Coca-Cola Femsa SAB de CV (KOF) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to Coca-Cola FEMSA's third quarter 2006 earnings results conference call. As a reminder, today's conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

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

At this time, I would now like to turn the conference over to Mr. Hector Trevino, Coca-Cola FEMSA's Chief Financial Officer. Please go ahead, Mr. Trevino.

Good morning, everyone, and thank you for joining us in today's conference. This quarter was a very positive quarter for us. We achieved balanced, strong top-line growth. Our Company's consolidated volume increased 6.5% and consolidated average unit price increased 1%, resulting in 8.6% revenue growth for the quarter on the back of 4.9% revenue growth in the same period last year.

Brand Coca-Cola contributed almost 70% of our Company's incremental consolidated volumes in the quarter, posting a 7% growth in this period, thanks in large part to our strategic marketing support and well-designed package segmentation by channel. Brand Coca-Cola continued to grow strongly across Latin America, demonstrating the widespread preference among our clients and consumers.

Additionally, Flavored Carbonated Soft Drinks were an important growth driver, contributing to more than 20% of our incremental CSD volumes in the -- during the quarter.

In the Non-Carbonated Beverage segment, we continued to generate strong performance in all of our territories. In Mexico, volumes of Ciel Aquarius, our flavored water brand, increased more than 90% in the quarter. And in Argentina, several recently introduced Dasani brand flavored sparkling waters have received a positive reception. The popularity of juice-based products continued to grow among our consumers in Central America. The Hi-C brand's regional contribution increased significantly to 40% of our non-carbonated companies' incremental volumes for the quarter.

In Brazil, the Minute Maid Mais brand continued to gain shelf space among our clients, helping the Non-Carbonated segment, excluding water, to grow more than 20% for the quarter. Also, our proprietary Crystal brand, still and sparkling water, continued to gain share in Brazil's Non-Carbonated segment, increasing almost 20% for the quarter.

Higher weighted average unit prices per unit case throughout the rest of our Latin American operations compensated for lower real prices in Mexico year-over-year, providing additional top-line growth. However, as we will discuss further in our Mexican results, price dynamics in Mexico were more favorable in September.

Higher revenues more than offset increased sweetener cost in the majority of our territories year-over-year. As a result, our consolidated gross profit increased almost 5%.

Central America and Colombia continued to exceed our expectations, contributing to almost 80% of our incremental growth in operating income for the quarter. These operations took advantage of favorable weather conditions, the positive pricing and more stable competitive environment in CSDs, and innovative new products, including Hi-C brand juice-based beverages, especially in Central America, and single-serve presentations of still and sparkling bottled water in Colombia.

Additionally, lower operating expenses per unit case in Mexico, Central America, Colombia and Brazil, driven by our operating leverage, offset higher operating expenses in Argentina and Venezuela, resulting in consolidated EBITDA growth of 7.6% for the quarter.

Our consolidated operating income margin declined 80 basis points year-over-year, driven mainly by raw material prices in the majority of our territories. Our consolidated majority net income reached MXN1.7b, 44% higher than the third quarter of 2005. This increase was primarily driven by foreign exchange gains, which resulted from the appreciation of the Mexican peso against the U.S. dollar as applied to our net liability position denominated in foreign currency, compared to a loss in the same period of 2005. Also lower interest expenses and higher consolidated operating income. As we anticipated, the unrealized foreign exchange loss recorded for the second quarter of 2006 was reversed in the third quarter of this year.

Now let me talk a little bit about our operations. Our Central America operations continued to deliver strong growth. On top of the previous price increases implemented during the quarter, we raised prices in the third quarter and, even with that increase, our volume continued posting double-digit growth.

The momentum of brand Coca-Cola, combined with better execution in the Flavored Carbonated Beverage segment, drove our Carbonated Soft Drink growth in the quarter. With the inclusion of Hi-C in our product portfolio, we were able to participate more aggressively in the Non-Carbonated segment, almost tripling our volumes in the quarter compared with the previous year.

From a profitability standpoint, the performance of our Central America territories was also remarkable, posting a 75% increase in operating income for the quarter and accounting for more than half of our incremental operating income on a consolidated basis.

