Coca-Cola Femsa SAB de CV (KOF) 2010 Q3 法說會逐字稿

Good morning, everyone. And welcome to Coca-Cola FEMSA's Third Quarter 2010 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 to questions and answers after the presentation.

During this conference call, management may discuss 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 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 CFO. Please go ahead, Mr. Trevino.

Good morning, everyone. And thank you for joining us today. In the third quarter of 2010, we continued to demonstrate the strength of our defensive business profile, despite bad weather conditions in our Mexico and Latincentro divisions and the challenging sweetener cost environment we have faced during the year, we improved the profitability of our balanced portfolio of franchise territories.

Our ability to selectively increase prices across our territories and the strong results posted by our Mercosur division were the main drivers of our performance for the quarter.

In the third quarter, our consolidate revenues were close to MXN25.7 billion, down 1% from third quarter 2009, mainly due to the devaluation of the Venezuelan bolivar. On a currency-neutral basis, our consolidated total revenues grew 13% for the quarter, driven mainly by selective price increases implemented across our territories and the strong performance recorded by our Mercosur division.

In the third quarter, our consolidated sales volumes remained stable. Double-digit volume growth recorded in our Mercosur division compensated for the volume decline due to the adverse weather conditions in our Mexico and Latincentro divisions but resulted in disruption of our distribution network.

Our consolidated gross profit increased slightly to MXN12.1 billion in the third quarter of 2010. The appreciation of the local currencies in the majority of our operations as applied to our US dollar-denominated raw material costs combined with the operating leverage from higher average prices per unit case offset high sweetener cost across our territories. Consequently, our gross margin improved 80 basis points compared to the third quarter of 2009.

Our consolidated operating income grew more than 7% to MXN4.2 billion in the third quarter, again supported by the strong operating income growth achieved in our Mercosur division. Operating leverage across our territories accomplished higher prices in local currencies to produce an operating margin expansion of 130 basis points to 16.5%.

On a currency-neutral basis, our consolidated operating income grew approximately 21%. Our consolidated EBITDA increased close to 6% to MXN5.2 billion in the quarter.

In the third quarter, our net controlling interest income remained stable at MXN2.1 billion. Higher operating income was mainly offset by expenses related to the restructuring of certain compensation plans within our sales and distribution workforce and the recording of a financial cost related to the sale of bonds in Venezuela.

Now let me expand on the performance of our operations. In the face of strong volume growth in the third quarter 2009 in Mexico and the effects of unusually bad weather conditions during this quarter, our Mexican operation sold more than 315 million unit cases, recording a loss of 2% volume decline year over year. These weather-related events were responsible for disruptions in our distribution network.

During the quarter, 3% volume growth in our single-sale water portfolio was more than offset by a mid-single-digit volume decline in our bulk water business combined with a 1% volume decline in our sparkling beverage portfolio.

Our average price per unit case rose 5% in the third quarter. This increase resulted from selective price increases implemented over the past 12 months combined with lower volumes of our bulk water portfolio, which, as you know, has a lower average price per unit case. As a result, our Mexican operations total revenues grew more than 3%, reaching almost MXN10 billion.

With regard to profitability, the impact of higher sweetener cost was offset by our operating leverage from higher average prices per unit case and the appreciation of the Mexican peso as applied to our US dollar-denominated raw material cost. Compared with the third quarter 2009, our gross profit increased close to 4% to MXN4.9 billion. And our gross margin expanded 20 basis points to 49.3%.

Our operating income decreased 1% to MXN1.7 billion. Operating expenses rose primarily as a result of the resources deployed across our Mexico division to support our growing still beverage platform, enhance our execution at the point of sale, bolster our turnover base, and improve our cooler coverage. Our operating margin decreased 80 basis points to 16.9%. Our EBITDA remained stable at MXN2.1 billion compared with the same quarter of last year.

In summary, our Mexican operations demonstrated the strength of our defensive business portfolio, delivering stable results for the quarter, despite the unusually bad weather conditions, which resulted in lower volumes. The strong preference among consumers for our portfolio of sparkling beverages allowed us to gain market share.

