of the year, we've added more than 9,000 clients and installed more than 13,000 coolers. All these as we continue to leverage our portfolios, affordability and superior execution to continue gaining share across all of our beverage categories. Additionally, aligned with our strategic pillar to remove infrastructure bottlenecks, and to satisfy our Guatemalan consumers growing demand we're installing a new one-way TEC line this year, as well as new returnable bottling lines during the first quarter of 2024. Finally, I want to comment on Colombia. After a historic volume here in 2022, a tougher than anticipated macro and consumer environment has slowed our volume space during the first half of the year, being flattish at 0.5% growth. Nonetheless, despite this challenging environment, we're outperforming the industry as we strengthen our competitive position by gaining share in the sparkling, personal water and non-carbonated category. As I previously mentioned, our first half results are in line with our plans, and we are encouraged to enter the second half of the year with positive momentum. Our teams across all of our operations are well equipped to continue accelerating across all of our strategic objectives, delivering on the growth strategy that we have set as an organization. Speaking of our team and our talent, I want to take the opportunity to comment on our culture, a topic that is very dear to me. As I previously shared with you, one of our six strategic corridors focuses on strengthening our customer-centric culture. This is critical to be our customers' preferred commercial platform. Along with this priority, we're identifying opportunities to, I better understand our customers' needs, two, improve customer experience and three, empower organization towards a more customer-oriented culture. We're convinced that by measuring the right KPI as well as empowering and aligning organizations towards these objectives, we will continue to progress improving our customer centricity, which is our customer, a common feature of high growth organizations. Finally, I want to take a moment to recognize our team in Argentina. Last week, Coca Cola FEMSA Argentina was awarded by the Coca Cola Company with a Candler Cup for 2022. The Candler Cap named after Asa Candler, Founder of the Coca Cola Company and the person who granted the first Coca Cola franchise is an important award given to a bottler in recognition for his excellence in execution, coupled with its investments behind its people development, training and culture. Congratulations to the Coca Cola FEMSA Argentina team who working together as one single team with our colleagues from the Coca Cola Company in Argentina have made this recognition possible. In summary, we are confident that we're on the right track to achieve our objectives for 2023, as we continue winning in the market and progressing on our key strategic priorities across our operations. With that, I will turn the call over to Gerry to expand on each divisions results, as well as progress on our saving initiatives.

Thank you, Ian and good morning, everyone. Expanding our divisions results for the quarter, in Mexico and Central America, volumes increased 8.9%, maintaining the solid pace of the first quarter. Growth across all of our territories in the division drove this performance. Excluding the integration of Cristal's bulk water, business, our volumes of division increased 6.6%. Revenues in Mexico and Central America increased 13.4%, driven by our volume growth and revenue management initiatives. These effects were partially offset by the unfavorable translation effects from most Central American currencies and to Mexican peso. Our gross profit increased 13% resulting in a gross margin of 47.7% a compression of 10 basis points year-on-year. This is a sequential improvement from the first quarter of the year. Top-line growth raw material hedging initiatives and the appreciation of the Mexican peso helped to partially offset cost of foods sold pressure. Operating income growth for the division accelerated by 13.7%. This resulted in a slight margin expansion of 10 basis points driven mainly by our top-line performance coupled with a non-cash operating foreign exchange gains related to the appreciation of the Mexican peso. Finally, our EBITDA grew 9.2%, with margin declining 80 basis points due to an increase in operating expenses mainly related to labor, marketing and maintenance. Moving on to South America division, volumes increased 3.8% in line with the pace of the first quarter. Low to mid-single digit growth in Brazil and double-digit growth in Uruguay primarily drove this performance. Our revenue for the South America division declined 2.2% as unfavorable currency translation effects into Mexican pesos more than offset our volume growth and revenue management initiatives. Notably when excluding currency translation effects, our comparable total revenues in South America increased the solid 20.3% during the quarter. Gross profit in South America declined 1.6% mainly due to a currency translation effect, resulting in a 20-basis point margin expansion. This expansion was driven mainly by volume growth, hedging initiatives and favorable mix. These effects were mainly offset by increases in raw materials costs, such as sweeteners and the depreciation of the Colombian and the Argentine peso. Operating income for the division increased 6.6% and operating margin expanded 80 basis points as compared to the previous year. As was the case during the first quarter of the year, our positive top-line coupled with tight expense control across our operations more than offset higher fixed costs and expenses. Finally EBITDA in South America increased 4.4%, resulting in an EBITDA margin expansion of 90 basis points. Moving on to our financial results. The quarterly comprehensive financing results recorded a significant increase as compared to the previous year. This is explained mainly by an unfavorable compression comparison base that included a one-off market value gains in financial instruments of MXN355 million recorded during the second quarter of last year. In addition, during the quarter, we recognize the foreign exchange loss of MXN437 million driven by the appreciation of the Mexican peso as applied to our U.S. dollar cash position and the lower gain in hyperinflationary subsidiaries. These effects were partially offset by a decrease in our net interest expense, mainly because of an increase in interest income that was driven by higher interest rates. Finally, our controlling net income increased 6.5% to reach MXN4.9 billion, resulting in earnings per share of MXN0.29. It is important to note that our controlling net income for the first six months of the year increased 17.3%, underscoring our positive underlying operations performance in the face of significant currency translation headwinds. Finally, as part of our initiatives to generate savings and efficiency at the beginning of the year, we shared with you a target of more than $60 million in savings to be driven by our supply chain team. We are encouraged by our progress year-to-date as we have achieved savings of more than $35 million during the first half of the year, driven mainly by initiatives to reduce our cost to make and our cost to serve, which exceeded our expectations for the first half of the year. We are confident in our team's ability to continue generating significant savings and efficiencies as we enter the second half of the year. With that operator, we are ready to open the call for questions.

