Coca-Cola Femsa SAB de CV (KOF) 2009 Q1 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's First Quarter 2009 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'll 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 expectations and are based upon certainly available data. Actual results are subject to future events and uncertainty which can materially impact the Company's actual performance.

At this time, I will now turn the conference over to Mr. Hector Trevino, Coca-Cola FEMSA's CFO. Please go ahead, Mr. Trevino.

Good morning, everyone, and thank you for joining us today. Our solid top and bottom line growth for the quarter demonstrated our Company's ability to adapt our operations to changing market conditions. Our acquisitions, our successful rollout of new beverage categories, and the price increases that we implemented across Latin America during 2008 extended our Company's track record of growth.

In the first quarter, our consolidated revenues reached MXN22.5 billion, up more than 30% from the first quarter of 2008. Organic growth, mainly driven by pricing, accounted for approximately 40% of our incremental revenues. The consolidation of REMIL in Brazil contributed more than 25% of our incremental revenues, and the effect of a positive exchange rate translation provided the balance.

Our consolidated sales volume rose more than 7% year-over-year. Excluding REMIL, our consolidated sales volume increased close to 2% during the quarter, mainly driven by growth from our still beverage portfolio in Mexico and Colombia and our water business, including jug water.

Our gross profits increased more than 26% in the first quarter of 2009. Higher revenues partially compensated for higher cost of goods sold, which resulted from the effect of the devaluation of local currencies as applied to our US dollar denominated raw material cost and higher year-over-year sweetener cost in our operations. Our gross margin declined 150 basis points during the first quarter of 2009.

Consolidated operating income improved more than 17% to MXN3.3 billion in the first quarter. Revenue growth compensated for normalized marketing expenses and higher labor costs, mainly in Venezuela and Argentina. A positive currency translation effect provided almost 40% of our incremental operating income. Our consolidated operating margin declined 160 basis points year-over-year to 14.7% for the quarter. Our consolidated average EBITDA rose close to 20% to MXN4.3 billion in the first quarter.

During the first quarter, our majority net income decreased 18% to MXN1.3 billion. This decrease was mainly due to the impact of the devaluation of the Mexican peso as applied to our US dollar-denominated net debt during the first quarter of 2009.

Now, let me expand on our operations. Our Mexico division delivered more than 3% volume growth for the quarter. The Jugos del Valle line of beverages and our water business, including the integration of Agua de Los Angeles jug water operation in the Valley of Mexico compensated for lower volumes of our sparkling beverages.

During the first quarter of 2009, our sales volume of sparkling beverages in Mexico declined 3.6%, mainly driven by a high single-digit decline in flavored sparkling beverages. Our water business grew more than 11% during the quarter, driven by volume growth in our single-serve water portfolio and the integration of Agua de Los Angles jug water business.

In the still beverage category, the Jugos del Valle beverage portfolio continued to expand its base of growth. Last year, we started to distribute this product in our Mexico division, selling approximately 3 million unit cases during the first quarter. One year later, thanks to our innovation and our experience with new categories, we served our consumers more than 12 million unit cases of juice-based beverages for the quarter.

Still beverages, including personal water and categories such as isotonics, energy drinks, orangeades and juices and nectars, have played a key role in our portfolio growth over the past year, reaching more than 10% of our total portfolio. Our average price per unit case increased 1.6% during the quarter. This increase was mainly driven by the average price increase implemented last year in our Coca-Cola portfolio, combined with higher average prices per unit case of the Jugos del Valle line of beverages.

These increases were partially offset by lower volumes of our sparkling beverages and higher volumes of jug water and by fruit, our orangeade, which carries a lower average price per unit case. Our Mexican operation's total revenues increased 4.8%. Incremental volumes accounted for the majority of our total incremental revenues.

On the profitability front, higher cost of goods sold was mainly driven by the devaluation of the Mexican peso as applied to our dollar-denominated raw material cost and was partially compensated by lower year-over-year rising prices. Our gross profit reached MXN4.1 billion, growing 3% as compared to the first quarter of 2008, and our gross margin in Mexico decreased 90 basis points.

Operating income grew close to 1%, reaching MXN1.3 billion. Higher revenues compensated for normalized marketing expenses, the addition of a specialized sales force for Jugos del Valle products, and the integration of the Agua de Los Angeles jug water business in the Valley of Mexico. Our operating margin declined 60 basis points to 16.4%. Our EBITDA remained almost flat compared to the same quarter of last year, reaching MXN1.8 billion.

