Coca-Cola Femsa SAB de CV (KOF) 2012 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Coca-Cola FEMSA fourth quarter 2012 earnings event conference call. As a reminder, today's conference is being recorded, and all participants are in listen-only mode. At the request of the Company, we will open up the conference for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance, and should be considered as good faith estimates made by the Company. These forward-looking statements reflect management's expectations and are based upon currently and 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 turn the conference over to Mr. Hector Trevino, Coca-Cola FEMSA's Chief Financial Officer. Please go ahead, Mr. Trevino.

Good morning, everyone, and thank you for joining us, as always. Building on the strong third quarter and in line with our expectations for the second half of 2012, our operators delivered solid double-digit top and bottom line growth and margin expansion in all divisions for the fourth quarter, compensating for a (inaudible) start of the year and [reaching] full-year EBITDA margin expansion.

During the fourth quarter of 2012, we continued to integrate the results of Grupo CIMSA and FOQUE in our Mexican operations, and Grupo Tampico's results are now fully comparable.

Their performance contributed positively to our Mexico and Central America divisions and our consolidated results.

Organically, the main drivers of our performance for the year were our operators' ability to leverage our new commercial model, execute at the point of sales, and implement selective price increases to capture our industry's value potential as well as the strength of our multi-category diverse portfolio, (inaudible) by the continued popularity of brand Coca-Cola and innovation in our still beverage and water categories.

In the fourth quarter, I will report that consolidated revenues were close to MXN40 billion, up 10% from last year, despite negative translation effects resulting from the devaluation of the Brazilian real and the Argentine peso in combination with the stronger Mexican peso.

Organically, excluding the noncomparable effect of Grupo CIMSA and FOQUE in Mexico, our consolidated total revenues grew 6% for the quarter.

On a currency neutral basis and excluding the noncomparable effects of the new franchises within Mexico, total revenue grew 14%, driven by top line growth in every country of our [balanced] portfolio.

This currency neutral revenue growth was driven by volume growth in Mexico, Colombia, Brazil, Venezuela, and Central America. And average price per unit case rose in almost every operation.

Our consolidated sales volume grew 11%. Organically, excluding the noncomparable effects of the new franchises in Mexico, our volumes grew 4%.

On the same basis, our sparkling beverage portfolio grew 3%, driven by the strong performance of brand Coca-Cola, highlighted by 17% growth in Venezuela and 4% growth in Mexico and Colombia.

As in previous quarters, our innovative [orangeade] categories contributed considerably to the 14% volume growth of the still beverage categories, complemented by Powerade and the recent rollout of Fuze Tea.

Specifically, in Mexico, Valle fruit generated 20% growth, while Powerade grew 31%, and Fuze Tea continued to grow significantly over the previous brand of tea.

In Venezuela, the Valle fresh oranges grew 150% and contribute more than half of the incremental total volume of that country.

In addition, our single-serve water portfolio grew 22%, reflecting volume growth in every country. This increase was supported mainly by the performance of Brisa in Colombia, the launch of Bonaqua in Argentina, and the incremental volume growth of Ciel in Mexico and Crystal in Brazil. As of these increases compensated for a volume decline in our bottled water portfolio.

In the fourth quarter, lower PET prices and sugar costs in most of our territories more than compensated for the average depreciation of the Brazilian real and the Argentine peso as applied to our US-dollar-denominated raw material costs. Consequently, our consolidated growth margin expanded 160 basis points to 47.2%.

Our consolidated operating income grew 30% to MXN7.2 billion in the fourth quarter. Organically, our operating income grew 26%. We continue to experience higher labor costs in Venezuela and Brazil combined with increased labor and trade cost in Argentina.

Mexico and Colombia, we continue to invest in the marketplace as in previous quarters. We continued to register expenses related to the development of information systems and commercial capabilities in connection with implementation of our commercial models and the development of new lines of business and categories.

Our operating income margin expanded 260 basis points. And more importantly, our organic operating income margin expanded 290 basis points.

For the quarter, our consolidated net controlled interest income grew 35%, reaching MXN4.3 billion.

Now, I will elaborate on the performance of each division. In the fourth quarter, our Mexico and Central America divisions reported volume growth 16%, reaching 476 million unit cases. As reported, our Mexican franchises volume grew 17%, including the noncomparable effects of 51 million unit cases from Grupo CIMSA and FOQUE.

Organically, our volume in Mexico grew 4%, successfully building on a 4% organic volume growth during the fourth quarter of last year.

Our increased volume was led by 4% growth of brand Coca-Cola in which our 500-milliliter returnable glass presentation grew more than 50%, contributing significantly to an improvement in returnable single-serve consumption.

Our flavored sparkling beverage categories continued to yield positive results, growing 2%, once again led by the Sidral Mundet brand and the rest of our core flavored sparkling beverages.

The still beverage category grew 11%, mainly driven by 12% growth of Valle fruit oranges, which is now our third largest brand in Mexico, selling close to 50 million unit cases a year in all of our territories across the country.

In addition, Powerade grew 31%, and Fuze Tea continued to deliver incremental volume growth, growing 20% over the previous brand, thanks to consumer preference and the portfolio of 15 different presentations in Mexico.

