Coca-Cola Femsa SAB de CV (KOF) 2013 Q2 法說會逐字稿

Good morning, everyone, and welcome to Coca-Cola FEMSA's second quarter 2013 earnings conference call. As a reminder, today's conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance that 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 may be 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, and thank you for joining us today as always.

In the midst of continued currency volatility and a tough environment for consumers across many of our operations, our people employed their skills and knowledge to our reinforce our marketplace execution and deploy our wide beverage portfolio to generate [30] currency-neutral top and bottom line growth.

Once again, our balanced geographic footprint (inaudible) yield positive results throughout our Company and our shareholders.

Although our reported results show relatively flat top line growth in our reporting currency resulting from the appreciation of the Mexican peso combined with the depreciation of the currencies in every other operation, our Company delivered organic currency-neutral revenue growth of 13%, together with a solid operating income margin expansion of 120 basis points.

Our reported total revenues reached more than MXN36 billion in the second quarter, including the non-comparable effect of one month of results from Grupo Fomento Queretano, which beverage operation was integrated into our Mexican franchise in May of last year, and one month of results from the recently-merged Grupo Yoli, which bottling operations were integrated into our Mexican franchise in June of this year.

Our consolidated gross profit margin expanded 140 basis points on the back of lower sugar prices across our territories and the appreciation of the Mexican peso as applied to our US dollar-denominated input costs.

During the quarter, we continued to see higher labor and freight costs, especially across our South American division. We also continued to invest in our marketplace execution and in one of our most important tools -- our returnable packaging base.

In addition, I would like to remind you that we continued to register our stake in our operating joint ventures, mainly including Coca-Cola Bottlers Philippines and Jugos del Valle, through the equity method.

Our net income grew 4% to MXN2.8 billion, despite higher interest expense due to a larger debt balance and a foreign exchange loss resulting from a quarterly depreciation of the Mexican peso.

Now, let's discuss some of the trends we see in each operation. In Mexico, we experienced a deteriorating consumer environment with less disposable income as a result of higher food cost inflation, falling remittances, and more personal debt, among other factors.

Our reported volume growth was 4%. Adjusting for the non-comparable effects of recent transaction integration, we registered flat volumes, compared with two historic record months of our Mexican operations in May and June of last year. Organically, it's worth highlighting that during the quarter we grew brand Coca-Cola by 1% in our territories, generating 86% of the consolidated (inaudible) growth of our most important brand in Mexico.

Organically, as we continue to proactively bolster our portfolio with (inaudible) alternatives for our consumers, our returnable presentations gained [230] basis points in the packaging mix of our sparkling beverages during the quarter. Notably, volumes of our 500-mililiter returnable glass presentation grew more than 50%, and coupled with the growth in our flagship 600-mililiter, one-way presentation enabled single-serves to remain almost flat in our packaging mix.

In addition, we continue to foster (inaudible) in our returnable multi-serve platform, as we further complemented our [growing] 1.25-liter and 2.5-liter presentations for brand Coca-Cola with a new 3-liter alternative, as well as the [recent] launch of Sidral Mundet in a 2.5-liter returnable presentation.

Despite the current environment in Mexico, our benchmark commercial model and refined [revenue-maximizing] management skills have allowed us to increase average price per unit case in line with inflation during the quarter, demonstrating our operators' ability to navigate through this environment.

In Central America, we achieved a 5% volume increase due to growth in Panama, Nicaragua, and Guatemala, which compensated for a soft volume performance in Costa Rica. Consistent with our strategy to foster affordable single-serve consumption for our consumers, our returnable 12-ounce and 500-mililiter presentations for brand Coca-Cola helped us to improve the share of our returnable and single-serve offerings in our packaging mix of sparkling beverages by 80 and 180 basis points, respectively.

Coupled with selective price increases in these operations, our Mexico and Central America division's total revenues grew 4% in an organic, currency-neutral basis.

Lower sugar prices and the appreciation of the Mexican peso as applied to our US dollar-denominated raw material costs result in a healthy, organic [240]-basis point expansion of this division's gross margin.

During the quarter, we continued to make marketing investments to foster our returnable base and reinforce our market execution and to incur certain restructuring charges across the division in conjunction with the integration of [new] franchises. Overall, our (inaudible) operating income margin in the division expanded 310 basis points during the quarter.

We are encouraged by the integration process of the franchises we have merged in the last two years, and we have been able to materialize most of the synergies that we have anticipated. During the second half of the year, we will continue with the integration process that is yielding profitable results for this division, and we will capitalize past learnings to ensure a smooth integration of Grupo Yoli's territory. We are confident that together we will consolidate our market-leading position in this country, serving now 60% of the Mexican population and providing for important opportunities for further synergies going forward.

Moving south to our operations in Brazil, we continue to face a tough environment characterized by higher food inflation, constrained disposable income, and bad weather conditions as we go through the winter season, among other factors. All of these events contribute to a 3.8% decline in our Brazilian franchise volume.

Despite this environment, our Brazilian operations generated low single-digit currency-neutral revenue growth on the back of our [relevant] management initiatives. These have taken a number of steps to further reconnect with our consumers. Recognizing that we are still in the process of rolling out some of these initiatives, we are enthusiastic about the preliminary results and will maintain the positive momentum that we have generated.

