Coca-Cola Femsa SAB de CV (KOF) 2012 Q3 法說會逐字稿

Good morning everyone, and welcome to Coca-Cola FEMSA's third quarter earnings event 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 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 will now turn the conference over to Mr. Hector Trevino, Coca-Cola FEMSA's Chief Financial Officer. Please proceed.

Good morning everyone, and thank you for joining us today.

In line with our expectations for the second half of 2012, our Company delivered solid double-digit top- and bottom-line growth and margin expansions in both divisions for the third quarter.

During the third quarter of 2012, we continued to integrate the results of Grupo Tampico, Grupo CIMSA, and Grupo Fomento Queretano in our Mexican operations. Their performance contributed positively to our Mexican and Central America division and our consolidated results.

Organically, our Company's performance continued to be supported by our operators' ability to leverage on our new commercial model and to capture the industry's value opportunities through point of sale execution, selected price increases, and the strength of our multi-category beverage portfolio which, once again, is led by innovation in our still beverage category and the many alternatives that we present to our consumers in our sparkling beverage portfolio.

During this quarter, our reported consolidated revenues reached more than MXN36 billion, up 20% from last year. Organically, excluding the newly merged territories in Mexico, our consolidated total revenues grew 10% for the quarter, underscoring our geographically balanced franchise portfolio. This increase was driven by average price per unit case growth in every operation and volume growth mainly in Mexico, Venezuela, Brazil, and Central America.

Our consolidated sales volume grew 18%. Organically, excluding the recently integrated territories in Mexico, our volume grew 1%. As in previous quarters, innovation in still beverage contributed to the 15% volume growth in this category. Specifically, the Fresh brand orangeade in Venezuela, the Jugos del Valle line of business in Mexico and Brazil, and the recent launch of Fuze Tea and Powerade drove this growth.

The strength of brand Coca-Cola, especially in returnable packages and single-serve presentations, supported growth in our sparkling beverage portfolio. In addition, our single-serve water portfolio grew in almost every country. All of these increases compensated for a volume decline in our bulk water portfolio in Mexico.

In the third quarter, lower PET prices and sugar costs in most of our territories more than offset the average depreciation of our main operations' local currencies as applied to our US dollar-denominated raw material costs. Consequently, our consolidated gross margin expanded 60 bps, to 46.9%, in the third quarter.

Our consolidated operating income grew 27%, to MXN5.5 billion. Organically, our operating income grew 18%. We continue to experience higher labor costs in Venezuela, combined with increased labor and freight costs in Argentina and Brazil. As in previous quarters, we continue to register expenses related to the development of information systems and commercial capabilities in connection with the implementation of our commercial models, and we continue to invest in the development of new lines of business and categories.

Building on our gross profit expansion, our operating income margin expanded 80 bps and, more notably, on an organic basis our operating income margin expanded 110 bps.

For the quarter, our consolidated net controlling interest grew 54%, reaching MXN3.5 billion.

Now, I will elaborate on the performance of each division. In the third quarter, as reported, our Mexico and Central American division volume grew 30%, reaching 478 million unit cases.

As reported, our Mexican operations volume grew 33%, including 106 million unit cases from our recently merged territories. Organically, our volume in Mexico grew 1.4%, successfully building on 5% volume growth in the third quarter of last year.

Our increased volume was led by a close-to-2% growth of brand Coca-Cola, consistent with our strategy to foster consumption of returnable and single-serve presentations. We recently reinforced our 500-milliter returnable glass offering, reflecting our strategy to bolster our presence in the flavored sparkling beverage category. Our volumes grew 3%, led by the Sidral Mundet brand and the rest of our core flavor sparkling beverages.

The still beverage category grew 11%, mainly driven by the continued success of our Valle Fruit Orangeade which now serves more than 40 million unit cases annually and has consolidated its position as this category's leader. Also contributing to our growth in still beverages, our launch of complementary packaging alternatives supported by the success of Fuze Tea, by presenting a wider array of options to our consumers and building on the positive growth momentum of this brand. Additionally, Powerade continues to deliver very positive results, growing more than 40% and gaining an important share of its beverage category.

Our water portfolio, excluding bottled water, grew 5%. This increase compensated for a 4.5% volume decline in our bottled-water portfolio, as we continue to work to achieve higher efficiencies and profitability in the jug water business.

In Central America, our volume grew 3%, building on 10% growth during the third quarter of last year. This increase was driven mainly by [15%] volume growth in the still beverage category, supported by the [Del Prado] portfolio and the continued success of Fuze Tea and Powerade; [14%] growth of our water portfolio; and 1% growth in our sparkling beverage category.

Our division's reported total revenues grew 35%, to MXN17 billion. Organically, the division's total revenues grew 9%. On the same basis, our average price per unit case increased 7% during the quarter, underscoring our operators' ability to capture the industry value potential by leveraging our new commercial model.

