Coca-Cola Femsa SAB de CV (KOF) 2015 Q4 法說會逐字稿

Good morning everyone and welcome to Coca-Cola FEMSA's Fourth Quarter and Full Year 2015 Conference Call. As a reminder, today's conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance 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 to discuss our fourth quarter and full year 2015 results. Our Company closed the year on the high note building on our strong performance in 2014. We delivered a solid set of comparable results for 2015 supported by the continued consumer recovery in Mexico, despite prevailing consumer weakness in Brazil, continuous operating and economic complexity of Venezuela and ongoing currency volatility across our markets.

In 2015, our consolidated revenue growth was driven by our pricing power and flexibility in every country together with our increased transactions, which continued towards outperform our volume growth in key markets such as Mexico, Colombia, Argentina and Central America. Thanks to our proactive currency hedging and procurement strategy, a favorable raw material price environment for most of the year and our operating discipline in every franchise. We continue to deliver improved bottom line results, expanding margins in almost every country.

For the full year, our consolidated comparable revenue rose 9%. Our comparable operating income grew 14% and our comparable EBITDA increased 10%, leading to a 60 and 30 basis point operating income and EBITDA margin expansion respectively. For the fourth quarter of 2015, we achieved consolidated comparable top-line growth of 10% and comparable EBITDA growth as close to 11% with improving margins. Our positive transactions performance were supported by our continued focus on amplifying our portfolio of beverage alternatives. Our relentless emphasis on further strengthening our point-of-sale execution including expanded cooler coverage and our ongoing commitment to reinforce our sparkling beverage offering through our introduction of innovative packaging solutions to connect with our consumers at the right price point for every (inaudible).

As always shown, this year we generated more than 25.7 billion total transactions across our 10 markets. Not only we achieved solid growth in our gross sparkling beverage transactions highlighted by a 2% improvement in Argentina and Central America, a 3% gain in Mexico, a 4% increase in Colombia, and 9% growth in the Philippines. More importantly, as we continue to balance our portfolio growth, still beverages accounted for 43% of incremental transactions across our 10 countries for the year.

Moreover, every operations continue to maintain or improve market share in the sparkling beverage category, while we strengthen our market position across the still beverage category. Mexico, Colombia and Argentina continue to gain share in such relevant categories as juice and tea. Powerade recorded important market share gains in Argentina and remarkably we continued to extend its legal position in Mexico. We also showed encouraging month-over-month market share gains in the non-carbonated beverage category in Brazil in the second quarter of the year; this year, we constantly deliver a solid set of operating results.

In Mexico, we saw continued improvement in consumer indicators, highlighted by the sustained growth in remittances in US dollars, amplifying Mexican pesos due to the [level] ratios, low levels of inflation, and improved employment data. Our revenues grew close to 8% on the back of a strong 6% (inaudible) increase and recovering volumes, which expanded by close to 2% driven by 3% growth in the sparkling beverages and the increase of more than 5% in the non-carbonated beverages. Our sparkling beverage performance was supported by 3% growth of brand Coca-Cola and 6% growth in flavored sparkling beverages, mainly driven by Sidral Mundet, our multi-flavored Fanta offering, and our recently launched sparkling orangeade and lemonade, Naranja & Nada and Limon & Nada launched in the fourth quarter, they accounted for more than quarter for the incremental volumes in sparkling flavors for the year. More importantly, the (inaudible) captured close to 30% of the sparkling orangeade market.

In the water category, we saw decline in both personal water and bulk water and we continue to improve the category profitability. During November, we magnified our water offering by launching Ciel Exprim flavored water and new formula of Ciel mineralizada, our sparkling water now with longer-lasting bottles.

During the fourth quarter, we saw very good volume on market share performance from these new product launches and we are encouraged by the growth prospects going forward. In the non-carbonated beverages; Del Valle, Vallefrut, Santa Clara continues to drive the category performance. We more than doubled the volume from our dairy business as we continue to expand point-of-sale coverage in the [regional] channel. Additionally, Powerade continue to expand leading position in the sparkling category, now capturing 52% of the market of across our territories.

Our solid top-line performance combined with our currency hedging strategy and our operating discipline enable our Mexican operations to deliver an 80 basis point EBITDA margin expansion. In Central America, we grew volumes by 3% successfully building on 5% volume growth from the previous year. By countries, Costa Rica grew 1%, Panama grew 4% and notably Nicaragua was little more than 8% growth continues in a row. This increases compensated for decline in Guatemala.

