Coca-Cola Femsa SAB de CV (KOF) 2014 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Coca-Cola FEMSA's first-quarter 2014 conference call. As a reminder, today's conference is being recorded, and all participants are in listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance, and should be considered as good-faith estimates made by the Company.

These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which 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 always. During the quarter, our balanced geographic [transact] profile, the strength of our varied portfolio, and the brand equity of brand Coca-Cola, combined with our revenue management initiatives, enabled us to deliver organic currency-neutral revenue growth of 20% for the quarter.

Our Company delivered these results in the face of structural changes and a difficult consumer environment, mainly in Mexico and Brazil, coupled with currency volatility across our markets.

Our organic gross profit margin expanded 130 basis points during the first quarter. Lower sweetener and PET prices in most of our territories were partially offset by the negative effect of the currency devaluation in our South America division and Mexico, as applied to our US-dollar-denominated input costs.

Our organic EBITDA margin expanded 120 basis points despite continued higher labor and freight costs, especially across our South American division. Despite this challenging environment, as we have done throughout the years, we continue investing in the marketplace, reinforcing our returnable packaging base, and improving our pricing architecture to connect with consumers every day across our territories.

Of particular note, as of the first quarter of 2014, we decided to use the SICAD exchange rate in Venezuela to convert these operational results into Mexican pesos. This exchange rate was VEF10.70 per $1 as of the end of March. And it will adjust according to the exchange rate resulting from each weekly option.

Now let's discuss our operations. In Mexico, we have experienced a slowdown in GDP growth, reflecting a continued weak consumer environment driven by lower disposable income levels. Higher taxes and price increases across consumer staples have affected consumer spending practices, especially in the lowest socioeconomic levels. Our organic volume in Mexico contracted more than 4% for the quarter, resulting from the effect of the price increases implemented to pass along the excise tax at the beginning of the year, as well as the ongoing weak consumer dynamics.

Despite these price increases, our average price per unit case in Mexico, which is presented net of taxes, did not cover inflation for the quarter; and as such, we have implemented an additional increase as of the end of March. Despite our declining volume for the quarter, we are seeing positive trends in certain categories.

Organically, while regular sparkling beverage declined 6%, low calorie and sparkling beverage increased more than 8%. Especially, we saw 14% growth of Coca-Cola FUZE. As this brand was not affected by the excise tax, its growth reaffirms that some consumers are looking for more affordable alternatives, and our Company has the right portfolio to satisfy these consumers' preference.

Notably, on an organic basis, our returnable packaging portfolio gained more than 340 basis points of our sparkling beverage mixes, underscoring consumer preference for our brands in more affordable packages. Additionally, our 500-milliliter returnable glass presentation, which is sold at the effective price of MXN5, grew more than 45% during the quarter, enabled us to shift volumes to single-serve presentations.

Organically, the personal water category grew 3%, driven by the Ciel brand. The non-carbonated beverage category contracted 3%. However, within this category we saw consumers move into more affordable products, such as Valle Frut orangeade, which grew 3%. To navigate this tough environment, our Mexican operations continues to emphasize returnables, low-calorie, and single-service sparkling beverages as compelling alternatives to connect more closely with our consumers' needs.

Despite the pricing initiatives that we have implemented, and the increasing complex competitive landscape in Mexico, our share of sparkling beverage market remains stable across our territories compared with the previous year, reflecting the industry's contraction during this period.

To compensate for the effects of the excise tax, we have proactively implemented portfolio and revenue management initiatives that have enabled us to maintain our top line in this difficult scenario.

Additionally, to contain costs and expenses, we have implemented transformational initiatives in our Mexican operations. During the quarter, we downsized our headcount in Mexico, including shutting down one production facility and three additional production lines in the quarter. Moreover, as anticipated, we have also reduced investment in new coolers by more than 50% and cut back entirely on purchases of distribution trucks.

Our Company has acted swiftly to protect the profitability and cash flow generation of our Mexican business. We will continue to focus on controlling expenses, and we are prepared to adjust our operating structure even further, if necessary, through the year to meet our goals.

Moving on to Central America, during the quarter we achieved 2% volume growth thanks to our positive performance in Guatemala and Nicaragua. Growth in the region was mainly driven by 2% growth of brand Coca-Cola, coupled with the sustained growth of FUZE TEA and the continued strong performance of Powerade and Alpina water.

For the first quarter, our reported Mexico and Central American division total revenue grew 4%. On an organic basis, the division's revenues contracted 2%, reflecting lower volumes resulting from the price increases implemented to pass along the excise tax in Mexico.

Organically, lower sweetener and PET prices were partially offset by the depreciation of the Mexican peso, as applied to our US dollar-denominated raw material costs. Consequently, our division organic gross margin expanded 150 basis points in the quarter. Overall, our division's organic operating cash flow margin expanded 110 basis points for the quarter, despite the previously mentioned discretionary expenses in Mexico.

