Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed outlook with strong growth strategies in Brazil and digital initiatives but faces challenges in Mexico due to tax impacts and cautious pricing. The Q&A section reveals uncertainties, especially regarding pricing and shareholder returns. The overall sentiment is balanced by optimistic guidance in some regions and cautious outlooks in others, leading to a neutral stock price prediction.

Key Financial Performance

Consolidated Volume Increased 1.3% in the quarter to reach 1.09 billion unit cases. Gradual sequential improvements in Mexico, coupled with solid volume growth in the rest of our territories supported this positive performance.

Total Revenues Grew 2.9% to MXN 77.7 billion, led by revenue management initiatives that were partially offset by unfavorable mix effects and headwinds related to currency translation from most of our operating currencies into Mexican pesos. On a currency-neutral basis, total revenues increased 6%.

Gross Profit Increased 1.8% to MXN 36.3 billion, leading to a margin contraction of 60 basis points to 46.7%. This margin performance was driven mainly by an unfavorable mix and hedging positions, coupled with fixed costs such as labor and depreciation. These effects were partially offset by better sweetener and PET costs.

Operating Income Increased 13.3% to reach MXN 13.7 billion, with operating margin expanding 160 basis points to 17.6%. This increase is positively impacted by the recognition of insurance claims recovered in Brazil and Mexico, net of expenses for MXN 1.1 billion. Excluding insurance recovery and related expenses, operating income would have declined by 2.1%, resulting in an operating income margin contraction of 90 basis points to 16.1%.

Adjusted EBITDA Including insurance recoveries, increased 12.8% to MXN 18.2 billion, and EBITDA margin expanded 210 basis points to 23.4%. Excluding insurance effects and related expenses, normalized adjusted EBITDA grew 4.4% with a margin expansion of 30 basis points to 21.9%.

Majority Net Income Increased 3% to reach MXN 7.5 billion. This increase was driven by operating income growth that was partially offset by an increase in comprehensive financial results and in the effective tax rate.

Mexico Volume Contracted 0.9% year-on-year, aided by adjustments to price pack architecture and revamped affordability initiatives in multi-serve refillable packs. Coke Zero maintained its solid growth pace with 14% volume growth year-on-year. Stills portfolio grew 7.4% year-on-year, driven by Monster (41%), FUZE Tea (33%), and Santa Clara (28%).

Guatemala Volume Increased 3.5% to reach 48.9 million unit cases. Growth was achieved despite a decelerating macro environment and reduced mobility due to rising insecurity in the country.

Brazil Volume Increased 2.6%, driven by a historic month of December, outstanding market execution, higher average temperatures, and significantly lower precipitation. Coca-Cola Zero grew 44% and Sprite Zero grew 93% year-on-year in 2025.

Colombia Volume Grew 4.5% as the macroeconomic environment gradually recovers. Coke Zero achieved double-digit growth during the quarter. Quatro became the #1 flavored sparkling beverage in the country.

Argentina Volume Increased 3%. Single-serve mix reached 26.3%, a 2.3 percentage point increase year-on-year. Digital orders increased 71% year-on-year.

Mexico and Central America Revenues Increased 1.6% to MXN 42.2 billion, driven mainly by revenue growth management initiatives that were partially offset by unfavorable mix and currency translation effects into Mexican pesos. On a currency-neutral basis, revenues increased 3.3%.

South America Revenues Increased 4.6% to MXN 35.4 billion, driven mainly by revenue management initiatives, offsetting unfavorable currency translation effects into Mexican pesos. On a currency-neutral basis, total revenues in South America increased 9.5%.

South America Operating Income Rose 32.8% to MXN 6.8 billion, with operating margin up 410 basis points to 19.2%. This margin expansion was positively impacted by insurance recovery in Brazil for approximately MXN 1 billion. Normalized operating income increased 6%, resulting in an operating margin expansion of 20 basis points to 16.3%.

South America Adjusted EBITDA Increased 29.5% to MXN 8.5 billion for a margin expansion of 460 basis points to 23.9%. Excluding the effects of insurance recoveries and related expenses, normalized adjusted EBITDA increased 9.6% year-on-year and EBITDA margin expansion of 90 basis points.

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Operating Highlights

Coke Zero: Achieved 14% volume growth year-on-year in Mexico. In Brazil, Coca-Cola Zero grew 44% during 2025, and Sprite Zero achieved 93% growth year-on-year.

Monster, FUZE Tea, and Santa Clara: In Mexico, Monster grew 41%, FUZE Tea grew 33%, and Santa Clara grew 28% year-on-year.

Non-carbonated beverages: Focus on developing profitable non-carbonated beverages as part of strategic priorities.

South America: Volume growth across most territories, with December marking the strongest month in the company's history. Brazil achieved the highest fourth-quarter volume on record.

Mexico: Implemented affordability initiatives and adjusted promotional grid to recover competitive position. Positioned for significant market execution improvements in 2026 with over 100,000 new cooler doors planned.