Coupled with our volume performance, our local revenue management initiatives and operating discipline enabled the region to deliver at 70 basis point EBITDA margin expansion for the year. Despite the few challenging economic and consumer environment, our operations continue to achieve key accomplishments; growing market share, implementing price increases and revenue management initiatives and expanding our franchise profitability.

During the year, we gained market share in both colas and flavored sparkling beverages, outperforming the industry for the 20th consecutive month. Our ongoing focus on affordability for our consumers underscored by the expansion of our one-liter and two-liter returnable presentation continued to give positive results. For the year, our multi-serve returnable presentations grew 7%, gaining 110 basis points of mix in the sparkling beverage category. Moreover, we continue to withdraw our single-sales offering to maintain competitive affordable price points for our consumers. As part of our ongoing revenue management initiatives, we moved our 200 milliliters packets to BRL125 and introduced 310 milliliters can to replace our popular 250 milliliters can at the (inaudible) price point.

Our two-fold (inaudible) strategy continues to deliver very positive results. On the one hand, our legacy Quatro brand grew 20% for the year across our Brazilian franchise, while continued to gain market share, especially for our two-liter presentation. For example, since we first launched the strategy in the legacy front, Quatro has gained more than 10 percentage points in (inaudible). Evidently, the potential of these initiatives as we have secured the rollout to less than over (inaudible). On the other hand, Schweppes Guarana, our premium offering continued to deliver incremental transactions as it gained momentum. In the still beverage category, we focused on improved [plain] cover together with packaging and brand innovation.

For the year, Crystal water grew 2%. Our bottling portfolio grew 13%, extending our leading market position. And our del Valle Fruit orangeade portfolio grew 4%. These increases partially compensated for a decline in our juice portfolio.

During the year, we reinforced our juice portfolio to offer our consumers more choices, regardless of the size of their pocket. To this end, we launched (inaudible) and strengthened our premium juice offering. Although our volume continue to perform negatively, we started to see month-over-month sequential share gains in the second half of the year in this category. Most importantly, in a complex economic and consumer environment complicated by a 42% devaluation of the currency and the series of one-time expenses related to the offering of our new state-of-the-art plant in (inaudible), our pricing initiatives, our currency hedging strategy and our focus on cost control enabled our Brazilian operation to deliver a 70 basis point EBITDA margin expansion for the year.

In Columbia, we marked the third consecutive year of high-single digit volume and transaction growth. Our sparkling beverage growth was driven by a double-digit increase, increase of Quatro and Sprite and a 4% increase of brand Coca-Cola. We achieved 19% volume growth in the non-carbonated beverage category, driven by the del Valle Fresh orangeade and Fuze tea. Our water category continue to perform strongly, thanks to this year's re-launch of our Manantial brand and innovative one-way PET packaging for our Brisa brand.

Throughout the year, we navigated a harsh volatile currency environment and increased inflation rates. To compensate for these inflations, we have implemented pricing adjustments that coupled with our currency hedging strategy enabled us to defend our Colombian operations' gross margins. At the operating income level, we faced year-over-year margin pressures, given the effects of lower comparable marketing expenses in 2014 due to extraordinary certifications of the Coca-Cola Company during 2013 and 2014 apart from (inaudible).

In Argentina, we delivered close to 4% volume growth and close to 6% increase in transactions. Our sparkling beverage volumes remained flat. And increasing flavors, driven by Sprite and Schweppes, offset the slight decline in colas. Water performed strongly, growing 20%, supported by our Aquarius flavored water and Bonaqua brands.

In the non-carbonated beverage category, our volumes increased by more than 30%, driven by Hi-C orangeade, Cepita juice, and Powerade, which continued to perform strongly. Our amplified beverage portfolio, the strength of our turnover packaging portfolio and our commitment to invest bolstered these franchise operation efficiency and continued to generate market share gains across every category. These were highlighted by a more than three percentage point gain in flavored sparkling beverages, mainly driven by Sprite, which is now the leading brand in this segment and the substantial increase in sports drinks, where Powerade now has reached a market share of more than 30%.