With regard to our profitability, lower sugar and PET prices offset slightly higher fructose prices and the devaluation of the average exchange rate of the Mexican peso. As a result, our reported gross margin remained almost flat, at 47.7% for the third quarter of 2012. Organically, our gross margin expanded 50 bps.

Our operating income increased 44%, to MXN2.7 billion. We continue to [group] certain restructuring charges related to the integration plan for the new territories in Mexico.

Organically, our operating expenses increased due to the investments related to the development of information systems and commercial capabilities in connection with the implementation of our commercial models, and to investments related to the development of new lines of business and categories. Nevertheless, our reported operating margin expanded 100 bps, and our organic operating margin expanded 210 bps.

Our Mexico and Central America division delivered strong results this quarter. In a more stable commodity cost environment, we continue our disciplined marketplace execution, implementing our benchmark commercial model, fostering single-serve consumption, and reinforcing our returnable base in the sparkling beverage category, and focusing on innovation to complement our wide portfolio of beverages.

Now, I will briefly expand on the newly merged territories in Mexico. We have worked diligently to enhance the operational structure of these territories. We have swiftly and smoothly integrated all of them. As planned, we have also continued with the restructuring of the manufacturing and distribution networks, the generation of operational efficiencies, and the implementation of the IT platform to support our commercial models.

As with every integration that we have undertaken, we know that the migration of talent and the cross-fertilization of best practices are key ingredients to success. This has been no different with these territories, as many of the talented executives of Grupo Tampico, CIMSA, and [FoQuen] now occupy different positions in other (inaudible) territories, an attribute that these family-owned bottlers have come to identify as a unique benefit of the Coca-Cola FEMSA culture.

We have not delayed making any investments or incurring any expenses needed to capture the synergies that we have previously identified. Indeed, we are pleased to announce that we have increased the synergy target from MXN800 million to MXN900 million, to be fully captured at the operative cash flow levels as of 2014. Beyond this timeframe, we will continue working to capture additional opportunities to increase the productivity of these new territories.

This quarter sets a positive tone for a more robust second half, as we had anticipated the last time we talked. We have taken advantage of some additional pricing opportunities in certain packages, and we have locked in the prices for PET, fructose, and sugar in our Mexican operations and secured the foreign exchange rate needed to purchase our dollar-denominated inputs for the remainder of 2012.

Our operators will work diligently to meet the business plan that we have established for our Company for the remaining of the year.

Now, let's talk about our South American division. Our South America division's total sales volume grew 1% in the third quarter, reaching more than 280 million unit cases. This increase was driven by volume growth in Venezuela and Brazil, with Colombia and Argentina remained flat for the quarter.

In our Colombian franchise territory, volume was flat, compared with 9% growth during the third quarter of last year.

In Argentina, on top of a [13%] volume growth in the third quarter of 2011, we experienced tough weather conditions in August and September of this year. For the quarter, this franchise, as I said, remained flat.

In Venezuela, we continue to grow, as exemplified by a 2% increase in volume for the quarter. Our still beverage category was the main driver of volume growth, which more than doubled thanks to the success of our Fresh Orangeade. Brand Coca-Cola continued to generate positive results, as well, growing more than 3%, supported by the launch of two new packages and consumer preference for this brand.

Consistent with our commitment to invest in the business, we started to roll out our new commercial model in this country, reinforcing our marketplace execution and especially our cooler covers.

In Brazil, despite tough weather conditions in September, our volume grew 1%, as compared to 2011. Our water portfolio volume grew 22%, driven by the performance of the Crystal brand. In the still beverage category, our volume grew 9%, driven by the Sucos del Valle line of business. Our flavored sparkling beverage volume grew 4%, supported mainly by the Fanta brand.

In the third quarter, our South American division reported total revenues grew 10%, to MXN19.3 billion. This increase resulted from double-digit revenue growth in Venezuela, Argentina, and Colombia, despite a negative translation effect due to the devaluation of the Brazilian real.

On a currency neutral basis, our division's total revenue grew 17%, mainly supported by selective price increases implemented over the past several months across our franchise territories.

Lower sugar and PET costs across the division offset the average devaluation of the Brazilian real and the Argentine peso as applied to our US dollar-denominated raw material costs. This resulted in a 120-bps expansion of our gross margin, which reached 46.3% for the third quarter.

Our South America division's operating income grew 13%, to MXN2.8 billion. Operating expenses were affected by higher labor costs in Venezuela and higher labor and freight costs in Argentina and Brazil.

Despite these incremental cost pressures, our South America division's operating margin expanded 50 bps, reaching 14.5%.

In the face of bad weather conditions in some of our franchise territories, our South America division delivered solid top line results in the third quarter, on the back of selected price adjustments to offset local inflation pressures and increased taxes.