Moving to Argentina, our operations post double-digit growth in sales volume for the quarter, driven by incremental volumes of brand Coca-Cola. In the premium segment, our Argentine operations have the highest proportion of Light beverages in our geographic portfolio, representing almost [12%] of the total volume in this region and outperforming the growth of core brands in the quarter with a strong increase of 16%.

On the Non-Carbonated side, excluding bottled water, we continued to post great results. This segment now represents more than 2% of our total volume in Argentina, compared to 1% in the third quarter of 2005.

High transportation costs increased our operating expenses by 21% and resulted in a decline in operating income of 5% for the quarter.

As you may know, levering Congressional representatives, the majority of our Venezuelan operations were blocked by a group of people claiming to be former third party distributors of our Company at the beginning of this week. Yesterday the block is finalized and today, as we speak, we are resuming our operations.

Now let me talk a little about the quarter in Venezuela. Our Venezuelan operations retook the path to volume growth after several quarters of declines. In the third quarter, our sales volumes increased by 7.4% [sic - see Press Release]. Volume growth from brand Coca-Cola and our Flavored Carbonated Soft Drink portfolio contribute almost equally to our total incremental volumes in the quarter.

As part of our SKU rationalization strategy, which is designed to keep more profitable SKUs in our portfolio, we phased our jug water presentation out of the market, impacting our total water volumes. However, volumes of our single-serve presentations grew more than 20% in the quarter.

On the Non-Carbonated side, Nestea continued to post strong growth in the quarter, more than offsetting the volume decline of our malt beverage product. For example, more than half of our Nestea volumes, on a consolidated basis, we sold in Venezuela.

Despite the 15% revenue growth that we post in the quarter, higher costs across the entire value chain, from procurement to distribution, and changes in the accounting for the useful life of our manufacturing assets increased our depreciation and amortization by 44%, resulting in a 25% decline in our operating income. It is important to note that this decline was lower on a sequential basis than those posted in the previous quarters. Nonetheless, after several quarters of decline, our EBITDA increased by 11.9% this quarter.

As we anticipated, during the quarter we began to capture some of the benefits from our analysis conducted in Venezuela throughout the supply chain. Among our results, we reduced our offering of SKUs and thereby improved our efficiencies throughout the value chain from manufacturing to distribution. Despite the recent operating disruption, we believe that we are reaching a turning point in Venezuela and we should be able to capture some of our top-line growth in our bottom line going forward.

In Colombia, our operations post 9% Carbonated Soft Drink volume growth in the face of a 14.5% volume growth in the third quarter of 2005. Brand Coca-Cola outperformed the rest of our Carbonated Soft Drink portfolio, delivering almost 100% of the incremental volumes in this country, despite price increases implemented in the second quarter for brand Coca-Cola. During the quarter we additionally increased prices in most of our portfolio, resulting in a 3.4% weighted average price increase.

Additionally, continuing the previous quarter's strength, our volumes of single-serve water presentations almost doubled in the quarter, driven by our recently introduced zero calorie flavored Dasani brand water, combined with our existing Manantial brand bottled water. This growth more than offset the volume decline of our less profitable multi-serve bottled water presentations and results in a slight increase for the quarter.

In Colombia, despite cost pressures coming mainly from a more than 35% increase in sugar prices and higher packaging costs due to a shift in our packaging mix to non-returnable presentations, our gross profit grew 9% and our gross margin declined slightly. Our quarterly operating income increased by almost 30% year-over-year as a result of improved operating leverage driven by our top-line growth and, obviously, improvements across the value chain.

Our operating income margin reached almost 15%, an increase of 210 basis points. Our Colombian market's growth in operating income accounted for almost 40% of our total incremental operating income for the quarter.

Finally, let's move to our largest operations of Mexico and Brazil. Our Mexican operations generated a healthy 4% volume growth in the quarter, with volumes of brand Coca-Cola increasing 5.7% and contributing to more than 80% of our incremental volumes for the quarter. Bottle water brand Ciel and flavored water brand Ciel Aquarius contribute to the majority of the balance.

Our performance in Mexico was driven by the strong preference of our operations outside of the Valley of Mexico. These territories have smaller, more fragmented urban and suburban areas compared to the Valley of Mexico, which makes it more difficult for lower price producers to reach critical scale and gain traction to the discounting initiatives. In our view, these market characteristics, combined with appropriate packaging segmentation by channel and socio-economic area, have helped us to achieve our strong performance.