The economy in Mexico continued to experience a slowdown, with lower industrial activity. Nonetheless, despite this environment, our Mexican business managed with these positive results. Our new avenues of growth, combined with our brand portfolio of products, allow us to offer an array of value alternatives for our consumers. We will continue to leverage our large returnable base and deep understanding of retail dynamics, our enhanced execution at the point of sale and our effective deployment of marketing resources.

As you may know, a case of swine flu has been recently reported in Mexico, mainly in the Valley of Mexico. Last weekend, this disease came to the attention of government authorities and the private sector, who are implementing several measures, such as the interruption of school for several days and the avoidance of large congregations of people, to minimize the spread of the virus, including the closing of bars and restaurants in Mexico City for one week.

As of April 24, our Mexican operation's volumes were off to a very good start for the second quarter. Innovation in our still beverage category, along with very good weather in our Mexican territories, has driven solid volume growth for the month. Our volumes in the Valley of Mexico represent approximately 35% of our Mexico division volume or close to 18% of our consolidated volumes.

We expect this event will affect some of our volumes in the on-premise channel, as we have seen recently given the deceleration of the economy. This volume decline is being partially compensated by volumes sold through supermarkets and the original channel for home consumption. We are still assessing the impact of this event, while reinforcing our market strategies to ensure the availability of our high quality portfolio of beverages in every channel.

Our Latincentro division recorded close to 2% volume growth. This increase was mainly driven by brand Coca-Cola in Venezuela and still beverages in Colombia. We successfully rolled out the Jugos del Valle line of beverages in this country, reaching more than 3 million unit cases during this quarter.

In Central America, we recorded a sales volume decline of 6%. Central America relies, importantly, on remittances from the US and tourism, both of which have experienced a substantial slowdown, given the current economic conditions.

Our Latincentro division's total revenues grew more than 50% year-over-year, reaching MXN8 billion. Organic growth, mainly driven by price increases implemented last year, accounted for more than 40% of our incremental revenues, and a positive currency translation represented the balance.

On the profitability front, our gross profit increased more than 50% to MXN3.7 billion in the division. Higher cost of goods sold was driven by the devaluation of local currencies as applied to our dollar-denominated packaging costs and higher cost of sweeteners across the division, which were partially compensated by lower cost of resin.

Gross margin remained almost flat at 45.6% as compared with the same period of 2008. Our operating income grew 32% to MXN1 billion. Operating leverage achieved by higher revenues compensated for higher labor costs in Venezuela. A positive currency translation effect accounted for more than 70% of our incremental operating income. Our operating margin declined 180 basis points to 13% as compared with the first quarter of 2008. Our EBITDA grew close to 40% to MXN1.4 billion.

During the first quarter, we expanded our sparkling beverage portfolio in Latincentro. At the end of March, we launched Coca-Cola Zero in Venezuela to complement our portfolio in the country. Coca-Cola Zero has played an important role in our sparkling beverage portfolio over the last two years, allowing us to develop our three-year Cola strategy.

Also, through our Jugos del Valle joint venture with the Coca-Cola Company, we will continue to analyze the introduction of new juice beverage alternatives to satisfy our consumers' changing taste and to complement our existing product offerings in that category. In the following months, we expect to finalize the installation of our new production line for juices in Bogota -- in Colombia. This incremental capacity will improve our go-to-market capabilities of non-carbonated products in Colombia.

Now, let's talk about our Mercosur division. Our Mercosur division net revenues grew 53% to MXN6.2 billion in the first quarter of 2009, excluding beer, which accounted for MXN608 million. We increased net revenues 50% to MXN5.6 billion. REMIL accounted for more than 60% of this growth. Organic growth, driven by higher average prices per unit case, represented close to 30% and a positive currency translation effect provided the balance.

Volume growth in our Mercosur division was up almost 21% in the first quarter of 2009. Sales volume, excluding REMIL and beer, declined 1.5%, driven by flat volumes in Brazil and a volume decline in Argentina. In Brazil, sparkling beverages declined 1%, mainly due to bad weather in the month of January and a 3% weighted average price increase implemented at the beginning of the quarter. Growth in the still beverage category, mainly driven by our revolutionary hypertonic product Inove offset the volume decline in the sparkling beverages.

In Argentina, our sales volume declined 4%, mainly driven by sparkling beverages. This decline was partially compensated by more than 75% growth in the still beverage category resulting from the successful performance of Aquarius, our flavored water brand.

