Coca-Cola Femsa SAB de CV (KOF) 2013 Q4 法說會逐字稿

Good morning, everyone and welcome to Coca-Cola FEMSA's Fourth Quarter 2013 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 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 many of you are aware, during the fourth quarter of 2013, we continued to face a difficult consumer environment, mainly in Mexico and Brazil and currently volatility across our Latin American markets.

Nevertheless, our balanced geographic portfolio and our revenue management initiatives, enable us to deliver organic currency-neutral revenue growth of 12% for the quarter.

Our reported consolidated total revenues reached close to MXN43 billion in the fourth quarter, including the non-comparable effect of the results from Grupo Yoli in Mexico, and the operations Fluminense and Spaipa, which were integrated into our Brazilian franchise in September and November of 2013, respectively.

Our consolidated gross profit margin was negatively affected by the devaluation of the currencies in our South American division and Mexico, as applied to our US-dollar-denominated input costs, which offset lower sugar and relatively flat PET prices in most of our franchise territories.

With regard to our consolidated expenses, we continue to see higher labor and freight costs, especially across our South American division, and more recently freight cost pressures in our Mexican operations as well.

As we have done throughout the year, we continue to reinforce our marketplace execution, enhance our returnable packaging base, and foster our magic price point strategy to intensify our opportunities to connect with the consumers across our territories.

During the quarter, our net income reached MXN3.1 billion. A larger debt balance, resulting from our recent acquisitions, led to higher interest expense. Moreover, the effect of the quarterly depreciation of the Mexican peso on our dollar-denominated net debt position, gave rise to a foreign exchange loss.

Now, let's discuss our operations.

In Mexico, an economic slowdown resulted in the deteriorating of the consumer environment through 2013. More recently, we experienced lower average temperatures and increased rainfall over the last four months of the year.

Our reported volume growth in Mexico for the quarter was 5%, including the non-comparable results of Grupo Yoli. Adjusting for these results, our volumes declined to close to 1%, reflecting ongoing consumer dynamics and bad weather conditions.

Organically, the personal water category grew 8%, driven by the Ciel brand, and the non-carbonated beverage category remained flat. [Notably] Powerade grew 23% during the quarter and continued to gain share across sales channels.

Our Mexican operation has focused on affordability through returnability, to connect more closely with our consumers. Our returnable packaging portfolio grew 5%, gaining 180 basis points in our mix of sparkling beverages. This increase was supported by 32% growth of our 500-milliliter returnable glass presentation, the recent introduction of our 3-liter returnable PET presentation for brand Coca Cola in Del Valle of Mexico, and 12% growth of our 1.25-liter returnable glass presentation.

All of these presentations were complemented by the performance of our 2.5-liter returnable package for Sidral Mundet in the Del Valle of Mexico.

In Central America we achieved 4% volume growth during the quarter. We delivered positive volumes in every country, especially our Guatemalan operation, which volume grew almost 8%. Growth in the region was mainly driven by 4% growth of brand Coca Cola, coupled with the sustained momentum from the [Cul Del Valle] line of business and the 20% growth of FUZE tea and the continuous strong performance of Powerade.

For the fourth quarter, our reported Mexico and Central American division total revenues grew 7%. On an organic, currency-neutral basis, the division revenues grew 1%, reflecting lower volumes and an average price per unit (inaudible) increase below the rate of inflation, which mainly resulted from a shift in our packaging mix to both returnable and multi-serve presentations.

Organically, lower sugar prices were partially offset by the depreciation of the Mexican pesos applied to our US-dollar denominated raw materials cost, resulting in a gross margin expansion of 40 basis points in the division.

Overall, our division's organic operating cash flow margin expanded 30 basis points during the quarter, despite ongoing marketing investment and freight cost pressures resulting from lower volumes and higher fuel prices.

For the full year of 2013, our Mexico and Central America division delivered an operating cash flow margin expansion of 110 basis points.

As many of you may know, as of January 1st, 2014, the new excise tax on sugary beverages went into effect. This requires beverage companies to pay a MXN1 per liter tax on any beverage that contains added sugar or fructose. As anticipated, since January 1st, 2014, we've passed this excise tax on to the end consumer to an average price increase of 16%.

In anticipation of an environment where many companies in addition to those in the beverage industry have to raise prices on account of increased taxes, we reinforce both our returnable portfolio and our one-way PET single-serve platform to 2013. Consequently, today we offer our consumers a more robust and affordable portfolio to enjoy the most beloved soft drink brand in the world.

We are confident that our amplified portfolio of returnable presentations, our magic price point strategy, and our relentless focus on point-of-sale execution will enable us to win in the marketplace.

In January, despite the pricing initiatives implemented and an aggressive competitive landscape, our market share of sparkling beverages remains stable across our territories, when compared to the previous year. More importantly, in Del Valle of Mexico, both brand Coca Cola and our flavored sparkling beverage portfolio gained more than 1 percentage point of market share.

Looking forward to the rest of 2014, our operators' consistent execution of our strategy, position us well to capture marketplace opportunities and remain the preferred choice of our consumers.

On top of the initiatives we have implemented for our regular sparkling beverage portfolio and in the spirit of getting closer to our consumers, we are working to increase the point-of-sale covers and packaging alternatives for our low-calorie sparkling beverage portfolio, which was unaffected by the excise tax and provides an additional alternative for our consumers.

Aside from our top-line initiatives, we have been working to optimize our fixed-cost structure since the beginning of the year. We will continue these efforts to protect the profitability and cash flow generation of our Mexican business.

Moving on to our South American division, our operations' organic volume declined 2% during the quarter. This decreased resulted from a continuous soft consumer and macroeconomic environment in Brazil and certain operational disruptions in Venezuela.