In the Valley of Mexico, we continued to capture growth in returnable presentations, mainly in a 2.5-liter returnable PET presentation, as well as a 1.25-liter returnable glass package for brand Coca-Cola. These packaging strategies have helped us to maintain our profitability, despite the stronger competitive dynamics of this territory.

Our returnable base of brand Coca-Cola has continued increasing in the Valley of Mexico in the third quarter of 2006. This packaging composition is a competitive advantage that our competitors would find almost impossible to replicate in Mexico. It takes many years of consistently supporting our core brands and extensive experience managing returnable packages to achieve this brand strength.

On the pricing front, our 1.1% year-over-year real price decline in Mexico was driven by a shift in our packaging mix to multi-serve packages, which drove our incremental volumes in the quarter. Sequentially, prices increased 1.4% in real terms as a result of a 2% weighted average price increase which we implemented on a segmented territorial basis, mainly in single-serve and in smaller multi-serve packages in June of 2006.

An additional 2% weighted average price increase implemented in early September of 2006 that increased our 2.5-liter returnable PET presentation of brand Coca-Cola from MXN13 to MXN14, and also increased our 2.5-liter non-returnable presentation of our core Flavored Carbonated Soft Drinks back from MXN10 to MXN12. We expect to benefit from these price increases in the fourth quarter. So far our main competitor has followed our price increases.

On the profitability front, our gross margins declined by 100 basis points as a result of higher sweetener cost and resin cost. In Mexico, our sweetener cost increased by approximately 4% year-over-year and our resin cost increased by more than 15% over the same period in dollar terms. These increases impacted our gross margin in approximately 200 basis points during the quarter.

At the SG&A level, our operating expenses remain well under control. In fact they declined slightly. Our operating income declined 1.4% year-over-year, driven mainly by this higher raw material cost. EBITDA increased by more than 3% in the quarter, also as a result of a higher breakage cost.

We believe that Mexico's consumer dynamics remain firm and the pricing environment seems to take -- have taken a favorable turn. We believe that any favorable raw material cost developments should help us to increase our profitability further.

Our Brazilian's -- Brazilian operations' result clearly prove that our knowledge and understanding of industry dynamics delivered solid sustainable top and bottom-line results. Our financial information for the quarter and full year is not comparable with previous periods because we just resumed the sale of Kaiser brand and changed the way we report that in our financial statements.

After several months of strategic planning together with FEMSA Cerveza, we launched in Sao Paulo a new version of Sol in different presentations. This launch complemented the core segment of our product portfolio, since we were not present in that important segment of the market. By leveraging our distribution network and a better understanding of the dynamics at the point of sale, we are well prepared to introduce these new products quickly and successfully.

For the quarter, our Brazilian operations' revenues increased 10.5%, excluding beer, as a result of sales volume increases and better average prices per unit case. During the quarter, average price increased 1.5%. Despite increased prices our volumes post 8.5% growth, driven by the strong growth of brand Coca-Cola, mainly in our 1-liter returnable glass presentation, and incremental volumes of Fanta, which grew 33% in the quarter.

Consistent with our returnable strategy, during the quarter we introduced Fanta in a 1-liter returnable glass bottle to expand our offering of returnable presentations for more price-sensitive consumers. We have been implementing different value-added promotions that, combined with our superior execution, drove our volume growth in the quarter. This also has enabled us to increase our share of volumes and, more importantly, our share of sales year-over-year in both the Cola and Flavored Carbonated Soft Drink segments, reaching record levels since we arrived to Brazil.

Mineral water volumes post strong 19% growth in the quarter, beating a 12% increase in the preceding year, driven by a more aggressive media campaign and our execution at the point of sale. Crystal, our mineral water brand, is the leader in our Brazilian territories and has consistently gained share of market and share of revenues.

In the Non-Carbonated Beverage segment, the recently introduced Minute Maid brand juice-based product drove 20% growth in the quarter. As I just noted, we offer a broad range of products to our consumers and continuously explore alternative products or packaging to capture potential growth in our different markets.