Additionally, our ability to increase prices, the appreciation of the Mexican peso as applied to our dollar-denominated raw material costs, and our operation's ability to balance our sweetener needs with high-fructose corn syrup are helping us to mitigate the higher cost of sugar.

As we enter the final quarter of the year, we continue to see volatility in sugar prices. Despite this challenge, we believe that our revenue management strategies and our cost discipline will continue to enable us to partially compensate for sugar cost pressures.

Now let's turn our attention to our Latincentro division. Our Latincentro division's volume declined 5% in the third quarter. This decline was also related to unusually bad weather conditions in our Colombian and Central America franchise territories. In Columbia total volume declined 5% during the quarter. Higher volumes from flavored sparkling beverages were outpaced by lower volume from brand Coca-Cola, our water portfolio, and our still beverage category.

Despite the unusually bad weather and the increased competitive environment, consumer pressures to our portfolio of sparkling beverage has allowed to gain market share on a sequential basis.

In Venezuela, our volume decreased 5% during the quarter. Low-single-digit volume growth in brand Coca-Cola was more than offset by lower volumes in our flavored sparkling beverage portfolio. Despite this volume decline over the past several months, our sparkling beverage portfolio has been able to outperform the industry.

Our Central America operations sales volume also declined 5% as a result of unusually bad weather conditions during the quarter and their effects on our distribution network.

Our Latincentro division's total revenue declined 22% to MXN7.6 billion. This decline resulted mainly from the effect of the devaluation of the bolivar in Venezuela. On a currency-neutral basis, our Latincentro division's total revenues grew 16%, driven by higher average prices per unit case across our operations.

With regard to profitability, our Latincentro division gross profit declined close to 20%, reaching MXN3.6 billion as a result of the devaluation of the bolivar in Venezuela. The impact of higher sugar cost at the division was offset by the effect of the appreciation of the Colombian peso as applied to our US dollar-denominated raw material costs and operating leverage from higher average prices per unit case in local currencies implemented over the last 12 months. Compared with the third quarter of 2009, our gross margin expanded 170 basis points to 47.1%.

Our operating income declined 3% to MXN1.3 billion. Operating leverage achieved through higher revenues in local currencies combined with lower marketing investment in Colombia and Venezuela, resulting in operating margin expansion of 320 basis points to reach 16.4%. Our EBITDA declined 2% to MXN1.6 billion compared with the third quarter of 2009.

Our Latincentro division delivered stable results compared with the second quarter of 2010, despite the devaluation of the bolivar in Venezuela and the unusually bad weather conditions in Colombia and Central America. In local currency terms, the selective price increases implemented over the past several months designed to compensate for local inflation and higher sweetener cost have helped us to increase our Latincentro division profitability.

Now let's talk about our Mercosur division. In the third quarter of 2010, our Mercosur division total revenues grew 23% to MXN8.1 billion. Excluding beer, which accounted for MXN819 million, our total revenues reached MXN7.3 billion. Higher average prices per unit case and volume growth accounted for all of these incremental revenues.

Volume growth in our Mercosur division was up more than 10% in the third quarter of 2010. Our Brazilian operation recovered more than 13% volume growth, driven mainly by brand Coca-Cola in (inaudible), along with the continued strong performance of the still beverage categories, supported by the Jugos del Valle line of beverages.

In Argentina, our volume grew close to 3%, resulting from the solid performance of brand Coca-Cola, which grew 5% and our still beverage categories supported by Aquarius, our flavored water brand.

With regard to profitability, our Mercosur division's gross profit increased 26% to MXN3.6 billion. Higher sweetener cost at the division combined with increased PET costs in Argentina were offset by our operating leverage from higher prices in local currencies implemented over the past 12 months and the appreciation of the Brazilian real as applied to our US dollar-denominated raw material cost. Our gross margin expanded 100 basis points to 44.8% for the third quarter.

Our operating income grew 37% to MXN1.3 billion. Operating leverage was due to higher revenues in Brazil, was partially affected by higher labor and freight costs in Argentina. Our operating margin expanded 160 basis points to 16.2% in the third quarter. Our EBITDA grew 27% to MXN1.5 billion.