Thank you. [Operator Instructions] The first question today comes from Ricardo Alves of Morgan Stanley.

Hello, gentlemen, thanks so much for the call. I had a question on the competitive backdrop in Mexico. On an ex-Cristal basis, I believe your volume is at 5% or so in the quarter? How do you think that that's compared to the industry in Mexico? Do you think it's fair to say you're gaining back some share here already in this first half of the year. And perhaps on that point, if you can expand a little bit, perhaps on your commercial approach, depending on the channel or packs, whatever color you can give on how you're dealing with competition in Mexico that will be helpful. My second question, typically, and obviously, we tend to focus on the bigger markets. But when you take Guatemala, the other Central America region, Colombia together starts to build up and particularly in Central America, the growth has been pretty impressive. So just wondering if you can talk a little bit about that. I missed the early remarks you made -- you guys made, but more interested, particularly in what you're doing in Guatemala? And maybe more important, what is the prospect for this market? What Coke FEMSA can do to further develop the market? And then in Colombia? Whatever color you can give, if, if this is the market, where do you see big prospects for growth as well? So a little bit outside of the Brazil and Mexico questions. Thank you so much, gentlemen.

Hello, Ricardo, how are you? Thanks for the questions. In Mexico, just a little background. We have been in an environment where we have had about five years of deteriorating competitive positions. As I stated, when we started at the beginning of the year that we needed to stabilize that and start to take a new territory -- growth trajectory, we've been able to accomplish that. So we've stabilized our competitive position. There's a lot that we're doing. I don't think it's healthy to go into the specifics. But in general, it revolves around multi-serve one way path where we're working with a better OBPTC [ph], more focused and targeted calendar initiatives. And also, there's work to be done on certain pricing strategies between channels. The brand is so strong, or multipacks are there, our flavors are there. And so far with very targeted adjustments that we're doing, it's responding very quickly. So I think the news on Mexico on the competitive position front is very positive, we established like that. By year end, we expect that slight gain. And that's the trajectory that we're going to looking to maintain. When you look at Guatemala. Guatemala is a jewel for us, as well as the rest of Central America. They're highly profitable market. And in the case of Guatemala, I think I mentioned before, this is a 17 million population country of, 17 million to 18 million, where our per caps around 207, is growing double digits. There is no reason that in the medium term, we cannot take per caps up to 250. We have enough differential in share where there's still a lot of share to capture as well as organic volume. So the story there has been fantastic. We've grown shares, almost eight points in the last five years. So our margins keep expanding as well as our return on investment capital. It's a nice little secret that's very busy in the very large Coca Cola FEMSA numbers. But now it's already the third largest country in terms of profits for us. And it should continue gaining importance. I don't know if that covered the points, Recardo.

