Coca-Cola Femsa SAB de CV (KOF) 2013 Q1 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's first-quarter 2013 earnings 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 the conference call up for questions and answers after the presentation.

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

Good morning, everyone. Thank you for joining us today. First I would like to apologize, because we had some technical difficulties with the conference system; but we are here to start. Sorry for the delay.

In the face of tough weather conditions, fewer selling days across most of our markets, and the highest currency volatility we have seen in many quarters, resulting from the depreciation of the Venezuelan bolivar from 4.30 to 6.30 and the depreciation of currencies in Argentina by 17% and Brazil by 11%, combined with a stronger Mexican peso appreciating 4%, our operators delivered currency neutral double-digit top- and bottom-line growth.

During the first quarter of 2013, we continued to integrate the results of Grupo FOQUE in our Mexican operations. As Grupo Tampico's and Grupo CIMSA's results are now fully comparable, their performance, coupled with the synergies that we have achieved from their integration, contributed positively to our Mexico & Central America division and our consolidated results.

Our Company's results reflected the balanced geographic footprint of our operations across Latin America, our operators' skillful marketplace execution, and their ability to identify and capture both pricing and volume opportunities through different commercial initiatives, supported by the strength of our multi-category portfolio and innovation in still beverages.

In the first quarter, our reported consolidated revenues were close to MXN34 billion, flat when compared to the previous year, despite negative translation effects resulting from the devaluation of the Venezuelan bolivar, the Argentine peso, and the Brazilian real, combined with the stronger Mexican peso. On a currency neutral basis and excluding the non-comparable effect of Grupo FOQUE's results in Mexico, our total revenues grew 11%, driven by volume growth in Venezuela, Colombia, and Central America and growth in the average price per unit case in almost every operation.

Our consolidated sales volume grew 4%, despite bad weather conditions in Mexico, Brazil, Argentina, Costa Rica, and Guatemala, and fewer selling days in the quarter. Organic volumes were slightly up, driven by growth in Venezuela, Colombia, and Central America, which offset declines in Brazil and Argentina.

In the first quarter, lower PET and sugar cost in most of our territories, combined with the appreciation of the Mexican peso, more than offset the depreciation of the Venezuelan bolivar, the Brazilian real, and the Argentine peso as applied to our US dollar-denominated raw material costs. Consequently, our consolidated gross margin was up 100 basis points, reaching 46.3%.

During the quarter, our operating expenses continued to register higher-level cost in Venezuela, increased freight cost in Argentina, and higher labor and freight cost in Brazil mainly due to changes to the transportation law which went into effect during the second half of 2012 and higher marketing expenses in our South American division. In addition, our other operating expenses net line registered the effect of the devaluation of the Venezuelan bolivar on our US dollar-denominated accounts payable in that country, as well as certain planned restructuring charges in Grupo Tampico and Grupo CIMSA in Mexico and certain operations in South America.

Our consolidated reported EBITDA grew 11%, expanding 20 basis points as compared to the previous year, while our organic currency-neutral EBITDA grew close to 13%. During the quarter, we recorded an implied tax rate of 33.7%. For the year, the normalized tax rate should be in the range of 32%.

For the quarter, our consolidated net controlling interest income reached MXN2.4 billion. Excluding the effect of the devaluation of our local currencies in combination with the stronger Mexican peso, our net income would have reached MXN2.7 billion, representing a 1% increase as compared to the previous year.

Now I will discuss the performance of each division. In the first quarter, as reported, our volume grew 6% in Mexico including the non-comparable effect of 25 million unique cases from Grupo FOQUE. Organically, our volume in Mexico remained flat, tightening 3% organic volume growth in the first quarter of 2012 and despite cold weather in March and fewer selling days in this quarter.

Organically, our still beverage category grew 4%. This growth was supported by fruit, oranges, the continued success of FUZE tea, which grew 12% over the previous brand, and the continued strong performance of Powerade, which grew close to 30% and continued to gain market share importance, now accounting for well over a third of this important beverage category in our territories.

In the sparkling beverages Sidral Mundet grew 28%, building on its launch in our new franchise territories and the recent introduction of a 2.5-liter returnable bottle that offers our consumers an affordable way to enjoy this brand. This launch was also coupled with our strategy of strengthening our portfolio of returnable packages.

In brand Coca-Cola, our 500-milliliter returnable glass presentation grew close to 45%, while our multi-serve returnable options continued to grow.

Our water portfolio, excluding bulk water, grew 5%, supported by packaging innovation in our Ciel mineral water brand. This increase compensated for a 5% volume decline in our bulk water portfolio, which is showing encouraging results in terms of operational efficiencies.

In Central America, our volume grew 2%, successfully building on 9% growth in the first quarter of last year, despite fewer selling days in this quarter and bad weather conditions in Costa Rica and Guatemala. This increase was driven mainly by 11% growth of our still beverage category, supported by the inclusion of del Prado, one of the juice brands incurred through the acquisition of Estrella Azul in our portfolio, 80% growth of our Del Valle Fresh orangeade, and the continued success of FUZE tea, which grew more than 60% over the previous brand.

Our water portfolio grew 10%, and our sparkling beverage category remained flat.

