Coca-Cola Femsa SAB de CV (KOF) 2014 Q4 法說會逐字稿

Good morning, everyone. Welcome to Coca-Cola FEMSA's fourth quarter 2014 conference call. As a reminder, today's conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open up the conference 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 this morning to discuss our fourth quarter and full-year results.

As you saw in our earnings press release this morning, there is a critical change to the exchange rate that we have used so far to translate our Venezuela operations results into Mexican pesos. Given the increased uncertainty and lack of liquidity of US dollars in Venezuela and to more accurately reflect the contribution of this operation to our consolidated financial statements, we have decided to use the previously denominated SICAD II exchange rate to translate this operation's fourth quarter and full-year 2014 results.

As per the last official auction of this mechanism at the end of 2014, the rate is effectively VEF50 per US dollar. Consequently, Venezuela's contribution to our consolidated result is now considerably lower. After this adjustment, Venezuela represents 7% of our consolidated volume and 6% of our consolidated revenues and operating cash flow.

We would like to underscore that Coca-Cola FEMSA remains fully committed to continue producing, selling, and distributing the highest quality products for our Venezuelan consumers that they enjoy daily throughout the country.

For the fourth quarter, as reported in Mexican pesos, our consolidated revenues and EBITDA declined 9% and 5%, respectively. For the year, our reported consolidated revenues declined 6%, and our EBITDA decreased less than 1%. These declines were driven by the negative translation effect resulting from the use of the SICAD II exchange rate.

For the full year, despite a tough economic and consumer environment in most of our markets, we delivered organic volume growth in Brazil, Colombia, Venezuela, and Central America. This growth almost compensated for the volume contraction in Mexico resulting from the excise tax, along with a [marginal] volume decline in Argentina.

Coupled with this volume performance, our local revenue management initiatives enabled us to increase average price per unit case ahead of inflation in most of our territories. On an organic currency-neutral basis, we delivered revenue growth in every operation but Mexico, which experienced, as I mentioned, volume contraction due to the excise tax-related price increase.

Lower PET and sweetener prices in most of our territories were partially offset by the [annual] depreciation of the currencies across our operations. Consequently, our organic gross margin expanded 70 basis points during 2014.

Despite certain restructuring charges, mainly in Mexico and Brazil, and higher labor and freight costs across our South America division, operating expenses remained under control. Underscoring our Company's ability to deliver profitable results in challenging conditions, our organic EBITDA margin expanded 170 basis points for the full year.

Building on the strong brand equity of Coca-Cola and our compelling portfolio of returnable and attractively priced one-way presentations, we continued to generate increased transactions across our territories. This top line performance coupled with our financial and operating discipline enabled us to close the year on a strong note in every market.

In Mexico, we successfully faced structural changes and an exceptional difficult consumer landscape, triggered mainly by increased taxes on most of our beverages. Our organic volume outperformed our initial estimated volume contraction of 5% to 7%, despite a 16% price increase designed to pass along the excise tax to our consumers in Mexico. More importantly, our operation's ability to react quickly to this tough environment -- containing costs and expenses while adjusting our operating structure -- yielded an operating cash flow margin expansion of 150 basis points for the [period].

In Brazil, despite a continued tough economic and consumer environment, we made significant investments to upgrade our manufacturing and distribution infrastructure, improve our sales and operations planning, reinforce our portfolio to offer affordable packaging alternatives for our consumers, and successfully integrated two franchises to reinforce our leading position in the Brazilian Coca-Cola system.

Our organic volume increased 3% and our average price per unit case in local currency grew in line with inflation, generating revenue growth of more than 10%. Notably, our organic operating cash flow margin expanded 190 basis points.

In Colombia, we continued to see the results of our reconfigured portfolio and pricing architecture, and we extended the positive performance of this operation to a second consecutive year of 8% volume growth. In the fourth quarter, we started to execute selective revenue management initiatives to improve our local pricing while maintaining our magic price points strategy. We also continued to invest in our marketplace execution and remained focused containing operating expenses to mitigate expected short-term pressure on our operating cash flow margin.

In Venezuela, despite the complex operating and consumer environment, our team improved its execution standards across the operation, growing volumes by a remarkable 8% while achieving record volume and market share levels for the year. Thanks to our local revenue management initiatives and increased productivity levels, our operating cash flow margin expanded importantly during the year.

In Argentina, our Company continued to invest in manufacturing and warehousing infrastructure to improve our operating performance and to meet demand in peak seasons. Although our volumes declined slightly for the year, we gained both share of market and share of sales across every category. On top of this outstanding performance, our financial and operating discipline enabled us to improve our operating cash flow margin by 160 basis points.

In Central America, we [ignited an] acceleration plan to trigger higher per capita consumption and volume growth rates, while capturing the full potential of our four regional operations. For the year, Costa Rica and Panama weather and economic slowdown to each grew volume by 3%. Importantly, Nicaragua and Guatemala, which have relatively low historical growth rates, each grew volume by more than 8%.

