Coca-Cola Femsa SAB de CV (KOF) 2013 Q3 法說會逐字稿

Good morning, everyone and welcome to Coca-Cola FEMSA Third Quarter 2013 Earnings Conference Call. As a reminder, today's conference is being recorded. (Operator Instructions)

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 are subject to future events and uncertainties, which can materially impact the Company's actual performance.

At this time, I would like to 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 we continue to face a tough consumer environment, mainly in Mexico and Brazil, our operators adapt our wide portfolio of beverage to enable our Company to capture different consumption occasions and satisfy our consumers' demand while capitalizing on the realities of our geographically diversified portfolio of franchise territories.

Together with our refined (inaudible) management capabilities, these portfolio initiatives allow us to achieve organic current neutral revenue growth of 15% during the quarter.

Our reported consolidated total revenues reached close to MXN38 billion in the third quarter, including the non-comparable effects of the results from Grupo Yoli which operations were integrated into our Mexican franchise in June of this year; and the results from the recently acquired Companhia Fluminense, which operations were integrated into our Brazilian franchise in September of this year.

Our consolidated gross profit margins remain flat as a result of lower sugar prices in most of our franchise territories and the appreciation of the Mexican peso as applied to the U.S. dollar-denominated input costs which were offset by the devaluation of the currency in our South American division.

With regard to our consolidate expenses, we continued to see higher labor and freight costs, especially across our South American division. We also continued to reinforce our marketplace execution across our franchise territory and in cans, our returnable packaging base, to provide our consumers with a variety of affordable consumption alternatives, especially for brand Coca-Cola.

During the quarter our net income reached MXN3 billion, and larger debt volumes resulted in higher interest expenses and the operating change loss resulted from the quarterly appreciation of the Mexican peso on our dollar-denominated cash position.

Now let's discuss some of the trends we see in each of our operations. In Mexico, throughout the year we have seen a deterioration of the consumer environment as a result of higher food cost inflation, increased personal debt and falling (inaudible), among other factors. Our reported volume growth in Mexico was 4%, including a full three months of results from the integration of Grupo Yoli. Adjusting for these non-comparable effects, volumes were down in low single digits.

A good start to the quarter was offset by very tough weather conditions and disruptions in the month of September, mainly due to hurricanes Manuel and Ingrid.

Organically, the non-carbonated beverage category grew, driven by the continuous trend of Valle, FUZE and Powerade which is now the leading isotonic brand in three of our five operating regions in Mexico and has achieved a 46% market share overall.

Understand the consumer environment and acting proactively, we have focused on affordability to returnable packaging. This part of our portfolio continues to yield positive results, growing 5% during the quarter and gaining 210 basis points in our mix of our sparkling beverages. This increase was supported by a 46% growth of our 500 milliliter returnable glass presentation, now the second-largest single-serve presentation in the Coca-Cola category, behind our flagship 600 milliliter one-way representation; also the recent introduction of our 3-liter returnable presentation for brand Coca-Cola and the 2.5 liter package for (inaudible), which complemented the 13% growth of our 1.25 liter glass presentation.

We will continue to strengthen and adapt our portfolio in every category and reinforce our marketplace execution to provide our consumers with an attractive alternative for every occasion.

In Central America we achieved a 2% increase in volume thanks to growth in Panama and Guatemala, which offset flattish volumes in Nicaragua and continuous soft volumes in Costa Rica. This growth was driven mainly by the [cool] and Valle line of business, the success of FUZE Tea, and the positive performance of Powerade.

Our Mexico and Central American divisions; total revenues grew 1% on an organic currency-neutral basis. Lower sugar prices and the appreciation of the Mexican peso as applied to our U.S. dollar-denominated raw materials cost, resulted in an organic gross margin expansion of 220 basis points in the division.

Overall, our division's organic operating cash flow margins expanded 70 basis points during the quarter, reflecting lower revenues combined with investments to strengthen our market execution, expand our cooler products and increase our returnable base.

Looking to the last part of the year, our operators' consistent execution of our strategy well-position us to capture marketplace opportunities and remain the preferred choice of our consumer.

Moving on to our South American division; our operations generated 6% organic volume growth during the quarter. In Brazil, as of September, we are including the results of Companhia Fluminense. Our organic performance in Brazil improved sequentially compared with the first half of the year. For this quarter, our organic volume in Brazil declined 1%, mainly due to continued consumer weakness in an environment characterized by constrained disposable income and high fuel inflation.