In summary, our Mercosur division delivered strong results in the third quarter of 2010. Leveraging a strong consumer and economic environment in Brazil, the continued preference for brand Coca-Cola among our consumers is driving higher demand. Additionally, the rest of our beverage categories are growing at double-digit rates.

In Argentina, we have recently seen strong macroeconomic indications. However, we remain cautiously optimistic about the translation of these figures into consumer demand and a sustainable recovery in this market.

During the quarter, we completed the integration of Matte Leao (inaudible) into the non-carbonated beverage platform we shared with our partner the Coca-Cola Company. The incorporation of this product into our portfolio will enforce our offering of non-carbonated beverages in Brazil and will help us to capitalize on the strong brand equity, consumer preference, and high-growth potential of this brand segment.

Now let me walk you through out financial performance for the quarter. This quarter, our geographically balanced portfolio of franchise territories helped us to deliver sustainable cash flow generation, compensating for seasonality or weather-related events. Our pricing initiatives across our territories and the strong performance of our Mercosur divisions were the main drivers of our cash flow generation.

As of September 30, 2010, we had a cash balance of MXN11.2 billion. And our total debt was MXN17.2 billion. Our net debt-to-EBITDA coverage ratio was below 0.3 times. And our EBITDA-to-net interest coverage ratio was close to 14 times, highlighting our financial flexibility and the strength of our balance sheet.

The ample cash position and the strong cash flow generation our Company has built has given us the flexibility to continue growing our business, both organically and to our positions in the beverage industry, while increasing dividends to our shareholders. With this financial flexibility, we embrace the important responsibility of being prudent and disciplined with our usage of cash and ensuring the value creation of the alternatives we pursue.

As you may know, on October 14th, we made an announcement regarding a preliminary understanding to acquire Grupo Industrias Lacteas in Panama. We are pleased and enthusiastic about this potential transaction, which will allow us not only to incorporate into our Panamanian operations the leading player in the non-carbonated beverage segment in the country, but also to capitalize on the vast experience this company has built in the beverage category.

At this stage of the process and since we are bound to a confidentiality agreement, we are not disclosing additional information about the transaction. Rest assured that as we advance in the negotiations and we receive the necessary approvals from local authorities, we will share more detailed information with you.

In conclusion, our operations delivered positive results for the quarter. The portfolios of our Mexico division continues to demonstrate our ability to increase prices in real terms for the second quarter in a row, building on the strong brand equity of our portfolio of brands. The solid performance of our Brazilian franchise during the year has been an important driver, allowing us to deliver increased profitability.

As we enter the final quarter of the year, we remain vigilant of our prevailing economic conditions and cautiously optimistic regarding consumption trends across our territories. We believe that our Company's taking the right steps to compensate for the still-challenging high cost of sweeteners. We are confident that the brand equity of our products, the operating capabilities we have developed, and the financial strength that we have achieved will help us to continue outperforming our industry.

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

(Operator Instructions). And your first question comes from the line of Lauren Torres. Please proceed.

Good morning. Hector, I know on several occasions you mentioned weather impacting volumes in Mexico and your Latincentro division. But just curious, how much of that weakness that we saw in the quarter do you think was truly weather related? Or are you seeing any fundamental changes with respect to how consumers are behaving in these markets?

Yes, good morning, Lauren. We believe -- and it's kind of difficult to have an estimate of the weather effect. But we believe that the majority of the fact that we have the reduction in Mexico and in Central America, especially because of the very heavy hurricanes that hit the area at the beginning of the quarter. Clearly, we have extraordinary rain and extraordinary cold weather compared to other years. That's very difficult to estimate.

The estimate that we have that is a little bit more realistic had to do with the disruptions of walking bridges and highways that were interrupted and that causing a lot of problems for us to being able to reach our clients, which are the small mom and pops. Some of the small mom and pops also disappeared for awhile because they were underwater for weeks now.

Now we're in the process of refurbishing or helping to refurbish some of these mom and pop stores with new coolers and things like that because some of the equipment was destroyed. The estimate that we have on that respect -- we have with the respect of the logistics interruption, it's not that a large impact. But it's in the range of 1.5 million unit cases in Mexico. That will explain around a third of the reduction that we have in volumes around of the 6 million unit cases that we have in Mexico. And we're going to add that to the logistic interruptions.