On Columbia, if I may expand, Ricardo, as Ian mentioned during the call, we are performing on top of our record volume year, which was 2022 at basically in line a little bit above last year, even considering the slowdown in macroeconomic activity in the country. We do expect some headwinds at the end of the year with coming out into effect of the sugar added beverage tax that will come into effect in November. But we certainly continue to be very bullish on the prospects of growth in Colombia going forward. We are operating basically at maximum capacity in both manufacturing and distribution capacity. And we are investing importantly for the following years to build up on that capacity because we certainly think that those two are the biggest engines for growth going forward, Colombia and Guatemala.

Very helpful color. Appreciate the time.

Thanks, Ricardo.

And the next question comes from Thiago Bortoluci of Goldman Sachs.

Yes. Hey, good morning, everyone. Thanks for the call for taking the questions. I like to double click following up on Ricardo's question on Mexico right. When I tried to break down the top-line drivers they see strong volumes, but at light sequential price acceleration. How are you seeing the outlook for demand going forward, specifically, if you're seeing any slowdown, related to the Mexican peso appreciation, the impact on remittances? And how your overall price strategy should behave in a context where your cost inflation is much really decelerating visit the first question. And the second one, I guess is a more long-term strategic update on what are the sources of synergies that you are identifying and might be able to explore, there is new forms of forward that dropped and joint effort to try to execute and monetize the B2B and the capillarity that both platforms might have traditional trades. Those are the questions. Thanks.

Thank you, Thiago. I think the first point is, if I remember correctly, was the top-line on Mexico and how that is going so far. So right now, our volumes in Mexico are growing around 8%. If you take out the bulk water business, it's 5% growth. So far, so good. We don't see any slowdown at all. Volumes are strong. I think we're going into an election year. There's a lot of inflows coming in from Mexico as a whole due to the nearshoring. So we're very positive on Mexico. So I don't foresee any the acceleration or pressure on the top-line. On the contrary, I think the way we've managed to set the new competitive landscape and strategy, our top-line and volumes should continue along this space barring any unforeseen climate or our strategy. But so far, so good. And that seems to be going along nicely. In terms of the synergies with FEMSA forward. Like I told you before in another call, there are two very concrete cases where we're, we're collaborating. And it's the case of the Juntos+ platform in Mexico, where we are tying in -- working tie in FEMSA or FinTech solution. So on the payments front, we will be rolling out that as a feature for our trade partners in Juntos+, and also in the loyalty plan, [indiscernible] a very large and robust loyalty plan at [indiscernible]. What we aim to do is when we roll out the app for version for Mexico in the end of the fourth quarter, our loyalty plan will have a link to the spin loyalty plan to implement loyalty plan. So that only makes it more attractive both for us and for the team plan, which is very simple. The point will be exchangeable not only for products that we manage both of the Coca Cola company and our third-party portfolio, but also interchangeable for Spin premium rewards, which have a much wider catalog. So it just gives it a lot of added value for our trade plan. That's basically the two large areas are where the largest impact that we have right now. I don't know, Gerry. Did I cover all points?

Yes.

That's correct. Thank you very much. Thank you very much.

Thank you.

The next question comes from Sergio Matsumoto of Citigroup.

Yes, hi. Good morning. Thank you for taking my question. Ian you mentioned just now on the Juntos+, and also on your prepared remarks about improving customer experience. There's, nice uptake on the traditional trade adopting the Juventus plus. Can you give us some anecdotes on how, how they have improved their experience with you through this platform? That's my first question. And the second one is on Argentina, having won the Canada Cup, very impressive. And can you share? What do you think were the aspects of your team's performance in Argentina that was most recognized by the Coca Cola Company? Given that they operate in Argentina, they have particular challenges. And if there are, if there are any best practices that you can transfer into Brazil or Mexico? Thanks.