Our water portfolio, excluding bottled water, grew 6%. These increases compensated for a 4% volume decline in our bottled water portfolio as we continue to work to increase the profitability and efficiency of our jug water business.

In Central America, our volume grew 5%, building on 6% growth in the fourth quarter of 2011. This increase was driven mainly by 4% growth in our sparkling beverage category and then by a 3% improvement in Coca-Cola, in brand Coca-Cola, and a 5% increase in flavored sparkling beverages.

The still beverage category grew 14%, supported by the inclusion of the del Prado in our portfolio and the continued success of Fuze Tea and Powerade, which grew 60% and 23%, respectively.

Our water portfolio grew 15%.

Our divisions reported total revenue grew 19%, reaching MXN17 billion. Organically, the divisions total revenue grew 7% on the same basis. Our average price per unit case increased 4% during the quarter. Selected price increases implemented in our territories over the past several months more than offset a negative translation effect resulting from a stronger Mexican peso.

For the fourth quarter, our profitability benefited from lower sweetener and PET prices coupled with the appreciation of the average exchange rate of the Mexican peso. As a result, our reported gross margin gained 360 basis points to 49.1%, while our [valid] gross margin expanded 390 basis points.

Our operating income increased 33% to MXN3.2 billion. During the quarter, we continued to book certain restructuring charges related to the integration of the new franchises in Mexico.

Organically, our operating expenses increased as a result of continued investments in the marketplace to reinforce our point-of-sale execution and, as in previous quarters, investments related to the development of information systems and commercial capabilities to support our commercial model, and investments related to the (inaudible) of new lines of business and categories.

Nevertheless, our reported operating margin expanded 200 basis points. And our organic operating margin expanded 260 basis points.

In our Mexican and Central American divisions, our operators delivered strong results to close the year. In the final two quarters, the division made up for a soft start of the year, despite the expenses related to the integration of our new franchises in Mexico.

Our benchmark commercial model, which we have already rolled out in our new territories, our passion for marketplace execution and innovation, and our targeted (inaudible) operators were the key drivers of these results.

Looking ahead, we take a positive view of 2013. Our operators' ability to selectively increase prices as well as our portfolio should allow us to grow our average price per unit case in line with inflation.

Our portfolio initiatives, particularly our focus on returnability and single-serve consumption are exemplified by the recent launch Sidral Mundet in the 2.5-liter returnable presentations and the extended coverage of the 500-milliliter returnable glass bottles for brand Coca-Cola will certainly contribute to our volume growth.

We anticipate a benign sweetener price (inaudible) going into the year. Through our participation in (inaudible) and contracts with suppliers, we have locked in most of our sweetener consumption needs for the year.

PET prices are expected to remain flat in the year. Furthermore, the synergies from our mergers in Mexico will start contributing to increased profitability.

Altogether, these factors should allow our Mexico and Central America division to generate margin expansion in 2013.

As for the recently announced merger agreement with Grupo Yoli, we are making progress on the confirmatory (inaudible) process. And we are confident that we will close the transaction during the second quarter of 2013.

Now, let's talk about our South America division. Our South American division's total sales volume grew 4%, reaching 334 million unit cases in the fourth quarter. This increase was driven by volume growth in Colombia, Venezuela, and Brazil, which compensated for a 2% volume decline in Argentina.

In our Colombian franchise territories, volume was up 10%, building on a 3% growth in the fourth quarter of 2011. Sparkling beverages grew 8% as a result of a 20% increase in flavored sparkling beverages and 4% growth in brand Coca-Cola.

The positive performance of our flavored sparkling beverage portfolio resulted from the successful launch of Fanta in three different flavors and a variety of presentations during the third quarter and the performance of Quatro, which grew 42% in the fourth quarter.

With regard to brand Coca-Cola, our twofold strategy to reinforce single-serve consumption and to increase affordable returnable presentations gives positive results, with our entry level 250-milliliter one-way presentation selling almost four times more than last year and our 1.25-liter returnable glass package growing 22%.

Our Brisa water brand drove a 20% increase in its category, including bottled water. Together, the Valle fresh oranges, which grew 9%, and Fuze Tea, which grew 37% over the previous tea brand, drove 11% growth in the still beverage category.

In Venezuela, we delivered 7% volume growth in the quarter. Brand Coca-Cola delivered very positive results, growing 17%, supported by the recent launch of a 355-milliliter and 1-liter package and consumers' preference for these brands. This increase compensated for a decline in flavored sparkling beverages.

Driven by innovation, our still beverage category accounted for a significant part of these operations incremental volume growth. The success of our del Valle fresh oranges among consumers led the brand to grow 150%. Fuze Tea also contributed to this category, growing 12% on top of the previous brand.

Our water category grew 28% in the quarter.

The initial rollout of our value-driven commercial model in Venezuela has yield very encouraging results, by reinforcing our marketplace execution and especially our cooler coverage. Through the placement of 20,000 additional new coolers during 2012, we have driven significant top line growth from our [plants].