As part of our business plan, we continue to focus on returnable presentations as a key driver of our sparkling beverage growth. We are also actively fostering single-serve consumption in this category. Our still beverage category will continue to yield positive results, supported by the Jugos del Valle platform and our continued innovation. We are confident that the full implementation of our new commercial model in Argentina and Venezuela will provide us with a clear picture to better capture the industry value potential.

As we face the final part of the year, we see international sugar prices remaining flat, sequentially. Our Brazilian and Colombian operations have hedged the majority of their sugar consumption needs for the fourth quarter. In addition, PET prices should also remain stable for the rest of the year.

With respect to currency volatility, which has offset the benefits of lower US dollar-denominated raw material costs, especially in Brazil, we have hedged the majority of our foreign exchange need for the remaining of 2012.

With regard to the potential Philippines transaction, we expect to reach a decision as to whether we should move forward with this undertaking and communicate it to you before year-end.

Looking forward at 2013, we see a benign commodity environment with sugar and PET prices remaining stable, sequentially, in US dollar terms. For fructose, we see slight upward pressures in dollar terms. In light of this outlook, we have hedged an important part of our sugar needs in Brazil and Colombia to prevent volatility in our input costs.

With regard to foreign exchange, we have already started to hedge our foreign exchange needs for the first half of 2013 in our Mexican operations.

Our business plan for 2013 continues to build on our long-term strategic framework for growth to achieve the full operating potential of our 16 operations. We remain focused on enhancing our competitive position by proactively implementing our commercial model and by fostering returnable and single-serve presentations across our markets and categories. There's still great growth potential for us to capture both by increasing per-capita consumption in every territory and by achieving a larger share of the non-carbonated beverage business.

Our strong pipeline of innovation is an integral part of our Company. Accordingly, we have been working not only to complement our winning brand portfolio with new packages and non-carbonated beverage alternatives, but also to develop efficient and effective business models to seize the opportunities in the vending machine channel and in our coffee platform. Capitalizing on our presence in Latin America larger cities, we have the capacity and the potential to grow these lines of business rapidly and profitably.

We maintain a disciplined and flexible approach to growth through mergers and acquisitions. Over the years, we have developed a very capable, prepared, and talented pool of executives and operators who we can rotate into any new territory without affecting the performance of our existing franchises. As we take steps to build a long-term emerging market platform, we continue to focus on the opportunities presented by the Latin American (inaudible). We have come to represent a valuable alternative for bottlers in Latin America, with a balance and reach geographic footprint, relevant growth opportunities in the beverages space, and a transparent investment vehicle led by strong management with a proven track record of value creation.

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

(Operator Instructions) Lauren Torres, HSBC.

Hi, Hector. I'm not sure how much more color you could give us, with respect to the Philippines, but it seems like earlier this year you were targeting a September, October close. Now, it's maybe moving to year-end, or closer to year-end. I don't know if there's anything, as I said, you could share on the learning process of what may be taking more time, if you're thinking about it any differently as far as adding it to your portfolio, the potential of that market? Like I said, any commentary would be great. Thanks.

Good morning, Lauren. I think that what I can say right now is that we have pretty much finalized our analysis of the opportunity. We feel that it has very good potential because, again, we are speaking of a very large population, close to 100 million people, a very important base of the pyramid, a very young population, a very fragmented retail system. I think that there are a lot of challenges, because the operations have been struggling in the past in terms of profitability. But, we feel that there are many opportunities.

We are basically in the process of finalizing negotiations with the Coca-Cola company which they are the owners of this franchise, as you know. And, basically, we feel very confident now that in these two months and one-half that we have before year-end that we will be able to finalize that negotiation process. And, as you can imagine, as they say in the baseball -- it's not over until it's over. And, sometimes, the detail of the negotiations and the contracts control for a lot of, so sometimes, delay.

We are pretty much on target of what we have announced at the beginning of the year. We are still in October. To be very honest, we are at the very end of October, but I am very certain that before year-end we will be able to announce if we go or not go and, if we go, what are the terms and conditions for that, for this [one].

So, it's more -- I would say, Lauren, it's the normal delayed process of the negotiation and documentation of this process.

OK. That's fine. Thanks.

Antonio Gonzalez, Credit Suisse.

Good morning, Hector. I just have two quick questions. First, I wanted to ask, on Brazil, I guess you've been following a different strategy, especially in terms of pricing, from what other Coca-Cola bottlers appear to be doing. You guys, I guess, have been moving ahead in anticipation to the tax hikes that have been announced, and some of the bottlers are not doing that same thing. So, I was wondering if you could give us some more color on how do you feel with respect to your market share in your particular franchise territory? And, how different do you think you are from the rest of the Coca-Cola system in Brazil, that you can have this stronger pricing recently? That would be my first question.

Yes, Antonio. With respect to Brazil, I think that -- let me make first a comment on this specific question. I think that in general from what I understand from others and we have seen and information we share with other bottlers, we have very good market shares, and we have increased -- basically in every category, we have increased our market share versus last year. The only exception that we have is in energy drinks and I really don't [believe] that that is an area of [opportunity], because obviously we have a very important [tea] presence after the acquisition of Matte Leao. But, in the other categories, we have continued to increase market shares.