Moving to the profit line, despite higher sugar prices, we post operating income growth of 3.9%. We believe that we are well prepared to improve our profitability in all of our market segments, particularly beer, now we have become a one-stop shop for our retailers by offering a complete product portfolio, including carbonated soft drinks, thereby brand Coca-Cola, juices, mineral water and beer, as well as through our greater operating leverage.

Now let me talk about our financial portfolio. On the financial front, our net debt has decreased approximately $204m compared to year-end 2005. And it's important to point out that in nominal U.S. dollar terms our debt has declined by $1b since the second quarter of 2003 when we acquired Panamco.

During November, we will pay down bonds coming due for approximately US$329m. Once these bonds are paid, we expect our weighted average cost of debt will drop from its current level and consequently reduce our expense further.

Finally, as you probably read in our press release, we reached a new comprehensive cooperation framework with the Coca-Cola Company. We believe that this framework is very positive for both companies. After one year of discussions in different forms, our relationship has grown stronger because both companies now understand better each other's business objectives and growth plans, and provides a long-term perspective on the economics of our relationship. In our view, the four main elements of this new framework are the following.

First, a relevant portion of the funds derived from the incidence increase will be provided by the Coca-Cola Company for marketing support of the Carbonated and Non-Carbonated Beverage portfolio.

Second, and specifically in the Non-Carbonated Beverage segment, this new business model better aligned our economic interests. This should help us pursue more proactively any growth alternatives, both organically and through acquisitions.

Third, this new framework will give us better visibility and economics of our relationship going forward.

And finally, this new framework provides us, Coca-Cola FEMSA, the opportunity to potentially expand our footprint within Latin America and in other markets where we could leverage our execution capabilities. After a year of conversations, we arrived to a comprehensive framework that not only addresses incidence increase, but provides us with a platform to continue working together, pursuing growth opportunities in several fronts.

Thank you for your confidence and support and I would like now to open the call for any questions you may have.

[OPERATOR INSTRUCTIONS]. And your first question comes from the line of Tufic Salem with Credit Suisse. Please proceed.

Yes, good morning, everyone. Thanks for taking my question here. I guess the most important and useful news is about the deal with Coke. I was wondering if you could be any more specific about any of those points, particularly in respect to the marketing support, whether it's going to be -- if there's a more specific breakdown of Non-Carb versus traditional CSD, additional marketing support.

And also if this is going to be -- of the increase, how much would be dedicated to extra marketing, and whether that's going to be on top of what you already spend today. In other words, there's going to be additional marketing or it's just going to replace some of the marketing you spent at the Company level?

Yes. Good morning, Tufic. With respect to your question, the agreement -- this framework that we have agreed with the Coca-Cola Company accounts for them dedicating a relevant amount of the increase in incidence to the marketing support. My expectation is that you will see our marketing support remaining at the same levels that we have right now at the beginning of this year, let's say 2007, 2008. And, as we start improving and consolidating some fraction of this additional volume growth by this additional spending by the Coca-Cola Company on CSDs and NCDs, that we might be seeing some reduction in the proportion of the marketing expenses that we carry.

It's important also to point out that we have agreed with the Coca-Cola Company that we would like both to agree in how to use these funds going forward. In other words, part of the -- a relevant portion of the resources that they are getting from this increase will be dedicated in a way that both companies will agree to support CSDs and NCDs. That, basically, is what I can say at this moment, Tufic.

Okay. Just to make sure I understand, in other words you're keeping, what, the same amount agreed upon before? But this should benefit you now in, let's say, a greater support for the brand and potentially higher volume going forward?

That's exactly where we are looking to [take] that as we spend more resources behind the brand. And I think that the result of this quarter has shown that, against all predictions and very negative view of CSDs in general around the world, when we invest behind a brand like brand Coca-Cola we have very good volume reaction. And that's what we are seeing this quarter.

We believe that with this additional marketing support we are expecting, and that's why we are confident with this agreement from KOF's perspective, is that the increase in incidence that we are having, starting January 1 next year, will be compensated by the additional marginal contribution from the volume that we are going to generate, both in CSDs and NCDs, as we spend more in these two categories.

Obviously, 2007 is going to be very difficult to see some of this volume reaction immediately. But it's our firm belief that this frame -- this agreement that we have with the Coca-Cola Company is very good for Coca-Cola FEMSA in the medium and long term.