For instance, we continue to foster price compliance with our clients, since maintaining suggested retail price is critical to our portfolio strategy. We have reinforced the [prominence] of our 2-liter returnable presentation for Coca-Cola brand and Fanta brand. We have also continued to increase the point-of-sale coverage of our Magic Price Points strategy for single-serve presentations.

Our Brazilian operators continue to achieve efficiencies in our route to market and supply chain, by increasing [pre-sale] units by 50%, cooler covers by 6 percentage points, which is 39%, as well as [light truck utility] by mid-single digits.

Moving on to Argentina, during the quarter we achieved close to 4% volume growth. This growth was led by brand Coca-Cola, with performance of (inaudible), launched in the fourth quarter of last year, and the performance of our non-carbonated beverage portfolio, with growth in Cepita and Hi-C Orangeade.

Focusing on innovation, one of our most important strategic pillars for growth during the quarter as together with the Coca-Cola company and the rest of the bottling [teams] in Argentina, we launched Coca-Cola Light and Fuze Tea to make a more robust beverage platform for our consumers.

Importantly, on June 26, together with the Coca-Cola company and the [Coke team] in Argentina, we kicked off the global launch of Coca-Cola Light, a low-calorie alternative for the world's most beloved brand, in Buenos Aires. Sweetened with natural ingredients such as [estedia] and [green] sugar, this brand has less than half the calories of regular Coke and will certainly make a perfect addition to our sparkling beverage portfolio in the country.

Launched in several packages, we reached more than 80% points of sale coverage, surpassing our initial target by 14 points and recording a very healthy [purchase] indicators. We are proud to have had the opportunity to support the successful nationwide launch of Coca-Cola Light, leveraging on our manufacturing facilities to produce (inaudible) to use for the rest of the Coca-Cola bottlers in Argentina.

Also in June, we made an incursion into a promising category with the launch of Fuze Tea in two flavors and two different packages, rapidly gaining 50% client coverage. As always, we will continue to work to ensure the success of our [system's] latest product innovation.

Despite a volatile macroeconomic environment in Argentina, our operators continued to achieve encouraging results, focused on cost discipline and efficient utilization through the entire supply chain.

In Venezuela, despite a 24-day (inaudible) strike at our Valencia plant and distribution center, we delivered solid 9% volume growth for the quarter, driven by brand Coca-Cola which grew more than 22% during this period.

It's worth highlighting that our Venezuelan operations have reached historical [threshold] sales indicators in the sparkling beverage this quarter, reaffirming our long-standing belief that it paid off to invest in leading brands and marketplace execution.

Moreover, during the quarter we integrated a [mixed-use] center in Guarenas, east of Caracas and one of the top-two growing cities in the country. The investment in this distribution center along with our recent investments in coolers and trucks are testament to our vision of long-term growth for this country.

With regard to Colombia, we are pleased to report our previously-announced strategy continues to yield positive results, as we present our consumers with affordable alternatives, driving growth of the beverage industry in this country. During the quarter, our volume increased 9%, delivering growth in every category. Brand Coca-Cola grew 5%, supported by our 1.25-liter returnable glass presentation and the success of our 250-mililiter and [two-pack strategy].

Flavored sparkling beverages grew 13%, driven by the 30% growth of Quatro and [Color Roman] and the launch of Fanta in the third quarter of 2012. Still water, Brisa and Manantiel, continue to deliver solid results, growing 11% and 14%, respectively. Del Valle Fresh, Fuze Tea, and Powerade drove the majority of our incremental volume growth in our non-carbonated beverage portfolio.

The division's positive volume performance was complemented by local currency [devaluation] management initiatives in Venezuela, Brazil, and Argentina. This led to more than 21% currency-neutral revenue growth in our South American division.

Lower sweetener prices in the division and lower PET prices in Brazil and Argentina more than offset the devaluation of each country's currency as applied to our US dollar-denominated input costs. As a result, our gross profit expanded 20 basis points.

Operating expenses continued to reflect labor and freight cost pressures and increased marketing investments. Our operating margin reached 14.3% in the second quarter.

We continue to look for increased productivity and efficiency levels across the divisions, as we believe that we still have room for improvement to seize additional sales opportunities and to continue to work on achieving the full operational potential of our operations.

With regard to our Philippines operation, we continue to see a sustained [EBITDA] momentum, and we believe that the Philippines will be one of the largest and fastest growing economies in the long term. This quarter, our revenues are up by single digit -- to the single digit versus the comparison compared to last year.

Moreover, we are very pleased to announce that we have launched one of the most important long-term initiatives that we plan for this country, with very encouraging short-term results. Our 300-mililiter, one-way presentation for brand Coca-Cola hit the ground running and gained traction with the Filipino consumer almost immediately. Our 750-mililiter returnable glass presentation continues to deliver incremental growth, as well.

In the route to market, we continue to test our segmentation and commercial models. To this end, we have launched our second pilot in the city of Pampanga, northwest of Manila. The first pilot, launched a couple of months ago, has significantly contributed to our understanding of the drivers of success for our commercial model and the reality of the Filipino market.

In the supply chain, we continue to work to ensure high levels of service and quality in our plants and provide the necessary capacity to fuel our portfolio initiatives.

In May, our Company raised MXN7.5 billion in Certificados Bursatiles, in Mexican bonds, in the Mexican market at a ten-year fixed rate of 5.46%. The coupon represents the lowest ever achieved in the ten-year [payments] by either corporate issuers or the Mexican government in the Mexican bond market. This coupon will (inaudible) at the moment of the issuance to US dollars, to an equivalent interest rate of Treasuries-plus-54 basis points.