We continued to see encouraging results from our intensified strategy to connect with the consumer. Our 250 milliliter presentation of 1 real grew 26% in the quarter and our reinforced 2-liter returnable presentation increased 36%. In light of the positive short-term results, we will continue to work to increase the point-of-sale coverage of these presentations in order to navigate through a soft consumer environment with the right portfolio.

As I noted earlier, as of September we have incorporated Companhia Fluminense in our results. We are pleased to announce our integration team has identified 40% more synergies than we initially expected. Consequently, we are raising our synergy target to $19 million on a yearly basis, up from the $14 million we announced in June.

The bulk of these synergies will result from additional efficiencies in the workhouses and commercial area, along with improved profitability of the Porto Real plant.

With regard to the Spaipa transaction, during the quarter we received authorization from CADE, the Brazilian antitrust authority and the Coca-Cola Company. We are finalizing details and expect to close this transaction as early as the end of this month, allowing us to include two months of these results this year.

We have already completed the financing required to close acquisition, such financing includes a $500 million 3-year collateral loan (inaudible) on August 30 and a $1.5 billion 5-year syndicated loan (inaudible) during October. Both loans are pre-payable at any time and we're financed at very attractive rates.

In connection with these transactions, we have swapped most of the debt acquired into Brazilian rei to match the recently acquired assets with a locally-denominated liability.

We continue to make significant organic investments in Brazil that will allow us to capture consumer demand as this trends upward. Such investments include the construction of another regional center to better serve the Northwestern area of Sao Paulo and the installation of a fully-automated vertical workout in our largest production plant.

In addition, we expect to open our new state-of-the-art bottling plant in the state of Minas Gerais during the second half of 2014.

These organic investments, combined with our recent acquisition of two franchises in the region, are a testament to our positive long-term view for Brazil.

This year we have significantly strengthened our position in Brazil as we have done in other countries in our geographically diverse portfolio, our investments through tough times will better position us to capture the benefits of the market's recovery. We are confident that our operators will work consistently to seize these opportunities today and into the future.

Moving on to Argentina, we achieved close to 9% volume growth in this franchise, despite an un-improving consumer environment during the quarter. This increase was mainly driven by 8% growth of brand Coca-Cola, supported by the launch of Coca-Cola Light at the end of the second quarter.

Our team's flawless execution of the launch of Coca-Cola Light in Argentina enabled us to gain additional share in the sparkling beverage category. As of September, we reached the highest share of market and share of value in this category in the past 19 years.

Furthermore, our BonAqua water brand continues to perform well in the market and we are strengthening our execution in certain key channels of this category. The recent launch of FUZE Tea has proved a real success. Brazil has a natural benefit to quench consumers' thirst. FUZE Tea has already gained a significant share of the flavored water category in only a matter of months.

We are confident that our Argentine operators will continue to perform well through the current consumer environment, capitalizing on a wider portfolio to capture more consumers, and our relentless focus on current discipline and efficiency optimization.

Our Venezuelan operations delivered solid 16% volume growth for the quarter. This increase was mainly driven by 17% growth in brand Coca-Cola, 10% growth in flavored sparkling beverages and 34% growth of del Valle Fresh, which was supported by the launch of additional flavors to complement this brand's offer.

With regards to Colombia, our strategy continues to yield positive results despite certain disruptions during the month of August and a difficult consumer and competitive environment. During the quarter, our volume increased 7%. Brand Coca-Cola grew 9%, driven mainly by the continuing success of our 1.25 liter returnable glass presentation and our 250 milliliter entry pack strategy.

Del Valle Fresh, FUZE Tea and Powerade showed 42% growth in our non-carbonated beverage portfolio. In the water category, Brisa and Manatial continued to deliver positive results, supporting 3% growth in this portfolio.

At the South American division level, the local currency revenue management initiatives that we implemented in Venezuela, Brazil and Argentina; coupled with the positive volume performance in the division during the quarter; resulted in a 27% currency-neutral revenue growth in our South American division.

The devaluation of each country's currency is applied to our U.S. dollar-denominated U.S. input cost more than offset lower sugar prices in the division and lower PT prices in Brazil, resulting in a gross margin contraction.

Operating expenses in the division continued to reflect labor and freight cost pressures in Venezuela and Argentina, changes to the transportation law in Brazil and increased marketing investment across the division.

In South America, our operators have implemented the right strategy to address each market challenge effectively to connect with our consumers more closely and to seize the opportunities that we have identified for the future.

We continued to increase our levels of productivity and efficiency to achieve the full operating potential of every franchise territory in this division.