Today, our Company offers one of the most robust beverage portfolios in the industry. We will work diligently to ensure that our consumers have many attractive alternatives to continue enjoying the most beloved soft drink brand in the world.

Whether their preference is brand Coca-Cola, Coca-Cola Light, or Coca-Cola Zero, in our returnable or one-way presentations, we are confident that we offer the most competitive choices for consumers who are increasingly looking for the right value in every context.

Moving on to our South American division, our operation's organic volume increased 6% during the quarter. This increase resulted from recovering volumes in Brazil, along with continued growth in Colombia and Venezuela. Including the performance of Fluminense and Spaipa in Brazil, margins in the division grew more than 28%.

As we entered the year in Brazil, our business was positively influenced by hot and dry weather conditions in January and February, and the performance of our new portfolio [Devanti]. Consequently, our [branded] volume in Brazil improved 5% for the first quarter.

We successfully intensified our connection to consumers through our magic price point for consumer self-consumption occasions, as well as our affordable, returnable 2-liter presentation. Importantly, our 200-milliliter one-way PET presentation for brand Coca-Cola at BRL1, and our 300-milliliter one-way PET presentations at BRL2, achieved price compliance indicators of roughly 70% among our favorites, ensuring the successful implementation of our strategy in the marketplace, and reflecting wide consumer appeal.

Additionally, our 2-liter returnable presentation for brand Coca-Cola grew 27%, supported by consumers' preference for this package. As a result, we increased the niche of returnable presentations in our portfolio by 280 basis points to reach more than 70% for this quarter.

In light of these packages' profitable result and the ongoing difficult consumer environment, we will continue to increase the point-of-sale coverage of these affordable presentations to identify the connection with our consumers throughout the year.

In a couple of months, the FIFA World Cup, and the promotional activity around this event, combined with the increased brand awareness of Coca-Cola, should continue to drive positive momentum and increased sales of our beverage for the second quarter.

For the rest of the year, our team will continue to reenforce our marketplace execution; improve our expanded operation's topline performance; optimize our operating structure through the integration of new [fantactor] products; capture the expected synergies; and extend the profitable results that we achieved in the first quarter.

Moving on to Venezuela, consumers continue to face higher levels of inflation and a scarcity of many basic items across the board. Our operators work hard every day to ensure our product strength at the point of sale and serve as much consumer demand as possible. Our Venezuela operations volume was up almost 11% in the quarter, successfully building on 11% growth in the first quarter of 2013.

Brand Coca-Cola surged 18%, more than offsetting a decline in flavored sparkling beverages, as we continue to focus production on the fastest-moving SKUs in our portfolio in order to navigate the complex challenging operating conditions. The non-carbonated beverage category grew 28%, mainly driven by del Valle Fresh orangeade, which grew 30%. Our bottled water portfolio grew 33%, supported by the performance of the Nevada flavored water brand.

Despite the challenges faced by these operations, our team continues to focus on better executing our picture of success at the point of sale, and maintaining the flexibility required to meet our consumers' and clients' demands.

In Colombia, our strategy to foster per-capital consumption continues to yield positive results. During the quarter, our volume increased 8%, successfully building on the 6% growth in the first quarter of 2013. Brand Coca-Cola grew 9%, driven mainly by the successful launch of our 1.4-liter one-way PET presentation, capturing transactions at the magic price point of COP2000.

In the non-carbonated beverage category, del Valle Fresh grew almost 50%, while FUZE TEA grew almost 70%, and Powerade doubled its profit during the quarter. We will continue capitalizing on our strategy in Colombia to foster per capita consumption through better execution on the point of sale, increased cooler coverage, and a more affordable portfolio to maximize the connection with our consumers.

Moving on to Argentina, during the quarter we experienced bad weather conditions in February on top of a weaker consumer environment, fueled by the devaluation of the country's currency and increased real inflation rates, which directly affected our consumers' disposable income. For the quarter, volume was down 1%. Flavored sparkling beverages were up 12%, partially compensated for a decline in brand Coca-Cola. Despite these dynamics, our market share continues to improve significantly year over year.

The non-carbonated beverage category grew 12%, driven by the Cepita juice brand and the continued success of FUZE TEA, which has enabled us to capture shares of the flavored water category. Additionally, our Bonaqua water brand continues to grow, now reaching close to 1.4 million unit cases.

During 2014, our operators will continue to focus on cost discipline, on efficiency optimization, as well as revenue management initiatives designed to capitalize on an improved operational structure, and the strong portfolio of [modes] and packages to serve a more difficult consumer environment.