Additionally, in May we paid the first installment of the dividend approved by our shareholders in the amount of MXN1.45 per share.

More importantly, at the end of June we were privileged to announce that our Company has reached an agreement to acquire 100% of Fluminense, a Brazilian Coca-Cola franchise that represents a strategic link between our Sao Paulo and Minas Gerais franchise territories, for an amount of $448 million. This transaction represents an important step in the consolidation of our Company's leadership in one of the top five markets in terms of volume for the Coca-Cola company worldwide, reiterating the long-term strategic importance of this market for Coca-Cola FEMSA and our belief in the attractive domestic consumption prospects and the country's socio-economic dynamics.

We are awaiting authorization from CADE, the Brazilian antitrust authority, and expect to close this transaction during the fourth quarter of this year.

We will certainly rely on the learnings of the recent [four] integrations in Mexico to ensure a fast and seamless integration of this franchise, with the ultimate goal of capturing our synergy targets within the announced timeframe.

Fully aware of the currency volatility and the challenges that each of our markets present, we have worked diligently to address each of them and make the translation to achieve the business targets that we set at the beginning of the year. Our commercial initiatives designed to better serve the point of sale, the strength of our returnable packaging base, and the SKUs that we have developed throughout Latin America provide the tools necessary to achieve balanced growth in our franchise territories and deliver long-term value to our shareholders.

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

Thank you. (Operator Instructions) In the interest of saving time, we ask that you limit yourself to one question and one follow-up question. (Operator Instructions)

Lauren Torres, HSBC.

Good morning. Hector, I was hoping that you could talk a bit more about your short-term outlook for Mexico. I guess I'm just trying to bridge the gap. Comments by Arca yesterday seemed to be rather positive with respect to the consumer environment. They talked about the weakness being transitory, and they do expect to see a recovery in the second half. So, can you just give us your impressions about how you think trends should look? And I guess another comment they made is they do think the environment's fine and they can take pricing in the third quarter in Mexico. So, I know you operate in different parts of the country, but can you just talk about your outlook and how do you think things will progress as the rest of the year flows through?

Good morning, Lauren. It's an important question, and we [come back] that we have difference in the territories, as you pointed out. Let me give you some flavor for what we see going forward.

First, I think that the pricing environment, we are facing in my opinion a tougher competitive environment. Pepsi Cola has been aggressive with pricing down some of their products. We are seeing price gaps that are as large as the largest that we have ever seen versus Pepsi Cola.

So, our visual of the second half of the year is that we will continue our strategy to price according to inflation. It will be very difficult to grow above inflation in this environment because, as I said, the price gaps that we are facing, especially with Pepsi, are as large as we have ever seen.

I don't know if Pepsi Cola will stay with those prices for a longer period of time. It's for them to determine that. But, we continue as we did in the first part of the year to price to the full opportunities for revenue improvement, with different SKUs, with returnable products, et cetera, to compete as we have always done that in the past, and we have done that very successfully, to compete on this environment. That's why we are referring to the importance of returnability in most of my speech at the beginning of this conference.

Returnable packages for us present the possibility of presenting in front of the consumer a package that is priced at a similar level to our competitors without obviously the convenience of being a one-way, since it's a returnable product. But that's the environment I see on the competition front.

In terms of the consumer, I think that we are seeing better trends. The consumer is -- we are seeing better volume trends in the month of July. Our (inaudible) feel that this is a positive trend for the second half of the year.

And one more important [carrot]. During the second part of the year, we have a [positive comparison] with respect to raw materials. First half of the year, we are seeing very important gross margin expansions that were basically the result of lower prices for some of the raw materials, especially sugar, as worldwide prices came down, importantly. And as last year because of drought we were explaining that we were suffering at the margins because we have very high prices of raw materials. This is part of the year, because we have a good environment on that front. The second part of the year, the comparison on raw materials will not be as favorable as some of the raw materials started to decline prices during the second part of last year.

I think that that will give you a good flavor of where we are seeing Mexico for the second half of the year, Lauren.

OK. Great. Thanks a lot.

Antonio Gonzalez, Credit Suisse.

Hi. Good morning, Hector. I just want to ask two quick questions. First, on the results that you account for under the equity method, you have a positive result this quarter. And I was just wondering whether the Philippines by itself is net income positive already? Or, it's just a combination of the Philippines and Jugos del Valle and the rest of the subsidiaries that you consolidate here?

And the second question, it's on D&A expenses. I think they were lower this quarter as a percentage of sales. And I think that's different from the trend we've been seeing the last year and the first quarter of 2013, as well. And I think that is particularly true for Mexico, that depreciation and amortization are lower as a percentage of sales relative to last year. Could you give us some color on that, please?

Yes, Antonio. The first part of your question, the equity method because of the IFRS, now we are accounting that as part of the operating income. And the numbers you'll see there is a combination of the Philippines, Jugos del Valle, and some of the other JVs that we have like Matte Leao, et cetera. In the case of Mexico, it's still Jugos del Valle and the Philippines, because remember that the Philippines, it's owned by Coca-Cola FEMSA which is the holding company, [for instance], but (inaudible) based in Mexico, we consolidate the numbers with the Mexican operations.

So, that's the (inaudible) because of the Philippines and, for again, because it's 51% owned by Coke FEMSA, and Coke FMESA is domiciled in Mexico. It's consolidation under the Mexico and Central America subsidiary.