With regard to our Philippines operation, quarterly revenues were down low single digits, driven mainly by our decreasing volumes due to the [two-type] launch that's hit the country and our initiatives to reconcile the portfolio.

The recent interruption of Mismo, our 300 milliliter one-way representation and the reinforcement of [Casalo], the 700 milliliter returnable glass presentation supported 9% growth of brand Coca-Cola in the quarter. This performance was more than offset by decrease in volumes of Coca-cola and flavored sparkling beverages.

In addition to the progress of Pampanga in the central (inaudible) area, the rollout of our go-to-market approach has been implemented in five out of the six distribution centers covering the greater Manila area, with encouraging results in terms of both clients and delivery partner acceptance.

In the last month alone, we rolled out the new commercial model in 43 new centers, building on the positive momentum that our team has developed in the country. With only one more distribution center to go, we are working to complete the rollout in the greater Manila area by the end of this year.

During 2014, we will leverage the knowledge gained from these rollouts to convert distribution centers in (inaudible).

Allow me to expand on our consolidated financial position. As of September 30, we had a cash balance of MXN23.8 billion and our total debt was MXN44.6 billion. Our net debt to EBITDA ratio was 0.74 times and our EBITDA to net interest ratio was 15.3 times, highlighting the strength of our balancing our strong prospects for cash flow generation, and our expected path to deleveraging of our capital structure.

With respect to the government proposal to impose an excise tax on sugary beverage in Mexico, we can share with you that the lower chamber has approved the proposed charge of MXN1 per liter and have sent it to the Senate where it will be voted on by October 31.

Although we are certain that this proposal will not (inaudible); if approved, we will make the necessary adjustments to our operating structure and portfolio to protect the profitability of our business, while maintaining our competitiveness and staying on our growth trajectory.

We would like to remind our shareholders that as of November, we will pay the second installment of the dividend approved by our shareholders in the amount of MXN1.45 per share.

Looking at 2014, we see a benign commodity cost environment with sugar and PT prices remaining stable sequential in June dollar terms. For fructose, we have already locked in our required consumption for Mexico at lower prices than 2013. Additionally, we have cached an important part of sugar and PT in Brazil and Colombia at lower prices in order to prevent volatility in our input cost.

In the face of continued currency volatility and the challenges that each of our operations present, the investments we have made in every one of our markets make a strong foundation to take advantage of the recovery that we see in the short-to-medium term.

The strength of our operating team, the magnitude of our beverage portfolio and the defensive profile of our geographically diversified footprint will enable us to deliver growth and value for our shareholders.

Thank you for your [time] and support and Operator, I will like now to open the call for any questions.

Thank you. (Operator Instructions). Lauren Torres, HSBC

Good morning, everyone. Hector, if you could talk about the volume weakness that we continued to see in Mexico; I guess it about down 1%. You put through a lot of initiatives to kind of maintain your volumes but I was just curious in light of what you're seeing at the consumer level, if there is the ability to kind of turn this positive in the near term or we should continue to expect declines?

And then if I could take this a little bit further, in light of the potential tax increase on sugared beverages; you've talked about things that you could do. I don't know if you can or would shed some light on those initiatives now. I mean is this more price led in order to kind of keep things going to offset the tax increase or you feel there's other initiatives to keep things going for you looking into next year? Thanks.

Good morning, Lauren. I think that it's very important to highlight that in Mexico in this quarter, volume trends were very positive during July. If I remember correctly the number was somewhere around 4% volume growth. August we had a positive trend; between 1.5% to 2% volume growth which is very encouraging for the quarter. But then September with these two hurricanes that hit very strongly in the Acapulco area and obviously affected the central part of the country and in the Gulf area with Ingrid and Manuel, I think Vera Cruz and the Tampico area, the (inaudible) area; volumes in Mexico for the month of September were very down 11% from last year.

That has to do a lot with the disappearance, let me use that word, for a few weeks of many of our clients that were flooded, a lot of these mom and pop- the recollection I have it's around 6,000 mom-and-pops were closed for a couple of weeks and then some of them probably will not reopen because they do not necessarily have the resources and the working capital to start building the small store again, no?

We did not suffer in our production plants or reclusion centers. But on top of the problems that we had with our clients, the small mom-and-pops; there were a lot of disruptions in the highways and you probably heard in the news that the communications from Mexico City to Acapulco was closed for two or three weeks.

So I'd like to think and maybe it's a little optimistic here, Lauren, but I think that September really brought down what looked like a very good quarter for the first two months.