If we don't have the largest market share of any other bottler in the system, we are very close or maybe tied on the top with other bottlers. I haven't seen the last data information recently, but it's that kind of market share. It's at the top of the Brazilian participants.

And, different than other bottlers, we have also been active on the pricing front. We have seen other bottlers that have stayed with prices and have benefitted from larger volume growth. In our case, as I mentioned, our share of sales have continued to increase, even though we have been active in the pricing front because, as we discussed over the last two quarter conference calls, the pressure of raw materials was there. It was important for us to recover profitability.

We basically started with this pricing activity since the end of last year, and we have had some -- we have been [touching] the prices of our products in March and July, et cetera. So, when you compare our prices versus some of the other prices on similar packages of our peers in the system, usually you will find that our prices are on the high side. The important element of this is that we have continued to improve our share of sales participation in these territories.

I think that in the Brazilian market you will find different levels of activities geographically. As the economy is softening a little bit in terms of growth, we are not seeing the same growth in our territories that we were seeing, in economic terms not necessarily in our (inaudible), but in general, the economic activity.

We have had some changes on the tax laws that have implied for us to also take some pricing. We are basically passing those [increased] taxes to the consumer. We have suffered a little bit from the, so-called, (inaudible) tariff, the transportation speculation that has made, have increased the cost of our logistics and freight within our territories. And, we have basically also tried to pass those additional costs to our consumers with price increases.

And, I think that with those comments, I give you I think a very good flavor of what is happening in Brazil vis-a-vis some of our peers.

Yes. This is super helpful, Hector. And, if I may, just a quick second question. Could you share with us what's your best guess, I think at this point, of the FX rates for Argentina and Venezuela? If you're incorporating in your base-case scenario that they will [lead] FX currency for 2013? And, how would those impact, I guess, the outlook, the benign outlook that you just described, for raw materials and the Mexican peso appreciating in terms of margins for next year?

Yes. In Argentina, it's very difficult to project, but we believe that the currency will continue to devalue a little bit. And, in some of our scenarios for next year, we are assuming as much as a 20% devaluation of the currency. Obviously, we do several [different] scenarios in our planning processes, but that's something that we think it's feasible that might happen. And, obviously, we are always very alert as to the implications of that in our operations.

For Venezuela, what I can say is that, similar to what I mentioned in the first two quarters, that we have a very plentiful access to dollars to buy raw materials. During the third quarter, that's not the case. We have been struggling a little bit with a request for foreign exchange to buy raw materials during the quarter. We expect that this will speed up in the fourth quarter. I don't know exactly what was happening with the authorities in terms of those processes, but in general we are seeing that, let me call, scarcity of foreign exchange to buy raw materials, especially during the third quarter.

Again, one of our scenarios is that we could see a movement in the foreign exchange in Venezuela for next year, and I think that if you interview many economists, everyone expects this kind of movement. It could be probably as much as 30% or 40%.

What implications does that have for our margins and raw materials? On those countries -- on top of this, let me say, macroeconomic environment that I just described with respect to currencies, those two countries have high inflation, compared to the other seven countries where we operate. And, in those territories -- and when you have high inflation, you always have also the opportunity to capture or to try to maintain prices at least with inflation and, sometimes, taking a little bit of advantage because of a mix change towards a richer package presentation. That has been the past history in Venezuela and Argentina.

So, when you look at the average price per unit case, we have seen good prices, again, in general, to recapture inflation, but some positive movement in the mix of our products that have [reached] our price.

So, in general, I think Antonio that the name of the game here is to be very careful and attend towards how you feel movements on FX and what that implies for materials and, again, try to sometimes when you have the opportunity, try to pass that to the consumer, so for us to maintain our margins.

In the rest of the countries, we see more stable FX environments. We have seen volatility in Brazil this year, for example, [along] basically -- if we compare with last year, we have seen close to 20%, or a little bit more than 20%, devaluation of the currency. I think that in general our operators, in terms of raw materials and trying to at least maintain flat margins on their operations, we are attempting to look at the opportunities to buy some of the raw materials, or to hedge all these raw materials. Remember that not all of them can be hedged but, in some cases, for example, with PET, we enter into agreements with the suppliers to pre-purchase part of the future needs at a certain price. So, it's a physical hedge as opposed to doing a financial hedge.

So, in general, my sense Antonio is that if we could continue with some of these pricing activity that we have seen reflected in our numbers, we could see flat to slightly positive margins for next year. That's my summary after all of this explanation of the different trends in the different countries.

Thank you so much, Hector.

Alan Alanis, J.P. Morgan.

Thank you so much. Congratulations, Hector, on the results. My question has to do more -- you can check if I heard something correctly. You said -- regarding the increase of Powerade, you said, 40%. That's -- 4,0? Did I listen correctly? Or -- 1,4? In Mexico.