The rest is very difficult to judge if it's related to the weather, although, as I mentioned, we have, for example, July was the month that we had the heaviest ran in the last 60 years in Mexico on record. So that clearly had an effect. But it's very difficult to give you an estimate.

I also believe that, as we improve prices, increase prices in real terms, that also has a small effect. The good news here is that, as we look at some of the market share trends, this clearly has been more an issue related with the home industry. And therefore, we have been able to increase slightly our market share according to (inaudible).

In Central America, it's very similar, the impact. The similar explanation about logistic interruption, obviously on a much smaller market in Central America, we are seeing around 1 million unit cases that will present a larger percentage of the drop in volume there.

And then when you move to Colombia and Venezuela, it has to do more with some other trends that we are seeing, like the Colombian consumer spending more on durable goods and therefore saving a little on some of the consumption of our products. Venezuela has to do a lot with the macroeconomic environment.

And then both Brazil and Argentina, we did have the positive impact in volumes mainly as a result, as we said in the press release and the speech, related to the introduction of the [turnover] presentations in Brazil that has presented an affordable product to consumer that is helping us a lot on that consumption.

So maybe I'll just follow up and kind of round it out. A couple days ago, Coke's CEO mentioned that he expects to see Mexico return to more normalized growth in the fourth quarter. I assume you're comfortable with that comment.

Yes, we are confident with that comment. The only caveat that there is that October, it's a month where last year we had very, very difficult high comp because it was like the record October on the impact. So for the fourth quarter, we'll see volumes starting to recover in Mexico.

Okay. Thank you.

And your next question comes from the line of [Gustavo Oliver] with UBS. Please proceed.

Hi, good morning, everyone. The question is on the price mix and the price increases that you are delivering in Mexico. Could you please comment a little bit the reasons for that substantial increase in this quarter? And what are your expectations going forward for the price increase in Mexico?

Good morning. In Mexico, we have been doing some price -- selective price increases in different markets. And I'll give you some examples. We moved the 600 mL at the beginning of the year in areas other than Mexico City from MXN7.5 to MXN8. Then we -- more recently, we moved it in Mexico City, the same movement, from MXN7.5 to MXN8.

The three-liter Coca-Cola, we're moving from MXN20 to MXN22, which is like a 10% increase, which is an important increase in prices. That was on -- during the second quarter.

Very importantly, also, you remember this line of business that we launched with Jugos del Valle, the Valle Foods, the flavored drink with no juice content that we started when we launched that a couple of years ago at MXN3.5. We took a leadership position. And now as we are the leader, we are doing important price increases.

At the beginning of the second quarter, we increased the price from MXN5 to MXN6, a 20% increase in that product that will give us gas for the rest of the year. And the same is true for the same product in two liters from MXN11 to MXN12.

So if you tell me in the rest of the year, I don't think that we will move any other prices in Mexico because we pretty much have the prices that we want, the pricing architecture we want. Obviously, it's going to be very important to judge how sweetener costs continue to move. And if that is being translated or not into some pricing pressure in our industry.

But if you give it -- my best estimate is that we stay with the price points that we have. That will take us to positive prices in -- slightly positive prices in real terms for the year. And we are happy with that.

Okay. And a follow-up question on your commercial policies -- you also mentioned in Mexico that you are deploying extra resources in coolers and in the distribution and so on as part of your new commercial model. Could you please provide some -- the status of this implementation and at what stage you think you are and whether you're still going to see some OpEx pressures for most of 2011? Or are you going to start seeing benefits of this in your commercial model already kicking in, in 2011?

Yes, Gustavo. I think it's -- I mean, you bring a really important point there. The Company has gone through a process of deciding and what we believe is improving our commercial processes to tackle and to be able to handle a larger number of SKUs as we diversify our company's products to include other categories. Without those efforts, selling Jugos del Valle in Mexico together with soft drinks and everything would be practically impossible.