In the Philippines, in the face of natural disasters that affected the country's infrastructure and, in part, our operations, we continued to advance successfully on the [total] transformation of this franchise. We continued to simplify the portfolio, focusing on the highest potential SKUs while expanding the coverage of Mismo, our exceptional popular one-way 250- and 300-milliliter PET presentations.

We also increased the coverage of Kasalo, our attractive 750-milliliter returnable glass presentation in the region of Luzon and [Baguio]. We further converted more than 60% of the country's volumes to our new route to market, regaining direct contact with our customers and achieving 7% volume growth across those transformed territories during the year.

Additionally, we continue investing in our operation's infrastructure, installing four new high-speed bottling lines in our Manilla and [Danao] bottling facilities, including two of the fastest bottling lines in the world.

Our core sparkling beverage volume in the Philippines grew more than 8% over the course of the year.

With regard to our performance per category, I would like to share a few relevant highlights for the year. As our consumers' taste evolve and the complexity of our categories and markets increased, it is increasingly relevant to measure [basic] interaction with our consumers across our territories.

Throughout the 10 countries where we operate, we serve more than 351 million consumers and record an average 70 million transactions every day. Indeed, our transaction growth outperformed our volume performance in every market, demonstrating our portfolio's ability to connect with consumers in a tough economic and disposable income environment. Thanks to our operators' capable execution and our packaging innovation, Coca-Cola once again proved its resilient, outstanding brand equity across every market.

For the year, brand Coca-Cola grew 15% in Venezuela, gaining three percentage points of market share.

In Central America, we delivered 6% growth, as well as market share gains across these countries.

In Colombia, Coke grew 7% and gained more than three percentage points of market share.

In Brazil, brand Coca-Cola generated more than 3% organic growth, while increasing its already benchmark share in the cola category.

In Mexico, despite excise tax-related price increases and a fierce competitive environment, Coca-Cola gained market share while contracting less than 4% in volume.

In Argentina, despite a 5% decrease in volume, Coke gained close to two percentage points of market share during the year.

Moreover, in the Philippines, Coca-Cola's volume grew more than 8% for the year. More importantly, Coke gained more than five percentage points of market share in Manilla and more than three percentage points of market share on a national level.

In the flavored sparkling beverage category, our brands' volume grew by double digits in Nicaragua and Colombia. In Costa Rica, Guatemala, and Argentina, this category's volume increased in the low- to mid-single digits. In Brazil, despite a very aggressive price reduction from our competitors, our flavored category declined only 1%. In Venezuela, due to raw material constraints, we prioritized our production of the fastest-moving SKUs; so, our flavored soft drinks declined 3%. In Mexico, this category's volume contracted by high-single digits, in line with the industry. And finally, in the Philippines, our core flavored brands grew by 10%.

In Argentina and Central America, we gained market share in this category, in flavors. In Mexico and Manilla, we maintained our share of the market. In Colombia, we lost two percentage points of market share, while we lost one percentage points in both Venezuela and Brazil.

In the personal water category, we gained market share in Venezuela, Central America, Manilla, Argentina, and Brazil. Despite a tough pricing environment, we maintained market share in this category in Mexico, and we were down only one percentage points in Colombia.

In Brazil and Argentina, personal water volume grew in the high teens, while in Central America and Venezuela our volumes grew 12% and 10%, respectively. In Colombia and the Philippines, our personal water volume grew 4%, while declining 1% in Mexico.

In the non-carbonated beverage category, we gained market share in Venezuela, Argentina, in Mexico, and Colombia, while maintaining share in Manilla and Central America and losing only two percentage points of share in Brazil.

Colombia delivered an impressive 35% volume growth in this category, driven by the Del Valle Fresh, Orangeade, Powerade, and Fuze Tea. In Venezuela, Del Valle Fresh and Powerade supported 11% volume increase. In Argentina, Powerade and Fuze Tea more than compensated for a decline in juices, to drive 8% volume growth in the non-carbonated beverage category for the year. In Brazil, the Jugos del Valle line of business supported a 2% organic increase in volume for the category. In Central America, our volume grew 3%, as Powerade and Hi-C drove the category's performance.

In Mexico, our non-carbonated beverage category's volume declined 9%, as consumers shift their disposable income to sparkling beverages. Notably, we increased distribution of Santa Clara portfolio of milk and value-added dairy products through our home delivery platform, reaching 65,000 households with this [tandem offering]. Moreover, Powerade also continued to gain share across the country, now reaching 48% market share through our territories in Mexico.

Finally, in the Philippines, our ready-to-drink, non-carbonated beverage portfolio grew 5% during the year.

Moving on to our consolidated financial position, our strong balance sheet along with our reaffirmed investment-grade credit ratings continues to underscore the financial strength and flexibility of our Company. As of December 2014, after adjusting for the negative translation effect resulting from the use of the SICAD II exchange rate, we had a cash balance of MXN13 billion and our total debt was MXN66 billion.

For the year, our operating cash flow was MXN28.4 billion.

In 2014, our operating cash flow to net interest coverage ratio was 5.5 times, and our net debt to operating cash flow ratio was 1.87 times.