Yes, it's -- 4,0. 40%.

4,0. OK.

In Mexico, I think that it's one of these success stories I don't talk. In fact, if I'm not mistaken, we now are close, or slightly above 25% market share in that category. If I look back a few years ago, we were basically non-existent. The job that has been done by our operators in the marketplace is tremendous.

Obviously, as in many cases, at the beginning you suffer with the price and you have to invest a lot in marketing and then you have the [work up]. And, so, at the beginning, you suffer on the profitability, but once you start getting a little bit of scale and once you start taking this product to the traditional channels, you capture some volume. Then, you start making this (technical difficulty).

(technical difficulty) and, obviously, on Santa Clara, on the dairy part. And, if there's any other one that we should be aware that you're seeing that kind of potential in Mexico or in other parts, I would be very interested in hearing your thoughts. So, that's my question. Congratulations, again.

Yes. As in every industry, Alan, you have some stories of success and, clearly, in that case Valle Fruit it was kind of going into a new category that was present but not very important in the marketplace in the past, with this Orangeade. And, it really took off. It was a very important success story. We have some more [flavors], also now. We have launched some products that we thought that very positively with them and, then, after a few months in the marketplace, we see that they are not getting any traction.

I think that the area of focus for next year for our organization is the coffee equipment. I'm not sure if everyone is familiar, but it's basically installing some equipment in some of the traditional stores, traditional channel stores, to sell coffee. The story there is that we have been getting some volume traction but still not very profitable. And, we are twitching a little bit on the cost structure of that, because we started with equipment that was very expensive. As we have worked with the supplier to redo the equipment to a smaller and a cheaper equipment, we (inaudible) might see better profitability on that segment. But, it's a category that we know is there and that we know we have the potential to capture, because we reach so many different [lives] with our trucks every week that if we can serve that category properly, we feel positive.

Clearly, Santa Clara, similar to what we did in Estrella Azul in Panama, it's a category that is new for us. Santa Clara is very small in Mexico, although you can argue that it's the third brand in Mexico. It has barely 1%, or 1.5%, market share. I think that our hypothesis is that the value there would be in value-added dairy products, like drinkable yogurts and things like that, not so much on the (inaudible) milk. And, there you also have a potential to have a very successful story. We are just starting with that.

Certainly, in Panama, our experience with Estrella Azul has been difficult. We have been operating that for a year and one-half, basically. And, we are struggling with the part of the business that we didn't know before, that has to do with connection of milk from the farms and working a lot with the quality and understanding the process that is behind -- everything that is behind putting the product in a bottle, or the bottling process, that we know very well. We are learning a lot on the [cold chain] and how to do the logistics and the transportation of these products that are more sensitive.

So, I think that all in all it is a good experience that has helped us also to get a lot of confidence in going into Santa Clara in Mexico.

The other area which is probably different than a new category but is like a new challenge, Alan, is that we think that vending machines in our territories in Mexico and some of the other Latin American countries, we are very underdeveloped. We have other peers that have much higher penetration than us in terms of equipments per 1,000 persons, or something like that. And, I think that you will see a big push on vending for -- starting in Mexico to see, to do the learning process there and that we find success, we'll try to copy that to other territories.

Just to give you some data right now, we have around 10,000 equipments in Mexico, and we feel that very easily, easily, the target for next year should be around 40,000. (multiple speakers)

(multiple speakers)

It's a good effort for expansion for the operation. If we are successful with that and start seeing that it's profitable for us, we will copy part of that to Sao Paulo and Bogota and Buenos Aires, and I think it's an interesting avenue of potential growth for our Company.

That's very useful, Hector. Again, congratulations. Thank you so much.

Thank you.

Lore Serra, Morgan Stanley.

Good morning. Thanks, Hector. Just a couple of specific questions and, then, one more general one. The specific question, can you tell us how much restructuring charges were in the third quarter from the three acquisitions and confirm that this is the last time we'll see restructuring costs?

Good morning, Lore. If I remember correctly, it was around MXN80 million, MXN85 million. And, right now, what I can tell you is that up to September, we have around 850, or 860 versus the headcount reduction, and we have continued to advance in October. So, we'll see still some in the (inaudible) charges during the fourth quarter.

If I'm not mistaken, the number right now should be around, a little bit more than 1,000 people are already restructured, I guess is the word, reduction in headcount. So, we might see a little bit more during the fourth quarter, but it's not as large as what we have during the first and second quarters of this year.

Great. And, there was a swing this quarter in Other Operating Expenses from where you were in the last quarter. Was there any account that was responsible for that? It swung about 100 bps, from expense to income.