We continued to see some softness in the consumer and you see that in other consumer companies and the results are announced by Wal-Mart and some of these stores. But we think that with the strategies that our operators have in focusing on the returnable presentations, you know it's a more affordable presentation for the consumer; that we were in the right direction on this quarter.

I hope to see recovery in the fourth quarter. Normally when it stops raining, then we get a good feel of recovering some of the inventories. And I hope that-- my expectation is that some of this strategies, as I mentioned during the introductory remarks, the returnable presentations can increase- important in the mix like 210 basis points; it's close to 36% now of our mix.

All of that bodes very well for our consumers that has-- there is a little more investment and (inaudible).

Now the new tax that was passed by the lower house, basically calls for a MXN1 per liter on sugary drinks. And we think they are discussing that in the Senate. The time here in Congress is that before October 31, it should be decided.

Assuming that this tax stays at MXN1 per liter, obviously we will need to focus a lot on the profitability of the business. That means basically implies that we will pass this tax to the consumer. In general, we think the industry will do the same thing because it's a heavy tax. It hurts different to different players because we have different price points. Even we think Coca-Cola FEMSA returnable presentations that have a lower price per liter will be hit a little bit harder by this tax. But obviously, some of the lower-priced brands, the percentage-wise will be affected a larger proportion.

We think that-- and our operators are already looking at some of these strategies that we'll follow for next year and that includes doing a full reconfiguration of our whole portfolio, even doing some downsizing. We need to look for the magic price points. So in other words, if we sell a 600 milliliter one-way presentation at [8.50], we need to increase 60 cents. We are going to increase it probably MXN1 because then you have to get to the price point that is the convenient magic price for the consumer; otherwise, you leave fractions there in the marketplace, fractional prices, then they will pay- the system will stay with the extra margin and we will not get the benefit of leaving those 3 cents in the (inaudible).

So in general, I'd say that if we work to increase-- if we were to have this tax of MX1 per liter, assuming that that passes, we will broadly increase in prices somewhere around 12% to 15%, in others only as I said returnable presentations will not get the same as some other presentations will lower (inaudible). Probably diet drinks will not be moving prices, because that will not have a tax on that. We are still debating internally if we will increase prices or not there and that will have obviously consequences in the volume and consequences on investment.

We'll probably have to reduce the workforce, importantly. Our calculation is that we will have probably around 3% or 4%, probably close to 5% of our routes that we can stop. So we will not be buying any trucks next year. Probably we will reduce a lot our purchase of coolers and certainly there will be a reduction in headcount because we will have extra capacity. If we increase prices on those levels, let's say close to 15%, we could see a reduction in volume at the low end probably 5%, the high end probably 7%. And that really creates a lot of extra capacity and our duty as managers of this Company is to continue looking for the profitability of this business and try to maintain that profitability.

I think that that's basically-- I think that is a good example of what to be expecting if that passes, if that tax passes next year.

That's really helpful. And I guess just one last comment or question to what you just mentioned. If we do see that 12% to 15% price increase, the proportionate volume decline based on that price increase-- is it something that we're going to see mid-single-digit volume declines, or you have initiative to offset that, so that wouldn't be reflected through on the volume?

No, when I say that somewhere around 5% volume decline, that includes some initiatives probably configured in the portfolio and looking for market prices. It's important that we maintain a MXN5 price point and that would imply reducing the size of some of the presentations. That will imply moving through to different returnable sizes, so we'll see a lot of activity in the configuration of our portfolio and also how we go to the marketplace.

Okay, very good. Thank you.

Antonio Gonzalez, Credit Suisse

Good morning, everyone. Thanks for the call. This is Hector Armando Perez on behalf of Antonio. I have only two questions, if I may.

First one, can you comment on your beer performance in Brazil? Heineken has just reported a high single-digit decline in volumes in the quarter and Carlos Salazar mentioned in the last conference call he joined that you might seek to fine-tune some aspects of their relationship with Heineken in Brazil. So we were wondering if there was any relationship in there, especially with acquisition of Fluminense.

And the second question will be- could you give us more color on your performance on the different channels; how full retailers perform versus mom-and-pops? And that's it. Thanks.

Good morning, Armando. We have not done any activity with Heineken. I think that in general, if I can comment on Carlos Salazar's comment last time. I think that what he was referring is- we already represent 40% of the Coca-Cola system in Brazil and all of the Heineken growth flows through because of volatility in Brazil. I think that given the size that you were referring, is that we have the size to start negotiating better in commercial terms with Heineken. We have not done anything in that respect so far. It was just more in anticipation of something that's going to be done in the future, if and when it makes sense.