During the second and fourth quarters of 2014, we made dividend payments in the total amount of MXN6.2 billion, demonstrating our Company's ability to return capital to shareholders while deleveraging our balance sheet, capitalizing on our financial flexibility, and continuing to invest in the future of our Company.

Our comprehensive financial result for the year was impacted by the acquisition financing of Spaipa and Fluminense, which was [brought into] Brazilian reais; a foreign exchange loss related to our US dollar-denominated net debt position; and a loss on the monetary position of Venezuela, resulting from the effect of high inflation on this operation's monetary position.

During the third quarter, we registered a one-time effect from the settlement of certain contingent tax liabilities at our Brazilian operations under the tax amnesty program offered by this country's tax authority. As a result, our effective tax rate for the year was 26%.

Our net income was MXN10.5 billion during 2014, resulting in earnings per share of MXN5.09.

As always, we took proactive steps to further strengthen our capital structure and financial flexibility. Our increased focus on financial discipline across our organization -- from more efficient, prudent, and stricter working capital and capital [investment] management, to developing of the talent and capability to carry out new debt financial and profitability analyses on many fronts, to the implementation of an organizational transformation giving increased efficiency in every process across our territories to make more better informed decisions -- enabled us to continue reducing our net debt position while maintaining our Company's strong cash flow generation.

Despite the structural changes in recent years, particularly in Mexico and Brazil, we continue to transform our Company's talent and management capabilities and our broad portfolio and operations, while investing in our supply chain infrastructure, our packaging innovation, and our route-to-market and commercial models to meet our consumers' ever-changing needs in the face of an evolving, challenging market environment.

Going forward, our financial initiatives, our team's operating strength and ability to adapt to the changing market dynamics of our geographically diversified portfolio (inaudible), and our Company's capacity to create a leaner, more agile and flexible organization will enable us to capture the long-term growth opportunities that we envision in the beverage industry.

We are proud to enjoy the opportunity to continue creating sustainable value for you now and into the future. Thank you for your continued trust and support in Coca-Cola FEMSA.

And, Operator, now I would like to open the call for your questions, please.

(Operator Instructions) Antonio Gonzalez, Credit Suisse.

Just two quick ones on Venezuela, and then one -- also a quick one -- on Brazil. First, what is the rate going forward that you expect in Venezuela? Because I just wanted to know if your auditors would allow you to use SICAD II in 2015, since in 2015 the rate is no longer available and it has now been merged into this so-called SIMADI rate.

The second thing is until when do you think you will have access to the VEF6.30 rate to imports your raw materials in Venezuela?

And just finally, on Brazil, do you have any comments -- maybe it's very difficult to quantify, but any big picture comments -- on what do you think would happen to the operations in Brazil in case of electricity and water rationing across the board, specifically if the mom-and-pops have any disruption because they run out of water or electricity?

Let me start, going in the order of your questions. With respect to the rate, as you can imagine, we had long and very lengthy and difficult discussions with our auditors, the auditing committee, the finance committee, and finally yesterday with the Board of Directors. We decided to use the VEF50 rate that, as you correctly pointed out, it was available as of December 31st, with the idea of trying to better reflect what the numbers of Venezuela within Coca-Cola FEMSA.

As of February 15, SICAD II, the VEF50 per dollar, is no longer an official rate. We thought that, when they were merging SICAD I and II, they would probably -- we thought that they would go for an average. That maybe was one that reflects better to have a [barrier] that will be used for companies to translate financial statements. Unfortunately, the only rate remaining was SICAD I, at VEF12. And then, they have this SIMADI, or this marginal market, where, so far, they have very, very few dollars trading on that. There are no clear indications of the depth of that market.

As a matter of fact, last week we presented three different bids, for a total of $0.5 million. We were not assigned any dollar at all. We still don't have any clear idea of the amount of dollars that were assigned in this bidding process, this market process, last week.

So, with all that information, the dialogue with our auditors is that we are using VEF50. And unless there is a very clear, new official rate during the first, second, and third quarters, we will continue to use VEF50 per dollar. That's our expectation. Remember that the first, second, and third quarters, we only have a [need to review] by the auditors and there is not a full audit and there is no opinion from the auditors. So, the auditors feel comfortable with that.

Once we get to the fourth quarter of this 2015 -- a year from now -- we would have again to review with the auditors with a very intense process again what should be the rate to be used to close the books for the year.

With respect to the VEF6.30 exchange rate, we continue to have access to that. I have to say that last year we received around $120 million at that rate for our raw material needs. You can notice a declining trend as the year advances, and a lot of that was during the first semester and a lower amount during the second semester.

During January, we received $750,000. In December, we received a little bit in excess of $5 million. So, we are still receiving the funds that we need to work with our operation. And obviously, we have a very important dialogue with our suppliers, for them to have patience the same that us, so that the two of us can work in this environment in Venezuela.

So, the dialogue with our auditors is that as long as we would have the [top level communication] with the central bank and that we have been granted access to the so-called [cento x] exchange rate, which is this VEF6.30, we should register our costs at VEF6.30, and that's what we are doing right now.