On the profitability front, our Mercosur division gross profit increased more than 44% to MXN2.7 billion. Cost of goods sold increased as a result of the integration of REMIL in Brazil, the important devaluation of local currencies as applied to our US dollar-denominated raw material cost, and higher sweetener cost in the division. Our gross margin decreased 270 basis points to 42.5% in the first quarter of 2009. Our operating income grew close to 32% to reach more than MXN900 million.

Operating leverage achieved through higher revenues more than compensated for higher labor and freight costs in Argentina. A positive currency translation effect accounted for approximately 10% of incremental operating income. Our operating margin was 14.6% in the first quarter of 2009, a decline of 240 basis points. Our EBITDA grew more than 36% to MXN1.1 billion.

During the first quarter, we started to distribute our Jugos del Valle line of products in the Sao Paulo region. We expect to increase this product coverage in our Brazilian territories over the coming months. We will continue to evaluate new product launches of juice-based beverages to expand our product portfolio.

Now, let me talk about our financial performance for the quarter. In the first months of the year, the global economy continued to experience a slowdown that was also felt in Latin America. However, our industry and our product portfolio have shown resilience to this crisis.

Our Company has been able to successfully weather so far this slowdown based on our ability to implement revenue management initiatives across our territories, the acquisitions that we have made and the strong pipeline of innovation that we have developed. We are continuously reviewing the performance of our business to protect our cash flow.

As of March 31, 2009, we had a cash balance of MXN9.8 billion, an increase of MXN3.6 billion compared with year-end 2008. This increase, net of $46 million we paid to finance our share of Brisa Water business acquisition, mainly came from cash generated in the quarter and the proceeds of the bond issuance we did in the month of January of 2009, for an amount of MXN2 billion.

Our total debt increased MXN2.4 billion compared with year-end 2008, mainly driven by the previously mentioned bond offering. As a result of these factors, our net debt decreased MXN1.2 billion during the quarter. As of March 31st, 2009, our short-term bond debt was MXN8.2 billion and our long-term debt was MXN12.8 billion.

As we mentioned on our last conference call, we have maturities for the equivalent of approximately $400 million coming due in July of 2009. On this debt, approximately 70% is dollar-denominated. The majority of our remaining debt matures from 2012 or more.

As of April 28th, we had the equivalent of $687 million in our cash balance. Over $435 million of this balance is already denominated in US dollars, representing close to 70% of our cash position. These funds are sufficient to meet our maturities coming due in July of this year, as well as other operating needs.

On April 13, we paid dividends in the amount of MXN1.3 billion, highlighting the strength of our balance sheet and our cash flow generation. As of March 31st, 2009, our net debt-to-EBITDA coverage ratio was 0.6, underscoring our solid financial position. Our net debt as of March 31st, 2009 is MXN11.2 billion, the equivalent of approximately $780 million.

Our liability structure is comprised of a balanced mix of currencies. Approximately 43% of our debt is dollar denominated and the remainder is comprised of local currency denominated debt, mainly Mexican pesos. As of March 31st, 2009, approximately 49% of our debt had a fixed interest rate. The effect of foreign exchange fluctuations between the Mexican peso and the US dollar as applied to our dollar-denominated debt is reflected in two lines on our consolidated income statement.

On our debt that was contracted in dollars, the effect shows on the foreign exchange loss line. On our debt that was contracted in pesos and swapped to dollars, the effect shows on the fair value loss on derivative instrument lines. The combined amount of these two lines on our income statement is approximately MXN460 million.

As we announced at the end of February 2009, Coca-Cola FEMSA and the Coca-Cola Company closed the joint acquisition of Brisa bottled water business from Bavaria, a subsidiary of SABMiller. This transaction will complement our product portfolio, allowing us to develop and offer our consumers a multi-brand water strategy in Colombia. As part of this transaction, we agreed to a transition period in order to consolidate its operation into our Colombian business. We expect to start direct sales and distribution activities of Brisa at the beginning of June of this year.

This first quarter of 2009 was another good quarter for our Company. Our performance is not driven by random events, but by the strength of our brands and the enhanced execution capabilities of our operators. This year, market conditions present us with the opportunity to reinforce our product portfolio with new beverage offerings.

We have introduced extremely novelty products across Latin America over the past couple of years and especially during last year, in the still beverage category, through the joint venture we have with our partner, the Coca-Cola Company. We will continue to measure the pulse of our market conditions and adapt our business, if necessary, to protect our cash flow generation and continue on our path for growth.

Thank you for your continued trust and support. And now, I would like to open the call for any questions that you may have.

(Operator Instructions).

Your first question comes from the line of Bob Ford with Merrill Lynch.