At the South American division level, the revenue management initiatives that we implemented in Venezuela continue in Brazil, coupled with our positive revenue performance in Brazil, Venezuela, and Colombia, resulted in 40% organic currency-neutral revenue growth for the division during the quarter. Organically, lower sweetener and PET prices were partially offset by the devaluation of the Colombian peso, the Argentine peso, and the Brazilian real, as applied to our US dollar-denominated input costs in the division.

Consequently, our organic gross profit margin expanded 120 basis points in the quarter. Despite ongoing labor and freight cost pressures, our organic operating cash flow margin expanded 130 basis points during the first quarter of 2014.

With regard to our Philippines operation, volumes remained flat in the first quarter of 2014. In particular, I would like to highlight the positive performance of Mismo, our 300-milliliter one-way presentation for brand Coca-Cola, which contributed significantly to 11% growth of Coke in the quarter.

Despite its relative recent launch in December, Minute Maid Fresh orange juice has been very well received by the Filipino consumer. Based on our continued framework, we are working to capitalize on the opportunities that we see in the Philippine market, expanding the initiatives that have been successful in greater Manila to the rest of the country. We are planning to strengthen our supply chain capabilities to have the capacity to support the growth of the business.

Finally, in the route to market, we have completed the rollout of our new commercial model in the greater Manila area. Building on this achievement, we are working to expand our route-to-market model across the rest of the Philippines. We will continue to build, step by step, the foundation to ensure our ability to capture the growth potential that the Philippine market offers.

Now, allow me to expand on our consolidated financial position. As of March 31 of 2014, we had a cash balance of MXN19.1 billion, and our total debt was MXN60.6 billion. During the first quarter, we leveraged our financial flexibility and capability to issue debt in the international capital market at very attractive rates by reopening the Senior Notes that we placed in November of last year. We will use the proceeds from this offering to repay debt in Mexican pesos.

Our net debt to EBITDA ratio is currently 1.42 times, a sequential improvement compared with the first quarter 2013, highlighting the strength of our balance sheet and our commitment to deleverage the Company. During the quarter, our net income reached MXN2.3 billion, reflecting our topline and operating income growth, driven by a value growth, mainly in South America, and also the acquisitions.

This growth was offset by higher interest expenses due to a larger debt balance resulting from the financings of our recent acquisitions of last year; higher interest rates on our Brazilian real-denominated debt; and higher interest rates in connection with extending our debt maturity profile from 4 to 8 years.

Net income declined 5%, mainly due to higher interest expenses as compared with last year, and the foreign exchange gain that benefited last year's net income in the first quarter.

During March, our shareholders approved the payment of a dividend in the amount of MXN2.9 per share to be paid in two equal installments in May and November of this year. This dividend, which remains in line with the previous year, is consistent with our commitment to return capital to our shareholders while deleveraging the Company, capitalizing on our financial flexibility, and continuing to invest in the future of our Company.

For the year, we will continue to work to achieve the synergies that we have identified in our recent remarks on the quarter and sector results in Mexico and Brazil, to take advantage of our team's capabilities and our portfolio's brand equity to capture opportunities across markets, regardless of the specific state of the consumer in our territories.

Now, before I open the call for questions, as we recently announced, as part of the continued management development agenda that we pursue in Coca-Cola FEMSA, Jose Castro, who has worked with me as Director of Investor Relations since 2010, was invited by our Mexican/Central American division to continue his career as Director of Operations Planning and Projects. Jose worked relentlessly to position Coca-Cola FEMSA's story as a benchmark in the global beverage industry.

Alfredo Fernandez, who many of you already know, who is overseeing financial planning, will now head our Investor Relations efforts in conjunction with his current role as the Company's Financial Planner. Welcome back, Alfredo.

Operator, now I would like to open up the call for any questions.

(Operator Instructions). Lauren Torres, HSBC.

Just wanted to ask a bit about the impact and the effects that you've seen based on the pricing actions you've taken to cover the excise tax. I guess in some respects, the behavior of the consumer is maybe a bit better than you were expected going into the year, with respect to the volume decline. Just curious to get your impression on that. And seeing that we're going to see some increased pricing come through, from what we saw in the first quarter, I was just wondering if you think there will be additional consumer reaction, or it's generally been accepted.

And I guess if I could just make that question broader on Brazil, because today we're hearing more about excise tax, and taxes they increased in Brazil on beverages. So just curious to get your general sense on the ability to take pricing in a soft consumer market. How do you deal with that if the consumer still is soft, and maybe your pricing actions remain limited, going forward? Thanks.

Good morning, Lauren. Let me start with Mexico. As you pointed out, in general, the 4.4% reduction in volumes that we had for the Company in Mexico is a little bit below the estimate that we have, and that we shared with you at the end of last year, when we said we were expecting 6% to 7% declines in volumes. The first quarter, in past tense, has been a bit better. It's important to highlight that when you look at the SKUs that were affected with the tax, those were affected in a larger percent of reductions, closer to 6%.