With respect to Brazil and the potential for electricity and water shortages, it's very difficult to quantify the effect on the traditional [trade] and the mom-and-pops in case we go into a rationalizing [mode]. Our strategy is to be present in the marketplace, even if the product is not [sold]. But we have to be there in the marketplace.

From our production and distribution point of view, we are not receiving any problems in terms of [the wells] that we have in our plants and the supply of water that we have in our plants. The largest plant that we have in Brazil is in Jundiai, which is near Sao Paulo, and that plant is the one that is a little bit more at risk because of being near to Sao Paulo.

We feel that with 30%, 35% rationalization in water, we would not have any problems because of the different supply of water that we have with the wells, or because we can use other production plants that are around the Sao Paulo area, including some in the former Fluminense and former Spaipa that are now part of our operation.

So, we can supply the Sao Paulo market and [the Brazilian] markets, maybe with a little bit higher transportation cost -- not maybe -- certainly with a higher transportation cost. But we will be able to supply 100% of the market.

With respect to electricity, we feel very comfortable because we do have generation in our plants. If we divert the electricity that we are using for the production of CO2 and some of the [process], we can use that for our production lines.

In addition to that, we are connected to a high voltage network, and in words of our engineers, we would still have electricity even if the airport in Sao Paulo doesn't have. So, they feel very sure that electricity would not be an issue for our production plants.

But again, we have a good network of plants. We have different climate conditions in [the different regions] in Brazil and the water. And therefore, (inaudible) is not the same in the different regions, and we can always with some additional transportation costs supply our needs for our consumers.

I hope that I answer your questions, Antonio.

Thank you so much, Hector.

Jeronimo de Guzman, Morgan Stanley.

My first question, just wanted to ask you about Mexico. How are you seeing the country at the start of the year, now that you're lapping the excise tax increases? Are you seeing any changes in the consumption? And also, how are you seeing the competitive environment, given that you mentioned that it was more aggressive last year?

I think that from my perspective the very good news in Mexico is that even in this very complicated environment [as a 15%] price increase during the -- to pass along the tax increase to soft drinks, we were able to deliver volume declines that were lower than what I was anticipating at the beginning of the year. Remember that I mentioned 5% to 7%, and in soft drinks we ended up around 4.5%, 4.6% decline in soft drinks.

We were able to pass the increase -- in addition to the tax, we were able to pass inflation as a price increase to the consumer. And therefore, you see important improvements in the profitability and the margins of the Company. At the end of the day, we ended up, for the full year, with an EBITDA growing 4%, 5% in the Mexico operation, which I think is a tremendous, tremendous achievement for our operation.

For the beginning of this year, we are seeing some interesting trends. Very good January -- very, very good January. Obviously, nothing as difficult January of last year, which was not the same in every part of the territory. And it's important also for you to remember that the different (inaudible) -- that we changed prices to the consumer at different pace in the different territories [with different bottlers that our] operations in Mexico.

February is a little bit softer. It's very similar to what we -- a little better than what we had last year, but not the same kind of growth that we saw during January. So, February, we haven't finished the month, but that's basically the trend that we are seeing.

So, it's a little bit surprising, because we are seeing some other industries with good performance at the beginning of the year, [even] in the retail. The so-called ANTAD indexes that they report are showing good trends.

I think that the positive for Mexico is the fact that the US is starting -- is showing strong signals for growth. So, that's positive. That will be positive for Mexico. We have a lot of issues with still the political and the security environment that we have in Mexico.

But I think that, everything included, January was a very good month. February is a little better than last year, but with not as high growth as we saw during January.

And you're able to take pricing more or less in line with inflation for the year?

Yes. Yes, we are still shooting for that. I can tell you that for this year, (inaudible) in January. And as of the end of the last fourth quarter, we are one of --. There are one or two bottlers -- we are one of those -- in Mexico that are increasing market share in spite of increasing prices.

Okay. And another question I had was related to your inorganic growth, starting maybe with the Philippines. It seems like you've made some good progress on the volume, on growing the top line and the go-to-market strategy. Wanted to see where you stand right now in terms of the margin? When you think you can focus more on increasing that profitability? And where you are in terms of evaluating other opportunities in Asia?

And then, I guess related to that -- and I know it's a long question -- just given that Coca-Cola company has given more details about bottler refranchising in the US, I wanted to see if you have any new thoughts on whether you would be interested in this market, given the economics that they've shared?

Let me start with the Philippines. I think that what we have accomplished in the Philippines is important in the sense that the strategies as we described with respect to portfolio and go-to-market are starting to work for us. And that's why we are seeing important growth, especially in the areas where we have deployed the route-to-market initiatives.

You see very important growth in terms of volume. Quality [index] for our products, out-of-stocks, capacity utilization -- all those indicators that have to do with supply chain are also improving.

And as you can imagine, as we have focused a lot on one-way presentations, we are shifting little by little the mix of products, and one-way are now representing around 40% to 42% of our mix, when they were more around 30% a couple of years ago.