In Brazil, as of September, we are including the results from Companhia Fluminense, and as of November we are including the results of Spaipa as well.

As we entered the summer season in Brazil, our organic performance continued to reflect a soft consumer environment, and heavy rainfalls in our [Minajirais] franchise, coupled with lower temperatures across our territories. Consequently, our organic volume in Brazil declined 11% for the fourth quarter.

During the quarter, we completed our portfolio strategy to intensify our connection with consumers to magic price points for single-serve consumption and our affordable returnable 2-liter presentation. We launched a 200 milliliter one-way PET presentation for brand Coca Cola at BRL1, replacing our 250-milliliter presentation in the traditional (inaudible).

We reinforced the on premise challenge through our 300-milliliter one-way PET presentation at BRL2. Additionally, our popular 12-ounce can will allow us to play an important role at the BRL3 price point. And finally we are offering our 600-milliliter one-way PET presentation at BRL4.

Taking into account the recent launch of our 200-milliliter presentation, we are encouraged by the point-of-sales covers and price compliance that our operators have achieved thus far. More importantly, our 2-liter returnable presentation for brand Coca Cola grew 14%, supported by our team's effort to increase the package penetration and acceptance.

As a result, we increased the mix of returnable presentations in our portfolio to 15.5%, an increase of 160 basis points versus last year.

In light of the positive results, we will continue to work to increase the point-of-sale coverage of these presentations to provide our consumers with a wide array of attractive alternatives to quench their thirst.

As we have often noted, our organic infrastructure and marketplace investments, along with the integration of Fluminense and Spaipa, are testaments of our Company's positive long-term view on Brazil.

In the short term, a much anticipated sport event will allow us to generate momentum in 2014. The FIFA World Cup to be played in June and July, will not only drive incremental sales of our beverage during the event, but also more importantly will provide the Coca Cola system with a perfect opportunity to increase connection with our consumers in every event and promotion leading up to the World Cup.

Thus far, our Minigarrafinhas de todo Mundo promotion has proved immensely popular with consumers and among many other promotions and events. We'll forward to hosting this profit tour in our territories during April.

Operationally, the start of 2014 is already encouraging. Our portfolio initiatives are making the right connection with consumers and coupled with favorable weather conditions, our organic volumes are up by high single digits so far this year.

Through the integration of Spaipa of Fluminense, we have enjoyed the opportunity to enrich our management bench with the talented executives from these franchises.

For the rest of 2014, we are confident that our expanded operation in Brazil, bolstered by another integrating of professionals, will continue to work positively to reinforce our marketplace execution and improve our operation's top-line performance, supported by a more robust portfolio of offerings for our consumers, a simplified picture of success for our clients and selective price increases across our territories.

We will continue to optimize our operating structure in the country, encouraged by the fact that we have already started to capture the benefits of our identified synergies from the integrated territories as of 2014.

Moving on to Argentina, during the quarter we achieved more than 8% volume growth. This increase was mainly driven by the remarkable 30% growth of our flavored sparkling beverage portfolio, as our local operators prepare in advance to meet big peaks on demand, reducing out-of-stock indicators and improving delivery efficiency rates.

Additionally brand Coca Cola grew 3%, supported by the recent launch of Coca Cola Light and the performance of Coca Cola Light and Coca Cola Zero.

Furthermore, our Bonaqua water brand continues to contribute significantly to this operation's growth, successfully building on this launch in the fourth quarter and last year with solid growth performance.

The non-carbonated beverage category grew 8%, driven by the successful launch of FUZE tea and the Cepita juice brand. During 2014, we are confident that our Argentine operators will continue to perform well through the current consumer environment, capitalizing on an improved operational structure and a strong portfolio of products and packages while relentlessly focusing on first discipline and efficiency optimization.

Moving on to Venezuela, during the quarter we faced a considerable slowdown in our (inaudible) plant and distribution center due to labor contract negotiation. Consequently, this operation's volume was down almost 6% in the quarter. The non-carbonated beverage category grew 24%, driven by Del Valle Fresh, with grew 31%; and [Capital] which grew 41%.

Our bottled water portfolio grew 28%, supported by the performance of the Nevada flavored water portfolio, which has enjoyed great acceptance among consumers locally. These increases were offset by a decline in sparkling beverages.

Year to date, we continue to see strong consumer spending levels that are reflected in the positive volumes for this operation.

In the first two months of the year, our operation's volume has grown mid-single digits, successfully building on two years of important growth. Despite this tough macroeconomic and operating environment, we are confident that our Venezuelan team has the right tools and the skills to better execute our picture of success at the point of sale, increase cooler covers, and maintain the flexibility to launch products and packages that will meet our consumers' demand.

In Colombia our strategy continues to yield positive results. Despite a tough consumer and competitive environment, during the quarter our volume increased 9%, successfully building on a 10% increase during the fourth quarter of 2012.

Brand Coca Cola grew 10%, driven mainly by the continued success of our 1.25-liter returnable glass presentation, and the launch of additional multi-serve one-way presentations to cover market price points for the consumer, and our affordable entry-pack strategy.

Del Valle Fresh and FUZE tea continued to perform exceptionally well, growing 50% and 52%, respectively during the quarter.

In the water category, Brisa and Manatial continued to deliver positive results, supporting 10% growth in this portfolio.

We began 2014 on the right foot in Colombia, growing volumes at mid-to-high single digits, successfully building on a 6% growth in the first quarter of 2013. We will continue capitalizing on our Colombia strategy, fostering per-capital consumption through better execution at the point of sale, increase cooler covers, and a more affordable portfolio.

At the South American division level, the local currency revenue management initiatives we implemented in Venezuela and in Argentina and Brazil, coupled with our positive volume performance in Colombia and Argentina, resulted in 21% currency-neutral revenue growth for the division during the quarter.