That restructuring is pretty much advanced in Mexico and Brazil. In Mexico, we -- and we mentioned that we had a hit in other income line below the operating line. And this (inaudible) in the consolidated numbers. That is basically related to restructuring our sales and distribution, the compensation of sales and distribution workforce.

What is happening here, as we segmented the market or the challenge in a better way, we didn't necessarily have the flexibility to move the compensation factors of our sales and distribution employees to a more flexible manner.

In other words, if we are selling a very large client that will distribute a large stock with a very large drop of cases there, we were -- let me use the word contaminated by the way of paying a very high variable compensation related to a number of cases than were being sold. Those cases were -- we made that a big drop size. It was for us important to start reshaping these compensation packages so that we can pay more on a per delivery basis regardless of the number of cases that you were delivering.

So that's part of the restructuring charges that we had this quarter and amounts to between $25 million to $28 million in Mexico. And we believe that the savings that we will start to see, starting 2011 and in the future, we basically -- we paid for that restructuring with a year and a half or two years of savings in the future. So starting 2011, we should be seeing this better operating expense line next year when we're doing this restructuring.

Brazil and the rest of the countries, in Brazil, we are pretty much advanced in the segmentation. We need to work a little bit also on this restructuring. And then we will continue to allow this new model in the other countries.

Okay. Thank you very much.

And your next question comes from the line of Jose Yordan with Deutsche Bank Securities, please.

Hi, good morning, everyone. Quick question on the difference in, let's say, the gross profit increase in Latincentro versus Mercosur -- with lower volumes, you were able to increase your gross profit 170 basis points as opposed to Mercosur with great volumes and pricing and also a strong currency and only 100. So can you help us understand why the big difference? Is it all priced in the strong Colombian peso? Or was there something else going on there that is not immediately apparent?

And I guess the other question I had was if you can remind us why you're showing FX losses when the peso has appreciated this year and even net of the derivatives gains that it's still showing a loss. I'm trying to understand that better.

Yes, good morning. The Latincentro division is presenting some I guess numbers that are a little difficult to explain because of the large devaluation of Venezuela. When you look at Venezuela and you have -- and you convert those numbers into Mexican pesos basically by half, you originally would expect us to see the total revenues with a very large reduction versus last year.

But as we have been able to increase prices very importantly in Venezuela and the (inaudible) Venezuela has not fluctuated that much when you look at the numbers translated into Mexican pesos.

One of the enemies that is a bit strange and is explaining this increasing gross margin is that last year we were acquiring some of the raw materials. Remember, we have a lot of pressure from the [Cavibi] Institute, the agency that distributes foreign exchange to buy raw materials. So we were acquiring raw materials at extremely high FX comparison rate. In some cases, we were buying close to VEB8 per dollar because otherwise we would not have the raw materials. We would have to stop our production line.

With the new instruments that the government in Venezuela has presented to the industries, when you have access, when you don't have the ability, you don't have the proper documentation, you have access to a third of (inaudible) rate of around VEB5.3 per peso. They also improve a lot in the delivery of dollars at the number one bracket, which is the VEB2.6 per peso.

So now they -- a lot of our raw materials -- most of the raw materials because we have our documentation in order, we're having access at a VEB2.6 exchange rate in Venezuela. That has created this I guess extraordinary improvement in the margin when you compare to last year and that we were buying raw materials -- not only we didn't have access to the controlled exchange rate, but we were buying at the silent market because that was the only availability in dollars available.

And that's the main reason why you see a very large reduction in revenues because of the translation of Venezuela bolivars and at half the rate into Mexican pesos.

But because the profitability in Venezuela has improved a lot because of this fact that I mentioned about the raw materials and some price increase that we have achieved, at the total profit level, basically the Venezuela result has doubled. And therefore, it has stayed (inaudible) by an exchange rate that is double this rate in the same -- in Mexican peso terms.

It's a long explanation. But I think that it merits the explanation.

That's very clear.

And the other element that Venezuela brings into the table and that's why the internal cost of financing looks a bit weird because we have a lower debt level. And rates have come down, although we have some rates that are fixed rates, obviously, that we are not benefiting from this reduction in rates in that area.