In Brazil, I think that if you look at the sparkling beverages and the consumer indices, we have had a very tough environment. I mean every single consumer company that I have reviewed is having some problems in Brazil. All the other bottlers (inaudible) in the system are also suffering. The positive notion is that I think that we are getting-- the third quarter on a sequential basis shows some better trend in the volumes. If I remember correctly, for the first semester in sparkling beverages we were probably down close to 10% versus last year. And this quarter we are seeing more like a low single digit number. It's still down. So we are improving. It has to do a lot with the initiatives that we have done and again [market] prices. We have started to increase current presentations at 1, 2 and 3 rei in single-serve presentations that have grown very importantly. Obviously those presentations are having some cannibalization effect on other presentations.

The 2-liter returnable presentation is also growing importantly. But for example, 2-liter one way that goes through a different channel; it's suffering. And I think that from the point of view of the consumer, we are still seeing some weakness in Brazil. But it looks like the trends, at least for our industry, are starting to turn around a little bit and grow sequentially.

Very useful; thanks. Regarding Mexico, the performance per channel; have you seen a significant difference in there because we have heard from food retailers and the low-income segment has performed poorly so we wanted just to check, thanks.

In Mexico, the trend we are seeing is that the consumer is going more for the day-to-day purchase of what they need, the pantry needs; and they are going a little bit more to the traditional trade. The only problem with that trend is that September we see a lot of damage to the small mom-and-pops because they were closed, as I mentioned, for a couple of weeks because of these storms. But in general the trend is the consumer going more to the traditional trade, to the mom-and-pops; and less to the modern trade. Our reading from this is that the consumer is going more on a daily basis to get the staples they need for their daily needs as opposed to going on a weekly basis to the supermarket.

Thanks a lot; very useful.

Lore Serra, MS

Thank you and good afternoon, or good morning. I wanted to ask a question on Brazil. Can you confirm that-- you said that you were increasing the synergies from Fluminense from $14 million to $19 million; I just wanted to make sure I got the number right.

And I wanted to get your perspective on how you're thinking about 2014 in Brazil. I mean you started to talk a little about the raw material environment being benign for next year and obviously you'll work on getting the synergies from the deals. But what's your level of confidence that you can deliver important margin expansion in Brazil next year? Because this year has been a really tough year in Brazil and when you look at the factors that have plagued the year this year, I guess some of them remain for next year but some of them go away. So how does that balance out and what's your level of optimism about margin recovery next year in Brazil, please?

Good morning, Lore. First of all, the number that we are confirming is $19 million of synergies, 1-9; as opposed to the $14 million that we announced when we did the preliminary due diligence analysis there. It had to do with workhouses and some of the plants of the commercials practices and also in the production plant, we were finding some additional synergies, so we are early in this (inaudible) in synergies in the Fluminense acquisition.

The question regarding expanding margins in Brazil; it's a little bit tough to answer. Let me tell why. I feel very confidently that from a raw material point of view and from the production capacity and the efficiencies that we are achieving. All of that is improving and that will help us in the gross margin.

The issue that is affecting a little bit the profitability of the gross margin level also is that as the consumer is switching to other presentations and obviously you can imagine that serving 250 milliliters at 1 real which is growing very fast; that presentation has a lower margin for us. I think that those are some of the temporary sacrifices that we need to have to reconnect with the consumer, and then start again building and improving prices or changing the portfolio for example. If that is the case, we are already envisioning and moving in the direction of moving from 250 to 200 milliliters. We will maintain the 1 real per transaction, but improving the profitability of that.

So if you look at Brazil right now; what is happening is we are having an important success in reconnecting with the consumer, especially with those 1, 2 and 3 rei presentations, but for one-way and in the 2-liter returnable presentation. All of those presentations have lower margins than what we had a year ago, especially 2-liter one-way.

So little by little, Lore, we will start trying to gain a little bit more margin with those presentations, with the strategies that I described on changing the size or even increasing the price; trying to maintain this magic price. Obviously, for 1, 2, 3 (inaudible) would not change 1, 2, 3 rei; that changes more changes to the portfolio. But in the returnable 2 liters we have some room for managing prices and I feel very confident that all of the other indicators of productivity like cases produces by a number of people, the salaries that we're paying as a percentage of revenue, etc in the total of the Company; waste that's in the production plants; all the indicators with respect to productivity are improving and that will bode very well to improve the margins next year.

But a lot of-- the difficult part that I wanted to comment here is the difficulty of predicting what the consumer is going to be buying in terms of package, presentation and consumption location.