Okay, thank you.

Your next question comes from the line of Jose Yordan with UBS. Please proceed.

Good morning. I guess my question was partly that. And I guess I would ask a different part of the question, which is how long did the period of, let's say, defined economics -- or how long are you precluding in the new contract another concentrate price increase? I guess have you been able to extend that to 10 or maybe more years?

And number two. I guess there has been some talk ahead of -- regarding this issue that you would also be in a more favorable position to make acquisitions as a result of this new Coca-Cola agreement. When might we hear news on that front?

Good morning, Jose. Obviously the issue of the timing is a very sensible issue. And, for us, it was very, very important to have the visibility that -- the long-term visibility that we are expressing in this understanding, precisely because of the point that you have mentioned. We feel that, given the understanding we have with the Coca-Cola Company about the longer vision of the economic relationship that we have reached, that now we are in a position to feel confident to pursue proactively acquisitions, as we mentioned in the press release, in Latin America and potentially outside of these territories where we can leverage our expertise. Again, this is basically what I can say at this point, Jose.

All right, thanks.

And your next question comes from the line of Reynaldo Santana with Deutsche Bank. Please proceed.

Yes, good morning. Again on this framework with the Coca-Cola Company, could you expand a little bit more on the new business model that complies to non-carbonated segment and some more specifics on the changes with [Selesco]? Thank you.

Good morning, Reynaldo. Yes, let me go a little bit on to that. I think that it was clear to all what has happened during the last year and even further than that that we have not had a successful strategy with respect to non-carbonated products, both the bottlers and the Coca-Cola Company. We are certainly very far behind some of our competitors and given the discussions that were taking place during this last year regarding the incidence increase and the changes in the economic relationship. In CSDs it was important to define, together with the Coca-Cola Company, a new business model for NCDs.

I think that, again, we feel very comfortable with the understanding we have reached, so comfortable in a way that we are in full agreement to what we said in this understanding, that both companies will be pursuing aggressively organic growth on NCDs and also through acquisitions. I think that the business model that we have in place now for NCDs further aligns the economic interests of both companies.

Thank you.

Your next question comes from the line of Lore Serra with Morgan Stanley. Please proceed.

Thanks. I guess my question's going to be a follow-up of that and some of the other questions. So, first I want to make sure I understand what I think you're saying about this incidence pricing. So, if I understand correctly, you will be absorbing the incidence prices that you quantified for us a year ago, and I assume those quantifications are still accurate. And if I understand what you said correctly, then you will be keeping your marketing spending initially at rates that you typically have, and you've always talked about it as a percentage of sales, but that Coke will make more investment into certain categories and products, and that as those volumes materialize you will then start to possibly reduce marketing spending for yourself. Is that the right way to think about the agreement?

Yes, Lore, that's the right way to look at the agreement.

Okay. And then I guess I'm not sure I understand the Selesco. Because Selesco - is it going to continue to exist? And how do you have an agreement with -- the marketing decisions I guess are made at Selesco. Does Selesco continue to operate the non-carbonated? Is this -- Selesco is just for the modern channels? Are you talking now about the traditional channels? I'm not sure I understand that.

Lore, the Selesco experience is a mixed bag of results. I think that from a volume and market share perspective it's working fine. I think that it still lacks -- or is still in the learning curve because it's a new experience for some of the bottlers; it's only focusing on the modern trade. Economically it has not been very successful. I think that we have to reduce a little bit the expenses or gain a bit higher scale so that we can carry somewhat better some of these unnecessary expenses that are embedded in Selesco.

Selesco, that concept will continue to exist. I think that when you go to non-carbonated beverages the market is very different from CSDs. In CSDs, the traditional mom-and-pop store is a very important mix of the volume. In the NCD categories, because of the way they we have been managed in the past and how our competitors have managed that in the past, and because of the -- also the lack of additional resources from the not so rich mom-and-pop stores, traditionally juices and flavored waters and all of that go through a bigger portion to the modern trade.

And we have to adapt our NCD strategies; it's a fact of life for NCDs. So modern trade should be managed in the same way that we are managing Selesco. Our expectation is that we will continue, as we introduce new products, to continue to work with Selesco. And as we get scale, I think that Selesco will work a little bit better from the economic point of view. As I mentioned, it's working well volume wise, it's gaining a bit of market share in the marketplace, etc., but it's still lacking the scale that is needed to be called a successful endeavor.