Guatemala: Volumes increased 3.5% despite macroeconomic challenges. Investments completed to address capacity constraints.

Colombia: Volumes grew 4.5% as macroeconomic environment recovers. Digital orders increased by more than 15% year-on-year.

Argentina: Volumes increased 3% with a focus on affordability and single-serve mix, which reached 26.3%.

Digital initiatives: Juntos+ Advisor rollout completed in Mexico, improving geo efficiency by 5.5 percentage points. In Brazil, Juntos+ increased efficiency by 9.2 percentage points and expanded monthly active users.

Cost control measures: Implemented in Mexico and Colombia to reverse negative trends and reduce costs, including freight and warehouse expenses.

Capacity expansion: Increased manufacturing capacity by 8.2% in Brazil, with five new production lines and a 6% increase in warehouse capacity.

Sustainability: Achieved an all-time high score of 81 in S&P Global Corporate Sustainability Assessment and improved scores in FTSE4Good, MSCI, and other benchmarks.

FIFA World Cup: Plans to capitalize on the event in Mexico, Brazil, and Argentina to boost sales and brand visibility.

Leadership changes: Welcomed new CEOs at FEMSA and Coca-Cola Company, marking a new growth chapter in the strategic partnership.

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Risk or Challenges

Weaker-than-expected consumer demand in Mexico: The company faced weaker-than-expected consumer demand in Mexico, which required adjustments to promotional strategies and affordability initiatives to recover competitive position and profitability.

Temporary unfavorable brand sentiment in Mexico: Early in the year, the company experienced temporary unfavorable brand sentiment in Mexico, impacting its market position and requiring swift corrective actions.

Excise tax increase in Mexico: The upcoming excise tax increase in Mexico is expected to impact consumers and customers, posing a challenge to the company's operations and profitability.

Unfavorable currency translation effects: Currency translation effects from operating currencies into Mexican pesos negatively impacted revenues in several regions, including South America and Mexico.

Higher fixed costs: The company faced higher fixed costs, including labor and depreciation, which contributed to margin contractions in some regions.

Macroeconomic deceleration in Guatemala: Guatemala experienced a deceleration in its macroeconomic environment, driven by shifts in consumer behavior and rising insecurity, which slowed volume growth.

Supply chain and cost structure challenges in Colombia: The company faced challenges related to cost control and supply chain efficiency in Colombia, although some improvements were achieved through capacity investments.

Volatile economic environment in Argentina: Argentina's volatile economic environment required the company to maintain a lean and flexible cost structure to sustain performance.

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Guidance & Outlook

2026 Revenue and Market Outlook: The company anticipates both opportunities and challenges in 2026, including the impact of an excise tax increase in Mexico. It plans to adhere to a sustainable growth model to navigate these challenges and strengthen its competitive position. Revenue management initiatives and affordability measures are expected to play a key role.

Strategic Priorities for 2026: Key priorities include growing the core business by accelerating Coke Zero, improving competitive position in flavors, and developing profitable non-carbonated beverages. The company also plans to leverage Juntos+ AI capabilities and foster a customer-centric culture.

Mexico Market Strategy: The company is prepared to address challenges related to the excise tax increase and soft economic growth in Mexico. Plans include bolstering the portfolio with affordability initiatives, increasing returnable pack offerings, and leveraging the FIFA World Cup to drive growth.

Guatemala Market Strategy: In Guatemala, the company aims to accelerate top-line growth by capturing share opportunities in flavors, leveraging the FIFA World Cup, and expanding availability. Productivity initiatives and cost structure optimization will also be prioritized.

Brazil Market Strategy: The company expects election-related spending, social programs, and the FIFA World Cup to be significant growth drivers in Brazil. Plans include leveraging digital initiatives, expanding manufacturing and warehouse capacity, and focusing on non-caloric and single-serve beverages.

Colombia Market Strategy: The company plans to expand its competitive position in flavors, grow Coke Zero, and optimize cost structures. A new distribution center in Medellin is expected to bring additional efficiencies.

Argentina Market Strategy: The company will focus on affordability plans, single-serve mix acceleration, and leveraging the FIFA World Cup. Digital initiatives like Juntos+ will be expanded to drive growth.

Digital and Technological Advancements: The company will continue to roll out and enhance digital tools like Juntos+ Advisor across key markets to improve efficiency, customer relationships, and sales.

Sustainability Goals: Sustainability remains a core focus, with improvements in climate action, water stewardship, and supplier management. The company aims to integrate environmental and social factors into its operations for long-term growth.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What was the performance in Mexico during the fourth quarter and early first quarter, particularly in terms of volume behavior and the impact of taxes?

A:In Mexico, the first quarter of last year saw a 5% decline, the second quarter had a 10% decline, the third quarter saw a 3.7% decline, and the fourth quarter was almost flat with a 0.9% decline. December was the strongest December on record for Mexico in terms of volume growth. Despite this, the company maintains guidance for a low to mid-single-digit decline in Mexico for 2026 due to the IEPS excise tax impact.