The devaluation of each country's currency as applied to our US-dollar-denominated input cost, more than offset lower sweetener prices in the division and lower PET prices in Brazil, resulting in a gross margin contraction.

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

With regard to our Philippines Operation, volumes were down only slightly in the quarter, despite the typhoon that struck the Visayas region and our ongoing portfolio reconfiguration initiatives across the country.

During December, we launched Minute-Maid fresh Orange and new low-juice content beverage tailored to the taste of the Philippine consumer. Initially, we launched a 250-milliliter one-way PET presentation with great success and consumer acceptance. More recently, in 2014, we complemented this brand offering with an 800-milliliter presentation.

Consistent with our strategy, we continue to enforce our one-way PET offerings in the marketplace. During 2013, completed the rollout of our go-to-market approach in the greater Manila metropolitan area with encouraging results. In 2014, we will expand our route-to-market model to cover as much as 70% of the country's (inaudible).

Now, allow me to expand on our consolidated financial position. As of December 31st of last year, we had a cash balance of MXN15.3 billion and our total was MXN60.5 billion. Our net-debt-to-EBITDA ratio was 1.58 times and our EBITDA-to-net-interest ratio was 10.6 times, highlighting the strength of our balance sheet.

Over the course of the year, we took proactive steps to further strengthen our capital structure as well as to follow our investments and acquisitions. During the past 12 months we have levered our flexibility and capability to issue approximately $3.1 million in three separate transactions in Mexico and international markets at very attractive rates.

Through this issuance we performed, [the ability] management strategies that enabled us to expand our investor base and improve our debt maturity profile, lengthening the average life of our debt from 4 to 8 years.

Moving ahead, we will capitalize on our proven ability to reduce debt, as we did subsequent to our acquisition of Bonaqua two years ago, to de-lever our Company over the next few years.

Yesterday our Board of Directors agreed to propose a dividend of approximately MXN6 billion to our shareholders. This proposal now represents a dividend of MEX2.90 per share and will be paid in two installments during May and November of this year.

As we shared with you recently, we continue to see a benign raw material environment for 2014 with PET prices remaining stable sequentially in US-dollar terms, and sweetener prices below 2013 levels.

For the remainder of 2014, we will work diligently to achieve the synergies that we have identified in our recently merged and acquired franchise territories. Despite the structural changes, particularly in Mexico due to the excise tax on sugary beverages, and Brazil due to the new transportation law; we will take advantage of our team's capability to adapt our operations to the new market dynamics while remaining focused on the prospects presented by our markets.

The strength of our operating team, the breadth of our multiple (inaudible) beverage portfolio, and the robust profile of our geographically diversified footprint will enable us to embrace the recovery that we envision in the upcoming future.

Thank you for you trust and support. And Operator, I would like to open up the call for questions.

Thank you. (Operator Instructions) Alan Alanis, JPMorgan

Thank you so much. Thank you, Hector; good day. The first question I have regarding working capital in 2013, I think you had a consumption of almost MXN900 million during the year. How do you see this going forward to 2014, Hector?

Yes, good morning, Alan. Yes indeed, as always we have paid very strong attention to working capital. I don't think there is anything to worry in these numbers. Basically, this is a reflection of two main issues. One and most importantly is the Venezuelan situation where our inventories are increased because of the scarcity that we find in that environment. So if we were to have normal inventory levels, out of that MXN900 million that you have mentioned, I'll say between MXN500 million to MXN600 million had to do with that situation in Venezuela, high inventories of raw materials and spare parts, because again, since there is a scarcity in the marketplace, every opportunity we have to buy these products, to basically have stability in our operations in terms of the ongoing operations and continue with the operations, we have been taking those steps.

The second element, Alan, is that we are incorporated in the Spaipa and [Fluminense]; so that happened in September and November. So we have the working capital needs of those businesses and still on the revenue side, on the profitability side, they are still just starting to be incorporated; but the inventories and accounts receivables and everything are the ones that changed that, you see.

So I will not put a lot of attention to those issues, Alan, and I don't think that there is anything strange other than the Venezuela situation that I explained, because of the scarcity that we're seeing in the marketplace for some of these spare parts and raw materials, that we need to build higher inventories to ensure the continuity of our business.

Yes, that's very clear. No, thank you so much. Now a couple of very unrelated follow ups on two totally different topics; one of them is you raised prices by 16% year to date in Mexico. Could you comment on the volume trends that you're seeing year to date, also in Mexico and any kind of expectation that you may have for the year?

And then last very unrelated question as well; any comment that you might have on the US refranchising, this announcement that the Coca Cola Company made last week whereby the territory of Chicago and Tampa were given to this beer distributor and this other entrepreneur. How do you envision the role, if any, if—in Coca Cola FEMSA, if the refranchising continues and what should we read in this process since none of the Latin American bottlers, you being the largest one, did not participate? Thank you.

Alan, let me start first with the volume trends. As you said, we increased prices around 16%. Say that the impact of the excise tax will call for an increase between 13% and 14%, so we have two or three extra points. Basically it's an effect of rounding up the prices to convenient price points, rather than have a fraction of peso amount, and also to recapture some of the inflation that we have had in the year.

I think that the important trends here, and that was reflected in the softness that we saw during December in Mexico. During the fourth quarter, we had a good October and good [September] and December we saw some pressure on the volumes, mainly as a result, Alan, of the fact that we did some price increases towards the end of November, beginning of December; in anticipation of this excise tax.

Most of our competitors started to adjust prices during January. We did a subsequent price increase in January and we think that we have to do some other price increases probably by midyear. That's basically to fully cover excise taxes and as I mentioned, getting to the convenient price points where we call the magic price points.