Hey, good morning, everybody. My one question, Hector, is for you to expand on the CSD business in Mexico, if you could, and just let us -- if you could remind us what the percentage of total flavors is of sparkling. You -- typically, in your press releases, you've mentioned that Coca-Cola continues to grow, it's a brand -- if you could comment on Brand Coke. And then, any impact that you may have had from Easter in the comp, as well as any impact you would have had from the upscaling initiative in flavors, as well, please.

Good morning, Bob. Let me talk to you on some of the main trends that we are seeing in the industry in Mexico. As you correctly pointed out, usually we will notice increases in Brand Coca-Cola quarter-over-quarter. This -- during this first quarter of 2009, we have seen small reductions in Brand Coca-Cola, a trend where we are seeing reductions in single serve presentations and some increases in multi-serve presentations, speaking specifically about Brand Coca-Cola, Bob. But the total portfolio of colas show a small reduction during this quarter.

The main impact of this is that, if you remember, we have been increasing prices, importantly, in some of these products, especially at the end of last year, with, for example, our 600 ML going from 7.00 to 7.50 and some price increases also in the large format presentations. But in general, the trend is a small reduction in colas, a substantially higher number in single serve colas and an increasing multi-serve colas. But for the total portfolio, colas in unit case is coming down slightly.

Now, when you look at flavors, we did an upscale in flavors, with no price movement. So in other words, we moved from two liters to 2.5 liters, maintaining the same price. And in spite of that, we saw a high single digit reduction in flavors. The main impact or the main reflection here is that because of the introduction of some of the juice-based products on the Jugos del Valle line of this business, especially this product by fruit or what we call this orangeade, where we are seeing tremendous growth. We believe that the main reason for flavors reduction has to do with the large increase on Valle fruit.

So just to give you an idea, Valle fruit, right now, it's selling, on one month, close to 3 million unit cases. That's more than what Coca-Cola sells in a quarter in Mexico. So, the success of that brand has been very large and obviously, has had an impact on the consumption of some of our flavored sparkling products.

I think that these trends within the company are good for us. You need to remember that some of our competitors are moving into these kinds of products, also, these Orangeade products, with low content of juice. But at the end of the day, it's a trend that we need to focus and to pay attention to that trend. So, I would say those are the main trends in Mexico with respect to CSDs and some of the still beverage categories, and that's basically what -- I think that will answer your question.

Thanks, Hector. And could you just touch on that cola flavor mix as a percentage of all sparkling?

Yes, Bob, this is Alfredo Fernandez. Yes, cola as a percent of our sparkling beverages in Mexico are around 80% and flavored is the balance. Given our upscaling, just developing on the explanation of Hector of upscaling of flavors, we have seen the decline diminishing and that's why he made on his remarks that we were off to a good start during the second quarter. And the segmentation we're doing with the multi-serve packages, including one-ways and returnables of Brand Coca-Cola, are helping us to -- going back to the path of growth in Brand Coca-Cola.

Great, good news. Thank you both very much and good luck.

Your next question comes from the line of Alan Alanis with JP Morgan.

Hi Hector. Hi, Alfredo. Good morning. Could you walk us through the relative profitability of CSDs versus non-CSDs, specifically in Mexico and in Brazil, because we're seeing this gross margin contraction and I wonder how much it's coming because of -- purely because of the exchange rate or because of the different economics between non-carbonated soft drinks and soda? And how do you see this profitability going forward?

Good morning, Alan. Let me start with Mexico and then I'll move into Brazil. Clearly, if you look at the profitability for the different categories, the most profitable categories for us are single-serve carbonated soft drinks. The trend that we are seeing and that I explained in the last question of a substantial increase in products like Valle fruit, we think that, in general those products have a lower profitability than single-serve CSDs, and most of these presentations in Valle fruit are also single-serve.

I think that it's important, from a strategic point of view, that, at first, we take control of the transaction, that we own the transaction, and then start moving prices of those products. And as a matter of fact, we have started to increase the prices of Valle fruit to start improving the profitability of those products. But that's normal when you do -- that's normal for us when we do introductions, no. We usually start with a price that attracts consumers. Then you start, little by little, increasing prices as you deem appropriate and as you also start seeing how competitors evolve and how your cost structure evolves.

One thing that is important to highlight is that -- remember that in all those, let me call it, juice categories are managed through the joint venture and remember that joint venture, we split 50/50 the profitability with the Coca-Cola Company. But it's important, also, to highlight that we also split 50/50 all the investments that are required for these brands, which at the pace that we are growing the volumes on these categories, you can imagine the high level of investment that we are needing for production lines to all Latin America.