Having said that, as of the end of last year and certainly the beginning of this year, we are now moving into how do we translate that into better margins and better profit for the operation in the Philippines. 2014 was a very tough year because of the disruptions that were caused by the typhoons, because of what we described in previous quarters about the [truck ban], and the increased costs that we have in our operations. We are better controlling that.

And we are now increasing prices at levels that should bring around better profitability. Obviously, we have to continue to adjust those price increases according to what we see in the [facilities].

Our expectation is to substantially increase the profitability. Remember that the Philippine market is a market that has been struggling with the profitability for many years; basically, break-even. So, whatever we can do will probably show a high increase, even though the numbers are small.

And it's important to remember [as we move on] we still have four and one-half, five more years on this call option to exercise the 49% -- to buy the remaining 49% of the Philippines. I think in my perspective that would be the first stage in whatever we do into Asia.

And given the structure that we have on that call option and the way it was structured together with the Coca-Cola company, it makes a lot of sense for us to delay that exercise until we feel very comfortable there. The carrying cost for that option is very small and financially it makes a lot of sense to wait until the end of that -- of the seven years after from the acquisition point.

Having said that, we are confident that what we are doing in the Philippines is going in the right direction. We are focusing a lot on the core products, forgetting about some of the powders and the lower brand equity brands. Increasing market share. For the first time in Manilla, we have (inaudible) brand Coca-Cola alone, because remember that before with brand Coca-Cola and Pop Cola were the two brands (inaudible). But now, brand Coca-Cola alone is the number one brand in Manilla.

And I think that the achievements we have in the marketplace signal that we are going in the right way in the Philippines.

Once we fully finish the [acquisition] of the Philippines, we would think about the other potential expansion in Asia.

With respect to the US, we know that the Coca-Cola company is thinking about increasing the speed of this process and do probably something during 2015 and 2016. We have not any specific proposal in our plate, but we are certainly interested in analyzing whatever is presented to us, if that is presented to us, in the future and go from there. We would have to analyze the economic conditions of a potential acquisition in the US, together with the commercial relationship that we would have with the Coca-Cola company and the different stakeholders in an operation like that. But there is nothing right now in the process.

Okay. Got it.

Andrea Teixeira, J.P. Morgan.

The first question that I had was about volumes, which you were able to respond. And I guess on the pricing front, I just want to reconcile -- the first question, reconcile when you said that you took pricing. If you can give us a sort of magnitude the pricing that you took? And if you saw a little bit more [leaning] of your main competitor doing the same?

And the second point is about raw materials -- because I think we haven't discussed that in the call yet -- for the outlook and its impact on margins? We heard some other bottlers said they can try to mitigate the peso devaluation with more [HFCS]. But I'm assuming you've done most of it, from conversations before and from the call before. But I wonder if the lower PET prices and if you have some way of maneuvering that to keep your margins flattish or otherwise?

Let me clarify the -- and maybe just to be very clear about the pricing in Mexico. We have increased prices during the past year and we have moved our -- as we focus more and more on transactions and trying to move to single-serve presentations, we are moving a little bit more the mix of our products to packages that have a better [pricing volume].

In January, we have not increased prices [of these real] packages, but we have -- [when] you look at the equation of [value] divided by volume, the total price per unit case is increasing. Just to be very clear with that.

Our idea is to move prices with inflation, and obviously we need to look at the correct time during the year when to do that. Probably March would be the first movement in prices on individual packages. But our people continue to work in increasing pricing -- the total pricing for the Company mainly going to more single-serve presentations, et cetera.

With respect to the FX impact, it certainly is something that we need to consider [in all of this]. We know that some of our peers and competitors have mentioned that they want to increase prices, because already there is some pressure on the FX front. I guess that everyone was a little bit surprised by the magnitude of the changes in the FX in the different countries in Latin America.

We have the positive effect of raw materials in dollar terms coming down a little bit versus what we had last year, and that being partly compensated, or a little bit more than compensated, because of the movement in the foreign exchange.

For us, we have around 30% of our needs for Mexico and around 28%, 29% of our needs for Brazil already hedged at very good prices. We did that many -- a few months ago. So, the impact that we will have is more around the 70% of our needs in those countries. In Colombia, we also have [solid changes]. Obviously, Argentina and Venezuela, it's very difficult to [go with them] with any FX hedge.

So, I think that the combination of [raising price coming down, I think we'll beat numbers]. With sugar, slowly sugar is slightly below the prices that we had last year, or flat. With the effect of the FX, we'll have still a very stable raw material environment during 2015.

Great. And in Brazil would it be the same, Hector, the outlook for pricing? You think given the very hot weather there that you are able to pass on some of the pressures on the real, even though as you mention, it's only on 70% of your dollar COGS? You think that you can find a way to pass on price increases there that are linked to inflation? Or, it's still quite competitive? You've done so well, just from the volume standpoint, sequentially, being able to pass on the price increase, especially in the summer.

It's a tough question in Brazil, Andrea, but certainly our expectation is to continue moving with inflation. Obviously, the expectation for inflation is moving; the target is moving every day. It's difficult to have -- to agree with different economists on a number for inflation.