The good news is that most of our competitors have increased prices now to more reasonable levels, so whatever price gap that we had in the past, we are basically seeing those price gaps maintained. You might find some changes by package, specific packages where either Pepsi or RC Cola or [Carvitos], (inaudible) have anchors from presentations at certain prices and maybe in that presentation we are hoping not a price gap; but in others we are reducing price gaps. Importantly for example with Pepsi, the 2-liter presentation that they have where it's important to reduce the price gap in that size.

So I think that the message is—the beginning of this year we are more or less on a level field, with some variations in price gaps in specific packages, but in general, say that we are in a level field.

The volume trends are pretty much in the level that I mentioned in the last conference call of our expectation for the year, 5% to 7% reduction in volumes; that's more or less where we are. I think that in general, as we mentioned, we are seeing first reading of market shares we are seeing some improvements for our brand because of the strength of the brand. So that calls for the industry also seeing reductions basically on those [amounts].

With respect to the US refranchising, I mean we saw the news. We have (inaudible). We need to understand what will be the relationship vis-a-vis the Coca Cola Company in this process going forward, when these franchises happen.

From what we are reading from the press release, because you probably have more information than us, this is more a distribution contract.

Yes, they are.

The company will supply the finished product. So it's a different arrangement than what we are used to in Latin America. And as always, we will have all of our screens and radar targeted to understand what is happening in this market and see how that is evolving.

I think that it's too early to really conclude what the [strategy] of the Coca Cola Company will be for the US. This is just in the markets of Chicago and Tampa. It's strange in the sense that it's to be distributed in an entrepreneur. We have seen in the past moments where they are—have assigned some of these territories in similar conditions to other US bottlers. And I do believe that at the end of the day, once strategy is announced and the process starts, I do believe that some Latin American bottlers will be also invited to take a look at this.

But I still say we need to understand the conditions—the commercial conditions, vis-a-vis the Coca Cola Company in this process going forward.

We will continue to focus in Latin America, as you can imagine and to turn around the Philippines and then look for opportunities in the Philippines and I think that's what I have to say in the (inaudible). I don't know if—

No. That's very clear, Hector, as always. Thank you so much.

Lauren Torres, HSBC

Yes, hi; good morning. Just a follow up on Mexico. Obviously you're coming off a tough year last year, explained the price increase just based on the excise tax on beverages. I'm just curious, Hector, about how you think about the full year. Is that 5% to 7% achievable for the year? And then I guess to think about it a little further; you talked about some initiatives. I wonder if that's enough to kind of keep margins stable for the year, or how are you thinking about the environment in 2014? Do you have enough offsets to kind of get through it? Or is the consumer still rough right here and there's not a lot of opportunity to grow in the market, particularly from a profitability standpoint?

Good morning, Lauren. Yes, I think that in general; I mean as you can imagine, being just at the end of February it's still kind of early to fully understand the impact of this tax initiative in Mexico. Our operators and our plan and our budget basically is-- work with this idea that the 5% to 7% reduction in volume is going to happen.

As I mentioned in the last conference call, that calls for very strict cost control. We're estimating and I did mention this last time that we, at this conference call; we're estimating that with 5% to 7% volume reduction we'll have extra capacity in production plant and in distribution centers and in all the supply chain, basically (inaudible).

So we are adjusting a lot of our CapEx for this year. We are looking at the reduction in headcount as I mentioned during the last conference call. Potentially closing down some (inaudible) facilities also; and with those efforts we believe that a reduction in that volumes of 5% to 7% we'll be able to maintain the profit margins.

Obviously this 5% to 7%, obviously the last unit cases that you sell are the most profitable. Those are the golden cases. So we need to do a key effort in cost control and cost reduction to be able to maintain margins.

Our plans for the year is to do all the effort to even, in spite of this volume reduction, to maintain margins or at least we will slightly (inaudible) margins.

And can I extend that question to Brazil? Obviously you had a really tough fourth quarter, but you said year to date things are looking better and I know weather has been a benefit. But for that market, do you think you are seeing some improving trends? Is it just more a result of the weather or do you think you're actually seeing some improvements in [your levels]?

In general, what we are seeing in Brazil is a very encouraging first two months. That (inaudible) remarks had to do with a little bit of weather. I like to think that a lot of (inaudible) and over the end of last year, of adjusting our portfolio to the market (inaudible).

Coming back to the category in general is this loss of market share this past quarter; we are starting to see, at the (inaudible) of January, there's some improvement in market share again and January and February we are seeing high-single digit volume growth. It's difficult to predict if that will stay for the rest of the year, but we've seen very, very encouraging results.

Again, with margins and volumes at level? I actually believe the same as I mentioned to Mexico was the reverse. This is one of the cases that brings, (inaudible) profitability in operations in Brazil and we are seeing that therefore is an expansion of margins so far in January and February.

Coming, I know there's big months and then we have Carnival, but in World Cup we also have an opportunity to connect with the consumer importantly. And an important trend I'd like to mention here in Brazil. Market share that we lost during the last year had more to do with the fact that generally in the industry partly today we're seeing (inaudible) importance. So we have a lower market share in that.

So when you look at it category by category in colas, basically we're flat, high in sparkling we're basically flat or slightly negative. But the total mix of [flavors] is starting to grow in importance every month. The industry total solution for that equation is that you see a market share reduction in our Company because we have much more importance in colas.

But in a category by category, market share numbers are very stable. So generally, Lauren, I will say I have very high hopes for Brazil and a very tough comparison versus (inaudible).

An easy comparison versus 2013 because we had a very tough year in 2013. But in general we are seeing, as mentioned, volumes growing and a very high (technical difficulty) middle-to-high single digits for the year and will call for (inaudible).