Thank you, Sergio. So I think on the first question on Juntos+, what we're seeing is, and this I think, applies in general to well established platform. When the client has time on his hands. He has the possibility of ordering more items. So for us, what is happening is, when we are allowing the client to place an order in that time and channel of their choosing, they're no longer hampered to take the order only when the reseller comes and visits. As you know, our users plus model is omni channel, that's a big difference to our main competitors. What that means is we have kept the reseller visits. And on top of that, we offer the order on the app or WhatsApp Chatbot. So whenever the client enter via our WhatsApp chat bot or our app, they're usually doing that when they have a specific needs that wasn't met at the reseller visit. And or when they're when they have more time on their phones. So it ends up that our items per store on those orders are larger. So what we see is an uptick for us when they're ordering online. And an increase on average frequency. So they're able to manage their working capital in a better way. And it seems we have either flexible delivery, as in Brazil, which is next day delivery, basically across 70% of our territory, or where we have a lot of delivery frequency, such as in Mexico. It's an uptick for them to be able to plan and take their order when they have a time. So we're seeing very positive results on that front and steadily more and more of the orders are coming in digitally, certainly. And in regards to to Argentina, the Candler Cup, recognize three aspects that that stood out in Argentina. And this is Argentina is always a book a context. However, they managed to ensure growth and consumption occasions. So, first of all, they had very high growth on the core, high growth on singles serve, good plans on segmentations and returnables, the growth of women leadership, coke no sugar. There were several aspects. So it's not only execution, but there are several minor points such as are not minor points. There are special points such as single serve, coke no sugar, women in leadership that stood out female talent and inclusion, customer centricity that stood out. And all of those practices we share in the commercial forums across Coca Cola FEMSA. So as you know, we have a new position that reports to me that the Chief Growth Officer, and they create communities or forum across Coca-Cola FEMSA’s commercial and marketing teams, where these initiatives are shared. So we were very happy and proud for the Argentina team to be recognized with this cup, with the first time anyone from Latin America has been recognized with this worldwide award from Coca-Cola.

Great. Thanks for that color.

Thank you Sergio.

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

Hi, good morning. Thanks for taking my question. My first question is based on a consolidated basis. Regarding the $1 billion in digital sales that you reach in the first half of the year. If you can comment what is the break down by country and where do you see the opportunities? And my second question is related to [indiscernible] you can share your thoughts of how they are performing the different types of projects that you're doing their traditional channel as well as in the B2C and B2C platforms? Thank you.

Hello, it's Jorge here. On your first question regarding the sales on the digital revenues. Basically, what we have seen there Fernando is to reach to those billion sales, we've seen a high level of growth coming from Mexico. So Mexico to give you a little bit of a sense of the breakdown, basically represents about $360 million out of those $1 billion in sales. No, but that's a very rapid increase. Mexico has been increasing, as we have been speaking before, and are very fast in the rollout of Juntos +. And there's a very similar number coming out of Brazil, approximately $370 million in digital sales coming from Brazil. The rest, Fernando is split between the rest of the countries, we have Colombia catching up as well, with around 30 million, and the rest is split between the rest of the countries. Now but as you can see, most of this is coming from the level of growth because of the rollout of Juntos + that we're having with Mexico and Brazil.

Yes. And this has been the big focus the two large markets, That's where we're focusing on for the version four, and then the rest of LatAm. So I think for us next year, the rest of LatAm will be a nice upside for Juntos + platform and we want to concentrate the rest of this year on, I would say the first quarter of next year on both Mexico and Brazil, which are the biggest countries for us so far.

And regarding your pilot project in Mexico.

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

Oh, sure. If you can share your thoughts of how they're performing the different types of projects that you are implementing in Mexico, China, as well as in the B2C and B2C platforms.

So far, so good, Fernando, we're adding more partners every day. I think we're around 14 partners. I don't remember the amount of partners that we have in Mexico so far, but in Mexico, our footprint is so much larger than any other competitive platform than I know we're signing up the largest plus players well ahead of our competition. So we're very positive on that. As you know, I have mentioned that for these offerings to be of scale, we will need at least five to six years for this to be around 5% of revenue. As we're growing our core business year-over-year, we expect to being in growth mode, it's always a challenge for this to become relevant. So, you know, in Brazil, this gets to around almost 2% of revenues, because we're growing as well. In Mexico, we're going to be hitting 1% of revenue, so they're still small, but these are when you look at that multi category three's it's doubling in size every year just that we're growing that base business as well. So you guys need to have some patience until we reach that ambition that we have to get to 5% of our revenues. At the rate that we're growing our core business, even though this is accelerating as well, it's going to take its time.