In the Other -- if you're referring to the Other Expense line, the main impact that we have there, Lore, has to do with the fact that on the inventories on raw materials, as you consume that, it goes to your cost of goods sold. But, then, you have a piece of that that is reflected in that line, because what you have an account payable that is dollar-denominated and you have an FX positive effect is reflected in that line. This quarter, as we closed the quarter with a very favorable exchange rate, that's basically a reflection of part of that line should be reflected in the, if you will, cost of goods sold of this quarter, but most of that is a reflection of an adjustment in the value of the inventories for the following quarter or as you would consume them in the future.

So, in other words, when you buy from a supplier, you receive an account payable that is dollar-denominated. You register that at the exchange rate of the day. But, you register. And, at the end of the quarter, if the exchange rate has improved, you have a positive impact that is reflected in that line.

OK. That's helpful. And, then, the more general question, you talked about closing Philippines by the end of the year. You also talked about how you've proven in these deals that you're a good partner for a lot of the LatAm bottlers. So, as we think about the expansion opportunities, kind of into 2013 and 2014, do you see more opportunities to expand within Latin America? And, can you do that concurrently with the Philippines? Is that what you're, kind of, transmitting with that comment? Or, should we really think about the Philippines as being the major, kind of, initiative on the non-organic side for [COF] over the next year?

Yes, Lore. I think that's the message that we want to send here, basically, is that in terms of the capacity of (inaudible) facilities. For the last, I would say, four or five years -- and yesterday we presented the same request for our Board of Directors -- we have been spending around $10 million every year, in terms of preparing people and talent and getting new people in the organization.

And, that goes from staying with, for example, very good executives from Grupo Tampico, CIMSA, and Queretaro that in theory might not be needed if you look at the present operations. But, basically, we are, for $10 million a year -- we have asked on the last five years for that amount of money as a waiver when you measure the performance of the businesses and the performance of the executives.

I think that that's very key in the way of having the bench strength to be able to go to different markets and, without distracting the management of the present operations or without putting at risk the present operations, for us to be able to go into other new territories and new geographies.

In terms of the geographic scope, when you do your normal planning process every year and you find that in some territories, like Mexico, you have high per-capita consumption -- so, some of your sparkling products, you have high market share -- you can argue that unless you go to other categories -- and that's the case of why we decided to go to Jugos del Valle or (inaudible) -- unless you go to those, your growth potential is very limited. You have potential to grow a little bit the per-capita, maybe improve the mix of the products as the population gets a little bit more resources or it has a higher per-capita income. So, they spend a little bit more on single-serve presentations and things like that.

So, in our planning processes, in order to continue growing at a fast pace, either you go to other categories that are growing faster than sparkling or, in other territories like Colombia, where you have low per-capita, you try to invest behind growing the per-capita for the sparkling drinks.

And, also, when you look at the map in Latin America, you have basically three large bottlers -- Andina, ARCA, and Coca-Cola FEMSA. And, the territories that are available in addition to those three are, to be honest, quite limited. Probably, as I have said in the past, there is no other (inaudible) story in Latin America unless you do a transaction either with ARCA or with Andina.

We already represent close to 40%, or a little bit more than 40%, of the volume of Latin America. So, when you do that analysis in your planning sessions, the direction of the planning goes to, start doing some investment in new categories. As I mentioned, that's why Jugos del Valle. That's why Matte Leao in Brazil. That's why the reason for Estrella Azul and Santa Clara. Or, you go to other geographies.

In the case of the Philippines, we were also I guess benefitted from this alignment with the Coca-Cola company, our partner, in the sense that they think the same that us that we have the capabilities to tackle a market like that, with a very fragmented retail system, with the way the population is, the per-capita income, the love for the Coca-Cola brand, et cetera. So, we think that we have capabilities for that.

So, what is in the future for us in the M&A front? I think that if we are successful in Philippines, we have opportunities in Asia and that this is like our beachhead to go into that territory. But, certainly, we will continue to look for opportunities in Latin America, because we think that those are very easy to tackle and to integrate and to start getting efficiencies and bring to the profitability levels that we have in our operations. And, that will continue to be very important in our focus, to continue growing in Latin America.

And, again, just to reinforce, very importantly, we have been investing important resources over the last five years so that our senior management is not distracted from their responsibilities in the present operation.

Thanks very much. Appreciate it.

Thank you.

Jose Yordan, Deutsche Bank.

Hi. Good morning, everyone. My question is specifically about the fourth quarter, where you see gross margins in the fourth quarter? But, if you could first clarify your earlier comment about flat margins in 2013? Is that your expectation for EBITDA margin for the entire year, versus 2012?

Yes, Jose. I think that my comment was, basically, flat to slightly positive margins for next year on a consolidated basis. It will vary by market. I mentioned second quarter, and I reinforce during this conference call we are planning especially for the Colombian market to invest importantly behind our brands to try to foster consumption per capita. We think that -- I mean, we have been on this conference call for many years and you know that Colombia has been an area where we see a lot of opportunities and we haven't had the opportunity or the capacity to really transform that market into a high-growth market in terms of volumes.