In Brazil, our volume grew 2% as compared with the fourth quarter of 2011. Our sparkling beverage category grew 2%. This increase was supported by 12% growth in Fanta, a 27% increase in Schweppes, and incremental volume growth of Quatro, all of which enable our local operations to achieve leadership of the flavored sparkling beverage category.

Additionally, we recorded a 2% growth in brand Coca-Cola. Our water portfolio volume grew 12%, driven by the Crystal brand.

In still beverage category, our volume grew 4%, driven by the Jugos del Valle line of business.

In Argentina, on top of 10% volume growth in the fourth quarter of 2011, we experienced very tough weather conditions for most of the quarter. Consequently, our volumes in this country declined 2%.

During the quarter, we launched the Bonaqua water brand with very good results, reaching almost 1 million unit cases in less than two months.

In the fourth quarter, our South America divisions reported total revenues grew 5% to MXN22.7 billion. This increase resulted from revenue growth in every operation despite the negative translation effect resulting from the devaluation of the Brazilian real and Argentine peso.

On a (inaudible) basis, our divisions total revenues grew 18%, mainly supported by selective price increases implemented over the past several months across our franchise territories.

Lower sugar and PET costs across the division more than offset the average devaluation of the Brazilian real and the Argentine peso as applied to our US-dollar-denominated raw material cost.

This resulted in a 20 basis point expansion of our gross margin, reaching 45.8% for the fourth quarter of 2012.

Before discussing our divisions operating income, I would like to remind you that, during the fourth quarter of 2011, we registered a write-off of certain nonproductive assets, including production equipment, coolers, forklifts, and returnable bottles and cases.

At the time, our results were reported under Mexican financial reporting standards. And this write-off was booked below operating income in the other expenses, net line.

As a result of our migration to international financial reporting standards, this write-off of operating items is registered of our operating income as part of the other operating expenses, net line.

Our South American divisions operating income grew 27%, reaching MXN4 billion. Operating expenses were affected by higher labor cost in Venezuela and Brazil and higher labor and freight costs in Argentina. Our South American division operating margin expanded 310 basis points, reaching 17.8%.

We continue to focus on single-serve consumption and affordability to returnable presentations to foster our sparkling beverage growth.

Innovation has proven to be a very valuable tool to tie growth in the still beverage category. And we continue to yield positive results, building on the Jugos del Valle platform. As we face 2013, we are confident that our operator will continue to take advantage of our value-driven commercial model to capture pricing opportunity and a richer volume mix.

The implementation of these models has allowed us to identify opportunities to increase per capita consumption of our beverage in each franchise territory. And our seasoned operators have already laid the groundwork with which to capture these opportunities.

In Brazil, we are refining our brand price package segmentation per channel. In Colombia, we continue to work on our portfolio to offer our consumers affordable presentations. In Argentina, we are launching a strong competitive water brand and expanding single-serve presentations for our sparkling beverages.

And in Venezuela, we have introduced affordable presentations for sparkling beverages and expect continued success from our still beverage platform.

For the year, we see the national sugar prices remaining flat. Our Brazilian and Colombian operations have hedged the majority of their sugar consumption needs for the year. Additionally, PET prices should also remain stable for the rest of the year.

As many of you may know, on February 13 of this year, the Venezuelan government announced a devaluation of the bolivar. The exchange rate moved from VEF4.3 per $1 to VEF6.3 per $1. This devaluation will have an effect on our US-dollar-denominated raw material and our results from these operations when translated into Mexican pesos for consolidation purposes.

However, we will continue to adapt our operations to the dynamics of the market in order to achieve our planned results in Venezuela.

In every country of our geographically balanced portfolio, we continue to concentrate on our value-driven commercial model and the focus that our operators place on point-of-sale execution, fostering single-serve consumption, expanding the coverage of affordable returnable packages, and [basing] and innovation.

With regards to our Philippines operation, we recently announced the successful closing of the transaction with our partner the Coca-Cola Company at the end of January. Our Company's confident that the skills and capability that we have developed in Latin America will allow us to capture top line opportunities and achieve important efficiencies over a mid- to long-term horizon.

Yesterday, our Board of Directors agreed to propose a dividend of MXN5,950 million to our shareholders. This proposed amount represents a dividend of approximately MXN2.90 per share and will be paid in two installments during May and November of this year.

This proposed amount represents a dividend per share of approximately MXN1.45 for the first installment, computed on the basis of 2,030 million shares, and a dividend per share of approximately MXN1.45 for the second installment, computed on the basis of 2,073 million shares, which includes the 42.4 million shares to be issued to the shareholders of Grupo Yoli, assuming the merger is approved by (inaudible).

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

Ladies and gentlemen -- .

-- Operator? Yes.

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

Yes, hi. My question's a bit more strategic in nature. Coke FEMSA's gone through a lot of changes just over the last two or three years with respect to consolidating the bottlers in Mexico and now entering the Philippines.

So, Hector, I was just hoping you could just talk a bit about your bench strengths, directing spend. How should we think about how you'll be spending time and money I guess developing these markets. It seems like there's a lot to be done, particularly in the Philippines, but also with respect to consolidating Mexico.

What's the timeline? Once again, how are you thinking about spending levels? I don't know if the Coca-Cola Company obviously comes into that discussion, too. But, if you could just round that out a bit, that'd be helpful. Thanks.