So, you have there the Philippines, you have Jugos del Valle, and you have some other joint ventures like [Tamplaclana] and Estrella Azul because in Central America (inaudible).

The Philippines is net income positive now in their operations which is part of your question, and related to this, this is a non-cash item when you look at the amortization number we are adding back that number of a non-cash element. That why the amortization number's much lower than last year, because the equity method on this joint ventures and affiliate is a non-cash item that we are adding back there.

In terms of administrative expenses and sales expenses, if I understand your second question, we are seeing improvement in every country. We have stressed the fact that we have been focusing on those items to have a more efficient operation, with the caveat that in Argentina and Venezuela we have pressure on the labor costs, and in the case of Brazil we have some logistic price increases because of the traffic regulations that we have in Sao Paulo and because of the so-called Ley de [Montonita] that has increased substantially our fee for transportation and freight.

With those two exceptions -- labor costs in Argentina and Venezuela and freight in Brazil -- and [a little bit] in Argentina on the freight front, the rest of the indicators that we see, we see improvements in our SG&A information.

Thanks a lot, Hector. I was actually referring to depreciation and amortization in the second part of my question, but I guess you answered it with the color that you gave us in the briefing. Now, if I understood you correctly, there is a positive net income in the Philippines, but that is added back to the amortization expense in the Mexico subsidiary? Is that correct?

Yes, that's correct.

Thank you so much. Thank you so much.

Lore Serra, Morgan Stanley.

Yes, thank you. Thank you, and good morning. I guess I wanted to ask a question in Mexico. Maybe two questions. One is that you've done a great job on the gross margin, and we see it come through really nicely, but the OpEx seems to be actually up slightly despite, I guess, we thought that you would start to see some synergy gains from -- or the full effect of the synergy gains from all the acquisitions that you've made in Mexico. So, could you give us some flavor of, are you getting those synergy gains and they're just being offset by something else?

And then, I just wanted to ask, if we look at the first half of the year, you've gotten margin expansion of about 200 basis points. Do you think you can maintain that pace into the second half of the year? Or, with your comments earlier about raw materials, would you expect that to be lower in the second half of the year? I guess part of that question depends on the first part of the question I just asked. So, that would be really helpful, please.

Yes, Lore. I think that in the first question from Lauren, what I was trying to address is we are benefitting this first part of the year, the first half, the first two quarters, by lower raw material prices, as we compare those prices to the first half of 2012. What we are seeing is that assuming that prices stay stable, we will not have such a large gap versus last year, because some of the prices of raw materials started to decline in the third and fourth quarter of last year.

So, on that front, we will continue to see some improvements versus last year, but not as large an expansion on the margin.

On the first part of your question, we are starting to see some of the one-time expenses related to Yoli that we started to integrate [that early] in June. And similar to what we did with the other franchises, we [borrow through a period] where we start to have some one-time expenses, mainly have to do with restructuring, labor restructuring and facilities restructuring. We still have some of the last one-time expenses related to FOQUE, and my expectation is that as we continue with that we'll see a better trend on those line items. But that's basically the effect of what I wanted to share with you.

The environment for raw materials is not going to be as (inaudible) the second part of the year, but our expectation is to have a nice comparison.

And then, as we finish up with some of these integration processes, we should pick up the full impact of the synergies of these franchises.

Right. Sorry. But, I thought -- as I remember correctly, you had restructuring expenses last year as well, in the second quarter. So, are the expenses higher than they were in the second quarter, in terms of restructuring expenses? Or maybe just asked another way, if you strip out restructuring, are the operating expenses falling as a percentage of sales?

What I was referring, Lore, we had last year. We have this year. This year is lower than last year. We have a few more marketing expenses, as I mentioned in my speech, investing in (inaudible) returnability for our products. So, speaking about Mexico especially, the marketing expenses have increased versus last year, and this is part of what we can [plan] and part of the reaction to the competition environment that I described with Pepsi Cola, et cetera, and that is what is accounting for some of this.

What I was saying is when you look at some of these details in terms of headcount, in terms of salaries that present (inaudible), et cetera, once you take out all these more than usual, or extraordinary, expenses -- not in the sense that they are not present every year, but we think they are more under the control of the mangers -- all of those in every country, we have efficiencies to report. We have some additional marketing expenses. Sometimes, we have some additional restructuring expenses. And then, (inaudible) this year, restructuring expenses are lower than what we had last year.

OK. Thank you. That's really helpful.

Alan Alanis, J.P. Morgan.

Thank you so much. Good morning, everyone. I have a few questions. The first one is more of an accounting, technical question and I think it expands on what Antonio asked before. So, if I'm understanding correctly, you own 51% of the Philippines, but you do not consolidate it, but you're putting the operating income of the Philippines inside the operating income of Mexico. That is what's happening -- correct? -- in terms of disclosure, and that's allowed by IFRS in terms of getting the operating income of such a situation like Philippines and your minority positions in the joint ventures of Matle Leao and Jugos del Valle as operating income, as well? Correct, Hector? That's how the numbers are being presented.

Hello?

Alan. Yes, Alan. I was looking for the P&L to give you exactly the line where we have it. You see a line that says -- Share of the Profit, Loss, Associated from Joint Ventures Accounted -- that number, if you look at Mexico, Mexico has our 51% participation of -- the equity method 51%, of the net income of the Philippines; whatever percentage we have of Jugos del Valle -- I don't remember the precise percentage, but it's close to around probably 30% -- 26% of Jugos del Valle; a similar percentage of Santa Clara; and 50% of Estrella Azul.