And as I mentioned during the introduction, similar presentation of Light Coca-Cola [fuel] growing 40%, still from a very low base. In general, this total mix of our portfolio -- of the total mix of our portfolio, Diet Coke represents less than 4%. But still is very significant that Coke Zero is growing at that pace. Juices and nectars are also softening; we are seeing that piece.

On the other hand, other growth like Powerade continues to surprise, with very positive performance. We also [won] 11% with Powerade. So, in general, we have to be careful in the sense of the volumes for the first quarter, in my opinion, are a little bit affected positively at the end of March, because of the inventory being dropped in anticipation of the price increases that we had implemented at the very end of March.

So, cases -- we should see slightly lower volumes, or a larger drop in volumes is not that significant. So my expectation for the second quarter is -- in general, my expectation is that we will see [low] numbers to what we've seen during the first quarter. And during April, as I've mentioned, because of the inventory effect is slightly below that number for the first quarter.

How do you work around that, as we mentioned, a consumer that is exposed to a general increase in practice and in prices for most of the consumer spaces. So the consumer does not have the same disposable income. That's a fact in Mexico. We've seen that the consumer is changing his consumer habits; and, in the certain ways, prioritizing soft drinks. In our opinion, they are not spending as much in other things like toilet paper, and in other consumer staples. We see that also with snacks, that are softening a little bit more than soft drinks.

And the Company, as I mentioned, has to a great, important effort in restructuring our operations. So I think that our guys that are managing the Mexico operation are doing a very important job in reorganizing our operations in this country. So, especially reducing the number of headcount, and working very closely with working capital and CapEx, so that we continue to generate important expansions, in my opinion, on the operating margins that we see.

My expectation is that these consumers -- that these price increases that we are doing in March, as necessary to fully compensate for the tax increase, and the effects of the worst especially for the year. I would expect that these are the last price increases that we see in the year, that it will be enough to have basically a fewer price increase, in real terms. And obviously that includes compensating for the tax, as I already explained.

And so far, our competitors have also increased prices, importantly, in similar levels, as we have seen. We have seen some of the low-priced brands increasing prices that they haven't moved for many years. We have seen, with the Pepsi operation, also increasing prices. So we are basically maintaining the price gap that we had before. And in that sense, I think that what we are seeing in this first quarter is a good reflection of what we can expect for the rest of the year, in terms of running performance. Because the corn industry is moving prices in a similar fashion, and I think that our industry is doing a little bit better than other consumer staple folks in the country.

If you look to Brazil, the authorities announced this morning a new tax -- or, excuse me. Let me say over. It's not a new tax. An adjustment to the tax -- the ways computer, and this adjustment normally happens every one or two years, with some minor adjustments sometimes twice a year.

In general, we have -- and just so that everyone has the same information -- in general, we have a tax that is establishing below. And then there is this so-called, the reference tax and the multiply, which are the two variables that they adjust for [robity]. And that is something that the government can't move without changing the law.

We are anticipating, or our expectation was, that this beverage tax was going to be changed in July or August. So it a little bit behind the schedule of the high number of [office], we still do not have computer the full effect of this. But the preliminary, back-of-the-envelope analysis for this is that we will have to increase prices between 1% or 2% in Brazil to compensate for this increase in the tax in Brazil.

Our idea is to always increase the prices. We think that the competitors will do the same. And as you correctly pointed out, the consumer will continue to be in a soft environment. There is restricted liquidity at the hands of the consumer. So we think that the consumer is very price-sensitive. So, in general, the way to tackle this soft environment, both in Mexico and Brazil is, as I mentioned, to continue focusing on the returnable presentations that have been very successful in difficult times in the past.

I think that returnable presentations have helped our modelers this year of uncertainty in Mexico and Brazil. And also having this affordable magic price points of MXN5, which is less than $0.50; or BRL1 in Brazil, which is approximately $0.50, for specific packages is very powerful when you have the brand preference of brand Coca-Cola. So, in general, I think that that's a good description of the consumer environment that we are seeing, and our possibility to increase prices in these two markets that are important for us.

It's a long answer to try to answer a difficult question, Lauren.

Sure. And just quickly, did you mention what the size of the tax increase that you took at the end of March was?

The tax increase in March? It's around 3% to 4% in Mexico, the average on the whole portfolio.

Okay, very good. Thank you.

Lore Serra, Morgan Stanley.