But we have in our business plan the idea of increasing prices with inflation. Remember that in Brazil, we are focusing a lot on the so-called magic prices -- BRL1, BRL2, BRL3, and BRL4 for different presentations -- and the returnable 2-liters.

Now, in Brazil, the formula has been a little bit different than Mexico. When you look at the average price per unit case, it's flattish and some months we see it's a little bit down. But it's more an effect of the mix, because we are, again, introducing this and the returnable presentation is gaining a lot of traction in Brazil.

So, within the different presentations, the idea that we have is to pass along this price increase. Remember that we have a new production plant that we expect to have efficiencies from that, both in transportation and in efficiencies just in the cost of producing our product, because it's a much more modern production facility.

So, all in all, I think that we would be able to continue with our magic price points and fostering the 2-liter returnable presentation, increasing that penetration.

The competitor has been aggressive in the past, especially during the World Cup, and we would need to check the competitive environment, continue just to see if we can pass along these prices. But our expectation is, yes, to pass along this inflation to the consumer in the form of price increases in every product.

And if I may, one last question, Hector, on Venezuela? I know in the first question you elaborated a lot. But just on -- I think the concern now is a transaction impact of this [act], right? How far in advance you are still buying on a monthly basis at VEF6.30? Do you see, obviously, a risk of not being able to source with the dollars? I know you printed in your press release, say you're still buying at VEF6.3. But that's on a monthly basis -- right? -- your being able to buy your raw materials at this currency? There is any systemic issue there, (multiple speakers)?

I think, Andrea, that in our P&L, the majority of the raw materials is registered at VEF6.3. When we don't receive an authorization from the central bank to import a specific product for whatever reason, or in the majority of the cases it's more with spare parts, we need to buy at a much higher rate, and we register that rate in our P&L. So, a very small portion of our P&L is affected by a higher rate, and sometimes it's close to VEF170.

As we mentioned, we are still receiving authorizations from the central bank to import these raw materials at the same currency rate, which is VEF6.30. The risk, what is the risk? The risk is that -- [probably different risks]. One is that the central bank says now the [cento x] rate is VEF12 or VEF20 or whatever, and we would have to register this new rate in our cost structure.

Another risk is that they say, you, Coca-Cola FEMSA, would no longer have access to the [cento x] rate. And then, we would need to see how to [go] with that.

What we are doing internally is to work with all the suppliers -- all the suppliers -- and basically it's in three categories -- four categories.

The Coca-Cola company concentrate that is coming from Brazil.

PET, the resin, that is only produced in a few countries around the world; no chance of producing that locally at all.

Caps, plastic caps, where we have some local producers that do not have a very good quality but we are working very closely with them so that -- to compare them and for them to do the investments so that we can source plastic caps locally and reduce the amount of dollars that we are requesting to the central bank.

And the other category is spare parts. And spare parts, every industry in Venezuela is having troubles, because it's difficult to give the proper maintenance to the equipment, in every industry.

So, we are starting dialogue with the Coca-Cola company to see if we can have some local sourcing of concentrate. We are working on that, but [it is not sure] that we will be able to do something like that.

We are working with the plastic bottle competitors to see ways to improve or to reduce the number of dollars that we demand.

And one of the alternatives, for example, that right now resin from China is substantially lower in price than from where we are sourcing the resin in Venezuela. But we don't have authorization in Venezuela to import resin from China. So, we are working on gaining the proper authorization from the authorities so that we can import resin from China. And that by itself would be a 35% reduction in price [increase] in Venezuela, and therefore a 35% reduction in the dollars that we demand in Venezuela.

So, all of these fronts, we are trying to work.

As we tried to express in the press release, there are risks that we will not be able to use the VEF6.30 in the future. Yes, that's also a risk that we have. So far, because we have all the authorization in place to have access to the [cento x] rate, our auditors -- local auditors in Venezuela which are E&Y and E&Y globally -- are telling us: You have to use VEF6.30 because this is the appropriate rate for that.

And in the meantime, as I tried to explain in this very long answer, we are trying to find ways to reduce the number of dollars that are needed to run the operation in Venezuela. If we could ever get to a moment where we charge bolivars for our products and only use bolivars for our costs, then we don't have any problem in terms of growing importantly our operation. Right now, we have capacity constraints and we are selling everything we produce, and that's why in flavors we have reduction in bottles, because we are basically favoring brand Coca-Cola that is growing a lot.

Should we invest in more production lines or more plants? It's very difficult. Maybe we get dollars to import the production lines, but then the amount of resin and the amount of caps and labels [would not to increase]. And we need to have assurances that it is not only the dollars for the production facility but also for the future raw materials that will be needed.

Again, so, we are in an environment where we use bolivars, only bolivars, in our P&L in terms of our revenues, our salaries, (inaudible), raw materials -- everything is in bolivars. Then, we can grow -- in bolivars, we have a lot of bolivars there [to support profitable operation]. The only movement that we are doing at this moment is translating those bolivars from Venezuela [at official] rate in the Mexican peso for the consolidated figures that we present.

Excellent. This is very helpful, Hector.

Gabriel Lima, Bradesco.