It's not (inaudible), but I have already provided. We are obliged to do it like that under IFRS. Since Coca-Cola FEMSA, the holding company, owns these participations and can serve as a consolidated -- (inaudible) Mexico, Coke FEMSA, the holding, reports together with the Mexico and Central America division.

The way you [stated] is precisely right. This number, MXN128 million in the second quarter 2013, is our equity method for all those participations.

In South America, we have the same for Matte Leao, and we have the same for a joint venture that we have with Coca-Cola for water in Brazil, where we have 50/50 ownership of a brand.

That's basically it. Is that clear, Alan?

Got it. OK. Yes, it's clear. Thanks a million. They're margin enhancers, to put it in some ways, but it's perfectly valid.

Let me ask you two other quick questions. The first one is regarding the pricing outlook. I've heard the emphasis you've made regarding the differential with your main competitor in Mexico being very wide relative to history. In other words, it seems that competitiveness in terms of pricing in Mexico has not changed lately, even has deteriorated. Could you comment on the pricing outlook of both Mexico, in the context of competitiveness, and Brazil, specifically?

And my last question is a little bit more strategic, Hector. I would be very interested in hearing your views in terms of what are the key drivers of the consolidation that is finally taking place in Brazil right now, with all the news? And what's your views in terms of consolidation of Brazil, with the Brazilian co-franchises, going forward?

Thank you.

Yes, Alan. One point regarding to the previous issue. Precisely because we know that this number of the equity method on the joint venture and associates it's important, that's why we are fully disclosing in our press release and in the conference, and making an effort so that everyone understands perfectly well what we are doing and not trying, taking anyone by surprise. It's fully disclosed everywhere where you look.

Yes.

Pricing in Mexico and Brazil, as I said, we are seeing price gaps that are very important with our competitors. I'll give you, just as an example -- and these are little examples that are not that important in the general context of Mexico, [but they all add up, which is one example in modern trading in Mexico], in Mexico City. You have Pepsi pricing 3-liter's at MXN15, [one size], and brand Coca-Cola is priced at MXN25, same presentation.

Obviously, for us, the strategy has always been to have returnable PET presentations, and now we have a 3-liter returnable PET package, (inaudible), depending on the area, which is very close to the 3-liter's that Pepsi Cola has (inaudible) returnable package. So, I give you that as just one (inaudible), just one store in the (inaudible). It's not the same in Wal-Mart, (inaudible), whatever. And totally in the traditional trade, [it's possibly different stories], because we have such a dominant position that we have more pricing flexibility.

But just having said that, the message that I wanted to say is the pricing environment is not that as good -- or, it does not provide a good environment for the second part of the year, because we are seeing price gaps that are very wide versus our competitor, main competitor.

And certainly, as I mentioned earlier on, we still believe that we can increase prices with inflation, the same way we did it in the first part of the year, and in fact we are okay is that we are maintaining this price gap that has been historically present for many years. And we believe that throughout the market initiatives and the way the commercial strategies that we have allows us to have (inaudible) opportunity of revenue (inaudible) initiatives in various positions challenged and segments where we can (inaudible). We will try and look at that.

For that, (inaudible) investment in 3-liter returnable PET bottles and in 2.5-liters and 2-liters. So, that's part of the depreciation of all the expenses and marketing that we have in this part of the year.

If we move to Brazil, Brazil we are still, as we reported (inaudible), a negative 3.10% trend, but while very much influenced by all the protests in the streets (inaudible). The estimate that we have is that we lost 1.1 million unit cases during the quarter because we couldn't serve our clients because of the protests that we saw on the street. So, [if we compare now], the clients didn't fully reflect the strength of the (inaudible) we are feeling in Brazil. It's not somehow answered by this focus. But, assuming that the protests were not there, Brazil was really not growing versus last year.

So, we have some initiatives, and we mentioned that during the speech, basically in two areas. One is to move to the Magic Prices, as we call it, of BRL1, BRL2, and BRL3 for the specific packages in single-serve, but for (inaudible) packages, for the repeated consumer, as a frequency, as an attracting, we think it's going to give us much more traction, volume-wise, in the second part of the year.

The other pillar of the strategy in Brazil is 2-liter returnable PET. For that, we are introducing more than 1 million physical cases over (inaudible) PET. It's a presentation that is helping us a lot to compete in the multi-serve, one-way packages from our competitors.

And the combination of all of that is that depending on how the mix works, my expectation is that you will see a slightly lower average price per unit case, because if, let's say, the BRL1-bottle starts to get a lot of traction, that will [compound] some of the other strategies. It's a product that is priced at a very attractive price. The same with the 2-liter returnable PETs, which if we continue to increase that presentation in terms of mix, that will reduce the average price per unit case.

Therefore, this strategy means that we will have (inaudible). The combination of volume plus the marginal contribution that we have on those packages will improve the profitability.

But in general, if we touch on it, the pricing environment in Brazil, we are basically moving to presentations starting with the strategy of the Magic Price and the returnable PETs. We are moving to presentations that will have a volume-adjusting pricing. So, you would see other prices probably coming from the others.

OK.