Great. Well, let me ask two questions. Let me just ask a follow-up to the question that you just addressed. It seems like, at least initially, the volume as we've talked about hasn't been quite as bad in Mexico as maybe as feared, and you seem confident in Brazil. And I understand some of that is because of what you're doing in terms of the returnability and the affordable magic price points. But if we contrast that with Colombia, your volumes are growing, but maybe not as proportional to the pricing that you've taken. I don't know if you'd agree with that statement.

So, are the different experiences you're having in Mexico, Brazil, and Colombia, making you think that the elasticity of the category is less than you thought maybe on the upside and on the downside?

And then the second question I wanted to ask was just an update on Venezuela. I appreciate that you're now using the SICAD I rate, and that it will move. I know there's a lot of uncertainty where that rate goes, but I wondered if you could talk about how confident you are. In the last quarter, you mentioned that you're still getting the access to the raw materials at the fixed rate. Whether that's still the case, whether you see that rate going to another rate, and how you see that playing out over the course of the year. Those two questions would be really helpful, please.

Good morning, Lore. I think that, in general, I think that our elasticity is slow. And I phrase that when we were discussing our [cap eye] importation tax in Mexico last year. If you remember, I mentioned that some people in the industry were expecting a larger reaction. Now you've experienced, for many years in this industry is that in some markets with certain brands, if you work with some of those like return on growth, you can contain a lot the effect of changes in prices.

I think that the affect in Colombia that you referring to -- it's a little bit similar in the sense that we lowered the prices of [restraining] when we described the Plan Colombia more than a year and a half ago, with the idea of increasing the consumption per capita in that country. At the beginning, the volume didn't react that well. However, we have seen volumes that have continued to grow, importantly, compared to the other countries.

But, as you said, it's probably somewhat to have expected a larger reaction of the volume, given the price reductions that we have taken. So, we are happy with Plan Colombia. Plan Colombia -- you have to understand that in that country, specific country, we have a very large market share in cola brands, and a very low market share in flavors. We have a very strong flavor, a local flavor producer.

And the competition they manage have changed importantly. So we lower the price; our competitors also lower the price; and in a sense, we feel that the industry is growing because globals are selling more cases. But we haven't changed dramatically the market share or the dynamics of the competition. Because the two competitors, having driven the cola product have adjusted -- the competitor have adjusted the prices to the downside.

So, in general, Lore, I think that what you're saying could be -- I think is correct in the sense that we have very important price increases in Brazil. Factors or otherwise, we would not see a substantial reduction, or that we have a reduction in volumes. At the same is happening when we reduce prices.

Always having in mind important factors like brand preference, affordability, returnability, and the effects of the movements that the competitor does in the specific markets.

In the case of Venezuela, we received very important approvals for one of the purchases in February. We have received fewer dollars as a fixed rate -- a fixed fairly recently. But there hasn't been any change in the [prunela] reception. We believe that, given the fact that we are considered -- that we are part of the food industry, that we will continue to have access to the official exchange rate. I would like the official exchange rate will be [fixed early], or will adjust to the outside in the future.

There was an important meeting with President Maduro and the industrials a couple of weeks ago. And he recognized us publicly, and it was on the TV, that the [low] pressure affecting the competitiveness in Venezuela, that he was going to fight that. And he even basically said that 30% of the accounts that were pending to achieve dollars to pay suppliers, that they would solve those 30% in a month.

We haven't seen that. But we are expecting for the next two or three weeks -- there is the potential that we will see another important amount of [cover] to take some of the debt that we have with supplies.

So, right now, as I mentioned, we changed all of our translation of our Venezuelan P&L at VEF10.70, which is the SICAD rate. There is a third rate, which is the SICAD II, that is trading around VEF50 per dollar. But the authority has been very clear that they would not allow the purchase of -- at that -- of dollars at that rate to pay dividends.

And that's why this is causing the volatiles, and seems like this is more or less a consensus among the companies that have operations in Venezuela, is that VEF10.70 is the right exchange rate for translating our P&L numbers.

Thank you.

Karla Miranda, GBM.

Congratulations on the results. Hector, I was wondering if you can give us more color about working capital going forward. It seems that you made a great jump in the quarter, regarding the declines on receivables on the inventory. But I was wondering if this is sustainable going forward, or what? Or which one is the level -- in which should we expect the working capital going forward? Thank you.

Good morning, Karla. Yes, I see that, in general, we have been the same way that I've been addressing you in this conference call that we are focusing on a lot, controlling expenses and SG&A. We have [a natural] for the last two years, or at least a year and a half, of monitoring and trying to control working capital in an appropriate manner.

It's not that it was out of control, but I think that it's important that as we go to our regional operations, especially in these mergers and acquisitions that we are doing in the previous years, that we have -- that we establish the best practices with respect to inventories and [conversieros] in the way we collect to return our bottles, et cetera.