My question is also related to Venezuela. It's a quick one, actually, just a follow-up on the first question. Just wanted to make sure of how much cash position you are currently holding in the country, Hector? And if the changes implemented in the currency exchange system recently -- in February, right? -- changed by any means your ability to cash out money from the country?

Before moving to VEF50 per dollar, the cash balances were close to $800 million. At VEF50, it was more or less around $200 million. That's what we have right now in our balances in the balance sheet that we reported today. So, it's around $200 million.

We have for several years a request for dollars for dividends to the central bank that has never been granted. If we find a way of buying dollars in this marginal market, (inaudible), in the SIMADI market, we will certainly buy some dollars and pay those dividends that have been there for several years. I think that right now only we would need to be sure that we have enough bolivars to run our operation properly in Venezuela, but we think that we have more than enough right now.

Okay. I see. So, if you had the option, you would cash it out at VEF170, but you're not executing that. That's pretty much what you're saying?

Yes. I think that we certainly need to evaluate how the VEF170 market is moving. As I mentioned, we put three different bids to buy $0.5 million at that market, and we were assigned fewer dollars. So, we're doing that in order to have some cash balances in case [we need] an emergency spare parts or something like that. But, yes, we will [evalue] that.

As we mentioned, probably the previous quarter, we have acquired some real estate also in Venezuela as a way of hedging our position in bolivars, because we have, again, a lot of bolivars in Venezuela. And just with inflation around 80% or 90%, cash balances would lose value -- [would be worth one-half] after one year. So, we have been buying some -- remember, a couple of years ago we bought our offices. And last quarter, or the last three or four months, we bought a couple of warehouses that were important for us, for our operations.

So, that was also a way of hedging part of that position that we have. And obviously, when you go to buy a real estate property in Venezuela, everyone is using the VEF170 as a reference to price these properties in bolivars.

Okay. Okay. That's clear. And just I want to make sure of another thing you mentioned in the call. So, we're going to be using VEF50 per USD in 2015, but there is nothing on the table yet of what currency is going to be used, going forward. Right?

Yes, that's basically what we discussed with our Board of Directors and with our auditors and the auditing committee during the last week, basically, to continue using the (inaudible).

Okay. Sounds good.

Alex Robarts, Citi.

I wanted to go back to Brazil and, really, it's two questions. First of all, on pricing, telling us definitely the goal was to try to get to inflation this year in Brazil. Can you talk a little bit about just this tax that we've seen. It's now formal. It's law. It's starting in May in Brazil on cold beverages. Can you comment a little bit on what you might need, if any, to pass on to the consumer starting in May, in terms of price? That would be great.

The second question is back on the cost and expense structure. You've made it pretty clear that we'll have some currency-related issues on the raw materials. But if we look ex-raw materials, I guess I see the productivity gains from the Minas plant coming through. I see the synergies from the two acquisitions. But I also understand that on the concentrate price, if it's not up for renewal this year, the negotiations on Brazilian currency trade, if I understand it correctly, are beginning. So, if you could just talk about those non-raw material elements of the cost structure in Brazil and how we should think about that, going forward?

Let me start with the pricing part in Brazil. Our objective in our business plan is to have prices move with inflation. We obviously have to be very watchful about how the real versus dollar rate evolves during the year, because that has an impact on our cost structure. But we think that -- [what I would say where the direct impact] is coming down and sugar prices stable or down versus previous year, we think that we would have stable, in general, raw material prices in Brazil.

So, assuming that that part of the (inaudible) is stable as we are assuming in our business plan, then we would continue with this (inaudible) increase in prices with inflation in Brazil.

The tax is moving from a very complicated formula that had some surveys done by the government with respect to the price at which the retail system was set in the products to the consumer and then having a strange formula there to try to compensate for the taxes that the retail system is not paying. Now, we are moving to ad valorem tax, which is very clear for everyone. And it's in theory, using the numbers, this ad valorem tax could be a little bit larger than what we had before, but without the mess of adjusting every six months the formulas.

So, all in all, it's very straightforward, and that ad valorem tax will be paid by the consumer and we will just deal with a net price that is staying with us.

Other than the raw materials, we don't have any dialogue at all with the Coca-Cola company with respect to concentrate in Brazil. We do have the element of the synergies in Brazil that we estimated in $52 million after 24 months. What we can say there is we are very much in target at a faster pace. So, that's helping this year.

We have started a lot of synergies, and I have to say that we are also using some of the best practices that Fluminense and Spaipa have, also to use those, especially some issues with respect to accounts receivables and the way the working capital was being managed. And we are using that in the former Coca-Cola FEMSA. So, in the synergy front, we are moving very well.

And as you correctly point out, in Minas Gerais, we are moving away from a very old plant, very complex because it has different levels. It was more like a pyramid. It's because it was not a flat piece of land. And now, we have what we consider is a very modern, state-of-the-art facility that started to work -- to produce commercially in November. And we think that we can derive some benefits from that, especially, Alex, [highly] returnable PET capacity to that region. That was not being served [property] with that package, because it was -- we didn't have the capacity there.