Our divisions' reported total revenues grew 9% to MXN16 billion. Organically, our divisions' total revenues grew 3%.

On the same basis, our average price per unit case increased 4% during the quarter. Selective price increases implemented in our territories over the past several months more than offset a negative translation effect resulting from a stronger Mexican peso versus our Central American currencies.

Lower sugar prices along with the appreciation of the Mexican peso during the first quarter resulted in a reported gross margin expansion of 180 basis points, reaching 48.7%. Organically, our operating expenses increased as a result of certain restructuring charges booked in the other operating expenses net line, related to integration of Grupo Tampico and Grupo CIMSA, which results are now fully comparable. Nevertheless, our reported operating margin expanded 140 basis points.

Our divisions' reported EBITDA increased 22% in the quarter, expanding 220 basis points, while our organic currency-neutral EBITDA grew 19%.

Our operators in the Mexico & Central America division delivered solid results for the quarter. We continued to execute our integration plan for the new franchises in Mexico.

The synergies from these mergers will increasingly contribute to our profitability, while we identify incremental efficiencies in our combined territories. We are confident that our commercial strategies will continue to yield positive results in an encouraging economic environment in Mexico, as we continue to see the non-sweetener price scenario and a stable PET price environment for the rest of the year.

Now let's talk about our South American division. Our South American division's total sales volume grew 1%, reaching 294 million unique cases in the first quarter. This increase was driven by volume growth in Venezuela and Colombia, offsetting a 4% decline in Brazil and a 2% decrease in Argentina.

Our Venezuelan franchise delivered 11% volume growth in the quarter, despite fewer selling days in this quarter. Brand Coca-Cola grew 20%, underscoring consumers' preference for this brand, while increasing market share. This increase compensated for a decline in flavored sparkling beverages.

Innovation remained an important driver of growth for still beverages. Our del Valle Fresh orangeade grew 70%, driving this category growth.

Our water category grew 48% in the quarter. We are certain that our reinforced cola coverage and our local operators' skillful marketplace execution will continue to support these operations' performance in the future.

In Colombia, our volume was up 6% in the first quarter. Sparkling beverage grew 6%, supported by a 15% increase in flavored sparkling beverages and 3% growth in brand Coca-Cola. This performance of our flavored sparkling beverage portfolio resulted from the continued success of Fanta and the strong performance of Quatro, which grew 32% during the quarter.

Our focus on reinforcing single-serve consumption and increasing affordable returnable presentations through our 1.25-liter returnable glass package, which grew 19% in the quarter, continued to drive incremental volume growth of brand Coca-Cola. Our Brisa water brand supported 8% growth in this category, including bulk water. Together, the del Valle Fresh orangeade, which grew 10%, and the continued success of FUZE tea, which grew 20% over the previous brand, drove 10% growth in the still beverage category.

In Brazil, we faced bad weather conditions in February and March along with fewer selling days in the quarter. Consequently, our volume declined 4% compared with last year.

Our sparkling beverage category decreased 4%, while our bottled water category, including bulk water, decreased 3%. Our still beverage category grew 3% driven by the so-called del Valle line of business and the Matte Leao tea brand.

In Argentina, our volume declined 2%, compared with 11% volume growth in the first quarter of last year. We experienced bad weather conditions, especially in March, and fewer selling days during the quarter. We continued to roll out the Bonaqua water brand in the quarter with very good results, selling more than 1.3 million unit cases and gaining market share in this category.

For the quarter, our South American division's reported total revenues decreased 6% to MXN17.9 billion. On a currency-neutral basis, excluding the negative translation effect of the depreciation of our division's local currencies, combined with a stronger Mexican peso, total revenues grew 16%, mainly supported by our revenue management [results].

Lower sugar and PET costs across the division offset the average devaluation of the Venezuelan bolivar, the Brazilian real, and the Argentine peso as applied to our US dollar-denominated raw material costs. This resulted in a gross margin expansion of 10 basis points, reaching 44.2%.

Operating expenses in the division were affected by higher labor cost in Venezuela, higher freight cost in Argentina, and higher labor and freight cost in Brazil, and increased marketing expenses across the division to support our marketplace execution, reinforce our affordable returnable alternatives for consumers, and prepare our Brazilian operations for upcoming sporting events this year, such as the Copa Confederaciones as well as the World Cup in 2014. In addition, our other operating expenses net line registered the effect of the devaluation of the Venezuelan bolivar on our US dollar-denominated account payables and certain restructuring charges recorded in the division.

Our divisions' reported EBITDA decreased 16%, while our currency-neutral EBITDA grew 9%. Based on our value-driven commercial model, we will continue to refine our clients' picture of success to capture industry opportunities.

In Brazil, we will continue to develop our channel segmentation initiatives and focus on increasing the attractiveness of our singleserve portfolio while reinforcing our multiservice returnable client colas. In Colombia, we are on track with our strategy to reinforce the brand equity of our products, delivering affordable options for our consumers while focusing on marketplace execution.

In Venezuela, we constantly adapt our operation to meet consumer demand for our products, capitalizing on new commercial models to accomplish this goal. In Argentina, we continue to foster returnability and focus on the profitability of our business.

With regard to our Philippine operation, as of February we are incorporating its performance via the equity method, on an estimated basis, as we continue to work on the acquisition balance sheet (technical difficulty).