And then maybe the same is true for CapEx. We believe that we have a very important discipline; that we monitor centrally; and that we monitor -- and the operator of every country has to review all these working capital needs, the CapEx needs, and everything that regards to cost and expenses with corporate offices.

I think that what you are seeing is basically the result of the last year and a half, or the last two years, working very closely with the operators on that front, Karla. And what you see now is probably a good level of working capital going forward.

The only caveat that I have for this is in the numbers for South America, Venezuela, given the fact that we do not receive a lot of upper -- at the phase we like, authorization to pay. Our accounts payable in Venezuela may be fire and stormy, are not [liar donde], no?

But that's the only caveat that I would have for this comment on the working capital. But in general, I think that it's easy to see that we have implemented, over the last two years, as being food now for our organization.

Great. Thank you very much.

Luca Cipiccia, Goldman Sachs.

I have two. One about Mexico, and the second one on Brazil. First on Mexico, assuming that the volume performance has, in fact, been better than what's feared in the first quarter, maybe I was hoping you could share some color on what has surprised you the most in terms of what you expected earlier, in terms of reaction, consumer reaction; or whether it's channel, whether it's for more as packaging, or have really been across the board that the performance was somewhat better than what you anticipated, even though it's still declining.

And secondly, on Brazil, maybe if you could give us an update on the synergies of the Spaipa and Fluminense the last year. Just to understand if it's really safe to assume that with the volume recovery that we've seen so far, with the workup around the corner, these past few months haven't necessarily been the most appropriate to try to look, or extract additional synergies. And that maybe we will see a stronger focus on that in the later part of the -- that would be my second question.

Good morning, Luca. Yes, I think that in general, I can say in Mexico that, as you say, we are broadly doing a bit better than what's here. My concern again is that, given that we had a price increase at the end of March, that the first quarter was a little bit positively influenced by that effect of some inventory buildup. But, in general, I think that the [consequence] of price is that the consumer loves our brand, so brand Coca-Cola is doing very well.

We are not doing well at some of our flavors. Our surprise that is effect of returnables, especially the 500 milliliter, which is at a magic price point of MXN5, and it's growing importantly. It's an important consumer occasion. I was positively surprised by Powerade. That is growing still double-digit and gaining, importantly, in the market share in Mexico, where we are now a close second place, as opposed to being very far in the competition front.

I was a little bit negatively surprised with juices and nectars, that are down double-digit, but both juices and nectars were also impacted by the tax. And recognizing that the consumer is preferring some of our soft drinks, because the juices that have a specific higher price than -- in comparative terms. And I think that, in preparation for all of that, and what is important to highlight, is the very important effort in reorganizing our operation to be able to tackle this reduction in volume.

When you think about a 4.4% reduction in volume, you are speaking about hundreds of thousands, or millions of unit cases, if you go to a yearly basis. And that's why we were able to close down one facility -- that facility got repairs for the lines. We are look to close down three other production lines. In total, we have closed six production lines now in Mexico.

And as we announced at the end of last year, we are going to be very cautious in some of the CapEx and investments, and knowing that we will have some distribution trucks idle. We are not buying trucks for this year, and I think that the discipline in the organization has shown it's an important element to highlight.

In the Ciel, I think that we are pretty much in line with the [delivery] that we were expecting. We basically mentioned somewhere around $50 million, in the 24-month period at the EBITDA level, and we are in line with that. This performance months of Ciel [flew] and Spaipa have been very good [important]. They are growing a little bit more than Sao Paulo, so that's good news.

We have had some difficulties in the state of Minas Gerais, mostly related to our ability to supply some of the products, and to know that we are building a very important facility that if the things [our guys] comply with our promises, should be up and running in September, with production ready to sell. So I think that in that, in the state of Minas Gerais, some of these shortages that we have had will be solved once we have this production plant.

And as I mentioned, I think that the World Cup is bringing another [activity] and attention to Brazil and a lot of potential activities around that, and I think that the next two or three months will be good for the Brazil operations. It's important to be remind, and that's why we highlighted this, even though we are growing 5% volumes in Brazil, it's important to highlight and to remember that last year we had a very bad quarter. So that's why we mentioned that we basically recuperated the volumes in Brazil.

But it is important as attention in the trend that we are seeing in that market. I think that that trend just (inaudible) with the effort that we put in place last year of the liter returnable, and this more packages in one-way presentations and [one-to-one PVIs] that are now presenting the results, in my opinion, during this year. Okay?

And if I could just quickly follow up, just want to understand -- is there any initiative that, for instance, given the [work cap], given the emphasis on volume in the first part of the year was, if you like, put on hold until later on, after this initial period, or of this more volume recovery period is over.

I think that's what I was trying to understand on the synergies on the integration; something that, from a cost perspective, will accelerate after the workup, simply because now your top line is probably a better and more important priority.