But as we have been able to buy some bolivar -- excuse me, [Penne Vesa] and Venezuelan government bonds in the marketplace so that we take advantage of the official process to buy dollars in the market. We have been buying some of these bonds. And as we said, those bonds are basically to have price balances in our Venezuelan operations and to pay for some services, et cetera.

We have been incurring some losses, accounting losses with which you register everything at 4.3. And we are getting some dollars, green dollars in our cash balances in Venezuela at a rate below the other part of the market, below the VEB5.3. But we have been doing some of that activity. And that has affected our good cost of financing. And that's also a situation where Venezuela is distorting some of our P&L numbers on that specific case on the financing cost.

That's very clear. Thanks a lot, Hector.

Thank you.

(Operator Instructions). Your next question comes from the line of Robert Ford, Bank of America. Please proceed.

Thank you. Good day, Hector. And I was curious with respect to the charge in Mexico. I wasn't really clear in terms of whether or not this is a one-time payment that you're making to change union employee contracts that will allow you to go to kind of a larger component of fixed. And then I'm also curious as to over the near term. How much will this add to your fixed cost structure until you can begin to post the operating leverage that you expect over the next year or two?

Good morning, Bob. Yes, this is a one-time restructuring effect. And that's why it's written in that specific line. And then we will discuss that with our auditors. Otherwise, it would have been in the normal operating line. As I mentioned, it was around $25 million to $38 million restructuring. Basically, we are compensating the employees, the sales industry and employees because of the contract that they have and rehiring them, most of them, with a new contract, where we have the flexibility that we want.

The savings that we estimate starting 2011, it should be around $12 million, $13 million on a yearly basis. So that's why I'm saying between 1.5, 2 years to pay for this one-time expense.

Okay. So you've basically wiped the sheet clean. You liquidated everybody. And you paid out all the severance compensation that they're entitled to under Mexican law. And then you start the time clock over with a new contract. Is that what happened?

Yes, that's basically it.

Okay.

It's basically what happened.

Great. That makes a lot more sense. Thank you.

And your next question comes from the line of Margaret Kalvar with Harding Loevner. Please proceed.

Yes, good morning. I was curious regarding the new acquisition in Panama. Admittedly, it's a small piece in the overall business. But it puts you into the dairy segment a little bit. It's probably different with just the cool and cold chain requirements and vulnerabilities to a different set of input costs. Can you comment a little bit on whether you plan to go more heavily into this area going forward and how you plan to deal with the new challenges that the acquisition brings?

Good morning, Margaret. Yes, let me expand a little bit on that. And obviously, some of the details as I mentioned, that we are bound by the confidential agreement with the vendors, some of the specific details of the Company and the transaction we cannot disclose. But let me give you some background on this.

When you look at the profile of Coca-Cola FEMSA and in conversations that we have had with our partners, the Coca-Cola Company, obviously, because we are kind of up on this venture, we see that we have very good penetration in carbonated drinks and with sparkling beverages. We have a relative good penetration in water. We still need to do a lot of -- to -- it's a more competitive market. We were late in that category. So we have a long way to go there.

We made two, three years ago the position of Jugos del Valle to enter this category with a number two brand in Mexico and number one brand in Brazil. Our partner acquired Matte Leao in Brazil, which is now part of the system in Brazil with a focus under the same scope of this 50-50 joint venture.

And when you look from a strategy point of view where is this missing part in the non-alcoholic beverage segment, which is dairies and value-added dairies, which is really what is important for us. And that category in the territories where Coke franchise expansion at the moment, it's almost the size of water. And it's double the size of juices and nectars.

So it's a huge area of opportunity, where we have a lot of experience already when selling some products that were produced by us, by other companies for us, by other companies, and with some milk with chocolate flavoring in Brazil and Mexico, and things like that.

So when we learned that this company was for sale, we -- it was very clear for us that it was an opportunity to enter a very small market where we have a natural footprint. This company has a 60-year presence in the -- they also deliver in Panama.

Anyway, you mentioned the market share and revenue share and everything. They are the leader from the milk. They are the number one players in non-carbonated products with juices and nectars, which we haven't started our introduction of Jugos del Valle line of business in Panama. They are the number one player with beverages with no juice content, having more than 50% market share in the Panamanian market, and all starting to do something with the Valle Foods (inaudible) into the Valle Foods centers in Mexico. So for us, it's important also to take in consideration to that.