Good morning, Lauren. Let me start with Mexico. I think one of the -- I'd say amazing events for the last -- for this past year, for 2012, is that our operations in Mexico have been able to integrate three different operations. And we are looking to do the fourth when we close Yoli without any problem.

We separated the northeast territory with one manager that we have in the southeast because of the distances and the logistics and all of that. And both FEMSA and (inaudible) were basically integrated to the same operating zones that we have.

We have been able to reduce the headcount of the operations importantly. And I think that the most important fact here in Mexico is that we have been able to integrate those operations without any union issue, without any problem in terms of the operations of these new territories.

We are little by little improving the profitability to the levels that we were anticipating in our (inaudible). We have been able to develop (inaudible) lines to better work with the supply chain in terms of distribution centers.

So, I think that, in Mexico, as you might imagine, if we -- before these integrations, we were close to 50% of the volume of Mexico. Then to use the word, quote-unquote, digesting these new territories was not a problem. And I'm sure that doing the same with Grupo Yoli will be done very easily.

The Philippines, obviously, is a different story. There is a different time zone. There is -- the distance is complex. We are finding out that -- we know that we are realizing more in our expenses that coming to the Philippines is complicated in time and in the cost of travel expenses.

We are basically -- you know that we sent four people since August of last year to be there, part of this because of starting to understand the market, but also very importantly because of the family-related things like schools and things like that.

So, these four guys, one that is the head of the Philippines, one that is in charge of planning and finance, one that is in charge of human resources and transformation of the Philippines to our -- to the culture and the integration of the two cultures, and one that is the expert on commercial practice, those four guys are now being helped by approximately 30 guys that are on the field that are assigned on a part-time basis in what we call training cells, which basically refers to our most talented professionals in some of the areas.

And you know that the three pillars of the -- our strategy in Philippines is portfolio, go-to-market, and supply chain. So, in those three areas, we have these 30 experts training people in the Philippines. And in the next two weeks, we'll have -- I still don't know the amount of people, but I suspect that somewhere, a number similar to 20 or 30 Filipinos coming into Mexico to be trained for a period of three to six months.

The idea with these training cells is to cross-fertilize this -- the capabilities of both organizations, understand what are they doing very well in the Philippines and if we are doing something better in terms of the capabilities in Latin America to train the -- our Filipino workers with these new capabilities and for them to go back to the operation and start replicating these processes in Philippines.

Obviously, we have never faced a similar transformation in the past, integrating -- probably (inaudible) because of the size in 2003 was similar in the challenge, but in this case, the culture, the time zone, and the traveling and expenses and traveling time. But, we are confident that working on these three pillars, again, portfolio, go-to-market, and supply chain, that we'll find opportunities to improve the operations.

No question about it, Lauren, it's going to be a challenge transformation or challenge and change from what the Philippines represent. But, we feel confident that we have the [talent].

One factor that I'd also like to mention is that, for several years now, our Board of Directors has approved a budget in the level basically around -- let's say around $10 million a year in training people and having some excess bench strength precisely preparing for these opportunities.

When I say they have approved this $10 million, it's that those $10 million that are reflected in our P&L for purposes of compensating the executives is like a waiver from the results so that it will not affect the performance meant for executives. So, we have had several years of that budget being approved precisely in terms of preparing this bench strength.

So, I don't know if I -- .

-- Okay. Yes -- .

-- Answered your questions.

I guess the only follow up is just to be clear on the structure of the deal that you have in the Philippines with the Coca-Cola Company, that -- those expenses, what you just mentioned, is more or less shared.

Yes, right now, as you know, we own 51%, and they own 49%. And that's (inaudible) in those proportions while they are shareholders in the Company, while we exercise the call, assuming that we do that in the future. Then we're responsible for 100% of all of these expenses and CapEx and everything in the Philippines.

Understood. Okay. Great. Thanks.

Thank you.

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

Hi, good morning, and thanks for taking the question. And I guess I wanted to ask a couple things. But, let me start in Venezuela. Hector, couple questions, I mean, if you could give us any sense of what your returnable mix is in Venezuela and with the new efforts you're making on kind of how you're seeing that or how you're hoping to see that mix evolve and if you can help us think through sort of how to think about what this means for the operation, in 2010, you guys did a really good job despite the turmoil in Venezuela with a lot of pricing, and I think you had some raw materials at the old exchange rates.

If you think forward to this time, do you have any raw materials at the old exchange rate? Do you see any risks that you'll be able to kind of contain or continue to be in the kind of pricing environment in Venezuela you've been in? That would be my first question.

Good morning, Lore. Yes, [let me stop]. I think that, obviously, our focus is to try to do something similar to 2010. Obviously, our management is focusing what can we do with pricing, and what can we do with this returnability [first]?

Some of the fact that I think are very important for you to know is -- and probably you have read in the press, there is some scarcity of raw materials in Venezuela. So, moving to returnable presentations in glass also helps us in that front because, as you can [state], when some of these [consequence] -- you have limitation on the availability of dollars. Importing some of the raw materials has caused some problems in the past. And there have been some (inaudible).