And last question, with respect to key players for Brazil consolidation, it's a tough question, Alan, in the sense that you have to put yourself in the mind of the owners of the franchises. The facts the following. You saw an integration of three bottlers in the north, creating the Solare, (inaudible) the Solare bottlers. You saw the announcement of Club America. And, if I remember correctly, a week after we saw the announcement of Adina acquiring [DI].

So, I think that from a strategic point of view and that's what we can in our side of the equation, is we think that having a country of 200 million people with socio-economic levels that are improving in the income levels at (inaudible), et cetera, it's strategically very important for us to be there. We already represent close to 26%, 27% of the volume in Brazil. We are in the most important cities in Sao Paulo.

We know that we with all the currency volatility that we have seen in Brazil and some of the other countries in Latin America, the protests that we have seen in the streets, the [struggling] with a government that we (inaudible) in several of the reports, and I think that we will go through one or two or three quarters that might not be that good, but in the medium to long term, having a brand that has the -- the (inaudible), we have it in Brazil. The (inaudible), as Coca-Cola, and the very and social important market which is one of the top five or six of the Coca-Cola system is strategically very important.

If there is other opportunities in the future where some of the owners of the franchises would like to entertain a value for a potential acquisition, we'll certainly be there, with the caveat of the attention that we have always put into the valuation processes and integration processes, et cetera.

But, this ability I think is very important for us -- Brazil is very important for us because of the recent [setbacks] that I mentioned. And I think that it's a market that you have to be there in the middle to long term, purely because of the sheer size and the importance of a brand like this in that market.

(inaudible). Thank you so much, Hector. Thanks.

Thank you.

Karla Miranda, GBM.

Hi. Good morning, everyone, and thanks for the call. Hector, I had a couple of questions. First of all, a follow-on on Brazil. I know that you just gave a wide explanation on your interest in Brazil in the long term. But, actually, I wanted to see if you can give us some color of what should we expect for Brazil for the second half of the year? I know that actually nobody expected that rough a first half of the year, and it seems difficult that the situation is going to pick up during the second half. Maybe, if I'm not mistaken, you were aiming for a positive performance in volume in terms in Brazil, and it seems quite difficult.

And second of all, I was wondering if given the volatility that has been taking place due to the changes in the FX, is there a possibility that you are going to hedge your FX needs for the rest of the year? Maybe some going into 2014?

Thank you.

Good morning, Karla. Yes, I think that in general the environment -- the main changes that we could -- should expect for the second half of the year is the strategy that I was describing of two areas. One is the 2-liter returnable PET, and the other benefit in the single-serve Magic Prices that I just described.

If these two strategies start to have traction in the marketplace, then we might end up with volumes that are either slightly better versus last year or even flat to last year. That's how confident we feel in some of these strategies in Brazil, and I think that what you will see an improvement in the volume trends in the second half.

With respect to volatility, first, as you correctly pointed out, the exchange rate has moved dramatically in a very short period of time. We basically have no -- we have already done some in the past some hedges of some of the raw materials. In the case of Brazil, for the rest of the year we have some -- we have hedged all of our raw material costs including in some cases the exchange rate hedge and hedged for probably 70% to 80% of the rest of the year.

Even, some of -- we have started some for 2014. I'd say probably around 35% to 40% of our (inaudible), because first half of 2014.

We have also moved to hedge the last acquisition that we did, in the Fluminense acquisition, the $448 million. We have already converted a portion of our debt into Brazilian reais just to have a perfect match of our investment and the (inaudible) that it's -- quote, unquote -- dedicated for that.

We know that we are seeing a higher interest rate, closer to 10% in Brazilian reais, 10.5%, which is the running rate in Brazil. But our position was to fully cover 100% of that acquisition -- or fully (inaudible) acquisition and definitely that is also Brazilian reais denominated.

So, we are active in that front, trying to always at least have raw material prices that are below the previous year or below our budget, and we will choose opportunities we start doing those hedges.

And I hope that this will answer your question.

Yes. Thank you very much.

Jose Yordan, Deutsche Bank.

Hi. Good morning, guys. I just had a quick question about a previous question on the depreciation and amortization charges, because even when you take into account the offset of the equity income, your depreciation and amortization still would have fallen by more than 50%. I know you mentioned some asset write-downs and maybe that's the source of this. But, if you could give us some color there, and more importantly if you can let us know if it's a one-quarter adjustment and then later on it's going to go back to normal, so to speak? Or, what the new normalized level of D&A, or amortization specifically, in the coming quarters would be?

And then, my main question was this time last year you were saying you were worried about corn. That's obviously turned around quite a bit, and you must be feeling giddy about corn for the second half of the year, and especially for next year's contracted season, et cetera. Right now, what's your view of what your corn syrup prices will be for next year, versus what they are this year?

Yes, Jose. You're right. When you adjust for this equity method, still the amortization it will be a lower amount. Basically the amortization, in some of the previous years I mentioned there would be very high investments in SAP and in our systems. That amortization number, it will still have some of the remaining of that. It is a much lower number now. And that will explain what you are discussing in the first part of your question.

With respect to high fructose, we basically have the rest of the year already covered. To be very honest, we have not covered (inaudible) prices, but we are aiming to have, as I mentioned in the previous question, to have either lower prices than our budget or lower prices than what we had last year.

And at the moment we achieve some of those and we feel and the operators feel that the prices are right, we do some of the hedges. For high fructose corn syrup the rest of the year, we have 100% fixed price already for that, at a lower price than what we had last year.