Great. Thanks so much for the color.

Our next question comes from Alan Alanis of Santander.

Thank you very much and congratulations on the results Ian and Gerardo. Couple of questions. One of them is regarding the normal price of the commodities in sugar, aluminum, and so forth and strength of the peso. Could you expand a bit more on terms of how much hedges? Are you extending your hedges beyond what you usually do? And how much you have already taken advantage of? Because normal prices of commodities, and the strength particularly on the Mexican peso. That would be the first question And I think regarding Argentina is, could you remind us what exchange do you use on the concentration of Argentina into your balance sheet any growth there given the depreciation of the Argentina peso as we have seen last year? So two very different questions. Thank you so much.

Hi, Alan, thank you very much for your questions. Regarding commodities, for 2023 we are with a very healthy hedging position on PET basically across all of our operations, and we're starting to build a little bit of position of hedging PET for next year. We are expecting a benign outlook for PET and aluminum. So we're being careful to stay within the low end of the range of our hedging objective. But starting to see a good opportunity to build a little bit more on those positions. On sweeteners, we're basically hedged for HFCS. In Mexico, which is an important component of our sweetener, expense. Sugar, there's a few alternatives that we have. But in Brazil, we also have good position as well as in order to wait basically, for 2023 we're a little bit above 50%, our sugar needs a hedge in '23 in both countries. That's a little bit on the actual commodity price. Hedging on the FX front, we have certainly seen a good opportunity in the peso to build up hedging positions, where basically hedge at 80% of our dollar requirements in Mexico for '23. And being a little bit more careful to start to build positions for '24. Regarding your question of the range that we are able to hedge, we continue to look at a 12 month rolling period for hedging on both commodity prices and FX related to cost of goods sold. So we haven't changed that. And we do not expect to change that in the near future. FX hedging for other operations in Brazil, Colombia, and Uruguay, we have a little bit or very close to 50% of our dollar requirements hedged for '23. And also as well as in Mexico starting to build position the first half of '24 in line with that 12-month rolling period. Going into your second question for Argentina results, we continue using the official exchange rate to consolidate Argentina. That the number -- or the exchange rate that we used for the consolidating of this quarter was 256.7. We really don't have any other alternatives because we have to comply with the official exchange rate for purposes of consolidating that business. We understand that a portion of the economy transacts at the parallel exchange rate, but most of our business, the raw materials that we require, as well as the capital assets that we require for our business are still done at the official exchange rate. So we understand that this represents a source of uncertainty, but that's the exchange rate that we have to use to consolidate that business.

That was a very comprehensive answer. I really appreciated. Thank you so much.

The next question today comes from Antonio Fernandez of Barclays.

Hi, good morning. Thanks for taking my question. Congrats on the results. My first question is regarding pricing going forward and overall efficiencies that you will see in Mexico. And just a quick follow up on the Juntos + penetration in terms of customers? Thanks.

Thank you, Antonio. First on -- your first question regarding pricing. We -- as we talked about in the previous few calls, we're trying to focus on sustainable growth and basically in all our territories. And specifically in Mexico, as Ian mentioned, during the script of the call, we have been facing share pressure in the past few years. So we're trying to stop that share erosion and recover competitiveness in our portfolio. We understand that our main objective and the way that we will continue to improve performance and return of our businesses through growth, and I want to underscore the word sustainable growth. And in that sense, what we're looking at for the foreseeable future is to price basically in line at least in line with inflation, trying to recover that competitiveness. And we've seen very good data points in these first six months of the year regarding the performance of the share of our products. The second question was on Juntos +. Yes, I think when you talk about Juntos +, you look at it in percentage of orders, about a third of our orders are coming through Juntos +. When you look at that in revenues, this offering goes towards the traditional trade. It's around 16% of our total revenue. But when you look at traditional trade revenues, Antonio, it's almost a quarter of our revenue for the traditional trade. And we do like a zoom in on Brazil, which is the country that's first started with this platform, it's already 60% of traditional trade volumes. So I think the penetration is encouraging. Like I mentioned, Brazil is started with it, but Mexico is accelerating fast. And next year, we should have an uptick in the rest of LatAm markets. So far, so good with Juntos + in terms of both the penetration and the partners that we're signing up.