I think that, in general, my feeling is that once we stabilize these products, we will get close to the profitability of CSDs, but I don't think that we will get to the same level of the profitability of CSDs that we have presently. Another important element, even in some high-priced products like juices, the cost structure of those products are also higher, because the raw materials you need -- you have a lot of raw materials that are very expensive on the production of that. So in general terms, we will see CSDs being more profitable than the other categories, but that doesn't preclude us from trying to find avenues of growing that profitability on those other products.

In Brazil, it's quite similar to what I have described to Mexico. With this distinction, I will say that really, the push for these new categories just started in this quarter, as we finalize all the agreements with the other bottlers and the Coca-Cola Company on the formation of this joint venture that was basically started at the end of January. So, we will see a positive trend in the growth of these products in Brazil, also.

I don't know if I answered the question with this explanation.

Yes. Basically, what you're saying is that part of the increase in cost of goods sold will continue in that way because the cost for this, particularly for uses, is slightly higher. Then eventually, you will be taking pricing on this product, as well, once you, as you said, own the transaction, but that you don't anticipate that even after finishing taking this pricing, that the profitability levels will be similar to the ones that you currently have or to the ones you previously had with CSDs.

Yes.

Okay. Thank you, Hector.

And Alan, just developing on the remarks that Hector made regarding the compression of the gross income level, during the first quarter of '09, the compression was mainly driven by the depreciation of the local currencies versus the US dollar applied to the dollar-denominated raw materials. I mean, it was mainly driven about that. And in the Mercosur division, because of the inclusion of the REMIL numbers, I don't think that is relevant at this point, the non-carbonated line of business in that light.

Now, the 50/50 joint venture, that's 50% the Coca-Cola Company and 50% all of the bottlers, correct? I mean, you have your proportional part of that 50% among all of the Mexican bottlers and among all of the Brazilian bottlers now.

Yes, but let me clarify. It's -- in the territories that we operate Brand Coca-Cola, it's 50/50 to Coca-Cola and ourselves, and that's it.

Okay.

When you look at the total country, then it's 50% to Coca-Cola Company, 50% to the rest of the bottlers. But each bottler is -- owns the other 50% in the territories that we own, okay?

Understood. Thank you very much.

(Operator Instructions).

Your next question comes from the line of Sean Glickenhaus with Citi.

Hi, good morning, guys. I'm trying to isolate the Valle benefit this year. I thought last year it was said that you reinvested about 100 basis points of a benefit from Jugos del Valle in Mexico, but it would appear that the benefit in the first quarter of '09 was significantly lower than that.

Then following up on that, in 1Q '08, it looks like there was an operating expense shift from Latincentro to Mexico. So, I wanted to get a little clarification on that, and finally, what the plan was for Brazil. I assume you'll be reinvesting a lot of the profits there for Valle, as well. Thanks.

Good morning, Sean. Last year, it was a special year, speaking about Mexico, with the Jugos del Valle acquisition, because remember that all the production for Jugos del Valle is centralized and in that, the factories are owned 50% by the Coca-Cola Company and the other 50% by all the bottlers. And we were, in a way, in a transition period and trying to measure how to allocate distribution and selling expenses that are shared with CSDs in order for us to properly compute this 50/50 sharing with the Coca-Cola Company in the territories.

So last year, most of these profits were left in Jugos del Valle to reinvest heavily on the production facility, because it was needed for, as I mentioned, just to comply to Coke with all this volume growth that we are experiencing in this category. And very similar is what is happening in Brazil, where we share the operation of Jugos del Valle with other bottlers and therefore, the production facilities are shared among the different constituents.

It's not so much the case in Latincentro, where we operate basically the whole country. For example, in Colombia, the Coca-Cola Company and ourselves alone, we are investing in new production lines and we are sharing 50/50 the cost of the production line and we will share 50/50 the profits of that. But nevertheless, that will still leave us the question of finalizing the agreement with the Coca-Cola Company on how much of the selling and distribution expenses that we incur in the CSDs business that are now distributing and selling juices, how much of that cost should be allocated to the joint venture.

And we are still kind of fine-tuning that number. I think that we are in a much better shape this year, but definitely, last year, everything was left at the production facilities for reinvestment. So my feeling, Sean, is that this year, which we'll be seeing a larger benefit of these juices, the effect of the profitability of this joint venture as opposed to last year, when everything was kind of left at the production facility, no.