They are the absolute leader in ice cream. They have 85% market share in ice cream, which is a small market. But it's also there. And so for us, Margaret, it's I'd say a picture-perfect opportunity to enter this category, learn from that, understand better that category. It doesn't have any -- they don't have any agricultural -- they buy this milk from local producers. They don't have any cows in their company. Our main competitor, basic competitor, in Panama is SABMiller. They are competing in milk. They are the number one in long-duration milk competitor in Panama.

So when you put to all this factors, it was clearly an opportunity -- a very important opportunity that we should -- that we think that we should take advantage of that. Our idea is to operate that market. It's a small country, a totally controlled environment for us in that respect. And if we have good learnings and we see that we can export those learnings to other opportunities, we'll analyze case by case.

If the (inaudible) is very competitive, we have very strong competitors in the other countries where we participate. But I think that it's an opportunity for us to experiment and do some learning and see what can we export from those learnings.

Okay. Thank you very much.

Thank you, Margaret.

And your next question comes from the line of Alan Alanis with JPMorgan. Please proceed.

Hi, thank you. Hi, Hector. My question has to do with the trends of non-carbonated soft drinks versus carbonated soft drinks in Mexico because I'm a bit confused. I'm seeing a deceleration -- first of all, a decline in carbonated -- in non-carbonated soft drinks in both Mexico and Latincentro. But what I'm -- I'm surprised that the decline is much faster than the carbonated soft drinks consumption in those two regions, in Mexico and Latincentro, isolating, obviously for jug water and bottled water.

And the question is -- how do you see the role of non-carbonated soft -- first of all, what's explaining that? And number two, how do you see the performance of non-carbonated soft drinks going forward in those two regions, Hector?

Good morning, Alan. You're asking me, when you look at some of these trends, it looks like if the carbonated and non-carbonated products are decelerated. I think that we have two or three points that is important to highlight. One is that also this water-related event obviously has caused a lot of disruption.

And as I mentioned, some of the clients were underwater for a long time. But that you can argue that to be more a factor more in the same line of other soft drinks. I believe that because of the smaller base, even a small reduction in number of cases looks a little bit larger in terms of percentage wise.

And the other argument is the most important element, Alan, is that we have been substantially more aggressive on the pricing tide on these non-carbonated products. I gave some examples of how we do Coke. We increase the price of especially the - this [orangeade] (inaudible). Then we start to -- I mean, a little bit more than a year ago, we were at MXN3.5. And now we are at MXN6 in some retailers.

So that has created much better profitability for the Company. We were looking for that. But that also obviously, as these orangeades represent 35%, 45% of the volume of non-carbonated products. That certainly has slowed down and is not growing at the pace that we were going when we were selling at MXN3.5.

So I'd say those are the main reasons on that. I'm not worried about a deceleration of this. I think that the normal trends of juices, nectars, juice-based products grow a little bit faster than carbonated soft drinks, where you have a very high per capita in the countries where we participate and not so large on the non-carbonated products. I think that that trend will continue. But this is -- my feeling is that has to rollout with the pricing and, as I mentioned, a little bit, awhile ago.

Okay. So just, I mean, if I'm understanding correctly, basically you will continue or you will try to close the gap between non-carbonated and -- if you see strong demand on non-carbonated soft drinks, you will take pricing there, so as a way of managing or balancing the demand between carbonated soft drinks and non-carbonated soft drinks in Mexico going forward.

Yes, I think that we need to have the portfolio and, I mean, and give the consumer whatever they are requesting here. I think that we have done very good market share growth in the non-carbonated products, including some products where we were very far away in terms of market share, like in (inaudible).

Powerade, obviously, we are a lot of marketing dollars behind because of the World Cup and all of that. It's making very large inroads versus Gatorade and the (inaudible) categories. These are growing very interestingly.

We have -- although it's a very small market, energy drinks are also increasing with some products that are designed with a lower price level and with a different consumer than the normal Red Bull and things like that.