Okay. And in terms of the incremental marketing spend from Coca-Cola in this agreement, can you give us a sense of whether more of that is going to be on the carbonated side or the non-carbonated side?

We don't have any specific definition for the split of that between non-carbonated or carbonated. I think that as opportunities are presented in the future in front of us, we have full flexibility. And as I mentioned, both companies, Coca-Cola FEMSA and the Coca-Cola Company, will be looking together on how to spend these resources.

Okay, thank you.

The next question comes from the line of Carlos Laboy with Bear Stearns. Please proceed.

Good morning, Hector. Just I want to dig further into this. You say you have clarity now on how concentrate pricing's going to behave going forward. Does that mean that you -- that there are more increases, so the incidence rate's forthcoming and that you just know how they're going to kick-in and when, or that there is agreement with Coke that incidence rates should remain stable over the long term?

It's more the latter that you mentioned, Carlos. It's more visibility with respect to the stability in the marketplace with respect to incidence increases.

Okay. And the other question relates to beer in this agreement. Does beer work into this agreement? Do you have a green light from Coke in this agreement on the integration of beer and soft drinks in other markets beyond Brazil?

Yes, Carlos. The understanding that we have with the Coca-Cola Company, and it's specifically mentioned in this understanding, because we believe it's an important point, is that on a case-by-case basis we should be analyzing the possibility of integrating beer and soft drinks, as we have been doing in Brazil. I can also mention that it's pretty much known that we were -- or that FEMSA Cerveza was bidding for the beer brands that [Kilma] was selling in Argentina.

What I can say, that was the Coca-Cola Company was in full agreement with FEMSA Cerveza going to acquire those brands, and obviously Coca-Cola FEMSA playing an important role in Buenos Aires for the sales and distribution of beer. So in that respect, Carlos, what I say is that we have discussed for a long time this idea of defending the position that we have in soft drinks in areas where we are competing with a competitor that is integrated with beer and soft drinks. And obviously we have mentioned this in the past; when you look South of Mexico in a lot of these markets that integration is happening. And I think that it's an important flexibility and, again, we should be analyzing and discussing with the Coca-Cola Company on a case-by-case basis each of these opportunities.

Actually, one last issue. Does the agreement move you, the bottler, away from owning proprietary brands?

The agreement, or this understanding, Carlos, is that we have a continuation of some of the understandings or agreements that we have since the Panamco acquisition. And two of those agreements that we had at that time, one has to do with FEMSA buying some of the shares from the Coca-Cola Company, Coca-Cola FEMSA shares, and the other is us selling at fair market value the brands that were inherited by KOF when we acquired Panamco. So, yes, we will continue with that process, as it was announced three years ago, of selling those brands at fair market value. And this is part of this understanding also.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Robert Ford with Merrill Lynch. Please proceed.

Hi, good morning, everybody. Just to clarify, Hector, the -- debt will not be impacted? Is that correct?

And then my question really is if Ambev is provoked in Brazil and they retaliate CSDs, how do you respond and will you be in some way indemnified for the impact to profitability?

Bob, good morning. [Mondelis] is a brand that we have a similar agreement with FEMSA. It's now run by Coca-Cola FEMSA. So in our understanding, we don't have anything related to that brand.

In -- with respect to Brazil and the potential retaliation of someone like Ambev, either in Brazil or Argentina, [you've seen] prices of soft drinks, we are of the idea that if we stay with a position where we are only present in one of these categories, then we are in a weaker position than having the possibility of having also a larger portfolio of these categories to also compete in the market. It's obviously a possibility. We hope that that doesn't happen. But in a way, the only real way that you have to defend one of the categories, if the other is in two, is to be able to be in the two categories. That's the only way to get some kind of equilibrium, Bob.

I understand that. I just looked at Andina too and they seem to have done fairly well in the absence of having a beer offering and just I'm curious as to how do you defend yourselves? How do you -- if they attack, how do you respond in Brazil? That's really my question.