So far, we haven't stopped our production or our sales effort because of that. But, a few months ago, there was very little CO2 available in the country. We were able to work around that.

But, we will find some shortages in sugar or high fructose. We are starting to use high fructose (inaudible) discussed (inaudible), etc.

The idea here, Lore, if you ask me in a nutshell is the devaluation, it's around 46%. It's basically the impact. And we will have that impact on our cost of goods sold. Everything that is dollarized has that impact.

Our challenge is how can we improve our top line in bolivars at a pace close to that 46%? As you said, the returnables right now represent around 8%. It's very difficult for me to give you a number of where -- what that is going to reach. But, we would like to see that growing because of the affordability and, as I said, because returnable glass bottles keep some pressure out of the (inaudible) [or counts], which are top dollarized raw materials and with all the logistic problems related to that.

So, we'd like to increase that. Right now, basically, most of that returnable presentations are single serve. We probably would like to do something in multiserves also. So, you will see more strategies focusing in that direction.

Where that number is going to reach, it's very difficult for me to predict right now. But, we will supply everything that is demanded on that front.

If we are able to increase, let's say, mid-single digits our volumes or high-single digits, and if we are able to price similar to the inflation, I think that we'll be very close to have a top line growing around 35%, 40%, 42%. And that's -- I think that's a challenge that our team has in Venezuela, have to be able to pass some of the effect that we'll have on the cost to revenues.

Do your operators see any risk to being able to put through the kind of pricing that you're talking about?

Not so far, Lore.

Okay.

So far, there is no regulation with respect to that. There is a lot of volatility in the marketplace right now because, as soon as a country announces a depreciation of the currency, you're immediately [stuck in] a lot of price movements, even raw materials. Now, (inaudible) obviously we'll need to try to [cut with them].

Okay. And then just moving to Brazil for a second, can you just -- any outlook there in terms of how you see your raw materials. I mean, (inaudible) this morning was talking about high teens pressure on COGS. Now, I mean, they have a different hedging strategy.

But, is there anything you could you tell us? I mean, you're facing a very good environment in most -- I could think most of your markets, right? Is there any -- except for Venezuela, obviously.

Is there anything you're seeing in Brazil that would suggest that you're seeing that kind of pressure that (inaudible) was talking about this morning?

Yes, I think that, from our perspective, I think probably one of the differences has to do with aluminum. For us, as you know very well, sweeteners and PET are very important raw materials.

We have -- we are -- we have expressed the fact that we do some hedging basically within Brazil and Colombia, where sweeteners are very closely correlated to international prices.

What we have done is to hedge those prices when the -- when our operators feel comfortable with the price of the raw material or the cost of the raw material.

In general, I would say that what we have been doing is -- and it's a very simple strategy, Lore, and maybe you can argue that we are leaving some money on the table because prices right now are lower than -- the spot prices are lower than the hedges that we have.

But, as long as we can hedge our cost of raw materials below what we have the previous year, in a way, we are avoiding having to move the prices of our products to the consumer. I don't know if I'm explaining myself.

So, when you have raw materials that are as important as sugar and you already have a price that's closer in the marketplace and you can take those prices below what it cost the previous year, you will not have to increase prices to compensate for the volatility of those raw materials.

So, basically, that's where we have been moving. As I said, spot prices on sugar are lower today of what we have in our contracts for Brazil and Colombia. But, we feel very confident of that. Obviously, we don't know the future of the prices of sweeteners the rest of the year. But, we are certain that we have hedged below the cost of what we had on 2012.

And I think that it was -- when we have the price gap differentials of our product versus our competitors, the fact that we can have those hedges give us some comfort that at least we don't have the pressure to move our prices because of the volatility of raw materials.

Okay.

In case of (inaudible), I think that they are pretty much affected by aluminum cans, aluminum that that -- and that would be rather important, but I'm not that familiar.

Okay. No, that's fine. That's fine. And just last question quickly, I mean, in the press releases, you talk about how much in Mexico or in Central America came from price versus volume. And it seemed like less came from price this quarter, a lot less than what happened in the third quarter.

I just wanted to confirm that -- I mean, it's just rounding or in the numbers. But, are you seeing any change in the pricing environment in Mexico?

Yes, Lore, your position is correct. I think that, during the fourth quarter, we are not seeing important increases over the previous year. And this quarter, volume was an important element.

As always, we continue to look for opportunities to do some price [implantation] and continue to increase prices. You know that we have always been on top of the pricing formulas. And we'll continue to look for opportunities. But, this quarter, we benefited from volume performance rather than pricing, especially in those territories.

Okay. Thanks very much.

Thank you, Lore.

Your next question comes from Alexandre Miguel. Please proceed.

Hi, good morning, Hector. So, my question is related just to a follow up on the raw material trend. You mentioned that you hedged your needs for Brazil and Colombia. And just [to make sure], you had already all your needs for the full year, that -- was that the case? And any (inaudible) cost would be below last year. Is that the case, or you still are somewhat exposed to the spot market?