Great; that's really helpful. And then jumping back to Mexico for a quick second; can you give us a little color on what drove the expenses in Mexico because you had a very nice improvement in the gross margin but it seems like all of that was given back on the operating expense line and you talked in the release about more investment in returnables, but could you give us a better sense of kind of why the OpEx is outpacing revenue; not just for kind of this quarter, but for the year to date, please?

Yes, I think that there are two impacts that are very important that we're identifying. One is that we do not have the top-line growth that we were anticipating. So part of the reason is that we have an organization that (inaudible) and when that sales organization, I mean the street guys are selling-- the sales people there in the streets working every day. And the top line was not there, we are taking away some of the (inaudible) presentation that have the higher margins.

And the other element is the marketing expenses. It's not so much advertisement and things like that. It has to do a lot with the returnable presentation in production as we are increasing the size of that. It's again, it's a little sacrifice that you do now because you're increasing the depreciation of the returnable bottles is affecting the sales expense, but we think that as we are connecting better with the consumer with returnable presentations and therefore it will help in the medium to long term.

Those are the two main issues that are affecting why, even though we have a nice margin expansion, it's not translated-- I mean we are expanding our margins but not in the same proportion that we have our gross margin expansion.

Great. Thank you very much.

Fernando Ferreira, Bank of America Merrill Lynch

Thanks. Good morning, everyone. I have two questions. The first one I'd just like to understand is this pick up in your effective tax rate to 34%. You mentioned the inflationary adjustment in Venezuela. I just wanted to understand if we can expect the same level of tax rate going forward or was that a one off and we're expecting to decline to normalized levels in the next quarters?

Good morning, Fernando. This quarter were impacted by this inflation in Venezuela, because inflation was getting close to 50% and that's more of a permanent thing. But it was-- during this quarter we also have the effect that we lost a case that was in courts with respect to some past taxes. It really was from 2010 that we have to pay, including some penalties and that amount is non-tax deductible and all of that. So this effect in Colombia also helped move the effective tax rate to 34.7%

What I'm expecting and what you should look in operations is somewhere around 32% to 32.5% as an effective tax rate for the full year. It's what we should be expecting.

Okay, perfect; thank you. And then I had a question on Mexico as well. Have you started hedging your fructose needs for next year and what's the outlook you see for raw materials into 2014?

We basically have already locked in the fructose for next year. If I remember correctly, it's 100% of our needs. It's not a hedge. It's basically an agreement with the suppliers where we already agreed on a price and amounts that we want to be delivered on a monthly basis. Those agreements call for lower prices than what we have during 2013 and we have done some also hedging of a portion of what we call dollar-denominated raw materials so that we have, just a fraction; there's only going to be a percentage that we have already moved in, locked in the FX for some of our raw material needs that are dollar-denominated.

So that's why I feel confident that the raw material environment for us for next year is going to be a reduction; but really have some prices what we can do. For example sugar in Mexico we cannot hedge for; that's totally out and we'll need to negotiate on a quarter-by-quarter basis with the sugar needs. But what we can do with what we can advance, we have already done that for Mexico, Colombia and Brazil.

Great, thank you.

Karla Miranda, GBM

Hi, good morning, everyone. Thank you for taking my question. Hector, I have two questions. First of all in Mexico, it seems that while today it was published that the Senate discussing to maintain the [EVA] in the border area of Mexico at 11% and in order to compensate for that loss in taxes, that it would be discussing to increase the proposed tax on beverages to MXN2 per liter instead of the MXN1 per liter that the lower house approved. Have you measured the impact of this mentioned MXN2 per tax liter?

And second of all, I was wondering if you can give us some idea on how the CapEx should behave in Mexico in case that the tax is approved? Thank you.

Good morning, Karla. The first part of the question, we have not measured any impact. We have to wait until the final decision is taken (inaudible). There are a lot of rumors going on and it's really not good to be planning on all of those rumors. We have not done any exercise yet, or helped to adapt our business in case something as you described happens.

With respect to your second question, CapEx for Mexico; for certain it will be reduced substantially. I already mentioned that, assuming that the tax goes by as it was written in the lower house of MXN1 per liter; we will not be buying any trucks next year. That's a big amount and we will have around seven production lines that will be totally EVA, so we will not need to do investments for two or three or four more years in production capacity.