In line with what we previously shared, these results do not have a meaningful impact on our consolidated results. Since we began operating this franchise, revenues are up mid single digits, versus the comparable year of last year.

We have been working together with our partner, The Coca-Cola Company, and a talented local team of professionals on the pillars of the strategic framework for this business (technical difficulty) -- portfolio, route to market, and supply chain. In the portfolio, we have identified SKUs that are subject to delisting and have started to rationalize some returnable glass presentations in one-way PET packages. This rationalization will free up capacity at our plants.

Additionally, we have launched Coca-Cola in a 750-milliliter returnable glass presentation called kaslo -- which means sharing in Tagalog -- at a competitive price point that we were not previously covering. In the route to market, we are testing our segmentation and service model to gain greater insight into the traditional trade channel before rolling out a larger effort.

And in the supply chain front, as part of our manufacturing master plan, we have been working to ensure high levels of service and quality in our plants. This will contribute to the success of the commercial initiatives we are deploying.

During March, our shareholders approved the payment of a dividend in the amount of MXN2.90 per share to be paid in two equal installments as of May and December of this year. This increased dividend is consistent with our commitment to capitalize on our financial flexibility, while continuing to invest in the future of our Company and increasing the cash we return to our shareholders.

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

Lauren Torres.

Good morning. Actually I have two questions, one on volume and one on margin. Just somewhat curious to hear more about the sparkling beverage category. You reported flat; I guess that is comparable volumes for both regions. I know you spoke about bad weather and the less selling days I guess in the quarter. Just curious to get your impression, other than those items, if that category is showing a slowdown particularly in Mexico.

Then secondly, on the margin side of the business, I think you were guiding for this year to hit basically flat margins for the total Company, but seeing some steep weakness in South America. I was just curious if you could talk about the ability to actually deliver that for the full year; and how do you plan to do that? Thanks.

Good morning, Lauren. Let me start first with the volume question. I think that in general we have seen some weaknesses on the volume mainly as a result of what I mentioned, the weather, but especially the fewer selling days. That has to do with the Easter holiday that last year happened in April, and this year it was during March. And the fact that last year it was a leap year and we had one extra working day.

When you start looking at what we use in the industry when you compare the average daily sales, which is a measure that we track internally, the numbers look fine obviously, with still beverages growing faster and water growing faster than CSDs. But we still see healthy growth in our CSD volumes.

Probably the only exception to this is Brazil where obviously we were impacted by the fewer days and the weather also. But we are seeing some trends that will call for certain, I guess, worriedness in terms of what the future [imparts] for us in that sense.

I think that the consumer in Brazil is at this moment with larger debt because of some of the activities that they were financing in the past. But I still feel confident that for the year end we will meet our targets. It is it challenge because obviously Brazil remains substantially below its budget, but I think that we are catching up in Brazil.

One of the trends that strikes me a little bit in Brazil is that, in addition to seeing this decline in volume, we are seeing a shift from singleserve presentation to multiserves, which also doesn't help in the profitability of the business. And also a trend from traditional trades moving volumes towards modern trades; that also not necessarily help us in our profitability.

I think that John Santa Maria and his team are focusing a lot on regaining preference for singleserve, and are taking care of the traditional trade and helping in that sense. So we are focusing in having multi price points for singleserve that will again recapture that growing singleserves.

In general, I think that we have very good market share performance, with some minor basis points being lost in CSDs in markets where we have a tremendous advantage in market share. We have a very large number, so not to worry in that sense.

We are seeing very good market share improvement, as I mentioned, in isotonics. I have mentioned this in the past. This is a very positive trend, and we are in now about 30%, 35%, depending on the country and the region, on isotonics with Powerade, with a product that basically -- in a category that we were not present a few years ago.

So volume-wise I think, Lauren, that when you look at all these trends, I feel positive in the sense that we will get to our estimates for the year. Again, my only question mark a little bit is in Brazil, given the volume base that we have during this quarter.

With respect to margins, I think that -- what I wanted to highlight is that when you isolate the effect of the currency movements, margins are behaving well, because we have a good environment in raw materials. We have had important efforts in every one of the countries in terms of operating expenses.

I think that it is important to highlight that, as I mentioned, especially in Brazil, as I mentioned in the past, that we were again looking at the basics of the business. And I have seen the efforts that the team has put there, and they are increasing basically in every measure in terms of productivity per line, efficiency in our sales system and the pre-sale systems, and the fill rate with modeled [freight] has improved dramatically.

Stock-outs, it is reduced by 3 times of what we have versus last year. It is not that last year was totally out of proportion; it was a good number. But it was out of the average that we use in Mexico.

So when you look at some of the basics in Brazil, I see the improvements in all of these basic indicators that are good for the business in the medium to long term. Brazil in terms of the profitability was additionally hit with the so-called Ley do Motorista, which is the transportation regulation in Brazil that has implied for us a higher workforce and a higher number of trucks, because of the restrictions in times and traffic zones, etc. Also, strong changes in tax law in Brazil has implied that some of our raw materials are a little bit more expensive. So Brazil was impacted mainly because of that, and the team is looking at ways of recuperate part of that profitability.