Our revenue management capability, our currency hedging strategy and our operating discipline continue to deliver solid improvement in our gross profit and EBITDA margins, reaching close to 20% EBITDA margin for the year. In Venezuela, the operating and economic environment, we experienced a 2% volume decline. In spite of this, we continued to gain market share highlighted by a more than 3 percentage point increase in colas and an increase in water. We continue to protect the profitability of our Venezuela franchise through our focused revenue management initiatives, efficiency gains, and production of the most profitable (inaudible) SKUs.

2015 marked the third anniversary of our entry to the Philippines, a promising long-term growth opportunity. (inaudible) we have successfully transformed the phase of this operation to drive the direct relationship with our clients, introduced a flexible one-way PET portfolio, focused on our core brand and importantly transformed these franchise supply chain through investments of more than $400 million, which were generated by this operation.

Our game changing MISMO, 250 milliliter and 300 milliliter one-way presentations continue to deliver solid results for our sparkling beverage portfolio, mainly our one way presentations to gain 320 basis points of our link of gross sparkling beverages to reach [38.2%] for the year. To complement these new flexible portfolio, we launched Time Out, a new taller, slimmer, 8 ounce returnable glass presentation at (inaudible) Controladora Vuela Compania, our MXN750 million, we don't know exact presentation. Thanks to this and my initiatives, we grew our closed parking dollars volumes by 7% and transaction by 9% for the year. This renewed tea portfolio has allowed us to gain pricing and revenue management flexibility, which has enabled us to deliver increased revenues.

Most importantly, (inaudible) strength of our ongoing strategy transformation, I would (technical difficulty) delivered positive operational and financial results for the year. We are encouraged by this operation, continue improvement and we continue the profitable evolution of our business in the future.

Moving on to our financial performance, our comparable net income for the year generated MXN4.59 per share. Adjusting for one-time tax benefit recorded last year in the field, our comparable earnings per share grew 6% for the year. The main factors affecting our reported earnings per share for the year was, higher interest expense in Brazil, a foreign exchange loss related to the depreciation of the Mexican peso as applied to our US dollar denominated debt position of approximately $650 million and operating currency fluctuation effects, resulting from the revaluation of our operational currencies and our broader denominated accounts payables.

The purpose of reducing counterparty risk during the fourth quarter of 2015, we reset the terms of the swaps used to change dollar denominated debt into Brazilian reals, in connection with the acquisitions of Spaipa and Fluminense in Brazil in 2013. As a result, we recorded a payment of advanced interest expenses due to the interest rate differential between the levels up, which is the dollar debt was the regional swap, and the level at which it was reset in the recouponing.

And so at the end of 2015, our net debt to EBITDA ratio, including gross currency rates swaps was 1.57 times. These dropped from 1.76 times at the end of 2014. We continue the evolutionary transformation of our organization's capabilities, skills and operating models to capture profitable future growth. To help prepare this transformation, our center of excellence, not only enable centralized collaboration and knowledge sharing to benefit our operations for also provide the potential to generate significant operating efficiencies and sales, along with opportunities to deferred CapEx through better asset management and (inaudible). Moreover, we continue to relentlessly reinforce our point-of-sale execution, our supply chain and that would be a slight high portfolio growth and packages to meet our consumers' ever changing needs and successfully navigate on the broadly challenging market environment.

To this end, we maintained a disciplined approach to capital allocation and we continued to optimize our margin of growth on a strategic capital expenditure to maximize our return on invested capital and deliver sustainable profit of growth for our shareholders.

This year, we continue to increase transactions after evolving growth into markets such as Mexico, Colombia and Argentina. We further delivered balanced transaction growth, with still beverage representing 43% of our incremental transaction for the year. While maintaining or improving our market share across all of our countries, we successfully increased average prices per case in line with or above the inflation in most of our markets supported by these top line performance, together we have active hedging and supplement strategy and our financial and operating discipline with the EBITDA margin expansions in almost every operation, highlighted by Mexico, Brazil and Argentina.

The performance of our Philippines operation remains encouraging, delivering a strong volume on transaction growth in our core beverage portfolio, generating important cost and expense savings through our improved logistics and manufacturing capacity and ultimately enable us to deliver consistent profitable results moving forward. Innovation on this core, our portfolio continued development and performance as if simplified by the launch of our sparkling orangeade and lemonade in Mexico. I will reinforce where on that portfolio and return on this investments in Brazil, and not only the performance of our Santa Clara portfolio. Well we more than doubled our volumes through our (inaudible) in the traditional trade channel and (inaudible). Finally, supported by our commercial manufacturing and distribution and logistics center of excellence. We continue to transform our management and operating models to deliver solid improving top and bottom-line results and increase it in terms of our shareholders.