As well as in Mexico, we are working very closely with our operators, have a very efficient supply chain, because we are seeing production plant in one territory of Brazil that will call for additional efficiencies, (inaudible) efficiencies that we will close in these two region centers and maybe even a production plant of the new territories and we will be working very closely to see that we achieve the targeted synergies we mentioned that it will take [a few] months to achieve somewhere around $50 million synergies.

Working on that front, positive moves also in Brazil is that the team of professionals that we found in Spaipa and Fluminense are very good. Most of them are staying with us and taking new positions within our operations and I think that having a talented team of Brazilian professionals in Spaipa and Fluminense is a very positive move for Brazil.

Thank you.

Antonio Gonzalez, Credit Suisse

Good morning, Hector. Thank you for taking my question. I actually just have two questions. The first one was on Venezuela I saw in the recent development section of your press release that you talk about different exchange rates. Well, I just wanted to make sure I get it completely right. Could you let us know what the percentage of your raw materials that you are importing at the official and how much at the [parlay] exchange rate in Venezuela?

And to the extent that it's possible, whether you have any comment on what would be the percentage going forward. And then I have a quick follow-up question.

Sure. In Venezuela, we continue to face, and that's related to the inventory question that we mentioned at the beginning with the working capital and the effect of the inventories in Venezuela.

In Venezuela, we continue to import 100% of our raw materials at the official exchange rate. It's taking very long for us today and a lot of patience for our suppliers, because we have been extending of those payments for them because we enter on the process we get authorization to import the raw materials and then the payment is sometimes delayed for well behind the official or the agreed payment dates.

So far the suppliers have been working together with the Coca Cola Company and we have been working obviously very closely with them for them to show support in these difficult times. They know that we are getting—at some point in time we are getting the dollars out of the Central Bank at the official exchange rate and that we are basically asking for their patience to wait for us.

But 100% of the raw materials that we are buying, it's all at the official exchange rate. There are very minimal things that we have been done outside of the Central Bank, mainly when we don't get authorization for the importation.

The first process in getting the authorization is that we need to ask and demonstrate to the authorities that the product is not available in Venezuela. So we have been moving to Venezuelan suppliers in some cases and remember that our case as not being the owner of the brand, calls for a lot of authorization for us with the Coca Cola Company; that also been helping us in this process. So we have been changing some suppliers to local suppliers.

But I'd say that 99.9% of our imports are at the official exchange rate.

Thank you, Hector. And secondly if you don't mind; I wanted to ask a more strategic question regarding capital allocation. And basically the question is whether you have been considering buying back your shares now and coming from the angle of at the end of the day when we see the M&A activities that took place in the last two or three years, which obviously was transformational in many dimensions. But yet it took place at a multiple that is probably higher than what the multiple is for the publically-traded bottlers today. With those transactions as high as, maybe I don't know—16 times in Brazil; obviously that is impacted by goodwill amortization and some other considerations; growth.

When you look at the correction in not just [Coke FEMSA] shares, but across the industry, when you think of the optimal capital allocation, I guess there's some additional elements like CapEx probably not increasing this year because of the adjustments that you mentioned earlier regarding the excise tax implementation in Mexico. But more really coming from the angle of how Coke FEMSA is thinking of allocating cash efficiently; is there a reason why it wouldn't be attractive to buy Coke FEMSA at a much cheaper valuation than the transactions that took place in the industry over the last two or three years?

Okay, let me go into this. Obviously that kind of analysis we'll always need to look at those opportunities and we do analyze that in our planning process and with our finance committee. Let me mention two or three issues that are at this moment against doing share buyback, an important share buyback.

One is that, and probably the most important right now, is with the acquisitions we did last year, the amount of debt that we have in our balance sheet has grown importantly. We still have a very healthy margins in terms of leverage and interest coverage. But similar to what we did 10 years ago with the acquisition of Panamco, the signal that we have or the structure that we have from our finance committees is start de-leveraging the Company, importantly; so that we don't have any let's say financial risk on top of the operational risk that is embedded in the integration of new territories.

So first of all, at this specific moment in time in 2014, we do want to reduce debt, importantly. One of the rating agencies—I don't remember if it's Moody's or S&P, had us with a negative watch because they want to see gross- debt-to-EBITDA around 1.5 level. We are slightly above that level and when you look at net-debt-to-EBITDA, we are well within that number. But I think it's important that we take care of the rating agencies and we are doing everything in our—that is in our power to maintain those ratings that we have.

I think that having those ratings has allowed us to look for credit very sweetly and efficiently in the marketplace. And therefore, there is this consideration of maintaining the rating agencies.

Another element here is that this year, the second element would be that during this year we are in the final process of terminating the investments of the new two plants- one in Brazil and one in Colombia. That calls for a necessary CapEx this year on top of the ordinary CapEx of around $200 million.

So even though we are reducing our CapEx needs in most of our markets, especially in Mexico with the reduction we are anticipating in volume, we will still have somewhere around $600 million to $700 million CapEx number for this year, including these two operations.

The number might be a little bit higher, depending on how do we invest in coolers and bottles and cases. Remember that as we are fostering or improving a lot the efforts of returnability. We are investing a little bit more important than previous years on returnable bottles and cases.

So my estimate is somewhere around $700 million I'd say. It could be a little bit larger or a little bit smaller, depending on how we are doing during the year. So that's the second consideration for this year.

And the third point here is that I think that even though the liquidity of Coke FEMSA has increased importantly because we have invited new shareholders and we expanded the percentage of our float and the market capital of the Company, if you compare it to other years in the past, has improved over obviously last year, as in the reduction in the market cap.