So, with all of those numbers in place, I think that what we are seeing in Brazil, it's important improvements in margins. Remember that last year we had important reductions in margins. So, we are getting back to the levels that we had in 2012. So, we feel very good about this, because I think that the fact that given the tax impact in Mexico and the fact that Mexico was able to deliver growth at the EBIT and EBITDA level, and having Brazil returning to the profit levels that we have in 2012, improving those margins. We still have some room to improve, but getting closer to the levels that we have in 2012, when you remember that in Brazil there was a very strong change in the tax law for raw materials that impacted significantly our cost structure. And we have also the so-called transportation law that increased our cost of transportation. So, just with those two issues, in 2013 we lost 300 to 400 basis points in margins.

So, we are recovering that. So, the fact that Mexico and Brazil, which is the bulk of our operations, are having this strength, I think that is a very good achievement for this year.

That's helpful.

Jose Yordan, Deutsche Bank.

A couple --. Well, most of my main questions were answered, but just a follow-up on the concentrate in Mexico. Obviously, we're coming up on the 10-year anniversary of the very contentious negotiations, back in 2006 if I'm not mistaken. How are you guys going to be approaching that this year? Is the conversation going to be preempted or brought up ahead of time? Or, has Coke indicated that given the difficulty in the markets, et cetera, and the margin pressure that it's just off the table indefinitely? So, any color you can give us on that would be great.

And then, just a more technical question, on Venezuela. Every year in the annual report, you've given us a breakdown of Venezuela operating P&L, because it was, I guess, deemed as relevant or material by the auditors. Will that still be the case for the 2014 annual report, or not?

Let me start with the concentrate. This, we have -- in 2017 is the 10-year anniversary of the [increase that] we have in Mexico. We are having some conversations [as industry] with the Coca-Cola company, just to start trying to find a way of doing something that is a win-win situation. We understand the need of the Coca-Cola company to also increase their profits, but they also understand that we are going through a -- 2014 was a very difficult year because of the tax for the industry in Mexico.

So, I think that, all in all, we have a good dialogue. Nothing to [increase] yet. And what I want to say is that our idea is that we should find a win-win situation where we can find ways to get increased profits from the marketplace and not from one company to the other.

With respect to Venezuela, we will continue to present in the annual report and if you look at the notes of every quarter, that it was represented [before], we do have -- we opened some of the main lines of the P&L and balance sheet for Venezuela. And we will continue to do that, because I think it's important for everyone to have a very clear idea for how to compare now that we've changed to VEF50.

One of the things that we are debating (inaudible) if we should present probably with more clarity and not only in the segment section of the notes, but just bring it to the front of press release and to do some comparisons so that you really could have a better understanding of the Venezuela situation.

Okay. Very clear.

Martha Shelton, Itau.

Thanks for taking the question; it's regarding Mexico. I'm just curious to know how much leaner your Mexico operations can become? Is there any room for additional SG&A efficiencies, given how well you've done throughout 2014?

2014 was, given the circumstances -- again, about the tax and all the impact that we were expecting -- we reduced substantially the workforce. Basically, we reduced 1,400 people from our workforce during 2014.

We are going into a second phase of what we call effectiveness and efficiency applications. That's basically the idea of to reducing layers and increasing expanse of control in all the organization. We expect that this will bring about some additional savings. It's still very difficult to quantify that, and we will be executing this country by country during this 2015.

The idea is to focus our organization in two [places] of excellence: the commercial, where we have people that, because we think that this is one of the top priorities for the Company, everything [that has to equal measured practices]; and supply chain, because we think that in order to compete in this market we need to be very efficient. So, we are focusing and reorganizing our structure using these two pillars.

So, for example, in the past a person that was in charge of sales, they would be in charge of making sure that the product was arriving on time to the warehouse, in charge of the maintenance of the trucks and the forklifts, as well as in charge of selling products in the street. Now, sales personnel will only be in charge of selling and having contact with our clients and our consumers. And supply chains would be in charge of everything else, and through to service level agreements with the sales people have the product that is nearer on-time, et cetera.

That implies some changes in the organization that we think will have some important efficiencies for us. Again, the idea is to be more effective and to be more efficient, both in our organization and in the marketplace.

Obviously, at the same time, we have a group of people that is thinking in managing that has to do with IT innovation and how can we use technology, especially mobile technology, to improve or to potentialize our sales personnel in the street. [Even] we have hand-held computers with every person, but these computers are kind of old. Not all of them are connected in real time.

So, we are analyzing what we can do in terms of improving our sales force capabilities towards securing the market, which I think that will also have -- at the end of the day, bring some efficiencies to our P&L.

Thanks for that. And you're unable to quantify. Is that what I understand? Unable at this point to quantify the effects of this de-layering process?

Yes, right now, it's still too early. No, it's something that will be evolving during 2015.

Great.

At this time, we have no further time for questions. So, I'd like to turn it back over to Mr. Trevino for any additional or closing remarks.

Well, thank you for your interest in Coca-Cola FEMSA. And as always, we are open for any additional questions you might have. Thank you.

That does conclude today's conference. We thank everyone, again, for your participation.