As always, thank you for your continued trust and supporting Coca-Cola FEMSA and we'd like now to open the call for any questions. Operator?

(Operator Instructions) Luca Cipiccia, Goldman Sachs.

Hi, good morning. Thanks for taking my question. I wanted to follow-up on two markets. One on Colombia, maybe if you can give us more background on the positive volume momentum that you keep maintaining there and how do you expect that to trend in 2016? But also, what is driving in terms of execution, in terms of pricing strategy, in terms of market share dynamics, maybe that would be helpful?

And then secondly, unsurprisingly, we keep saying volumes in Brazil suffering. You're going to enter probably easier comps now in 2016. So just wondering whether you start seeing some degree of a floor in the volume performance there in terms of growth, in terms of outlook, for this year and you keep reiterating or highlighting how market share trends have actually been supportive. So how do we reconcile that with the type of volume decline that we would continue to see?

Good morning Luca. In Mexico, I think we have been looking at the consumers that have been recovering, the customer confidence and in a way as I have mentioned during the speech, when we consider and challenge the indicators, we look at retail operations that have been reporting recently. We see good numbers in the economy. So I feel that the name of the game in Mexico for this coming year is to continue to deliver affordability to our consumers in some of the areas that we feel need to provide an affordable growth. And for us to be able to continue increasing prices to compensate not only the inflation rate, but also the effects of some of the internal cost that we have as you know, with portion of our raw materials are dollar denominated and we had been trying to pass alone those cost increases to our consumers. I think that in general we are seeing a stabilized market share -- stable market share in Mexico. We have very large price gaps versus our competitors. Therefore in different categories you might see some small declines, very very small declines in market share, but we are favoring the price increases even though that might imply a small market share erosion in volume terms, so that that we can maintain our margins.

We had been doing several innovative launches like the Limon & Nada and Naranja & Nada that help the growing very importantly, that's you see the performance of flavor, sport and flavored (inaudible). And I feel that again the name of the game is, how can we continue to take the profitability of our Mexican operation in a very volatile environment in terms of the FX volatility.

In terms of raw material prices, we are seeing PET prices coming down, we are seeing fuel prices coming up a little bit, but in general, I think that we can (inaudible) we have what has been very successful taking a strategy over the last two or three years. You have heard that our reviews, -- where we protect some of the volatility of the cost structure that we have in the raw materials, for example in the case of Mexico, we already have hedge around 40% to 45% of our mix for raw materials for next year. So, this will also help us during 2016 in terms of us being able to protect some of these cost pressure that we have. This is very important Luca, because that I mention that we have very high priced (inaudible) versus our competitors, is very important that we are not (inaudible) to increase prices more than what is needed because of these FX volatility. I think that finally, in Mexico this concept of the center of excellence as we rolled out some of these new processes and the way of approaching this commercial practices and supply chain practices, we're expecting of (inaudible) some savings going forward and we have profitability further operation in Mexico. So all in all, in Mexico, I feel that we are seeing our consumer that is behaving a little better. Responding to some of the promotional activity that we have. So we see volumes growing, we see maintaining our market shares and you see our prices moving with inflation was slightly better than that in order for us to compensate for internal cause. And you see a very big effort in having a lot of effectiveness and efficiency in our SG&A expense. All of that should combine for us to maintain or improve a little bit of our margin for 2016. We will move to Brazil.

Brazil history that basically has to do with front line as you -- if you correctly point it out. Historically Brazil how do we grow volumes because the consumer is not there because the consumer's confidence is very low. The consumers has a lot of debt. They are starting to stop purchasing some durable goods and some consumer goods, and therefore our volumes are suffering. Direct of the indicators in Brazil are good. we have very good cost control. We have good cost of raw materials. We have some hedges that have been also to replace in Brazil. Going for 2016, half of our main stream Brazil has already been hedge. So, we feel comfortable in that front and we have seen improvement again in the efficiency for SG&A and which is lower SG&A expenses compared to our revenues, but the name of the gaining of the volumes are very soft. January is a very difficult month to try to predict the trends before 2016, but January has very, very low volumes, because January 2015 was a very, very good month. So what we done, I think the biggest numbers in January, we are seeing a better February, but I think that the name of game in Brazil, is when we are going to see the consumer coming back to our [approach]. I think that all the strategies that we have developed over the last two years are very important, basically look into protect our profits and looking to both in front of the consumer and (inaudible) an affordable package that is why when we feel is this production plant in State of (inaudible). We basically finalized or finally got to a stage where we have the returnable production capacity close to our consumers (inaudible). So one liter returnable glass two liter returnable PET have been very importantly which is an indication that the consumer wants to buy our product, but is moving away from the single (inaudible) where you're having a more affordable product.