I think that the fact that we are part of the indexes has helped us a lot on the liquidity of our shares. It took us a lot of time to be part of the Mexican Bolsa Index. I think that we need to take care of that also in terms of going forward. And that's also consideration when we look at share buybacks.

This (inaudible) makes a lot of sense. Thank you so much, Hector.

Lore Serra, Morgan Stanley

Thanks and good morning. I actually wanted to ask two questions. Let me ask them one at a time. In Mexico, can you just confirm that that 5% to 7% drop you're talking about for year to date, that's on an organic basis, or does that include Yoli, in this year and not in a year ago?

And then just the question I really I have is on the operating expenses and I'm looking at the fourth quarter and year numbers and the growth in operating expenses was really high, 18%. And I see the depreciation and amortization up a lot. I'm not sure why and I don't know how much of that was the 18%. But I'm just trying to understand why the operating expenses went up so much last year, and then as you look to this year, I would guess that you're going to see a pretty strong shift into the returnables, given the pricing you'd have to take. And that's higher cost to sort of, to move around; so I'm wondering kind of how you're thinking about—where is the confidence coming from in terms of the operating expense containment next year, given those two factors. Thanks very much.

Good morning, Lorre. The trend for the 5% to 7%; what I mentioned, is organic. We have started January basically with the effect of the inventory built up that we saw at the end of December. So that calls for a very tough December, because I mentioned December was a negative in Mexico. October and November were more or less flat numbers and December was a negative number in volume.

Including the fact that there was some inventory built up because of the (inaudible) was coming together. So at the beginning of January, volumes were substantially lower than that level, the 5% to 7%. We are seeing that number improve. We have seen some very encouraging dates where we compare on a daily basis, where that number is not different from last year.

But in January, 5% to 7%, the number I'm referring to, that is an on an organic basis.

In terms of the OpEx, I think that is more a reflection of some adjustments that we had during last year, last meaning the fourth quarter of 2012, where even though we were making efforts to adjust our marketing expense so that we don't have variation on a month-by-month basis, the final number for the year was smaller than we were anticipating in 2012. So we have an unusually low marketing expense during the fourth quarter of last year.

That's why, when you look at the full year numbers, the comparison is not as dramatic. And the other effect that you have there is that as we are investing heavily on returnability, and in coolers, our depreciation expense is increasing.

I don't have a specific breakdown. My math (inaudible) that how much of this as it goes one way or another, but I do see a more stable 2014 in that respect. I know that we have been saying this for many years, but believe me the efforts are there in the Company. We have been reducing headcount, certainly in the sales industry scenario. I think that there is some work to do going forward.

And with respect to returnability, I think that you are right. I mean part of the increase in freight expense has to do with the fuel cost. And returnables have to go back and forth to our production plants. So there is a little more expense in that.

But the fact that you are reducing margins, the model also calls for reasonable margins in that presentation, similar to what we're having in one-way, including the additional expense that is related to that.

Obviously the difficult part which is always a challenge and that we think that we are very good at, is taking good care of bottles [location] because if they don't come back to the production plant, it's a very expensive proposition. That's why we believe that in some markets, our competitors are not necessarily on the same page in terms of this knowledge of how to manage these products.

I will not (inaudible); I think that we will be able to have very good margins with that and protect the price points that we want to protect with these returnable products; this 500-milliliter returnable glass in Mexico; at MXN5, is very, very powerful.

We have seen growth, that presentation grow in excess of 30%, obviously from a very small base. But I think that is very, very important in our strategy going forward.

Okay, that's really helpful. And then just in Venezuela, I know the situation is very uncertain. If you could help us understand kind of—with that extra inventory; how much days of supply do you think you have? And if you could also help us understand how to think about this issue of the exchange rate.

I mean some of the companies are starting to translate at a different rate. Most of the [banks] are still at the 6.3 rate. I guess your positioning, as long as you can get it, at 6.3. Then you'll continue to translate at that rate. But at what point do you—what causes you to shift the assumptions, not the assumptions—what you do for reporting purposes? Because it seems like that that's going to happen at some point. I don't know. Is it just a matter of you stay at 6.3 until you can't get all the permits or how do we understand that issue?

Lore, you're raising a very good point, a very sensitive one. Let me try to help you clear up (inaudible). We have been discussing the issue of the convert of the exchange rate that we need to use for the conversion of the financial statements. We are using the 6.3 rate. We discussed very thoroughly that with our auditors.

We know that some other companies are using a different rate. We believe that in those cases, where we have seen, are cases of companies that are normally [hardly] related to the fuel industry. It's more like Proctor and Gamble and some other (inaudible). And in some cases, they do not necessarily have manufacturing facilities for those products in Venezuela, so they need to import (inaudible) from the outside and clearly they are not getting the official exchange rate for that.

In our case, we disclosed in yesterday's Board meeting and in the auditing committee, a very thorough [result]. We feel that recently—not last Friday but the Friday before, we received $20 million of payments that were for our suppliers at 6.30. We even received out of this $23 million that we did, 2 of those were still at 4.30 and (inaudible) because these were, months ago, were there in the Central Bank in (inaudible) for close to a year. So they respected the fact that we introduced this request for FX a year ago, and they gave us the amount for this borrowed [cap] at 4.3.

So the argument for using the 6.30 is very strong. We know that there is a lot of pressure on this new change in the convertibility laws in Venezuela where we fear there will be some—the so-called (inaudible) or exchanges among particulars. We don't know exactly how that's going to work.

At the moment, we have not had so far access to foreign exchange for [deviants] with which use the exchange rate for deviants.

The unique part that we will have as a translation effect, you know the numbers from Venezuela, because we do report that on a yearly basis in our (inaudible). It's probably around MXN1 billion, if you translate it at the level as opposed to 6 on the translation on the P&L. But that potentially could be the impact on our P&L, a change of that nature.