In the case of Brazil, we are still, because of tax considerations, special tax considerations, the effect of the joint venture will be for us, basically, through the equity method, because all the profitability will be staying in the joint venture, where we share, as a shareholder of this production facility, with the rest of the bottlers, because there are important tax considerations to accomplish there. So in Brazil, we'll be receiving dividends from this joint venture and that's the way we will account for that.

Okay. And sorry, I didn't get -- so that shift -- the operating shift Latincentro to Mexico for one quarter of '08, that restatement, that was Valle related because of the production or that's completely separate?

I don't know exactly what you're referring there. Alfredo, do you know what?

(Inaudible - microphone inaccessible). Are you referring to the incremental operating expenses of Latincentro?

Correct, for the consolidated EBITDA was the same first quarter '08 as originally reported, but there was a shift, the EBITDA, sorry, came in higher in Latincentro than Mexico, right. So Latincentro's 1Q '08 margin is now higher than it was originally reported and it was just -- basically, it looks like there was a shift of operating expenses from Latincentro to Mexico. So consolidated, it was break-even and I just kind of was curious as to what that was.

Okay. Let me look into that and we can check that offline.

Okay, great. Thank you.

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

Yes, hi. I wanted to ask just two questions. One was if you could just comment on how you feel about the price increases you've implemented. I mean, you made some pretty aggressive actions in the third and fourth quarter. Volumes were weak, but I suppose within expectations given the situation, although I was a bit surprised that you had no volume growth in Brazil ex-REMIL.

If you could comment on how comfortable you are with the current pricing structure and whether you see opportunities down the road in '09 to take any more pricing. And then separately, I think the surprise this quarter, to me, anyway, was that your operating expenses didn't look that tight and I know that you explained why they were very tight in the fourth quarter and that was sort of a one-off.

But when you're getting that much revenue growth that's coming from pricing and volumes are not growing that much, is there some reason why you're not picking up more leverage there? Is there some way, as we see the rest of the year, you could see tighter OpEx? You've explained some of it in terms of Argentina and Venezuela and Jugos, but it doesn't seem to add up, given that none of that is a sizeable portion of the total revenue. Thanks.

Yes, Lore, with respect to prices, I don't know, it's always kind of -- I mean, when you move prices, you have all these questions about what the competitors' reactions will be. So far, we feel comfortable with some of these actions and, as you probably saw, we were moving prices from some of our strong brands, mainly Brand Coca-Cola. We increased some of the prices on Jugos del Valle.

In flavors in Mexico, we reduced prices. We increased prices in Argentina, Venezuela, Brazil, everywhere, because you need to take into consideration that when you suffer such a high movement on the exchange rate and such a high impact on the cost of goods sold because of the raw materials that you have to import, it's important that you try to compensate for those increases.

Our experience in different situations like this in the past is that it's better to take the price and maybe suffer a little bit in the volume and, sooner or later, you will capture again the consumption occasion and the volume. I think that with the price increases that we have done, we feel comfortable. It's too early to know if we will increase a little bit in the second half of the year, but that's a possibility, but we need to continue measuring, obviously, the impact of this and the competitive environment in the second half of the year to see if we can move prices again.

On the operating expense line, I think that the main impact here is what we explained with respect to the very strong increases in labor costs in Argentina and Venezuela, and obviously, the Jugos del Valle introduction also brings from -- all the way from specialized sales force to additional initiative expenses that are related to all these new volumes and all these new joint ventures, no.

Other than that, Lore, I don't see any specific increases that are important to highlight and I agree with you, I think that we need to start seeing some additional traction on this -- additional leverage on the operating expenses in the rest of the year.

Just a quick follow-up. In Brazil, I mean do you think you lost market share as a result of your pricing actions or do you think the market was flat in the first quarter in volume terms?

When you look at the share of volume, we probably lost a little bit of market share, but I'm speaking from basis points. If you look at share of sales, it's basically flattish.

Okay. Thank you.

Your next question comes from the line of Jose Yordan with Deutsche Bank Securities.

Hi, good morning, everyone. I just had a quick question about the volumes. You gave the figures for total volume growth and excluding REMIL, but I was wondering what the organic volume growth would be if you also excluded the Agua de Los Angeles and to the extent you consolidated Brisa volumes into Colombia for the month of March, if you excluded that, too, if you were to exclude that, too, what would be your organic sales volume, both for Mexico and for the consolidated entity?

Jose, this is Alfredo Fernandez. We have been migrating some of the volume of Agua de Los Angeles to volume being sold under the brand Ciel right now. So, it's not that easy to differentiate one against the other, but on a net-net basis, certainly, that is giving us 5 million unit cases of incremental volume that we were getting on a quarterly basis. That is one way to see the jug water business, no.