Remember that the strategy in this case, it's very simple. When you have such a large price gap versus your competitors, you have to start taking some of the risk away, mainly raw material price volatility, so that you don't have the need or the pressure to increase prices and to open up further the price gap, because of the volatility of the materials. Or better even, you can stay with the prices and hope that some of the competitors have to increase prices because they are suffering from that, this price volatility.

So, it's basically [accrediting] the comparative risks that these companies have with respect to the volatility of raw materials, as a way of protecting our pricing architecture.

All right. Sounds good.

Fernando Ferriera, Bank of America Merrill Lynch.

Thank you. I had a question regarding your competitive environment in Brazil and Mexico, if you could guide us or tell us a little bit how your market share has evolved in both Mexico and in Brazil?

And then, I just had a follow-up on the Philippines.

Market share wise, we have very stable market share in all of our territories, very few exceptions. We have lost a few basis points in Mexico, in colas, in CSDs. In Brazil, we have lost a few basis points, also in CSDs.

We have gained market share in most of the other categories, in juices, in sports drinks. We have increased very importantly our market share in most of the markets.

We have a couple of markets within Mexico, we're probably the number one sports drink. We are certainly number one in the traditional trade, not still yet and supermarkets with respect to the sport drinks.

But, in general, the movements in market share are very small, with the exception of the ones that (inaudible) have increased.

And as I mentioned, we lost a few points' market share in CSDs in Mexico and a few points in CSDs in Brazil. The rest of the markets in CSDs are very much flat.

And I understand that you have another question for the Philippines, Fernando?

Yes, your comments on turning Philippines already net income positive are pretty encouraging. Can you share some more color on that front? Do you think that's sustainable, or not? We should still see more volatility? Or, can we expect this equity income line to continue to be positive along the same magnitude going forward?

I think that to really understand, we have (inaudible) in the Philippines five months ago. We started with some of the -- remember that I mentioned three pillars. One had to do with supply chain, which is totally manageable by us. It's internal, and there we will see some efficiencies and better quality for our products.

The two other important pillars are very much related to markets and the reaction of the consumer and our clients, which are the storeowners. One is the portfolio, which is the single-serve presentation of 200-mililiters. We are (inaudible) of the 750-mililiter returnable bottle. Those, we found encouraging signs where we are selling.

As a matter of fact, the 300-mililiter we are selling everything we produce, and we are in the process of ordering two additional lines, because we are at capacity and we cannot take that product to the rest of the country. It's only in Manila, because (inaudible) success.

Obviously, it's also affecting some of the volumes not only from our competitors but from our own SKUs and because of that we have discontinued 22 different SKUs that were selling very little volume, as a way of improving the supply chain.

The other is the route to markets, which is also and not dependent on the reaction of the wholesalers and the storeowners.

My gut reaction is that, answering your question, we will still see volatility, but I think that the trends are very positive and very encouraging.

I think that I would not be surprised in the Philippines if it stays on the positive side of net income for the rest of the year, although we might have some little surprises, probably like (inaudible) is positive from here on on the net income level.

But, again, it will depend a lot on the successes, especially of those two pillars that are more market-related and not 100% under our control, because it has to do with the reaction of the consumer to the portfolio, our competitors as they react to that, and the wholesalers and the storeowners to the new route-to-market initiatives.

Perfect. Thanks, Hector. And if we continue to see that positive trend going forward, when do you think you might be able to open up, or to break some more, for some more data for the Philippines? Do you think still this year, or probably next year, to give us a little bit more color on that front?

I think that in general we are pretty much restricted by that, because we are not consolidating this operation. When we buy the remaining 49%, or when we exercise this call option and we do it and we own 100% of that, then we will have full disclosure as a third subsidiary of Coke FEMSA. In the meantime, I think that our objective is to give you a flavor of the success of these initiatives that are important, so that you might get a flavor of how successful are we or not in the Philippines and that will be our main objective for now.

For us, it's impossible to do a full disclosure seeing that we are a subsidiary to our vision, until we exercise the -- until we consolidate the numbers. It's (inaudible) top of mind that we should keep investors and analysts aware of our progress in the Philippines as we advance on that, especially on these initiatives (inaudible) that we have developed.

Great. Thanks, Hector.

Thank you, Fernando.

Luca Cipiccia, Goldman Sachs.

Thank you. Thank you. Just two very quick follow-up, if I may. The first is if you could maybe share some of the short-term trends as you mentioned earlier about volumes in Mexico, that they seem to have improved a little bit in July? I don't know if you could give us similar feedback for the other countries?

And secondly, on the acquisition front, on the consolidation front in Brazil, I was also curious to understand a little better if proximity and contiguity in this process will be maybe a bigger factor for your choices? Or, should opportunities come up, how much of that (inaudible) will play a role, given that the country seems to be starting to get split more clearly between the three larger clusters, or the larger operators? So, maybe if you have any comment on that, that will be great.

I think that with respect to your first questions regarding the trends, we are seeing better trends in July in all of our operations. Everything is increasing so far during July. It's a little tricky sometimes because we still have one week to go and sometimes the last week plays a little tricky roles, normally to the positive, because as they close the month, the operators want to hit the targets, et cetera.

We have (inaudible) in Central America, but it's less than 1% in (inaudible). The rest of the markets and the rest of the categories are moving well in the direction.

It's positive including in Brazil? I'm sorry.