But so far, it's very, as I mentioned, we are in discussion with our auditors. There are a lot of reasons why 6.30 should be—still apply in our P&L, as I mentioned in our translation in banks. As I mentioned, close to 100% of our raw materials have been supplied [since] January.

And as recently as 10 days ago, we received $20 million that covers basically two or three months of needs of supply of raw materials. And we would need to evaluate month by month when and if it's appropriate to use a different exchange rate.

In terms of the number of days, it varies by raw materials, Lore. But let me give you some ideas in some cases like in concentrate we have many days of inventory because we have obviously the relationship with the Coca Cola Company and the (inaudible) maintaining of the business continuity that we both want to maintain in Venezuela.

In terms of raw materials like caps for bottles, we are very short on inventory. We work closely basically as a just-in-time inventory (inaudible) six to 10 days inventories. PET (inaudible) are around a month and it's similar to sugar.

But it varies month by month as we get opportunity to buy some of these raw materials, we take the opportunity and build up inventories.

Okay, very helpful; thank you very much.

Karla Miranda, GBM

Hi, good morning. Thank you for taking the question. Hector, I was wondering if you can comment a little bit about pricing in South America. So far in 2013 it seems that—it was assessed that the price increases implemented for Coca Cola FEMSA weren't enough to offset the FX affect. So I was wondering if we should witness further price increases in order to offset this negative devaluation of local currencies in South America.

And second of all, I was wondering if you could comment about the effective tax rate for 2014. Thank you very much.

Good morning, Karla. I think that in general, you will see in South America and Mexico, partly because in Mexico we already said that we need to increase prices around 16% which is much higher than inflation, but we have the tax, the excise tax inflation.

We will need that in South America. We need to increase prices with inflation. Sometimes the FX, does not necessarily match the inflation numbers and that's why we're going to see some (inaudible).

But in general, our objective is to—and we think that we have opportunity to move prices with inflation in all of our operations. And so I would not see--- I'm not seeing any pressure because of our competitors and the pricing front in Latin America.

With respect to the tax rate, we will see a slight increase in the effective tax rate, somewhere close to 33% would be a good number. This slight increase is basically because of the tax reform in Mexico. There will be some expenses that are now not 100% tax-deductible and that will increase a little bit our tax rate.

Plus the numbers that are in Brazil, we have the effect of this amortization of goodwill and obviously the effect of the new debt that we have now in the Company, reducing the tax burden for the Company.

But while we take into consideration all of these numbers, the effective tax rate will be somewhere around the 33%.

Okay?

Great; thank you very much.

Luca Cipiccia, Goldman Sachs

Hi, good afternoon. Thanks for taking my question. I, also would like to go back a bit to Brazil. I think you made some comments before on the profitability you're expecting for 2014, but the line wasn't great. So maybe if you can elaborate a bit on that.

And also on Brazil; as time has gone on, what would you think we may hear on incremental potential synergies on five of the target initiatives; it was relatively low. So as you've been a few months into the integration and into (inaudible) transaction; so I'm curious to know if there will be some news there.

And lastly, given the volatility of the currency in Venezuela and in Argentina and the size of Brazil in the LATAM operation; is it possible to think that you will maybe report the region separately at some point so that—to track the progress on margins, on top line and on improvements as well with the integration. That would be my question. Thanks.

Yes. I think that—Luca, good morning. I think that in general, Brazil as we are seeing, high-single digit volume growth numbers so far in January and February. And we expect somewhere between mid-single digits to high-single digits for the rest of the year. I think that we will see improvements in the margins in Brazil definitely.

I believe that the reduction that we saw last year in an important the reduction in the EBITDA margins and EBIT margin and EBITDA margin; I don't know whether I can say 100% of that reduction in margin, but certainly it will make a good end road in getting part of that.

We're seeing that trend in January and February and I think that it's important that you have that.

Synergy-wise, we are working very well with Fluminense integration. We are well on track. We (inaudible) that was integrated in September. Spaipa we are well on track on that. But it's still too early because we basically analyzed this integration in November. We're in the process of finalizing the organization. As I mentioned, we are staying with a very good solid group of professionals from Spaipa and [Flu]; but it's too early for us to change our expectations on the synergies from Spaipa.

So somewhere around, as I mentioned, the $90 million in Flu; $33 million in Spaipa is still the target number that our executives have there.

I'm certain that at some point in time, we will be able to discuss this with more (inaudible) change our expectation on that as we find more opportunities. I mean we do have it on paper, $33 million for Spaipa which a little bit more of those is an important element for synergies going forward.

And in terms of the volatility that we're seeing in Venezuela and Argentina, especially on the currencies; we don't see that in Brazil, yet. Brazil, so it is now very important element of our Company because we increase the size of our operation there basically by 40% and it's very large now.

Venezuela we have to report separately (inaudible) region on a currency basis on the coming year. There is some indicator which basically (inaudible) exchange (inaudible).

I think that we are still far from that in Argentina because inflation numbers, although being higher now, still far from high provisionary accounting which is one of the elements why Venezuela has to be reported separately and the region, the FX control.

But as always, we'll try to provide information in terms of the top line and volume and the consumer trends on a region-by-region basis. But I don't think that we will, as (inaudible), financial statements of those sectors going forward.

So for Brazil specifically, you don't think you will isolate the numbers just for Brazil in the future for profitability like you do for other regions as they are today?

No, we do not have plans to do that so far, Luca.

Okay, okay (inaudible). Thanks; thank you.