So all in all, a very long answer, Lauren, to say that volumes for CSDs are still growing. When you take into consideration this number of selling days, the fewer selling days that we have in the first quarter, I think that the numbers look fine. As I mentioned, growing at a slower pace than water and still beverages, but that is normal.

And margins, I think that we are basically in every country doing very well in the expectation for margin. The only, again, question mark is a little bit Brazil because of the shortfall in volume, and the transportation law, and the tax changes in Brazil that impact [their] profitability during the quarter.

So I think that in general I am still positive that we will get to the number that we are estimating in our project for the year.

Okay. That's really helpful. Just one quick follow-up on Brazil. You mentioned the weaker consumer, but are there new or increased competitive pressures that are weighing on your volume? Or that wasn't particularly a new impact to first quarter?

I think that it's worth mentioning and I know that some of the other companies, Brazilian competitors, have not reported, but there is additional pressure, and let me explain why. There is now in Sao Paulo and some of the large cities, a very tough law with respect to drinking and driving that has made an important dent on the consumption on-premise, especially for beers. And obviously for us, on-premise volumes have also decreased because fewer people are attending bars and that kind of on-premise consumption at night. Because -- it is called the Zero Tolerance Alcohol Consumption, and it is really -- what I understand is that even with drinking one beer, if you are driving you are in trouble; as opposed to other countries where there is probably a more flexible, let me use that word, level of alcohol in the blood levels. That has put a lot of pressure on the beer companies.

Our beer volumes are -- the Heineken volumes that we sold are also affected by that, and that has created a little bit more pressure on the CSD front because the competitors are also looking to recuperate part of that, I guess, volume being lost in beer. So we are seeing a little bit more competitive pressure there, but I don't think that is something to worry about at this point, Lauren.

Okay, great. Thank you very much.

Antonio Gonzalez.

Hi, good morning, Hector and team. I wanted to ask a couple of questions as well. First, are there any preliminary comments that you can make on the talks that appear to be now very frequent in Mexico about the possibility of excise taxes? I guess this is a sensitive subject, so I understand if there is limited information that you can share.

But I wanted to ask specifically whether you have seen the industries participating as they always have, both Coke and Pepsi bottlers, with authorities. Or whether you maybe can comment on -- you have a sense that the industry is not being so active maybe as we saw in some other reforms that were recently approved. The telecom reform in Mexico, for instance, in which industry participants were very explicitly mentioning that they were not part of the negotiation.

So I just wanted to have a sense on whether you can make some comments on that, Hector. And then I will have a follow-up question, but I'll make it later.

Good morning, Antonio. You are raising an important point here with respect to all these issues of our [robetity] etc. I think that we have been doing very important efforts to better communicate those issues to the consumer and obviously to Congress in Mexico, which is the area that you are referring specifically.

There were a lot of comments during the past, at the end of last year; that is when they passed the new fiscal laws for 2013. At the end of the day, the decision was that there was not an excise tax on soft drinks.

So our understanding so far is that next time we will confirm; that is, next September when they start again to review the taxes and the fiscal budget for 2014. So in theory, Antonio, we should not have any surprises with respect to excise taxes from here to September.

But let me tell you, importantly, we have been having obviously important conversations together with all the bottlers associations, including Pepsi, as you mentioned. I think that The Coca-Cola Company together with the bottlers, we are also helping a lot on that front.

If you visit Mexico, you will see. And I think this is more global; it is not only Mexico. You will see a lot of new advertisement on brand Coca-Cola that are really giving information to the consumer about the caloric content of our products. We are presenting very importantly that a can of Coca-Cola has 149 calories, and there is very important advertising campaign communicating that.

Because before this advertisement -- before this campaign, excuse me, we did some testing and the consumer does not necessarily have the correct information. So a lot of the efforts are presented towards communication, so that people understand exactly the calories that they are taking with our products; communicating that more than 30% of our brands have zero caloric content and more than 40% of our SKUs have low caloric content in Mexico. So there is an option for the consumer with a very ample portfolio.

We are communicating a second element, which is promoting physical activity, which is also -- you see a lot in the campaign. And the third element is prevention and, I guess, food and nutritional education.

So a lot of the campaign is focused on that, and I think that The Coca-Cola Company has done a very good job in organizing internally and dedicating a team of professionals to conduct those campaigns on a global basis. But I am speaking to you more about what we are doing in Mexico.

So the short answer for this, Antonio, is we are not expecting any activity on the excise tax front from here to September. In September, there will be additional debates.

But with all this campaign that we have had in terms of information and having the right, I guess, communication with authorities and the consumer, we think that we have good chances for not to have a discriminatory tax on soft drinks. Because at the end of the day, there are many different products that have sugar in their formulas, including bread and chips and snacks or whatever. So that is a lot of our focus on this campaign, Antonio.

Perfect. Thank you. If I may just very quickly, can you give us an update -- I guess you mentioned already that in certain markets in which you do have very large market share for sparkling beverages, you saw some small market share losses. I was just wondering if you could refer to Mexico in particular and whether -- obviously, with this new competitor coming to market recently, you did mention some comments last quarter about seeing some more aggressive activity from competition.