Perfect. Thanks for the color.

The next question comes from Luis Willard of GBM.

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

Hi, Luis. Thank you for the comments on the [indiscernible]. Like I mentioned, the unit -- the driver for us is not a cheaper cost to serve, although, as you intuitively are pointing out in your question, it is depending on the market and the labor costs of the different market, it can be all the way an average of 20% less cost to serve in the -- when it comes to the order entry. So sorry, a 20%, so 80% less cost to serve. So you know, it's a big difference. However, this has not been our driver. What we're trying to do is be a higher growth company. So we -- our intent on keeping the omnichannel model, we're not reducing our feet on the street. The role of the reseller changes as far as the more penetration on orders are taken online, then we're freeing up these resellers to do more of the execution, the introduction of new products and launches the bringing of new partners. And we want to -- we think it's a big advantage to us how we look in the point of sale, versus our competition. And that stems from the fact that we are omnichannel because the digital portion of our platform allows us to bring in more business, like I said, it's higher IPAs, it's at a lower cost. But really, when it comes to execution of the point of sale, the having that relationship still makes a lot of difference. And for new product introductions as well, the new launches entering into different categories, developing cold channel, it makes a lot of difference having those specialized structures and our resellers. So we're not seeing a difference in the cost to serve because of that we're maintaining the omnichannel structure. And, like I mentioned in terms of revenue, since it's still in the incipient stages, it's around 16% of total revenue. So it hasn't made that big of an impact so far. But we measured those digital revenues, and you can see a larger ticket. So in those digital revenues, when you compare them to the traditional or salesman controlled points of sale where we look at those control points, we do have an uptick. So a portion of that which is not irrelevant is incremental for us when you do those analyses.

Thank you. I know your give us give me too much credit thinking about costs. I was looking for ticket and higher orders. Thank you.

The next question comes from Felipe Ucros, of Scotiabank.

Thanks, operator. Hi, Ian, Gerardo and team, thanks for taking my question. First, and maybe on an update on partnerships for Juntos, obviously, your partners in Mexico are pretty defined at this point but still premier [ph]. But just wondering if you have made any advancements on talking to partners, for royalty payments in the other regions, that you can give us an update. Of course, you may not be able to give us an update on the conversation. Just looking for any updates there. And also a question on Argentina. Done or are you looking to make any repatriation of capital ahead of a possible devaluation after elections?

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

Understood on the partners that are jumping on the platform. I was looking more for [technical difficulty] will help you on payments in the other countries and the same as a partner to start the loyalty program in countries outside of Mexico?

No, I was getting to that Felipe. So on the services from that we're spearheading out of Mexico. So the focus is getting that done in Mexico. And then we'll be testing that out in the rest of the market. So no. So far the on the service portion, which includes both financial services and loyalty partners, makes it spearheading that efforts.

Understood, very clear. Thank you.

On the second part of your question regarding Argentina and our exposure there. It's certainly not an easy solution. The operation has been growing. Very importantly. So the first priority for using our capital generated in Argentina is to continue to build capacity to make plans to that very healthy growth that we've been seeing. On second alternative, we look for alternatives to invest in assets that way we can protect our cash to exposure of FX depreciation. And we certainly continue to see or look for opportunities that we can materialize in as our last position in our excess cash to repatriate assets, but that is much more complex. Because there is no access to freely to $2. We have a small position of our total cash about 3% of our consolidated cash is concentrated in Argentina. So it's not a significant impact for the consolidated business. But we certainly focus on looking for alternatives for using that cash.

Absolutely clear. Thanks a lot for the color and congrats on results again.

Our next question is from Alvaro Garcia of BTG Pactual.

Hi, gentlemen. Thanks for the call, and congrats on results. A couple of questions in mind. First on beer in Brazil, we saw nice sequential acceleration there. I was just wondering if you can maybe give us some color, if that was Heineken brands, or maybe some of the other smaller brands that you've been ramping up there. And then my second question is on is on sort of capital allocation as a follow up to what we've discussed on past calls in terms of what I sort of consider a sub optimal sort of cash balance and access sort of cash balance. What's been your thinking there? Is there any update with regard to a potential shift and how you’re thinking about your dividends? Any sort of color there would be greatly appreciated? Thank you.