Fernando Ferreira, Bank of America, Merrill Lynch

Thank you and thanks for taking my question. I had two questions, actually. First one, can you comment when you look at the volumes in different categories in Mexico so far this year; are you seeing some shifts or growth in categories like water or Coca Cola Light and diet presentations? Or are you seeing declines across the board?

Good morning, Fernando. We are seeing certain trends where you have some of the (inaudible) of the fact that they are seeing some improvements in the mix of non-calorie products. Let me give you—it's very small compared to our countries- Mexico non-calorie that we're seeing, probably around 3% to 4%.

But we think that number, I know (inaudible) there's been an increase of non-calorie products, on the volumes on non-calories and we are running 5% during (inaudible). (Inaudible) a reduction a little bit more than 7% decline that I mentioned.

In total the Company is between the 5% and 7%, but we are seeing non-calories growing, water growing and basically this year has been some juices and (inaudible); only because of the price changes that we've seen.

Remember that one of the properties we have is that Coca Cola Light, Sprite, (inaudible) with brand Coca Cola, because it's been improved. Coke Zero is staying below the price of Coca Cola because since it's not affected with the tax. We are staying with that price point, which is a different strategy again that Coca Cola Light is not being taxed, but we are increasing price because of the (inaudible).

So we are seeing some shift in the trends of the different categories within the soda category.

That's clear. Thanks, Hector. And I had another question. I don't know if you already mentioned it and I apologize if you did, but last one is also on Mexico; what's your strategy for branding, advertising this year and also how do think about SG&A? Do you see SG&A being sustained at the same levels we've seen in the last few years or do we have some extra support from the Coca Cola Company in terms of advertising?

I think that we will be very cautious with the expenses, on the marketing expenses. But in general, whenever we have this kind of situation with countries like an excise tax in Mexico or a currency movement in Argentina, normally you see a consideration of the marketing strategy because these are your opportunities when you capture important [growth] in the market.

So my answer will be we are going to be cautious, but you will see similar in the areas of marketing expenses throughout the year.

The only caveat for that in Mexico is that as we see volumes declining, remember that part of the investment that we're doing in coolers goes to the marketing. It's a marketing asset that we use and it's reflected there.

Coolers; we will continue to invest, probably not at the same pace because we have some extra capacity in coolers probably, so we will see a lot of activity on redeploying the assets that we have to and also say that has been performing better and that will call for a slight reduction in the marketing expense in Mexico, because of lower level marketing assets in that (inaudible).

It is important that—to bear in mind that in every crisis that we have had in Latin America in the past, the Company continues to invest in these marketing efforts and advertising. And we have benefitted from that in the past.

We have the World Cup here that normally calls for marketing expenses around the world, this is an event that Europe and America and Africa and Asia; the scale will be behind that.

And again I will say that we will not see kind of operating expense growth that we saw during the fourth quarter. As I mentioned it was a little bit (inaudible) in terms of marketing expenses in 2012. And we'll see a more normalized OpEx going forward.

Okay, perfect. Thanks, Hector.

Marco Montanez, Vector

Good morning, Hector. Thank you for taking my question. Could you share with us the [modeled] exchange rate for 2014 for the currencies in Argentina, Brazil and Venezuela please?

And in particular in the case of Argentina and Venezuela; do have any stress scenario for the expected rate?

And the second one, if I may; and regarding the freight cost in Mexico; could you give us more color about it? Is there any regulatory impact or increase in the fuel prices? Thank you very much in advance.

Let me go to the page—basically that is only our (inaudible) poses our exercises, the internal exercises where we use some sensitivities and we do several analyses for the potential changes in that. And basically we have our analysis and we use ranges for that.

We are assuming a 12 point rate average for Mexico, but right now it's our economy's estimation regardless of the year.

In terms of the real; we are somewhere around—the model that we use amount to 35 to 40.

And in Venezuela, exchange rate we are using somewhere around the 9.8 exchange rate. But it's just, again, just for budgeting purposes and some scenario statistics.

It's very difficult to (inaudible) how these numbers will be, but it's more or less our estimate.

In Argentina around this time to [9.2]; right now [7.7].

Those are more or less the averages that we have for the countries.

I didn't follow on the second question what you were referring to? Sugar? I'm not sure even on that, Marco; if you can repeat the second question.

Yes, of course; regarding the freight cost in Mexico. I don't know if you want to share with us if there is any regulatory impact or increase in the fuel prices I mean at the end of last year there was some regulatory reforms in Mexico in order to—you had some changes in that activity. So I don't know if you can give us more color about it.

Yes, sorry. Yes; now I understand. In terms of freight, we are seeing some—it's modest; there's a slight tick up in freight expenses and that has two main (inaudible).

One has to do with the increase in fuel prices, that you know in Mexico it's adjusted every month and it has been increasing importantly.

And the other element, although smaller, it's also important to take into consideration of our mix of returnables continues to increase; because we are growing behind this strategy of (inaudible) impact of returnable presentation.

Returnables, the deal is that returnable calls for going back and forth to the marketplace and the plant and that will also imply some extra freight expense.

There is nothing special on the regulatory front. There has been thoughts of limiting the price and the cost; nothing definitely but remember that most of the freight that potentially could be affected by (inaudible); so we will assume that I will adjust to whatever regulation there is in that front.

But what we have is our P&L reflected in 2014 is a slight increase in freight, mainly as a result of fuel prices and a little bit because of the increase in returnable mix.

Okay, excellent. Very clear. Thank you so much, Hector.

This concludes today's question-and-answer session. I'd like to turn the call back to Mr. Trevino for closing remarks.

Thank you for the interest in Coca Cola FEMSA and as always, Jose and Roland are available to answer any remaining questions you may have and we'll forward to another conference call in probably in a month and a half; the first quarter numbers are coming very soon. Thank you.

This does conclude today's conference. We thank you for your participation.