Yes, good morning, Alex. For Brazil and Colombia, I'll say that, basically, we are -- we have hedged around three-quarters, 75%, probably a little bit more than that, around -- between 75% and 80% of our needs for 2013. So, we still have some exposure, so between 20% and 25% of our mix in Brazil and Colombia.

In Mexico, we do have some -- these are not -- in Mexico, the prices are not correlated to the financial market. So, we have, as we with some of the suppliers, the number is much lower because we do -- like for the next three months, we have a -- as we have some pricing on sugar, in the case of high fructose, which are international suppliers, which have a (inaudible) higher.

Okay. And in Mexico, can you comment a bit on the trend for the sugar price? Do you think would -- it could see the same declines we are seeing in the spot market internationally for the Mexican market, or you think the decline will be softer because the market is more controlled?

In general, my expectation is that it's going to be soft because it is a market that is more controlled. And it usually lasts -- the decline that we see in international markets. But, certainly, the prices have been coming down in Mexico (inaudible).

Okay. And about synergies, your target of MXN900 million, can you comment on how much you have achieved by the end of 2012 as far as developments of what's left for '13 and onwards?

Yes, Alex. So far, the synergies, I mean, we have the same number MXN900 million. We are basically -- I'm saying that our -- for this year, we are round MXN300 million of those MXN900 million and expect most of that to come in the following year, in (inaudible) in 2013. Sorry, I was discussing 2012.

So, for 2012, around MXN300 million, and then I expect the next around MXN600 million to be achieved -- the additional MXN600 million to be achieved in 2013. And then we have to ask what the Yoli synergies are.

That's perfect.

We announced around MXN140 million. And we are -- as you know, we are -- the Yoli probably was a little bit different in the sense that we are finalizing a [more profound] business process as we speak. And when we finalize that, we can share with you the synergies.

So, if the number is correct, we should increase or decrease (inaudible). Okay?

Yes, perfect. Just to clarify a bit on the expenses that you said it was related to the restructuring of the companies acquired, do you expect the expense in some of that or all of that to continue in the following quarters or that I think around MXN200 million of expenses that should be phased out going forward?

I think that (inaudible) actually number. What I remember is that we have reduced the headcount by around 1,500 employees. Severance payments during 2012, I don't have [an exactly] number that I can share that with you. But, it's the most important element of this one-time expense.

We will have some in 2013. And especially once we finalize the integration of Yoli, we certainly will give that number. But, of all the one-time expenses, there are some related to fees that were paid to bankers and lawyers, something like that. But, the most important element has to do with severance of -- [in the new structure].

Sure. Perfect. Thank you.

And your next question comes from the line of Karla Miranda. Please proceed.

Hi, good morning, everyone, and thank you for the call. Hector, I was wondering if you could give us a little more color of what should we expect in terms of margins for the South America division.

I know that you're going to be working in Venezuela in order to offset the negative impact of the devaluation. And all the efforts been doing -- that you've been doing in Venezuela, in Colombia, and Brazil, what should be looking for the end of the year?

Karla, in general, I would say that the environment for South America for the next year will call for a small reduction in margins. What are the main elements there? We have an aggressive plan in Colombia to foster affordability of the products. We believe that we owe to all of our shareholders to have a better performance in Colombia. And for that, we need to increase per capita consumption in Colombia. We have discussed this in -- during several conferences.

So, we have specific plans where we are spending in marketing. We are launching more presentations. We are launching returnable presentations to bring affordability. And that -- the whole mix of that you heard me in a previous conference call saying that 2013 for Colombia is going to be a transformation year. We'll spend some in the marketplace with the idea and the hope that, in the following years, we have [better] per capita.

We have the impact of Venezuela. But, as you correctly pointed out, we are counting on our operators to compensate for the additional cost of raw materials that are dollarized and the impact of some of the cost of raw materials and (inaudible) and everything.

Argentina, I think that Argentina should have a good year. So far, during the beginning of the year, the weather has not been (inaudible) with volumes. In Argentina will reflected -- was reflected also in the fourth quarter.

But, the pricing equation (inaudible) Bonaqua water lined up, we have a lot of [freight]. It's -- and I think important element for you to know there is that, it's a coordinated effort with the Coca-Cola Company and [Antilla] towards -- in that presentation, in that specific brand, so Argentina should have good performance.

Brazil, it would be also -- we don't do anything with prices. We're certainly negative (inaudible). We need to work on that. What are the main elements in Brazil? We have change on taxes in Brazil similar to excise taxes that the impact during 2013 wouldn't do anything -- I mean, everything is paying similar in terms of pricing and costs and etc. -- will have that sole impact on taxes will be between $60 million to $70 million in our P&L.

Obviously, similar to Venezuela, will operators have all the challenge to reverse that trend. We have issues like the drivers or the so-called (inaudible) or the hours of operation of the transportation in Sao Paulo are pretty much limited. So, that will call for additional cost. So, again, I will say that Brazil should have flat margins or slightly negative margins.

All in all, I think that South America will have a small contraction. I think that Mexico will have some expansion of margin. So, on a consolidated basis, I'm expecting to see flat margins.

Great. Thank you very much. That was really helpful. And additionally, I was hoping if you can give us some sense of CapEx for this year, including all the investments you're planning to do in the Philippines. Thank you.