Is there any chance you can mention, Hector, whether you are seeing efforts from the Pepsi system more directed towards the mom-and-pops, or more of a generalized tougher competitive environment? Or would you say that at this point it is still somewhat constrained to key accounts and some very visible accounts you have mentioned in the last few quarters?

Hello. You are live on the call. Please go ahead. Please go ahead, you're live on the call.

Yes, hello. I will just repeat my question in case it didn't go through. Hector, I was just wondering whether you could give us an update on the competitive environment (technical difficulty) ? Did you get the question or would you like me to --?

Sorry. It was cut down from the call. As you were saying about the competitor being a little more aggressive and you wanted to -- I understand that you wanted to speak (multiple speakers) speak about Mexico.

Exactly. Just if you have some update that you can share. I guess over the last few quarters, you mentioned that you saw competitors a little bit more focusing on really visible accounts. And I was wondering if you could mention if maybe you were seeing more of a generalized competitive environment escalating in Mexico; or do you think it is still somewhat constrained to these very visible accounts?

So far, Antonio, we have seen basically activity in this -- what we call key accounts, like the amusement park and some of the cinemas. Pepsi increased a little bit their market share in colas, but with numbers that are still below 10%. So it is very little improvement on that.

I think that the positive move here is that they have been a little less aggressive on the pricing front. We still have very important price gaps. If you go to a supermarket you will find our cans being priced more than double of a can of Pepsi-Cola, which is very high price gap for a singleserve presentation. In the multiserve, they have been a little bit less aggressive.

But on the other hand, what I would like to point out is that in isotonics, the last numbers that I have for 2013, we are increasing between 7 and 8 percentage points our market share, basically reaching to 35%, as I mentioned in the conference with Powerade, which is again as I expressed in the past a very important advancement of our brand there.

So, I think that in general, Antonio, I would say that there is no specific change that I can report to you versus what we discussed a couple of months ago when we had the last conference call.

Thank you so much, Hector.

Lore Serra.

Morning, Hector, and thanks for the call. I wanted to just ask a little bit about Venezuela and then a little bit on Brazil. In Venezuela, could you give us a sense of your ability to get raw materials at the official exchange rate, and how you see that playing out over the next six to 12 months? Do you see any risk to being able to maintain your margins in that country?

Then I guess in Brazil, and maybe this is a question more generalized, but you have taken a lot of pricing in South America. And I guess with some of the systemic inflationary pressures you might need some more pricing. I am just wondering; it sounds like when you are talking about Brazil, and I am not sure if it is the consumer or the competitive environment, but you are suggesting that the pricing environment isn't as good as it has been. So I wonder if you could talk to those two points, please.

Good morning, Lore. Let me start with Venezuela. First of all, we have in place what is called a certificate of nonlocal production in Venezuela so that we can have access to the official exchange rate, which is now 6.3%. So far for this quarter around 98% of our applications for this have been accepted and the dollars have been supplied at the official -- at the 6.3% exchange rate.

So on that front we feel very confident because we have all of our paperwork in order to get the certificates and to continue going in that direction. I think that -- and that has been the case basically in Venezuela for most of two or three last years.

In general, I don't recall a specific case where we are being denied a specific raw material authorization. Sometimes we get delays with the authorization or with these orders, and then we have to work with the suppliers to work on longer paying terms. But given the circumstances in Venezuela, I think that we have a very good dialog with our suppliers to work on that front.

Right now what we are facing, and it's probably the more challenging issue in Venezuela, is that the inventory levels for some of these raw materials are very low. In some cases, where there's shortages of sugar, for example, we have been with very low inventories; but so far we have not stopped production because of these issues.

Our management there had to learn to work under this difficult environment, but so far so good. I don't think that it will have an impact on the margins because of [study], a specific issue going forward in Venezuela, I mean in terms of not having the availability of dollars for raw materials.

In Brazil, with respect to prices, you're right; we have inflation at a higher level probably than what's anticipated by some of the government officials and economists. In general we still feel confident that we will be able to increase prices with inflation, and that is what we have been trying to do in Brazil.

I think that the issue of our mix of products moving from singleserve to multiserve is creating some pressure on our total pricing formula. So when you look at the average price per unit case we are having some pressure because of that. But in general, the prices that we have for every SKU have been increasing with inflation to the consumer.

Our job, as I mentioned previously, is to find strategies to revert that trend, so that we will continue to increase singleserve presentations and, again, to foster traditional trade support to the key accounts. That, as I mentioned, will be done through trying to find market prices for singleserve presentations, a package selling at BRL1 or BRL2 or BRL3, and see -- and we will share how we will work with that in the future once we have some strategies in place.

Thank you very much.

Operator, is there any additional questions?

Ladies and gentlemen, I do apologize for the lost connection. Please stay connected to the call and we will rejoin shortly. Hector, please go ahead. Your line is now live.

Yes, I know that Alan was going to do a -- make a question, but I didn't listen to anything. I don't know if you are there, Alan? (multiple speakers)

Yes, hi, Hector. I couldn't listen that I was given the next one. Sorry about that.

Go ahead.

Let me ask you a question regarding Mexico. What you have said about Brazil is very useful, but going back to Mexico, a couple of questions there. You are seeing -- you saw a slight decline in carbonated soft drinks in the first quarter, correct, Hector? And you explained the reason for that.