And obviously, juices and nectars, which is the basis of all of this, has also been going through a lot of regulatory changes with respect to labeling and what you can sell or not sell in a school or something like that. But juices and nectars continue to grow, not at a very fast pace compared to the other products that I mentioned, like teas, tonics, and energy drinks.

I hear you. Okay. There is one quick follow up on a totally separate topic, the dividends. You mentioned that -- in your prepared remarks that that's one of the things that you will be taking a look at now. But the record low levels of net debt-to-EBITDA that the Company's having right now, what's the message for investors regarding the dividend for managing expectations for next year because the yield remains quite low, correct?

Yes, I think, Alan, that we have been obviously receiving a lot of indications that the preoccupation of the market with our capital structure and basically that meaning that we pretty soon will have no debt. As we have said in the past, we have in our DNA this idea of continuing growing.

I think that although we -- there have been some opportunities like this (inaudible) franchise that we mentioned in the past. But obviously, we were not wise about that franchise. But we continue to see some opportunities.

And as I mentioned in the past, Alan, I have been presenting to the Finance Committee and to the Board of Directors this specific issue, which is we have a capital structure that is more efficient. And if we don't have an acquisition in the near term and it's very difficult to judge if near term means 12 months or 18 months or whatever. We should be thinking about increasing the dividend yield.

And the Board of Directors has been receptive. And the Finance Committee has been receptive. But we believe that at this moment in time, we can not decide if we are increasing or not our dividend yield, importantly because we think that we'll have opportunities to grow. And that's basically the -- we are pretty much in the same state. What I want you to have comfort in is that it's an issue that is present in our minds and that the Board of Directors and the Finance Committee is aware of this issue.

I hear you. Thank you so much, Hector. Thanks.

Our final question comes from the line of Celso Sanchez with Citi. Please proceed.

Hi, this is actually [Martha Shelton] on behalf of Celso. My question is around operations in Argentina. Just wanted to see if you could offer an update on the commercial model rollout going on there and also any thoughts that you have around the consumer environment in Argentina.

Yes, good morning, Martha. In Argentina, I think that Argentina -- let me just step back here. Argentina, the main issue that we have is that we have pressure to -- not to increase prices by our plans, the big supermarkets that are (inaudible) unofficially.

We have pressures on the salary and wages that have impacted a lot of our own salaries and freight costs because a lot of freight is done by third parties and that they have a lot of pressure on their salaries. They increase the freight charge to us.

So in there, what we are working is expanding this commercial model to the big clients, to the supermarkets and all of that and trying to replicate what we have been doing in Mexico and to certain extent in Brazil as we segment our channels to have a different way of approaching how we sell the big clients. That's a very important element.

I think that that is important for all of you to know is that we just opened a new distribution center in Argentina that is dealing a lot with automation and laser-guided vehicles to load and unload trucks and all of that as a way to starting to move into a more automatized warehouse.

I think that we're going to learn from that. And we work very close with the union leaders also. So everyone is in agreement that this is a new model that will help us have a better efficiency in our distribution facilities. And I think that will be a learning experience for the rest of Coke FEMSA and to see if we can also import that knowledge to other countries.

But I think that in Argentina the restructuring that we have to do has to do a lot with the margin that is staying with intermediary because, in some cases, in areas that are very difficult to cover, we use third parties with margins. And the changes in the commercial more have to do more with that, how we'd restructure the margin that is there in the marketplace without increasing the price to the consumer, thus capture a bigger share of the margin that is there in the value chain.

And any thoughts on the consumer environment that you can offer us?

In Argentina, we are seeing a little bit more -- something similar to what I expressed about Colombia with the consumer because we are seeing an important growth in the economy. The consumer is dedicating a little bit more resources to durable goods. And that way we have been -- this quarter, we had a positive volume level. But we haven't started it with the volume numbers in that region. And that I believe is an industry-wide trend because we also see positive market share numbers in Argentina.

Great. Thanks so much.

At this time, our question and answer session has been completed. I would now like to turn the conference back over to Mr. Trevino. Please proceed, sir.

Thank you for your interest in our Company. And Jose and his team are available to answer any remaining questions you may have. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.