Hi, Alvaro, it's Jorge here. On your first question regarding beer. Yes, as you mentioned, we saw a sequential improvement as compared with the first with the first quarter. And it comes basically from a combination, we have been implementing some plans with Heineken as well together to accelerate the performance of the portfolio. Now, so we have some plans that we have implemented there that are starting to show some results. And that is [indiscernible] as well, and all the brands that we have as well, it's accelerating, it's growing. And to give you a sense, there in the first six months growing 30 plus rates compared versus the previous year. So that's a little bit of what we're seeing in beer. Obviously, it takes time. We know that. But the strategy is what we have to continue improving. Now we are improving versus the first quarter. That's for sure.

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

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

Yes, Alvaro. Yes, it's doing very well. Actually on the prepared remarks Ian mentioned a couple of points regarding Coke, zero sugar, for example, in Mexico, it's growing double digits, year-to-date. When you look at the mix, still on the single digits, but it's growing. No, it's outperforming. The case of Brazil, for example, is outstanding. I would also highlight that Ian mentioned also during the prepared remarks 30 plus 32%, if I remember correctly, as compared to the previous year on the first six months of the year. And there the mix is now reaching double digits. So it's a great product, obviously it's a great brand, and we are executing that and winning in the market. So I think it's very encouraging to see what we're doing with Coca-Cola zero sugar across all markets.

Wonderful. Thank you very much, and congrats.

And the final question today comes from Rodrigo Alcantara of UBS.

Hi, thanks for taking my question. Two quick ones, one for Ian and one for Gerry. For Ian, well thank you very much for the comments in the competitive position in Mexico, what spectrum the pricing strategy over there, maybe you can replicate those on the field for the case of Brazil on the pricing strategy. Is there also a slight deceleration in the pricing there in Brazil, be all terms, talking about your growth rates? So just curious of what's driving that -- what drove that innovation? And my second question would be for Gerry. Labor expenses concentration have been like a topic more for regional industry, but we can seem like any more relevant for orders pressuring margins. And so like, let's just share this year can you comment to share with us, like basis points, like how much of your margins have been eroded by increasing labor expenses? You can comment on that also. On the savings that we mentioned at the beginning of the call. For next year, do you see room for more savings to come from logistics? Those could be my two questions. Thank you very much.

Thank you, Rodrigo. Yes, on your first question regarding pricing in in Brazil, as Ian mentioned during the remarks as well. I think we can definitely see that we're leveraging on the pricing carryover that we have no. So we're cycling pricing from last year that was very solid. And so we do expect that to moderate. We're seeing inflation across most of our markets normalizing and we have initiatives to continue to improve our mix, leveraging revenue growth management. But you can expect that to moderate versus the pay that we had last year. As Ian mentioned, to summarize this, the target is to be at least in line with inflation. So partly that reflect on what you're seeing in in Brazil. On the other hand, we continue to see on the competitive position that we are -- we're gaining share in Brazil. So obviously also on the margins front, we're seeing easing PET rising costs. So we continue to see space not to be able to be more or less aggressive on that front.

Regarding, Rodrigo, your question on margins in Mexico, basically, the whole explanation of margin impact in Mexico is related to fixed costs and expenses, and specifically labor is one of the biggest impacts, I would say that of the total increase in fixed costs and expenses about 20, a little bit above 20% of the impact is related to labor. DME, marketing expenses, also playing an important role that related to our tactic of recovering competitiveness and positioning our brands to recover share in the market is important. And the third, I guess, big component there is IT expense. As Ian was mentioning, in a previous question, right now we're investing importantly in digital capacity and technology that represents an increase in IT expense. But it's related to our one of our main pillars, strategic pillars for growth and the way that we're trying to become the preferred B2B platform in our market.

That's useful. Thank you very much, Gerry, so you expect that 2Q OpEx growing at the same rates that we have seen in the last quarters. Does that a fair assumption? Like 20ish percent, something like that?

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

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

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

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

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

And that does indeed conclude today's conference call. We thank you all for participating. And you may now disconnect.