So the capacity that we have of the (inaudible) a consumer different affordability -- with different approach with different affordability would be very important in the next two years because we think that the consumer will continue to be in a tough environment for the next year and a half to two years.

I hope that this is an explanation for the question.

Absolutely thank you. Thank you very much. May be just a very quick one on Brazil, your market share improvement, so that argument doesn't have to do with pricing, given that -- are you seeing elements of trading down for consumers somehow switching to other brands, to other products in lower price points. How do you reconcile your market share gains with the weaker consumer and the risk of trading down maybe in some categories?

I feel that the steady market share is unbelievingly every time we see volumes, for example, this month of January as I mentioned that we've a high single digit volume decline, I was worried about market share, but (inaudible) we see the information and then we see again (inaudible) where we have a very high market share, maintaining our normal flavors increasing a little bit market share because of the (inaudible) described and then you have (inaudible) in the market share. So, it's a clear segment than the legacy which is behaving very close or similarly to our performance. It's again some indication that the consumer is still (inaudible).

Thank you.

Fernando Ferreira, Bank of America Merrill Lynch.

Hello can you hear me?

Yes, please go ahead.

Hi, good morning. Actually, I had two questions please, if I may. First one, I'd like to hear a little bit more on your price mix expectation in three countries; Colombia, Argentina and Brazil in 2016, given the weaker currencies in these three countries. How do you feel about -- and the higher inflation obviously, how do you feel about pricing there?

And then second question, I had to ask about the review as to refranchising right. Last week James Quincey was very focused on the acceleration that Coke wants to do on the refranchising plans in the US right. Then, how do you feel about this new model where they agreed to sell the production assets as well and then if you have any update on that front? Thank you.

Good morning, Fernando. I feel that -- let me give you a general comment for all the franchises, not only Colombia, Argentina, Brazil. I think that -- you have heard me during many quarters and basically for the last two years, (inaudible) transaction. And I think that it's a very important element here that -- we believe that we are in a much better alignment with the Coca-Cola Company in the fact of looking at revenues, transactions and not so much gallons or volume. So, volume is important, market share numbers are important, the share (inaudible) is also probably more relevant. So our plans for 2015 basically calls for trying to continue to improve the pricing mix formula in each of our accounts.

In areas where we have higher inflation as in the case of Argentina, Brazil and I note that Venezuela is not that important, but Venezuela is also a country where we have a very high inflation. We are trying to at least keep up with the pace of inflation. And our plans for 2016, we can call for some real price increases in real terms ahead of inflation. I think that, that's a very important element for us to be able to maintain the profitability, especially a strong of the volatility on that pace is translated into inflation and especially into cost inflation because of our raw materials.

In the specific case of Columbia, for the last two or three years, we were embarked in what we called Plan Columbia, where we lowered the prices of our products to make it more affordable and to really create additional traction in the volume trends in Columbia. I think that we have a confident that because for last three years we have grown volumes close to 10% every year. So (inaudible) on the profitability because we have lowered these prices. Now we are at a stage where we are recuperating some of these prices. My belief is that given the sharp devaluation of the Columbian peso has also put a lot of pressure on our competitors. So whenever we have increased prices, our competitors have also followed, which is good news for us also and we are facing a very strong competitor in Columbia.

In Argentina, the consumer at the beginning of the year, it's also suffering a little bit because of the adjustment on the effects. We made strong adjustments that happened in December, where we moved basically from the MXN10, MXN11 through MXN14 per dollar. Salary negotiations have not been finished. That would be finished around May. So this is the case of an environment where most of the industries favored by the adjusted prices because of the devaluation of the Argentine Peso, but the consumers have not received the salary increases and that way the consumer is not (inaudible) some of the other competitors and some other consumer growth. But we feel that Argentina, even (inaudible) and the reviewers note that level that they do not have a lot of debt (inaudible) was not exceeded for many years. I feel that it is totally where we will see a very fast preparation of the consumer. In the case of Brazil, we will see a consumer that has a lot of debt that is now trying to save a little more by repaying some of that debt and we've seen in other industries also indications of very strong decline in top line. And as I mentioned, January was a top month. We have a very difficult comparison versus January 2015 and we have easier comparisons for the rest of the year. All of these three concepts given the fact that we are very high inflation that we have before. We will try to move prices ahead of inflation.