What do you see as outlook for the remaining of the year? And if volumes remain weak, would you be -- what is your thinking regarding taking further pricing over the 3%, 4% that you have taken year-over-year in Mexico? That would be my first question.

And my second question has to do with, just if you could remind us, Hector, how do we reconcile the numbers that The Coca-Cola Company reports. I think they said around 3% volumes up in Latam, and pretty I guess much stronger volumes in Mexico and in Brazil, the ones that you and Andina have reported so far. So if you could remind us how to reconcile that, that would be useful, please. Thank you.

Alan, good morning. Let me start with Mexico. I think that the trends that we are seeing in Mexico are very positive. I think that we have -- speaking about the business, and I'll go into volume numbers in a second.

What do we are seeing in Mexico is very good margin expansion. Remember that last year we had the impact of raw materials, important impact.

So we are -- we have a decline in the profitability numbers of Mexico last year during the first and second quarter. We are reversing and more than reversing that. We are going to margins that are higher to the numbers that we have in 2011. So I think that is very positive news and the margin expansion you are seeing there is important.

Soft drink in Mexico, we have important inroads. For example, as I was mentioning, we see brand Mundet growing importantly. Brand Coca-Cola is basically flat, which we remember we have many quarters saying that brand Coca-Cola was growing and continued to grow even though the -- all the noise about brand Coca-Cola and it was able -- who were able or not to increase volumes in brand Coca-Cola.

We continue to reinforce returnability. Flavors, some brands are performing better than others.

So I would not to worry a lot about the volumes in Mexico in CSDs at this moment, Alan, because I think that again when you look at the other daily sales that we have, we have positive numbers. In that, when you take into consideration that last year we had 29 days in February, and this day we have a negative, one day less because of the Easter week, I think that that will -- basically the volumes will be growing in the low single digit [box].

When you look at April trend, it's just that we are reversing all of that effect because of now this is the reverse. In April, we have one less day last year than now, we are catching up, and the total number is looking very well for April.

So I would not worry about the trend on CSDs at this moment. I think that we will reverse that.

For the pricing gaps that we have, certainly one of the challenges that Ernesto Silva and his team have in Mexico is we have very important price gaps that we need to monitor. Again, reinforcing returnability help us. For example, I will give you some numbers.

Again, as I mentioned, if you go to a supermarket, you would find a singleserve -- a single can of brand Coca-Cola selling at MXN7 when Pepsi is selling at less than -- between MXN3 or MXN3.50. So it is a tremendous gap in singleserve.

In 2.5 liters that Pepsi has between MXN15 to MXN17 -- in 3 liters, excuse me, for Pepsi, we had a 2.5 returnable selling at MXN16 and we feel very comfortable with that. It is a returnable package with a slightly less liquid content on the bottle; but we feel very comfortable with that price equation.

Our 3-liter Coke product is selling for MXN24, so we have a gap on a comparable basis. But we have a returnable presentation to confirm that.

So we have done some price movements, especially at the end of last year and the beginning of this year. That in theory will call for most of the price -- the pricing that we need to compensate for inflation during this year.

So we will see how we move prices going forward. In theory, we can stay with the prices that we have right now and we will be flat with inflation for the year, already. So I think that Mexico has very positive elements to be analyzed for the results of this quarter.

Okay.

The reconciliation with Coca-Cola, I am not sure I saw the numbers they reported. I am not sure about the volumes of the other bottlers.

I know that because of the conversation that we have at The Coca-Cola Bottlers Association that everyone will be reporting similar to us, more or less flattish numbers on an organic basis. I am not so sure what the numbers -- I don't know if there are some inventories building up, etc., that might reflect this number for The Coca-Cola Company.

Okay. Thank you so much.

Luca Cipiccia.

Yes, good morning. Thanks for taking my question. I was hoping to have just a follow-up on Brazil, on your earlier comment about a shift away from the traditional channel and whether this, in your view, is more related to the dynamics that you commented on already -- the changing drinking law, increased competition. Or going forward, do you see that more as a bit of a gradual structural shift?

And if so, how that may affect the investment strategies that you were trying to implement in Brazil. I understand that this year you were going to put some effort in strengthening the traditional channel. And in general if you could comment more on the outlook for Brazil from a channel perspective, that would be great.

Yes, good morning. I think that in general what we are seeing is that the singleserve presentation, that we are seeing that transfer from singleserve to multiserve is also in a way fostering this change in the channels. Because a lot of the singleserve consumption is done in the traditional trade, more as an impulse consumption, on-the-go consumption as we say, when you're working in the street and buy a singleserve presentation of Coca-Cola to drink on the street. [Buy] is helping on the [retail] trend.

And I think that the pricing equation that we have on 2.5-liters and 3-liter one-way packages that sells a lot in supermarkets and those categories are growing, it's more related to this trend of the supermarkets gaining in importance. As I've mentioned, one of the strategies that John Santa Maria and his team has presented to us is how to reconnect the consumer to the traditional store with singleserve presentation with matching price points. And that is some of the effort that we will be doing.

I think that right now these trends have to do more with the pricing architecture of singleserve, with multiserve, rather than a trend that we need to -- a trend that has to do with the channels.