Yes, I think that -- in general, we have, as I've mentioned, we have reviewed again our -- we are trying to reorganize our operation in a more efficient manner. We have done restructure in terms -- and we have some expenses related to (technical difficulty) payments. We are focusing, as you say, a lot on top line, no question about it. Because we believe that the issue with Brazil is to grow volumes as a way to grow the business importantly.

This is not by savings have a few pennies in expenses of little to none. Down around that -- to really grow that business more is really growing the top line, so there's a focus on that; there's a focus on the World Cup, and there are expenses related to all the execution of the marketing campaigns and commercial activities that we have during this period of time. So in general, you're right that the second part of the year should be good in terms of not having those regional expenses that are due to that FIFA World Cup.

But, in general, I say that we have very good expectations for this year for Brazil, since our budgeting process, and we are counting with our operations there to have a good performance this year.

Thank you. Thank you very much.

Jose Yordan, Deutsche Bank.

Just wanted to follow up on Lore's question on Venezuela. Looking at your recent annual report where you break this out, I was a bit shocked to see that margins are actually down over the last couple of years there; slightly down, let's say, to 11% EBIT margin. Because if you're buying one-third of your COGS at a zero inflation even in nominal terms, and you're raising prices in line with inflation, give or take, one would expect a big increase in margins there, unless the other costs are significantly higher than local inflation.

So, I was just -- any color you can give us on how each of the different input costs and labor, et cetera, play into this, and how you plan to manage the Venezuela P&L going forward? What can we expect in terms of margins? I realize that it gets increasingly difficult to do so, but any color you can give us on that would be great.

Good morning, Jose. I would agree, for a [good response] in Venezuela, I think that we need to be very careful with Venezuela in to say, that is a very, very, very difficult environment to work. And the questions that we have, about why to do [receive] is really a reflection of this, what you say, is effectively improvement in margins, has to do with the fact that even though we get dollars up to VEF6.30 exchange rate, prices for raw materials in dollars, having this important to because the suppliers are very afraid of moving probably into the country.

Everything but what to do with no current raw materials is crazy. The price movements that we see are very important. That's why our growth is also -- is increasingly important for the price. When you have inflation of 50%, you have prices growing importantly, more on that. But you have labor and raw materials also growing at the very high pace.

That's the latest [lamation] that is defining these numbers. It's a very difficult environment. Last quarter, we discussed some of the inventory problems that we have in Venezuela, where we are, almost every day, trying to solve an issue of -- I don't have caps, or I don't have labels; or I don't have bottles; or [she] worries, is she going to fuel with this pump in the highway and still make that.

Remember that the economy there is under very, very difficult circumstances. So, even though as you correctly pointed out, we are getting dollars at these exchange rates of VEF6.30, that does not necessarily reflect on lower raw material prices because of the scarcity that we have in that market.

Are you saying, for example, that your resin supplier in Venezuela charges significantly more in dollars per pound of resin than they would in Mexico and other places, assuming it's the same company? There's really only a handful of suppliers of that stuff in the world, right? So, are you saying they have different (multiple speakers) pricing?

Yes. It's a little bit of that, and maybe resin is not the best example, because of various -- it's not -- there are not that there are less number of suppliers. We have basically two in Venezuela that also help us in other markets. But the prices that we have in dollars for the product in Venezuela is different than what we have in Mexico, Brazil, as I described. The main problem is with the local raw materials. It pays to be sure.

Okay. And then -- and just to remind me that Coca-Cola concentrate pricing in Venezuela is the same [incidence] pricing model as everywhere else, or is it any different?

No, it's the same model; the same model as the other countries.

Okay, great. Thanks a lot, Hector.

Alex Robarts, Citi.

Thanks very much. Let me turn to Mexico. Two things there, please. First is jug, and I know it's not the main category for you in Mexico. It's almost 20% of the volume. And a little surprised to see that I guess it's down, given that it's not subject to taxes, down 2% in volume in the quarter. And went back and saw that really this is the third quarter in a row that we've seen it down. And I recall you talking about your efforts to optimize the routes with the new acquisitions in Mexico.

And could it be that you're still involved in this process, and that's why we're seeing jug volumes down in this first quarter in Mexico? And when can we perhaps think about seeing growth and margin enhancements there? If you could talk about that as we look out for the rest of the year. That's the first question. Thanks.

Good morning, Alex. Let me -- one quarter -- I guess it's important that we review this. One quarter, you have seen, for many quarters our results are in the volumes as a way of optimizing the [parechial dusting]. And we have moved away from some of the practices of the past of delivering bottled water for very long distance. So in a way, bottled water have transformed as compared to a very broken business, where if you are not producing in sufficient [tier of] ingredients, it's very difficult to send profitably water for a long distance.

So we downsized it a little bit the business for that, and we have been doing that for many, many quarters.