With respect to that, and as I mentioned, I think that very positive note is that, altogether with Coca-Cola company focuses more on revenues and profits as opposed to just volumes or gallons. In respect to the US refranchising, we know that the Coca-Cola company has expressed in several locations that they would like to finish within by 2017. We do not have anything new to report so far in terms of engaging the Coca-Cola company (inaudible) we've not been approached (inaudible). I have seen that the US market is up in very thirsty markets especially some of the states that are still in the hands of the -- as the Coca-Cola company, especially state that was the Mexico territory, and we are very glad that the Coca-Cola company is changing more, where that we will have control on the production capacity. We've seen that over many years that we had been in this business, we now have a very, very good expertise on leveraging that has to do with the supply chain and I think that it is important that you are competing in that market that you have the lowest cost possible in terms of production and distribution. So, I think that is a positive note that the Coca-Cola Company is moving in that direction.

Great, thank you, Hector.

Antonio Gonzalez, Credit Suisse.

Hi, good morning, Hector and team and congratulations on the results. I had just two quick questions. First, on the write-off (inaudible) on your equity accounts, I wanted to ask; A. is it mostly Venezuela, or is there anything else say on the Brazil acquisitions of Spaipa Fluminense that is relevant? And second, just I guess technically, why did you decide to not take the hit through the P&L and just do it directly in the balance sheet. So, that's my first question?

And then secondly, just wanted to ask, very quickly. You did some comments earlier on margin that you expect for Mexico, et cetera. I just wanted to confirm that overall when you look at all of the markets, do you think that given the currency depreciation in Mexico, Brazil, Argentina and so forth, you will be able to maintain a flattish or increasing margins on a consolidated basis this year? Thanks, Hector.

Good morning Antonio. Let me see if I follow the first question that you have in respect to the balance sheet items. Yes, we have there in the cumulative translation in the (inaudible) account. Basically, it has to do with all the translation effects of the different countries in domestic campus. So for 2015, as we have Brazil, Argentina, Colombia, and Venezuela depreciating the currency more than the Mexican peso, where we translated those accounts -- those numbers into Mexican pesos, we have this effects which is basically a balance sheet item. Everything that has to do with balance sheet accounts, the translation effects goes into the equity. If it's a P&L number that is affected by devaluation then it goes to our P&L. I don't know if that was your question Antonio. These are specific numbers in equity where we have -- and (inaudible) we have the equity -- we have at the beginning, which increased by the end of 2015 and then it's reduced by destabilization effect and the bigger impact that we faced and that's basically why we have a small reduction in with our MXN1 billion reduction in our capital. As you revised, is that your question on Spaipa Fluminense.

Yes, that's very clear. I was wondering why it wouldn't go through the P&L both per your response, there is no write-off of the goodwill of the recent transactions or anything like that in which case you would need to do it through the P&L right?

Well, it doesn't have anything to do with goodwill. I think it's just the translation of balance sheet accounts of these countries into Mexican pesos and given the fact that the devaluation of those policies were higher than the Mexico, they're devaluated versus the Mexican peso. That's following the accounting rules.

That's very clear. That was the question, yes Hector.

And then with respect to your second question, we are basically the (inaudible) who would try to maintain our margins despite the volatility that we have. I have to say that if you look at the predictions for FX in the different countries is very tough and these are the economies that have the Mexican peso of the MXN20 level and these are some economies that see the Mexican peso coming back to below MXN17. So I've seen that our idea on again as I mentioned in our terms, we are very active in our hedging strategy. We do a 12 month broadly, where the closest three months we have our largest portion of our mix basically covered and we never go to a 100% currency conversion which implies taking a risk and this is not a profit centers, just a way of client to reach on a stability of cost to our operators, so that they have the stability on their cost and therefore the stability on the price increases that we have to pass to the consumer.