But is it fair to assume that the greater competition or competitive pressure that you felt in this quarter was more on the traditional channel?

And the question would be, if you think that is sustainable going forward, do you think you will have to rebalance? It was just a method of your competitive strength to compensate maybe what they were losing with beer, with soft drinks? How do you see that playing out?

Yes, it is difficult to judge. I know that the on-premise consumption in bars and restaurants we were down the same that our competitors. I think that the competitive pressure is both in traditional trade and supermarkets to recapture part of the profitability that they might have been losing on beer.

Similar to Mexico, we have a few basis points reduction on share, but it is nothing to worry so far. And I think that similar to Mexico we are gaining in isotonics and juices and losing a little bit of market share from very high numbers in CSDs.

So, I don't think that the pressure on competition is focused only in traditional trade and that is why we are moving more towards the other channels. It is just that it is more the relative pricing of our own products that is, in my opinion, creating some of these transfers between channels. And as I mentioned, the team is going to be working on reversing those trends with singleserves.

I understand. Thank you.

Operator, do we have an additional question on the line?

Alex Robarts.

Thanks, everybody. I had two questions, Colombia and then Philippines, please. Just looking at the Colombian business, the highest margin operation in South America, and you have given us some good indications about how that pricing reset initiative has been going on in the country. And just was curious to see about any updates that you could pass to us.

I mean just thinking about also the tax reform that has come into play this year, to the extent that that has had an impact either way, on demand for your products. You have told us that 200 basis points might be the magnitude of margin contraction this year. I am just wondering if you are still feeling comfortable with that kind of guidance, and if Postobon group have been responding to some of your per-capita initiatives there.

The other question really is just on the Philippines. I appreciated the magnitude here of the equity income is small; but just looking at the press release, this MXN210,000, which seems to be related to negative equity income from the Philippines. Is that a safe assumption? Is that roughly the extent of your 51% of the net loss?

And just on a CapEx issue there, you have been saying that you feel like the operation over there will make itself whole and internal cash flow will fund CapEx. Might that change? Would you have to at some point during the year draw down from KOF resources to finance any CapEx? Thanks very much.

Good morning, Alex. Let me start with Colombia. Colombia, as we mentioned, we embarked in this plan to try to foster consumption per capita. That basically implies having presentations that are more affordable to the consumer. In a way it's been introducing prices of our products in certain presentations.

I think that everything is marching to plan in Colombia. We have 6% volume growth with reduction in prices.

I think that in the competitive front, at the beginning we saw Postobon launching a new product that was catching up importantly and now has been basically not -- was lost on this -- lost [there] being a new product, and it is called Speed. So far Speed is again basically back to zero, very little activity. The group is actually losing market share and volumes in Colombia.

So I think that in general our plan is working in a scale to what we say we are expecting. A lower profitable Colombia for this quarter with the -- was [coming] for this year with the idea that we will increase per-capita consumption in the [country]. It's the first quarter of this plan, and we will continue to monitor if everything is working according to plan or we need to do some adjustments going forward.

But so far, I will say that we are working according to plan and actually the resulting margin during this quarter is lower than what we were anticipating. But we are lowering prices and increasing volumes, and I think that is the main message in Colombia.

In the Philippines? The Philippines, just bear in mind that we finalized the transaction at the end of -- we closed the transaction at the end of January, so we have been working there for two months. The three pillars that I mentioned -- which is portfolio, route to market, and supply chain -- are still there. We have started to execute some of these, as I mentioned.

With the portfolio we launched this 750-milliliter returnable glass bottle because we have a gap in our prices from the MXN8 to MXN10, MXN12 pesos, all the way to MXN25. So we have a gap there on the MXN17, MXN18 range that we needed to cover. It is too early to know the impact of that, because you can imagine that in two months we are just starting to do that; but the results are encouraging.

We are testing the route-to-market initiatives that we have. We have some encouraging results in the sense that when we do census, which is the basic of all our activity in the marketplace, we are finding a lot of clients that do not carry our products. So it is encouraging that if we find a way to serve these clients, we will get substantially better coverage of our products.

And in the supply-chain front, too early to know if we are going to close distribution centers or plants. Our hypothesis is that we will be able to close some facilities and work with a more efficient supply-chain format.

We already dismissing around eight SKUs that will certainly help us in the supply chain as we better tend our market. These are SKUs that represent very little volume and it's very complicated in terms of -- complicates a lot our production capacity.

We have already identified another 15 SKUs that we probably can drop. We have to work with the inventories that we have, to deplete those inventories, so that it is not as costly in the future.

But all in all, we have -- between these five and 10 -- excuse me, eight SKUs that we have already reduced and another 15 that we have, all of that is probably around 21% of the SKUs or 20% of the SKUs and represent less than 5% of the volume.

I think that those movements will again indicate some of the things that we do very well, which is have our supply chain in order. And I think that will help us in the future. Again, since we have been there for two months it is too early to know the results.

The impact that we have on it is more -- answering more specifically to your question, but the impact that we have this quarter is a negative MXN2 million on our participation on Philippines in our P&L. It is basically less than, I don't know, less than $150,000 for this quarter. I think obviously our expectation is that we revert to strength and will show better numbers in our P&L in the future.