Including in Brazil, yes. Including in Brazil, the sparkling, we are seeing some so far. Maybe I don't have to (inaudible). Water has a little negative trend during this month, but very importantly sparkling soft drinks has the right positive trend in Brazil.

From my perspective, the overall view that I have on the second half is positive volume trends.

With respect to consolidation in Brazil, I think that the proximity will play a very important role, because the country's huge in area and space and distances. And I think that you saw very clearly that in our announcement with Fluminense, we announced a very important synergy number, as a percentage of the (inaudible). It was (inaudible), in territories that is farther away in distance.

So, proximity plays a very, very important role in the consolidation in the future. If something like that happens in the future, as I mentioned, it's near (inaudible) willingness of someone to sell and someone to buy in this process. And as I mentioned, we certainly look for opportunities, if they are present in the future. But the other half of the equation is you need to (inaudible).

Your question about (inaudible), I think that Brail, of any of the countries in Latin America being the largest in distances, proximity is very important.

OK. Very clear. OK. Thank you very much. Thank you.

Alex Robarts, Citi.

Thanks. Let me just start with two quick ones and then one on Colombia. Philippines, we're seeing you guys get to a positive net income a little sooner than at least we had thought. And, does this change the timeframe for you to contemplate buying the Coke stake? Could we see you buying this Coke stake as early as next year?

Secondly, in Brazil, any comment around July and these demonstrations vis-a-vis volume? Not material? Material? In between? That would be helpful.

Question on Colombia though really is, first half, we've seen a 7.5% increase in volume. It's your third biggest market. Margins have not been there and contracted. Wondering how do you see second half vis-a-vis the margin in Colombia versus the first half in terms of the magnitude of contraction? And to the extent that this tax reform there that we are actually seeing hitting certain consumer categories, mostly on the food side, but could you talk a little bit also and include that tax reform in the answer?

Thanks very much.

Yes, Alex. Let me start with -- with respect to the call that we have in the Philippines, we haven't really moved to this, to the timeframe where we would start thinking about exercising the call. Obviously, there is always value in the optionality of that, and I think that we should [earlier] take advantage of that. So, I will not be surprised. My initial reaction is that we should wait until the end of the period to exercise our call. We are not in a rush to do it right now. As we mentioned, Philippines is a transformation story. We need to fully convert that into a positive story and then think about that consolidation of the other 49%.

In Brazil, we mentioned that in the second quarter we were affected by around 1.1 million unit cases because of the protests. During July, as was mentioned, we are seeing positive trends in the sparkling beverages. So, I haven't seen any specific issue reported with the market (inaudible) improve, not being able to serve the market in Sao Paulo because of these protests. So, the trend as I mentioned is positive, and it's starting, (inaudible).

And in Colombia, your last question, we are seeing positive volume growth which is part of the strategy that I described probably two or three quarters ago, where I said Colombia we were embarking on a strategy to increase per-capita consumption. That means (inaudible) could lower some of the prices of our products, or create (inaudible) with lower prices in any case.

Two or three quarters ago, I mentioned that I would expect Colombia to have a margin decline of around 200 basis points, and we are still on pilot on that. The only positive surprise in Colombia is that the volume is reacting and it is better than what we were expecting. Colombia grew 9%. We were expecting somewhere around the 7% range.

So, the (inaudible) decline has not been as severe as we were anticipating, but I'm expecting that the second half of the year will continue to see margin declines in Colombia, with this plan that was especially anticipated all lowering prices for the consumer, increasing per-capita consumption with the expectation that we can better manage the future of Colombia in the future.

All of this is part of our business plan that we shared with you -- I don't remember if it was two quarters or three quarters ago.

Fair enough. OK. So, no change there. But, just to understand, any color on the tax reform in the country? Maybe it's just a net neutral for you guys. Could that be the case?

Are you referring to the tax reform in Mexico?

No, in Colombia, the changes that happened this year in Colombia.

No, sorry. I was confused on that. The tax reform, we are neutral on that. You know that we are building a new production plant that will help us with our tax structure in Colombia, because it was in a tax-free zone, where we will be taxed on incentives in the tax front when we've been in that production plant.

The plans for this new plant are being delayed a little bit because of a lot of (inaudible) processes with water rights and wastewater treatment processes, with some of the government there. But we are finding a lot of support from the government policies, because they'd like us to invest that amount of money in Colombia and create all these new jobs in Colombia.

So, we are just going through all the paperwork that is needed to be able to finalize the plant. We probably have a two- or three-month delay on that process, and that plant should be ready by the end of next year. But once we finalize that plant, we will start to have some tax breaks because of being in a tax-free zone will help us on that front.

OK. So, no real impact in terms of the consumer and the environment on -- there's some salary payroll tax changes in a lot of categories and cuts in VAT increases. OK. So, you're saying in that regard, the consumer environment, no real impact from the tax reform issues. Is that right?

Yes, I haven't -- the operators in Colombia haven't brought to my attention anything regarding an impact that is affecting the consumer in Colombia.

Perfect.

So, it's neutral.

Very helpful. OK. Thank you.

That concludes today's question-and-answer session. Mr. Trevino, at this time we'll turn the conference back to you for any additional or closing remarks.

Thank you for your interest in Coca-Cola FEMSA, and as always Jose and his team are available to answer any remaining questions that you may have.

Thank you.

That concludes today's conference. We thank you for your participation. You may now disconnect.