Just to give an idea, as I mentioned, In Mexico we have between 40%, 45% of very colorful 2016. In the Philippines, we are closer to 50%, Colombia we have 30% and Argentina which we're anticipating a devaluation and we starting to do some hedging since last year. Even for 2016, we are closer to 60% of our needs, already called it out, but we believe are the effective rates. And having said all that, price increases (inaudible) just have an inflation, some tailwinds in terms of [diesel] prices because of the oil prices on the world-wide basis, some headwinds on sugar prices, because we've seen sugar coming off a little bit and somewhat with cost control and efficiencies that we have introduced over the center of excellence based on debt solution that we will maintain the margins or it grew slightly with margins on a consolidated basis.

Okay. Thank you Hector.

Carlos Labo, HSBC.

Hello, can you hear me now. Two questions relating to Brazil Hector, please. The first one is, can you comment on -- give us an update on how long you think it will take you to get price compliance in Brazil up to the national average of the entire system? And second of all, whatever evidence can you share with us of improved point-of-sale execution in Brazil? The reason I ask the second question is because we see volume declines of 5.5%, but 8% decline in transactions which would seem to indicate that there is difficulty in the traditional trade and it's hard to tell from the outside how much of that is the economy and how much of it is with some of the execution measures you're putting into place on taking traction.

Good mooring Carlos. I think that I had mentioned, I believe it in the last conference call, we have -- there are positive things about being in Brazil because there is a very large concentration of people in this bound area similar to Mexico City. It brings some efficiencies in terms distribution and supply chain. The difficult part of being in the capital -- republic country is that, that's where all the competitors are questioned and in the fields of -- and a city like Sao Paulo, it's very competitive, very large and other competitors are similar to Mexico City, where you have competitors are not present in other regions of the country, they just focus their attention in the larger areas. I feel that we have been improving in spite of execution, it's complex, let me tell you why because of this specific moment in time we have been reporting some of the price points and this is -- let me give you some examples. You probably talk about the one, two, three price points that -- magic price points to the consumer, but given the devaluation the Brazilian Real plus the inflation that we're seeing in our costs, it's very difficult to maintain, for example, the BRL1 price point. So, we are moving back from BRL1 to BRL1.25. In some cases we would sell the traditional trade that is really more sophisticated (inaudible). However, you have taken some of these prices up and that's what price compliance was (inaudible).

In cans, which is an important SKU in Brazil, we are moving from the (inaudible), now we're lowering the size to 310 (inaudible) and from where you currently maintain the 3 right price points.

That can growing very importantly, but 350 is coming down, also very importantly and we're maintaining that (inaudible) to supermarkets. So, I feel that our fellows are doing a good job even with the changes that we are doing. We have been improving in some of the execution and some of the (inaudible) Coca-Cola Company runs. I feel that the issue that you mentioned about volume declining 5% and transaction declining 8% have to do a lot about with the plans that we are selling more and more multi serve presentations. So, in liters, we are not declining as much and the customer switching to larger presentations to share with the family or friends as opposed to buying a single-serve presentation and that's the trend that that is affecting conceptions coming down. I think that the (inaudible) in Brazil, which we should not be distracted from that is that we are improving margins in Brazil, even though we are going through a very difficult macroeconomic and consumer environment. With inflation and devaluation (inaudible), we were able to increase EBIDTA margins slightly. And we have continued to gain market share, which is also a very important element of (inaudible) our operation in Brazil over the long term. I feel that those are the main elements that I can comment to at this time. Thanks

Thanks Hector.

Thank you Carlos.

Andrea Teixeira, JP Morgan.

Hi, hello. Thanks for taking the question. Just to, I think we extensively worked on the margin front, but I just wanted to get a little bit of color on the revenue front, if you think that, obviously you have easier comps in the fourth quarter, but how you're seeing 2016 as you started like with a tougher comp there. And that specifically on Mexico and then obviously Brazil while I am assuming was what you just described hasn't been an easy market now despite your market share gains, of course. I mean what I want to also to explore, if you can comment a little bit of the refranchising of the US, which apparently has had some changes recently (inaudible) I guess, if you can comment, if you're seeing indeed an acceleration of interest or a movement there and lastly, on the hedges as you said like you have had some hedges. But if you can comment on how it had evolved and so part of your explanation that you aim to have like a flat margin if that has to do with like more consistent hedging through the region. And lastly, if you can touch, I'm sorry on Argentina, if you are seeing better volume trends there given the shortfall in fourth quarter, thank you.