I think that obviously in the soft drink industry it's a very competitive industry. I think that Andina has been very successful in Chile and we have been very successful in Mexico and Argentina and the other markets where we are. I think that having the presence in the other categories helps us to get closer an equilibrium than if we are in a disadvantage of just having one category.

It's very difficult to -- it's a very tough question, the one that you're raising, Bob, but our feeling is that we are better positioned if we have beer and soft drinks in some of these markets. And again, it's not for every market. But if we only have only soft drinks in Brazil, we have been competing with [Antaxita] for a long time and sometimes they are very aggressive on the pricing front. And we have our strengths and our portfolio and the segmentation by channel that we can use.

Right. So, what I think I'm hearing you say is if the battle spreads, it won't be on soft drinks, doesn't it?

I didn't understand this question. If the battle spreads --

So, what I think I'm hearing you saying is that the battle would spread well beyond just CSDs.

I'm not sure that that's what I'm saying. What I'm trying to say is -- and I'm not looking to necessarily to be in a battle with Ambev. It's just that when you have the presence and you can also retaliate on some of -- in the other category, where it hurts more, you have better chances that he would not be hurting you where it hurts you. I don't know if I'm explaining myself.

I think you are and I appreciate it very much, Hector, it's a very difficult question. Thank you.

Thank you, Bob.

Your next question comes from the line of Alex Robarts with Santander. Please proceed.

Hi. I guess the question I have again relates to the non-carbs, but I did want to ask a clarification. So, just to understand the compensation concept here, if, let's say, going forward you were going to launch a Haifi or a Jewish product in Mexico, what this agreement basically stipulates then is to say, with this launch Coca-Cola will contribute more than it would of without this agreement to the marketing support of this kind of launch? Is that a safe way to look at this?

Alex, I didn't understand if the -- your question is if Coca-Cola Company would contribute more to the launching of a new brand, is that what you're asking?

That's right. What's clear is that, as you mentioned, you're kind of behind your competitors, particularly in Mexico, in the non-carb segment. And so whether you have this or not, this contract, it would seem to me that you need to build out the non-carb portfolio. So trying to understand how this is connected to your negotiations to offset, right, the increase in the Coca-Cola -- in the soft drink concentrate, as we try to understand that, is it that this particular framework then says going forward with non-carb launches, unlike before, Coke will put in more money in the marketing support than it would have without this framework?

Alex, I think that what is important to mention here is that we believe that with this - and I did try to summarize on four specific points - where we think that we can capture or recapture some of the lost economics because of the incidence increase. And that has to do with additional marketing support, the potential to grow horizontally both in CSDs and non-carbs. A new business model for non-carbs, and I'll explain that a little bit in a second, and, again, a better visibility about the economics in the future.

With respect to the non-carbonated categories, what we are saying is that we have a different business model than that of CSDs. And it's important -- and then the reason is what's important is that we are just starting to have some products do lower volumes, they are very low, as we mentioned, we are behind our competitors. And I think that with this new business model that aligns better the economic interest of the companies, I think that both companies will be pretty much incentivized to pursue opportunities in non-carbonated segment. And that is what we were trying to say with respect to this idea of a new business model in non-carbonated beverages.

I guess that the question that I had initially was - where are you paying incidence prices on non-carbs within the cost system? And does this agreement basically mean that you will pay more -- or other non-carbs in other countries will have incidence prices that didn't happen before, like in Mexico, Argentina, two different types of incidence pricing economics. And so maybe you could just -- again, just where are you paying now on non-carbs and where might you have -- where will you have to pay, as I understand it, in the context of this framework going forward for non-carbs?

Alex, I think that what I feel comfortable saying today is that we feel that this new business model, that is different from the model that we have for CSDs, aligns better the economic interests of both parties. And by that, what I am trying to say is that we are sharing a little bit better the economics and also some of the investments that are required for [business]. And that is what gives us comfort going forward with NCDs.

Ladies and gentlemen, this is all the time we have for questions today. I would now like to turn the call over to Mr. Hector Trevino for closing remarks. Please go ahead, sir.

Well, we thank you very much for your attention and obviously we know that there are a lot of issues to understand going forward. I feel confident that as we advance you will see some of this in our results as we go forward. And we are open for any further questions that you might have and you can call Alfredo, Julieta or myself to clarify some of these points. Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect. Good day.