Q:What are the strategic ambitions for 2026 across all territories?

A:The company aims to grow its core business, particularly focusing on Coke Zero and other products like Sprite Zero in Brazil and Quatro in Colombia. They plan to leverage digital tools like Juntos+ Advisor in their largest markets to improve visitation and share. Additionally, they are working on customer-centric measures to ensure long-term business health. They aim to be prudent due to the tax increase in Mexico but remain committed to sustainable long-term growth.

Q:What is the update on shareholder remuneration given the below 1x EBITDA leverage?

A:The company is monitoring its capital structure and cash flow closely, especially given the challenges in Mexico with the IEPS tax. They are cautious and waiting to see how cash flow behaves during the year before providing more information on dividend strategy.

Q:What are the drivers behind the strong category growth momentum and relative performance in Brazil?

A:Brazil's performance is attributed to consistent investment in brands, distribution, and digital enablers. The Coke Zero playbook, developed in Brazil, has been successful and rolled out in other geographies. Sprite Zero has also shown significant growth. Advanced AI enablers and improved customer service metrics have contributed to share gains, particularly in mature territories like Sao Paulo and Minos.

Q:What caused the working capital outflow in the fourth quarter, and when is normalization expected?

A:The working capital outflow was due to a significant increase in accounts payable in the fourth quarter of 2024, related to delays in the ERP SAP/4HANA implementation. This has been normalized, and no further disruptions are expected in 2026.

Q:How comfortable is the company with implementing another round of price adjustments in Mexico to cover cost inflation?

A:The company is cautious and believes it is too early to implement another price adjustment. Elasticities are behaving as expected, but the consumer sentiment in Mexico remains sluggish. They plan to wait until the first quarter closes before making any decisions.

Q:What is the visibility on gross margins and cost inflation for the next 12 months, particularly in Mexico?

A:Gross margins in Mexico are under pressure despite a benign raw material environment, except for aluminum. The company aims to compensate for this pressure through fixed cost and expense management to deliver flat EBIT margins for the year.

Q:What is the status of supply chain improvements and CapEx investments in Brazil?

A:Supply chain improvements in Brazil are ongoing, with most benefits expected by May. Brazil has received significant capacity investments, and no major new investments are expected until around 2029, when a new plant may be needed.

Q:What is the company's outlook on affordability and pricing strategy in Mexico?

A:The company aims to maintain household penetration and believes the current pricing strategy is sustainable for the long term. They plan to focus on affordability for the next 12 months to recover from the IEPS tax impact and then grow through revenue growth management initiatives.

Q:What are the expected CapEx levels for 2026?

A:CapEx levels for 2026 are expected to be lower, dropping to around 7% to 7.5% of revenues, compared to 8.2% in the previous year.

Q:Was there any overstocking in December in Mexico due to the upcoming tax hike?

A:No significant overstocking occurred in December. Adjustments in the traditional trade were made mid-month, and the modern trade did not stock up significantly due to year-end working capital considerations.

Q:What is the company's strategy to capitalize on the World Cup opportunities?

A:The company plans to leverage the World Cup for brand engagement and increased consumption occasions. They will activate campaigns for Coca-Cola, Coke Zero, and other categories like Powerade, focusing on frequency and consumer engagement.

Q:What is the consolidated volume outlook for 2026?

A:The consolidated volume for 2026 is expected to be flattish to slightly positive, with low to mid-single-digit declines in Mexico and low to mid-single-digit growth in Brazil. Other markets like Argentina, Colombia, and Guatemala are performing well.

Q:Review of Unclear Management Responses

A:Management avoided providing specific numerical guidance for the impact of the World Cup, stating it is difficult to quantify but emphasizing brand engagement and consumption opportunities. They also did not provide a clear answer on whether a second round of price increases in Mexico would occur, citing the need to wait for first-quarter results. Additionally, they were vague about the exact timing and details of shareholder remuneration, stating they are monitoring cash flow and will provide updates later in the year.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q4 2025 Earnings Call Transcript

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The earnings call presents a mixed picture: positive elements like new production lines and strategic growth in South America are offset by challenges such as tax impacts in Mexico and cautious outlooks in Brazil and Argentina. The Q&A reveals a lack of clarity on key issues like excise tax impacts and non-caloric beverage targets. Although there are growth opportunities, the market's cautious response to uncertainties and macroeconomic factors suggests a neutral impact on stock price.

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The earnings call summary presents a mixed picture. Financial performance shows stability with a 6% increase in housing orders and positive revenue guidance. However, there are concerns about market conditions in Mexico and Brazil, and management avoided specifics on future growth. The Q&A section highlights challenges like declining EBITDA margins and competitive pressures. Despite some positive aspects like Coke Zero's growth, the lack of clarity on future revenue and cautious guidance temper enthusiasm. The overall sentiment remains neutral, reflecting a balanced outlook with both positive and negative elements.

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