Ladies and gentlemen, due to the large volume of participants, please limit to one question. And if there is opportunity, we'll take it again at the end of the call. Your next question -- .

-- Okay -- .

-- Comes from the line -- .

-- Let me just answer that question, please, operator. And then we go with the [follow]. CapEx for 2013, I'm looking at somewhere around $800 million and say that's slightly above the number that we presented on the future number for 2013 -- 2012, excuse me, that were around $750 million, mainly because of the two production plants, one in Brazil and one in Colombia that -- which we have started the one in Brazil, would like to finish that by the end of the year. Colombia's a little bit behind schedule because some authorization paperwork. But, we are expecting that to (inaudible).

The Philippines, we mentioned that the CapEx for the year should be somewhere around $100 million to $120 million in addition to this $800 million that I mentioned.

Obviously, as I said in a previous question, that is (inaudible) to be funded by the Philippine corporation alone. And in case some additional money needs to be contributed to the Philippines, it's going to be done in the 51%-49% ownership that we share with the Coca-Cola Company.

Thank you. Operator, we can follow up with the next question, please.

All right. Yes, the next question comes from Fernando Ferreira. Please proceed -- .

-- Question and just had a question on the Philippines operation, if we can expect some contribution already this year, 2013, on the equity income line, or you expect that mostly towards 2014 and beyond? Thank you.

I think that it's still too early to [know]. But, I expect that this year will be more neutral and then to expect some positive numbers for 2014. I mean, we just closed the transaction basically a month and one day ago. And even though we have some of the guys working there since August, we started with some of the strategies [promising] and these three [trends] that I mentioned, portfolio, go-to-market, and supply chain.

And the idea is to start collecting some of the so-called low-hanging fruits as soon as possible. That [early] would have to be done more in supply chain. The other two, go-to-market and portfolio, are more transformative.

Volumes during January were quite low. And I would think that has to do with a lot of inventory [destock] before the closing in December. February's looking better with flat numbers compared to -- in volumes versus last year.

But, in terms of profitabilities, it is very difficult to predict something, Fernando. But, my expectation is that this year is going to be more neutral and then 2014, which would be expecting some contribution to lower numbers.

Perfect. Thanks, Hector.

ladies and gentlemen, your next question comes from Alex Robarts. Please proceed.

Hi, thanks. I guess for my question, I'd like to go back to Mexico on volume, kind of price outlook for this year. Just, you basically had more price than volume last year. Do you think that, as you look out into this year, that kind of ratio will continue? How are you seeing the volume trends right now, still versus sparkling?

And related to this, the jug water, if I understood the press release, in Mexico, it is in a decreasing year-on-year mode. I assume that, if that's true, that's related to some of this restructuring that you're doing with the new territories. Could you give us a sense of when you might start to complete that process or where jug volumes, which is about almost 20% of your volume in Mexico, when that segment starts to get some positive growth?

Yes, Alex, volume and pricing, I think that, in general, in Mexico, we will continue to have in total and ongoing into effect coming to segmentation by categories, but in total growing mid-single-digits volume and keeping prices with inflation should be our target for this year.

When you look at sparkling drinks, in general, my expectation is that volumes should be growing to low- to mid-single digits, noncarbonated drinks in excess of 10%, double digits, but more in the 10% to 12% range. And jug water in single-serve presentations is a difficult market, very competitive. We have good quarters. Then we have bad quarters. But, in general, I expect to have mid-single digits to low-double digits in water in single-serve presentations.

Jug water, this is the fifth quarter that we have a decrease in volume. And that has to do with the strategy of converting that jug water business into a more profitable unit for us.

Right now, we have prices for a jug of water in Mexican pesos of around MXN28 to MXN30. When some of the refillers that are quite [informal] but that are pressing the marketplace are selling at MXN10 to MXN12. So, we have a tremendous price gap. But, that price gap is being [built] little by little in -- on purpose because we have to have a profitable jug water business. But, remember, a lot of that is driven to the home or to the offices.

I think that the positive trend on jug water is that, as we are visiting the households and offices, we are able also to bring new products into the [scene]. Before, these routes were 100% dedicated to jug waters. Now, we are offering soft drinks. We are offering juices. And at some point in time, if everything goes fine, I think that we will able to -- be able to sell some value-added (inaudible). So, it's important that these are profitable in their operation.

In the past, not long ago, we were selling jugs of water at MXN20. So, we have increased 40%, close to 50% with the price of our jug of water of Ciel. And that's the main cause, Alex, of why jug water has had five quarters of consecutive decline in volumes. It's totally on purpose to convert that business into a more profitable unit for us.

Right. And so, the mid-single to low-single kind of guidance for jug water this year, that's a full-year number, right? I mean, that's what you expect to book for the year, or that's a rate that you expect to reach or achieve at some point this year.

Yes, Alex, I think that, on a total portfolio basis, to look for -- on an organic basis to have a low- to mid-single digit number volume growth is a good number for Mexico for 2013.

Great. Very helpful. Thank you.

Thank you.

Your next question comes from Sambuddha Ray. Please proceed.