And we need to also make sure the impact of our cooler investments and returnable bottles-- they are important elements here in the CapEx, in our CapEx. The big lines in the CapEx always have to do with returnables and cases, coolers and trucks and whatever you need for production capacity. None of them will have-- even capacity I would substantially reduce our investment. We will continue to do some replacement of the equipment that is totally outdated or that is broken down or whatever, so we have some CapEx; it's not huge. But we will substantially reduce our CapEx number for next year.

Great. Thank you for very much, Hector. That was very helpful. And if I may have another question regarding Colombia; it seems that the strategy that you've been implementing for the full year is already, it has been paying off in terms of volumes. But I don't know if you could give us more color regarding how's the profitability line working over there? Thank you.

Yes Karla; Colombia; we are basically in line with our plan. Remember now for a number of quarters I have mentioned that for 2013 we will suffer in Colombia because we are reducing prices in order for us to capture some volume. I think that the volume trends are very, very good in Colombia. Brand Coca-Cola is growing importantly, we're gaining market share. We are suffering a little bit on the profitability side because the competitors are also reacting to that and the competition is getting a little bit tougher.

But I think that we are very well within our plan of starting now to improve the price points, once we are connected again with the consumer and we'll expect the profitability to improve. But if you remember correctly probably a year ago, in the last conference call of 2012, I was mentioning that we have this plan for Colombia that will be (inaudible) for our profitability, with the expectation of increasing volumes importantly. I think we are pretty much in line with that plan.

Great. Thank you very much.

Alan Alanis, JPMorgan

Hi, everyone. Thank you for taking my question. The first question I have, Hector, is regarding the high fructose and sugar. Could you remind us how is your mix right now between fructose and sugar in the context of high fructose or corn prices having come down more than 40%-- I think they're 44% down year over year, while sugar is only down high single digits. I mean how much can shift and you plan to shift towards more high fructose on the light of that situation? That would be my first question and I have a follow up, but it's a different question, okay?

(Inaudible) your first question; we are basically at the maximum capacity that we have to have in fructose and we are more or less 60% fructose and 40% sugar in our mix as we speak. It is precisely what you say with prices being very good on the fructose area with lighter declines in the sugar. It's easier for us to move to a larger percentage of uses of sugar, but using more fructose, we are fixed at the top. We will not be able to grow significantly from those levels.

Got it. Okay, and the second question has to do-- I mean you talked about FUZE and Valle Fresh in Mexico as one of the other emerging categories that continue to perform very well. Could you give us some comments on other categories, specifically the dairy ones, Santa Clara; and your coffee initiatives? How are those doing and then another from a much smaller base, but you're referring to quite positive results I think in dairy in Panama. So I guess we can frame that question as well as lessons learned in Panama that you are rolling out, that you could be rolling out in Mexico.

I think that in the case of Santa Clara in Mexico, the dairy company; we are working according to our plan. I think that we have positive results in general. We have not fully developed the traditional trade which is really the missing link that will really slowed volumes for Santa Clara. Obviously we need to work on the capacity and all of that. We are working in adjusting all of our learnings and everything to work on the modern trade, which is where Santa Clara is present. We are not really working on innovation with new products, etc. But really to catapult really the growth in dairy, we need to be able to get to the traditional trade and we are still working on that.

Other categories are growing importantly which I'd like to highlight is that in the case of Powerade, we are continuing to increase market share, importantly. And as I mentioned in the speech, in some of the regions that we serve we already have more than 50% market share which is I think is a tremendous job by our operators, given the strength of our competitor's brand preference that we had in the past. So I think that we have done a tremendous job there.

And as you said, FUZE and Valle Fresh have continued to grow, the non-carbonated drinks continue to do well of having an alternative to our sparkling beverage and growing at their pace we have seen for many quarters.

Got it. Congratulations and if I may, last question; regarding your dividend policy; I mean you're going to go to I think 1.6 times net debt to EBITDA next year as we start seeing the debt acquired for Spaipa. Is that increase in leverage changes at all or influences at all the way we should be expecting dividends, Hector? That will be it.

Yes, we need to look at the-- our first take Alan, is to fully understand the impact of this tax, as soon as (inaudible). And ultimately the tax also calls for a tax on dividends that we need to understand; if it's something that we are going to repay at the time it is paid by the dividend that receives the tax, or is it a tax on the Company. Those also will be influencing how our dividend policy is going to maintain. Our first state so far is we think that the debt that we have taken, it's nothing to worry-- it should not influence our dividend policy. But certainly the performance of Mexico, depending on how we can work around this new tax in case it's passed and this new tax on dividends; we might be adjusting our (inaudible).

Our first, as I said, our first intention is just to maintain a dividend that is similar to what we had on this year, 2013.