The per-capita's in Colombia are basically comparable to those in Nicaragua, which are the lowest per-capita's that we have in our nine countries. So, last year, Colombia, as I mentioned in the second quarter, we'll invest a lot on marketing expenses. So, Colombia will pull down on a consolidated basis some of the margins.

Colombia will suffer on the margins next year, because we are, again, spending -- we will be spending a lot of marketing resources. We have a plan together with the Coca-Cola company where they will invest similar amounts than us with the idea of starting to push volumes and per-capita consumption in Colombia to a next level.

The other countries, I'll see better margins than what we have during this year. It will depend a lot, again, on the -- as you know very well, Jose, we have a very important price gap versus our competitors, in terms of the prices in the marketplace. That's why we have been a little bit more active on trying to strike volatility from raw materials and FX when we see those opportunities, by hedging that.

But, in general, I do see a positive trend for Mexico, a positive trend for Brazil, and obviously Argentina and Venezuela will depend a lot of the macroeconomic environment. And, as I mentioned, Colombia will suffer for a year, but we think that if we are successful with that, we have a better future in Colombia.

Got it. (multiple speakers)

(multiple speakers)

If I can ask you about Mexico, specifically, because last year's fourth quarter is a not meaningful comparison, et cetera. So, how should we think about a gross margin for that division in the fourth quarter this year? Should it be the same as third quarter? So, a sequential flat? Or, are there any reasons, mix wise, that would lead you to a higher or lower gross margin in the fourth quarter of the year, of 2012?

Yes, specifically in Mexico, Jose, I think that you will have a better fourth -- organically, we will have a better fourth quarter than the third quarter. And, in the new territories, we are also improving little by little the profitability of these, as is normal as we start to capture some of the synergies.

As I mentioned in one of the earlier questions, we will still have some restructuring charges, but it's very little compared to what we have in the first and second quarters of the year. And, rather than focusing on the restructuring charge, I think that the fact that we have been doing such a level of restructuring in the organization without any problem with unions and newspapers and everything is very important.

We have closed, if I remember correctly, seven or eight warehouses already from these territories. We restructured some of the manufacturing capacities. We haven't closed plants, but one specific plant that was important in the Tampico territory, we basically have restructured that to maintain a very small operation for water, because it's important because of the logistics locally, that you keep the water operation there. But, most of the production lines for soft drinks have been transported to other parts of our operations, including moving some of those to Queretaro, for example, which was also an acquisition.

So, I think that the whole logistics of our operations is improving, and we'll start benefitting from that in the fourth quarter and onwards.

All right. Thanks a lot.

Thank you.

Alex Robarts, Citi.

Thanks. Hi, everybody. I guess I wanted to focus on volume. And, you know, 1.2% organic volume growth on a consolidated basis for the quarter was a little bit lighter than what we were looking for. And, I kind of just noticed Brazil. You know, looking at the carbonated soft drinks in Brazil, you know, the volume was down in the quarter. I guess, first nine months, you're also down, as well. And, kind of, I guess the specific question comes, if you could kind of give us a sense over the coming quarters whether we could get into or kind of achieve some volume growth there? And, I guess, clearly, you know, passing on [delay] of more recent costs, the increase in the tax -- and I appreciate you having to go aggressive on price increases -- should we expect this kind of dynamic to continue in the coming quarters? Is demand perhaps softening a little bit more? I know you alluded to that earlier. And, I appreciate you talking about market share trends early in the call, but it would be great if you could give us a sense of, you know, that core carbonated soft drink volume in Brazil, which again, Brazil is 20%, or that piece is 20% almost of your total volume. I mean, how do you see that volume growth in CSDs over the coming quarters?

Yes, Alex. I think that this quarter, this specific quarter in Brazil, we suffered basically on the brand Coca-Cola front. If you look at some of the numbers that I shared during my initial speech, almost every category in Brazil grew, except brand Coca-Cola. Brand Coca-Cola for the quarter was, if I'm not mistaken, around 2% reduction versus last year.

But, the important element here is that in market share terms, when you look at colas, we are basically above 90% market share, and we were flat versus the same quarter last year, even though we suffered in volumes.

So, as I mentioned, in terms of sales, we are not having any problem. And, in my opinion, it's more related to the fact that after many years of very important growth in Brazil, we are seeing a slowdown, in our opinion, in the general economy. And, as we have been very active on the pricing front, as you expressed in your questions correctly, I think that we are basically sacrificing a little bit the volume to maintain the profitability of that specific category in Brazil.

We are focusing a lot on returnables, returnable products, and single-serves. That's the main focus of the management down there.

The other very important element is how to extract additional profitability from the cost structure. And, for that, there is a big effort of restructuring the operations in Brazil, in terms of logistics and manufacturing. We have mentioned before that we are building a new plant in the state of Minas Gerais. It's going to be tremendous. It's a plant similar to what we have in Toluca, for those of you that have had the opportunity to visit, that is state of the art. That obviously requires some additional CapEx, but I think that we'll start to see improvements in some of the efficiency measures in production and logistics that have been lagging some of the other operations in the nine countries.