Hi, Hector. This is Alan Alanis. Sambuddha and I are -- he is here with me. Quick question on the competitive environment. I mean, we've seen this -- the Pepsi system starting to operate as a single entity very recently. Have you seen any change in that competitive environment in Mexico? And what do you anticipate?

And let me tell you where the question is coming from. I think that the Pepsi system is going to focus a lot on other than the Pepsi brands, but also on the noncarbonated, where they have some leading brands.

Is there a risk, Hector, that you might have to accelerate SG&A in the next year or next few years in order to contain these changes in the competitive environment, particularly for noncarbonated soft drinks? That would be the first question.

Yes, Alan, yes. You're referring to Mexico, obviously. And yes, they have been a bit more active in the marketplace, especially in key accounts.

Okay.

Whoever visits Mexico City has seen the (inaudible) now with a big Pepsi sign. For many years, it was a Coca-Cola property. Some cinemas are also [being more], some restaurants, and things like that.

Honestly, at the end of the day, we haven't seen any movement on the market share and the numbers, a slight reduction on a very dominant position that we have in market share in cola, but very, very slight.

I think that, in the traditional [trade], we have continued to see our operators working very well. They are starting to do some activities, integration (inaudible), but not important so far.

I think that the point to highlight is that they are doing a lot of restructuring in their organization still. We have increased very importantly our market share in [natural tonics], where they have a very dominant brand and where they (inaudible) a lot of their profits for the Pepsi system.

And there, we are doing tremendous inroads on natural tonics. The last reading that I have is that we've achieved 35% share on natural tonics. That means Powerade versus Gatorade, 35% share in our territories in Mexico from basically low teens before.

So, I think that, obviously, it's a very competitive market. And we are very watchful of this [strategy they are following]. Sometimes, it's kind of [mind boggling] how they're going to get a return for the prices they are paying for this property. But, I assume that it's part of their marketing expenses. The top dollars they are paying for these things is going to be difficult to get a return on that.

But, I understand the strategy. They are building little by little of the brand. I don't see an increase on our marketing expenses. You know that somewhere around 3.5%, 4% of our revenues is a good number. Last year for the full year, it was around 3.5% for Mexico.

But, at the beginning of the year, we mentioned that we increased some of our marketing expenses, maybe in returnability and cooler placement that had to do with the preparation to their integration.

And I think that, in general, I would say that the market share numbers, as I mentioned, a slight reduction in a very dominant position that we have in [colas], a very important inroads that we have done in our [natural tonics] with Powerade. In flavors, we are increasing slightly market shares also, so nothing to worry so far on this front.

Got it. And changing completely, going to Brazil, this is my last question. And it's more of a strategic question I guess. Coca-Cola reconfirmed last Friday that these three bottlers in the north of Brazil are merging, Norsa, Renosa, and Guararapes.

Any chance that you would be interested in participating in that -- in the creation of that Brazil -- or how would you -- how are you thinking about the consolidation in Brazil, both in terms of those three particular bottlers and potentially the rest of the bottlers in Brazil? What would that trigger in -- that you can share with us, of course? Thank you, Hector.

I think that, basically, that's not (inaudible) integration is basically the (inaudible).

Okay.

It's -- I think that they have been -- they have commented on that for many months or years. I think that is positive for the system that they are doing that integration.

It's very early to know, Alan, if that will create a similar effect to what happened in Mexico that once -- .

-- Exactly -- .

-- (inaudible) merged, then everyone was looking for -- to (inaudible) their own strategies.

I think that, in Brazil, given the size of the country, it's important that you -- that we focus on the areas that are more synergetic in terms of the logistics and [products and] capacity and distribution centers because the country's huge in the area.

But, that's basically what -- I think what I can tell you. And certainly, we're open to explore possibilities. With respect to your first question, I mean, can we do something with the north? I think that I can hardly envision us joining forces with them and having very small participation there. I think that our DNA and our -- .

-- Yes -- .

-- (inaudible) calls for us managing the operations. And at some point in time, we can do something with them and, in the future, we -- as I mentioned, we are far in distance, far away. But, depending on how the consolidation of Brazil is happening, if that happens in the future, maybe at some point in time, we'll be closer to that area, in terms of distance.

Yes, that's a very clear answer. Thank you, Hector. Congratulations on your results.

Thank you.

Your next question comes from Marco Montanez. Please proceed.

Good morning, Hector, and thank you for taking the question. I was wondering if you could give more color about the great performance in the working capital (inaudible) and at the end of the last year. In particular, we see that the suppliers [for you] increased importantly. Could you give more details about this? That would be very helpful. Thank you.

Yes, Marco, I think that, in general, that movement that you're seeing has to do more with integration of some other (inaudible). But, we are seeing the suppliers number going up. We always are very watchful of our cash flow (inaudible) and our working capital. But, we -- once we [have] integrations fully done, we shouldn't be seeing that kind of changes in the working capital.

Okay. Thank you.

Thank you, Marco.

I would now like to turn the call back over to Mr. Hector Trevino for final remarks.

Well, thank you for your interest in our Company. As always, Jose and [Justine] are available to answer any remaining questions you may have today. And we hope to see you (inaudible) in the future. Thank you.

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