Got it; very clear. Thank you so much, Hector.

Luca Cipiccia, Goldman Sachs

Thank you. Thank you, good afternoon. Good afternoon, everyone. Just a couple of follow-up questions on Brazil and I was wondering- as we look in 2014 related to some of the previous questions and your capability to return to an upwards move in margins, how should we consider the impact from the World Cup? More in the sense of-- supposedly it's going to benefit, the sector is going to benefit, most consumer companies. But in your case, there should be a convergence of investments from Coca-Cola itself, so I was just wondering if we can make a relation with similarly instances in the past when the local operators have benefited from the additional investment visibility. It is a global platform for Coca-Cola. One would expect that they would also invest a lot around the event. So I was just wondering if that is going to be a factor.

And also related again on Brazil, you've been commenting for some time on the pressure on the operation costs from transport, from labor costs. As you gain more scale, as you move forward with the acquisition, how-- what are the initiatives that you could do or that you may have already started to put in place, to contain some of that inflation? How should we think about that going forward, given that it's been a factor for some time now?

Normally when you have a World Cup Soccer event as important as the World Cup; normally what happens is that the marketing expenditures grow a little bit because the Coca-Cola Company and the bottlers together normally decide to do a lot of much more activation of our brands around those events. I think that locally in the field, where the companies are in their field, you will see some investments in trying to capture high profit areas with spending on equipment and banners and promotional activity and all of that.

Normally we see an important pick-up in volume but also some additional expenses related to marketing, which normally tends to be positive at the end of the day for the local bottler.

With respect to labor and freight cost in Brazil, we have a lot of regulation with respect to, especially to the freight (inaudible) that is impacting especially Sao Paulo because obviously or the lighter cities; as we have moved to [Flumi] and (inaudible) to Spaipa, we will not suffer as much in Sao Paulo with this transportation law. But normally what is happening is that the government is trying to have more transparency in their relationship with all of these transportation companies that usually were very formal in terms of the taxes and all of that.

The costs for these third-party providers, transportation providers, were increasing very importantly because for them, just to accommodate this new regulation it is more expensive for them. So what we are seeing is that, and other companies are doing the same as we are, is starting to do more and more our own freight services in a way, with internal-- with our own employees and our trucks. That will call for some investments, but that's much better to have it like that than to suffer the price increases that will apply, accepting the new tithes from the third-party suppliers of these services.

So that's basically what is happening, not only with us but other consumer companies also. It's the-- let me use the word, internalization of the freight services and going just like their own freight services.

So would expect this pressure to graduate more the rate; how should we think about that as we look at 2014 for this type of cost?

Yes, (inaudible), as I was saying, we are internalizing some of these services. We are growing some profits with respect to that and increasing our labor and workforce, but you will see a more normalized trend in 2014.

Thank you. Thank you very much.

Our final question comes from Luis Miranda with Santander.

Yes, hi; good morning. Thanks for taking my question. Most of them have been answered. Just to follow up, Hector, in terms of the competitive environment in Mexico; have you seen any change regarding-- I understood that there were basically the key competitors are focusing on some key accounts and how you mentioned high profile accounts. And has that been the case in the quarter or have you started to see some change that flows to the traditional channel? Thanks.

Good morning, Luis. I think that in general I think the main competitor continues to be aggressive with some of these key areas or high profile clients, as you called it. And like (inaudible) and some savings on (inaudible). I think that in general, we see a lot of aggressiveness in that sense. We have regained some of these points, again without paying a lot-- without paying extra resources. But in some cases, when we see a client that is being offered what we believe is an irrational proposal, then we just walk away from that and just focus our marketing resources in other areas. But we see our main competitor is quite aggressive on that front, especially in Mexico City.

Perfect, thank you. And if I may have a follow up here; you mentioned the steep decline in September for the reasons that we know. But your October, have you seen a material improvement or has seen or the sequential recover has been very slow, with information that you have so far?

Yes, October has a positive trend in low single digit numbers for Mexico. I'd say that in general, and expecting positive results in Mexico and Central America. In the case of South America, we are seeing very good positive trends in Argentina and Venezuela. Colombia is also-- like Colombia was very good volume trends. We have continued to see some softness in Brazil in spite of all these efforts of the market prices and all of that; Brazil so far in October is (inaudible).

Okay, perfect. Thank you very much.

It appears we have no further questions in the queue at this time. I would like to turn the conference back over to Mr. Trevino for any additional or closing remarks.

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

That does conclude today's conference. Thank you for your participation.