So, returnables, single serves, in terms of portfolio, and a strong focus on extracting value from the cost structure both in logistics and manufacturing in Brazil are the main focus for the management there for next year.

What is the outlook for volumes [overall], of Brazil? I think that we'll have positive impact because of the Olympics and, then, the World Cup in a couple of years after that. And, we are hoping to see that these increases in taxes and increases in some of the transit regulations, just to pass that away and start constructing from this new base of our business.

OK. Thank you.

Alexandre Miguel, Itau BBA.

Hello. Good morning, Hector. So, just a quick question on Mexico and the synergies. I just wanted to understand actually how much you have achieved to date, and just to get a sense of how much is left for 2013 and 2014, out of the new guidance of the MXN900 million?

Good morning, Alex. I think that in general the good news is that we continue to find some opportunities, as we mentioned, once we passed the first 24-month period of the acquisitions where we have basically a lot of restructuring charges and closing of the facilities and reduction in headcount. The number as I mentioned is around MXN900 million. I'll say that, for certainty next year, we'll start seeing a lot of those. I don't have a specific idea in my mind, but I'll venture to say that probably 60%, 70% of those should be captured during 2013, as an approximate number. I'm very confident of that.

For 2014, clearly the $900 million should be thereon every -- excuse me, MXN900 million -- they're coming every year during 2014 and after.

OK. But, is there a starting point, like to capture this [67%] until next year, how much you have done in 2012, or before, just to get a sense of the additional amount you probably will see in 2013?

I think that -- I mean, we are already capturing some of that. I mean, for example, raw materials, that was very fast. Headcount reduction is happening quarter by quarter. But, when you look at the separation between organic and reported numbers, you see how the profitability of the new territories has been improving quarter by quarter. So, I think that we are already capturing part of that. It's just a fact, and we are separating that (inaudible) during the first, especially during the first year, but some of these expenses also are recurring in the second year.

We have some expenses related to closing the facilities, moving production [lines] from one plant to another, indemnifying employees. At the very beginning, we had some due diligence expenses that are related to lawyers and things like that that are charged as part of that.

So, I mean, we are already basically capturing a bunch of those synergies. As I said, raw materials (inaudible) that was day one, we were with that. I'd say that for the full year, next year, we'll have somewhere around 60% to 70% of those [$900 million]. I'm very confident that we'll have them on a full-year basis.

OK. Perfect. And, just a final question if I may regarding Mexico, as well. We have heard from different sources of a possibility of a new [venture], a new excise tax for soft drinks in Mexico, maybe as part of a wider reform on taxation or any other reason, (inaudible) of any other potential reason. But, just wanted to get a sense for you guys if you are aware of this, if you have heard something related to that? Or, if your guys are taking part of any discussions regarding a possibility of new taxation for soft drinks in Mexico?

Basically, Alex, every year we have, at the end of the year, when they are preparing the new tax law, or changes to the tax law, we are basically every year confronted to a situation similar to this in Mexico. It happens also in other countries. In Brazil, they just offered some increases in federal taxes. We know that the beer industry has been able to postpone some of these increases in Brazil to the end of the first quarter of next year, and the industry in Brazil is also working to try to do something similar. And, maybe we'll have some success at that. That will help our operations in Brazil, because we have already tried to capture part of those increases in our prices.

Specifically, your question in Mexico, there is always at this time of the year a lot of -- let me give you the word -- noise, of new taxes for different industries. Beer, tobacco, and soft drinks are very easy to tax, with a few participants, and it's easy to tax those industries. We don't know if there is -- it's difficult to venture today if there is going to be a tax or not for this year. There is always that possibility.

And, I'll say that on a worldwide basis, this issue with obesity and repercussions of other movements that you have seen around the world are always observed by different countries. And, I think that the argument of obesity is also something that has created some negative potential trends in terms of taxation in the different countries.

I think that our conversations as an industry are more in the sense of trying to work in living a more active life, as opposed to trying to tax a very specific product that we think is discriminatory. If there is any tax in the horizon, in our opinion, it should be more in taxing the sweeteners, so that every product that has sweetener would suffer a little bit from that, as opposed to taxing a specific product like a soft drink. But, every Congress in every country has a different plan.

But, certainly, at this time of the year in Mexico, there is always this, I guess, (inaudible) in the newspapers about the potential, or the debate in Congress to see if there should be taxes or not on soft drinks. That's always a constant in our industry in Mexico.

Sure. Perfect. Thank you, Hector.

Thank you.

At this time, there are no further questions in the queue. I would like to turn the call back over to Mr. Hector Trevino for any closing remarks.

Well, thank you for your interest in our Company. And, as always, Jose, Roland, and their team will be available to answer any remaining questions that you might have. Thank you.

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