So, excluding 5 million cases, okay.

I'm giving you the rough figure, it probably could be four, but this is because of the combination of gradually migrating the brand Agua de Los Angeles to our brand Ciel, no.

And then Brisa, I appreciate your earlier comment about not distributing directly until June. But did you include those volumes for March since you closed the deal in late February?

No, Jose. Let me explain on that. The agreement with SABMiller is that on June 1st, we will start selling and distributing the products and right now, they are selling and they are distributing and they are producing the volumes, because we need to do all this transforming all the production -- of moving all the production equipment that they have in 13 different plants to our plant. So, if we move -- when we move that, starting June 1st, we will start to account for volume for Brisa. So far, it's volume that we are not adding a single case of Brisa water to our numbers until June 1st.

All right, great.

I did a small computation for the first question that you had for our Board meeting. Excluding the Agua de Los Angeles and REMIL, excluding REMIL, the volume is growing around 2% and with Agua de Los Angeles, that number is around 1.4% to 1.5%. This we'll call organic volume growth, no.

All right, super. Thanks.

Thank you.

Your net question comes from the line of Alex Robarts with Santander.

Hi, good morning. I guess my one question, just kind of going back to the organic soft drink growth rate in Mexico. I guess I was a little bit surprised at the 3.6% drop and I guess looking back, it seems to me the largest such drop that you've had in recent history, and I'm trying to get a sense of just where we are in this kind of -- in the weakness and recession type of issues.

In other words, clearly, the remittances are less, as you've talked about. The general GDP growth or lack thereof is also an impact. And you've given us some good color as far as flavors versus colas. But I mean, if you think about it, as far as how you are in your territories, have you been -- how is your market share, I guess is the first kind of question here, in the first quarter, in CSDs vis-a-vis Pepsi and the B brands.

And are we kind of just -- if you could give us some kind of notion of organic guidance perhaps for the year. The brewers are kind of giving us some organic guidance vis-a-vis basis points of growth above GDP. But I'm trying to get a sense of -- or maybe you could give us a sense of, really, based on the first quarter, where could we see that organic growth rate for your CSDs for this year as far as kind of -- just a range would be helpful.

Yes, Alex. Well, I think that the general message that I want to translate I think it's very clear. The economies are suffering, in general. It's not particular to Latin America. It's the world, in general. We are suffering because of the remittances, because of tourism, because of industrial activity that has fallen, importantly, in most of the countries where we operate, and that has had an effect on some of the consumption, consumption patterns that we have.

If you look at the restaurant activity in Mexico City or Sao Paulo or any city that you visit, it's not the same as a few months ago. So, that's point number one. We are going through a slowdown in the economy. That is important to take into consideration. And I think that under that environment, when you see industrial production falling close to 20% in each of the countries, that we suffer a little bit on this volume on CSDs, I think it's a remarkable achievement for our Company and shows also the resilience of our operations.

The point number two is that as we have anticipated for many years, we are trying to diversify our platform of beverages through acquisitions, and I think that we have been very successful showing that, and through innovation. And that's why our annual report also focuses a lot on innovation activities and I think that what we have been doing in this industry is remarkable.

Having Valle fruit, a product that didn't exist a lot at all in our operations, selling 3 million unit cases a month, after launching that a few months ago, I think that's a remarkable explanation of how our business adapts to these environments. True, it doesn't have the same profitability that CSDs, as I explained, especially when you refer to single-serves. But again, I think that that is a message that we have been trying to convey for many years.

I mean, we started being from a Mexico-centric operation to now being a diversified company operating in nine different countries, where the other countries have also an important weight. And two, with these acquisitions in CSDs and different categories, we are showing that we have the potential to continue showing top line growth. We need to adapt our operations to have better traction and better leverage on some of these operating expenses and marketing expenses and all of that, but I think that that's the message that I want to convey, Alex.

I mean, the idea -- I guess you don't want to comment on the market share, but I guess I'm just trying --

I'll give you some thought -- some flavor on market shares. Market share in Mexico, we have lost a few basis points on volume and when you look at share of sales, we are almost flat, slightly below what we had last year. When you look on a sequential basis, we are improving versus February and January of this year.

And as far as trading down, Hector, do you think that this is something that we can kind of expect going forward as far as just generally -- as consumers look for options in the CSD, strictly the CSD category, and does this mean a kind of renewed focus at KOF this year in CSDs in Mexico toward the multi-serves and returnables?