In terms of funding, we don't see any problem of having the resources to fund the capital needs of this operation. In the future, you can imagine the idea is for the operation to fund by itself. If we need to contribute resources, remember that we have 51% of that and The Coca-Cola Company is in total agreement that if we need it we will supply resources and we will fund capital to this business in that proportion, if it is needed. But I don't envision at this moment to have any shortfall of capital for whatever is needed in the Philippines during this year.

Great. Thank you.

Alex Miguel.

I haven't heard anything here, operator. Do you have Alex Miguel on the line?

Alex Miguel, please go ahead.

Hi. Can you hear me now, Hector?

Yes, sorry. I am here.

Okay. Okay, now my question is related to the margin trend in South America. Should we expect that continuing year-over-year decline in EBITDA margins in South America? Like in the sense that, how you plan to deal with these pressures from price, labor, and marketing going forward? If you plan to be more aggressive in pricing?

Because what I understood, some of the issues tried to continuing in Brazil, maybe some [walk] with the price freeze in Argentina. So if we should -- do expect for the whole year like a margin contraction in South America around these levels? And if so, if you plan to compensate maybe that with Mexico.

Yes, good morning, Alex. I think that in general, as I explained the Colombia -- what we call the Colombian plan that calls for a slightly lower profitability this year, because of this idea to foster consumption per capita. And precisely the points that you are mentioning, the Brazilian situation that we explained in previous questions, and the fact that we have not been able to increase prices in Argentina at the pace that we were anticipating, we are suffering a little bit on the margins this quarter.

My expectation is similar to what we commented in the previous quarter, to expect flattish to negative -- excuse me, flattish to a small contraction in margin for South America; and I am still with that estimate. I don't see a need still to change our estimates for the year.

And that these are the issues. It is the Colombia plan that is calling for lower profitability, in theory to foster better growth of volumes in the future; the difficulty to pass prices to the consumer in Argentina; and all the competitive environment; and the softness from volumes that we are seeing; and the consumer that is a little bit more in debt still in Brazil.

Okay. But, Hector, these -- you reported a 170 basis points margin contraction in South America. How do you think you will narrow to maybe flattish to small contraction in the -- by the full year? Like your plan you think will be -- you will speed up the pricing? Or maybe your expenses won't be as high as they were in the first quarter? Or maybe you will have further help from raw materials?

I just wanted to understand how you plan to get from this minus 170 basis points to a slightly negative by the full year.

It basically has to do with pricing activity in Argentina we expect to start in May. We have already had conversations with the commerce authority in Argentina and the supermarkets that are also playing a role here in Argentina. We are expecting to have, as I mentioned, a lower impact of Colombia. As I mentioned, this quarter we are suffering less than we were anticipating in Colombia.

And in Brazil we are expecting, again, pricing activity to compensate for some taxes that have impacted raw materials to everyone in the industry, this Ley do Motorista, which also is impacting everyone. And I think that the pricing activity should be there, in combination with efficiencies in operating expenses.

I mentioned some indicators earlier in terms of Brazil, saying that most of our basic indicators in Brazil are improving, all the way from brand preference to supply-chain efficiencies, service level to our clients, all those [routes] are calling for efficiencies in the OpEx. Obviously, these are what we are anticipating for the rest of the year, with all these challenges that we have to apply those price increases in the marketplace and efficiencies.

Okay. No, no; clear. And for Mexico, Hector, the pace of margin increase that we saw in this first quarter, should we expect a similar pace for the rest of the year? Or maybe the gain from raw materials will play less of an important role as seen going forward.

I think that in Mexico you should expect, Alex, a reduction in the expansion in the second part of the year. Remember that last year, the first part of last year, we were favorably impacted by raw materials. That is why we have a very good expansion, a very important expansion this first quarter.

I think that second quarter should be similar, but then the rest of the year will have more comparable raw material pressure on our cost basis. So we will see some expansion, but not as large as what we are seeing during this first quarter.

Okay, and last question if I may. If you can give us any update regarding The Coca-Cola Company plans to divest in some US territories; and if KOF sees those as opportunities, how would you see that moves?

Yes, we saw what The Coca-Cola Company communicated about some movements in the USA. Those movements represented a very small part of what is now under Coca-Cola Refreshments. So I think that if The Coca-Cola Company continues with the plans that they have expressed in the past of refranchising some of those territories, I think that we certainly like to take a look at those, and I hope that we are invited to look at those territories.

Right now, all our focus is looking at opportunities in Latin America and to work on the Philippines on the plans that we have. But if those opportunities are presented to us, we will certainly analyze and take a hard look at the opportunities in the US.

Perfect. Thank you, Hector.

Thank you. At this time we have no further questions. I would now like to turn the floor over to Hector Trevino.

Okay. Thank you all for your interest in our Company. As always, Jose and his team are able to answer any remaining questions. I know that this has been a complicated quarter to explain, with all the currency volatility that we experienced. And you maybe have a lot of questions on that front, but we will be glad to answer to all of our capacity any questions that you might have. Thank you.

Thank you, ladies and gentlemen. This concludes your conference call for today. Thank you for joining us. You may now disconnect your lines. Enjoy the rest of your day.