The second stage of this is that as we use the home delivery trucks of bottled water to risk the -- directly to the consumer, we are targeting to -- we tried to do this at very positive movement, which is taking other trucks directly to the hub. So, in a sense, what you have seen in the last two quarters with respect to bottled water is more the consumer -- all the other products from our trucks are those meeting the performance in soft drinks and juices instead of water.

And that's why the water bottles, we are seeing some reductions to the water bottle. Because you say it's an important number than -- so you indicated. It is not that important in the profitability front. It's a business that is every day, and we have downsized the business. It's a little bit more profitable I would say, but it's not as profitable as soft drinks, as you can imagine, or juices or other products.

So I think that the second part of the question is important to you, in the sense that route -- the home-delivered trucks is setting all of those, and setting [profitability with] bottled water.

So as we think in the second half with the easier comps, given what you said, might that be, then, the time to think about growth? Or it's still too early to call, at this point?

I think it's too early to call, at this point, in the still run. I think that we are now at a level that we feel comfortable with the profitability of the bottled water, and as different from what it was toward a year and a half, two years ago. And it's important also to remind everyone that in [driver] specific markets, there is a level of informal competition that has erupted in most of the territories.

So it's a market that we -- so it's a category that we monitor very closely, and that obviously we are going to continue selling the amount of water that is necessary to maintain a profitable water business. If we need to downsize it a bit more, we will do it. There's a lot of informal so-called [hejeno orders], so the people that buy, an informally fill out these jugs in little jugs.

Okay. Very helpful. Thank you. And just the second one was more of a question/clarification on your comment about 2Q in Mexico. And definitely appreciate you being open and forthcoming with us, on giving us your feeling for the quarter, or how it would shape up in volumes in Mexico. And I understood you to say that you thought -- or you're thinking now that the volume drops in Mexico in the 2Q could end up being similar to where we've seen it in the first quarter.

And I'm assuming that's what you were saying. And so when I thought about the (technical difficulty). Hello?

Pardon the interruption. Please stand by.

Hello?

Your phone line is now live.

Sorry, Alex. Somehow we lost the connection. Sorry about that interruption. You were saying about the second quarter, and then we lost the connection.

Sorry about that. Good, yes. Listen, just to finish the question. I appreciated your comments and you seemed to characterize your feeling now about 2Q in terms of Mexican volumes being similar to what they were in the first quarter.

And if I understood that right, I guess I would have thought that there would have been some marginal improvement, in the sense that maybe volumes would not be as impacted in the second quarter than in the first quarter.

And as I sense, and during the first quarter, you had a little bit of a less of a drop in margin than January. And obviously there's elements around the timing of your pricing, and you mentioned an inventory effect. And I guess there was also an Easter effect.

But is it -- are you being conservative when you suggest that, in fact, that the volumes might be similar to the first quarter? Or is it really just the fact that you're just not seeing the consumer adjusting to it? As you mentioned, it has reduced disposable income disposition and such.

Yes, Alex. Obviously, we don't have a crystal ball to predict exactly what's going to happen. But my personal feeling is that, as you said, and that we were guiding at the end of last year, somewhere around 6% to 7% volume drop. The number for the first quarter is 4.4%. I think that is important to highlight that the SKUs that were affected by the tax are being affected more, and disruption is more in the 6%, 6.5%.

We have, as I mentioned, juices and nectars dropping double-digits. And we have other products that are growing. So at the end of the day, it's going to be the preference of the consumer on certain brands. I think that is going to be the affordability that we present to the consumer, with internal practices. There will be two factors that will be very important to help (technical difficulty) of the year.

But I was saying these hope surpassed their first quarter for all the positively affected by the fact that we increased prices at the end of March, and that will also be in the first. So there is a possibility that the second quarter will be a little bit worse than the first quarter.

But no question that we are suffering with some of the [polls] that we have -- where we have the tax. Coke Zero, we didn't move the price, and it's grown 14%. That's a clear thing that the consumer is looking for on a [parallel] product. Returnable packages at MXN5, 500 milliliters. We need it when we're [done]. It's an important (technical difficulty) active on that.

What would be the effect of the rest of the year? We might end up in the 6%, 7% reduction that I was mentioning, or I was guiding at the end of last year. So far, the fact is that the first quarter we are doing slightly better because of the products like water and Coke Zero that was all affected by the tax. Okay?

Yes. Thank you very much. Thank you.

That concludes today's question-and-answer session.

Mr. Trevino, at this time I will turn the conference back to you for any additional or closing remarks.

Thank you for your interest in Coca-Cola FEMSA. And, as always, Alfredo, Juan, and the team will be available for any remaining questions that you may have. Thank you for your presence.

That concludes today's conference. We thank you for your participation.