I mean, Alex, this is Alfredo Fernandez. We have seen now that -- that's why Hector made, in his initial remarks, that we had a good start in the second quarter. The trend that we're seeing is that Brand Coca-Cola multi-serve packages, three liters, 2.5 liters, and the 2.5 returnable are starting to grow and that is giving us growth of Brand Coca-Cola.

Now, at the same time, we're seeing that the decline in carbonated soft drink flavors or sparkling beverage flavors is less than we have seen before and the single-serve transactions that probably we lost in soft drinks during the previous quarter, we have been able to make up for the majority of that in the innovation with non-carbonated products. So in a way, all these things combined are showing that our portfolio is being able to capture the consumer under the current circumstances.

Okay. Thanks.

Your next question comes from the line of Lauren Torres with HSBC.

Good morning. You just touched upon it, I guess, with the previous question, but I also was curious to learn more about the consumer environment. Some other bottlers, be it Coke or Pepsi bottlers, over the last week, have talked about trends improving a bit, nothing too fantastic, but some sequential improvements over the last four months of this year.

I'm just curious once again to get your thoughts, if you are just generally seeing any improvement there, be it by channel or product. Even though your results and your volume growth have been relatively good, I was just curious, with respect to the consumer, if you're seeing that at all. And if you'd also comment on the weakening of volumes in Argentina, what your thoughts are there going forward.

Yes, Lauren. I think that, in general, we have seen volumes improving, especially for this second quarter. We need to understand what is the full impact of this thing with the flu will be in our markets, especially northern Mexico City is a very large market for us.

The numbers that we have up to yesterday, we haven't seen anything happening yet because of the large trend of people being scared and doing a lot of supermarkets purchases as a way of accumulating some food and beverages in their houses, and that more than compensated some of the reductions of the restaurants that are closing since yesterday, no. So, restaurants will certainly have an impact, restaurants and bars and discotheques will have an impact on some of our volumes in Mexico City.

I believe my feeling is that we need to wait a little bit more for more time is that the extraordinary purchases that we saw in supermarkets and traditional sales during the week and these few days are more than a one-time thing. That is not going to be day-over-day, but is more like stocking a little bit or doing some pantry load for the house.

So far, if you look at the trends that we have before this crisis with the flu started, we were looking at volumes for CSDs in Mexico growing close to 4% during the month of April. That also might have an effect with respect to the Easter that happened in April and all those effects, no.

I think that the weather has helped us a lot with some of the trends, especially in Mexico during this first month of the second quarter, during April. May is always our strongest month in Mexico and so far, if the weather continues to have these trends, I think that May will be a very good month, although we have one less day of sales during the month of May. But I think that the trends continue to be very important. Obviously, this thing with the flu brings on the wire that it's too early for us to understand what the full impact of this will be, no.

In general, the other countries were also growing, probably not at the same pace that Mexico, because of different weather conditions or whatever. In some of the Central America countries, we changed the trend from a negative number that we showed in the first quarter to a positive number in soft drinks and everything. The same in Colombia, and Venezuela is a little bit flattish compared to last year because of the economic situation and all of that.

Obviously, when you look at the production of all -- and I'm speaking basically about CSDs. In every country, when you speak about other products, including juices and still beverages, those are continue to show very, very important trends of growth. I think that will basically be the comment that I have for you, Lauren.

Any comments on Argentina?

Sorry, Argentina, yes. Argentina, I don't know, it's kind of a tough situation. I mean, the reported inflation is around 6%, but salaries continue to increase at closer to 30% base. So, it's kind of -- the economic situation in Argentina is complicated. We have been passing some price increases, obviously, with soft drinks and, as you know, one of the main focuses of the authorities are is to control inflation in Argentina.

But we have been able to continue moving or having a richer mix approach in terms of the pricing formula in Argentina, and that's why I think that the volumes were a bit soft during this quarter. During the month of April, we basically have flattish volumes compared to what we had last year in basically this first month that we are close to an end to.

Thank you.

Your next question comes from the line of Antonio Gonzalez with Credit Suisse.

Good morning. My question was related to recent trends, as well. So, it's been mostly answered. So, if you could just remind us of the mix between on-premise and off-premise consumption in Mexico City, please.

Yes. In Mexico City, in general, on-premise is around close to 15%.

Okay, thanks.

Ladies and gentlemen, this concludes your question-and-answer session. I would now like to turn the call over to management for closing remarks.

Thank you all for your interest in our Company and, as always, Alfredo and his team are available to answer any remaining questions you may have. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.