Good morning, Andrea. I think that, maybe start with Mexico topline, I think that if you look at what happened in Mexico over the last two years, we had the tax, volumes came down importantly to close to 5%. We have grown volumes not to the level that we have in 2013, but we are very close to those levels and we are seeing that here, for next year, when we see some volume increase in Mexico, probably closer to GDP type of growth in Mexico somewhere around between 2.5% and 3% volume growth that would be my call for Mexico. I feel it is a little tougher because again the consumer is not there, it's not responding to a lot of the promotions that we have. The trend that we see is the consumer moving, as I was explaining in the previous question, to big packages to multi-serve packages away from the one-way packages and they are moving to return our packages also which is basically a very clear thing that the consumer is looking for our products but they're looking for an affordable price on that.

You mean in Mexico or sorry the line is not very clear.

Sorry, no I was -- in Mexico what I'm seeing -- let me get closer to the mic. In Mexico, to summarize what I was saying is I am seeing a better consumer environment this 2016 and therefore, we will see some kind of volume growth similar to GDP. That's my summary for Mexico.

In Brazil, I think that the consumer is suffering a lot from, as you very well know, from all the increases that we have in electricity, transportation and all of those very basic expenses. The devaluation of the real is very large. And the consumer has a lot of debt. So, my feeling is that Brazil will see volumes that are very similar to what we saw in 2015 maybe a slight increase over that. I feel that the industry is expecting something similar to that and even though we've been suffering in volumes, we've been able to maintain or increase market share in all of the markets. So, the name of the game in Brazil is to have an affordable product in front of the consumer, maintain some of the magic price points so that the single-serve presentations continue to have some traction and therefore we're adjusting those presentations to smaller sizes but presenting that at that magic price. So, if we have consumer that is not necessarily with a lot of resources just spending on consumer goods (inaudible) but we would see volumes either flat or slightly increasing versus 2015.

With respective to the US --

Right. That would be a marketing strategy. So no, I was just saying that, that will continue to embed market share gains in Brazil, because it is obviously declining?

Yes, as we mentioned we have been having very good performance in the market share front over many months now and we feel that we will continue to gain market share in Brazil.

Okay, great. And then on the hedge is just to clarify that -- is that you're putting more hedges in place than before, because some of the comments and I know you extensively explained, so I apologize that I want to go back to the cost side. But the hedge is you continue to renew those or even increasing in some of the countries, I mean or hedging also against the price of sugar, is that a fair assumption?

No, I feel that in general what I can tell you this is as I mentioned you know and let me give you some examples. For the following three months, we basically moved between 40% to 70% of our needs should be stretched. If we don't like the exchange rate at this, for example the certain moment on some of the currencies, we move to the lower band closer to the 40%. If we think that there is an opportunity, because we see a further deterioration of exchange rate, we would move close to the upper band.

During 2015, because we were starting with this volatility, we were closer to the higher side of these bands. During 2015, we have a lower amount of (inaudible) as a percentage of our needs. But I think that this is a very reasonable. And I was mentioning it in the previous question, even in the Mexico we are around 43% of our needs for the full year, in Brazil we are around 50%, in Columbia we are around 30%, and Argentina we are very close to 60%. In Argentina, that was one of the cases where we started a few months ago started to hedge some of it in 2015 because we were seeing a discipline in the devaluation, so we were moving ahead very fast and Argentina is one of the countries where we are kind of on the top of the limits that we set in certain posts, in our processes internally.

With respect to the US refranchise, we're certainly interested in analyzing that whenever it happens. I know that the Coca-Cola Company has been a little vocal about finalizing this process by 2017 and I mentioned the bordering states of Mexico would be very interesting for us. And we expect to the consumer in Argentina, we are seeing a consumer that was trying to buy a lot of African and consumer groups before the end of the year -- before the big depreciation of the currency and now the consumers decided farther away from buying the stock basically because most of the salary negotiations in Argentina would happen in April and May. That's when most of the contracts, the labor contracts are renewed and to fix this in the first quarter, you will see an adjustment for the prices of most of the items that the consumer would buy, because everyone is adjusting prices because of the devaluation of the currency.

But the consumer has not received the salary increases yet. So what I'm expecting is that a very tough first quarter for early April will be a top month also and then for all these a better performance in the second half of the year as the consumer has better salaries.

That's very clear, -- I'm sorry, I didn't mean to interrupt you, I just was thinking --.

Thank you.

Alex Robarts, Citi.

Hi, thanks for taking my question. I wanted to go back first to Mexico, the comments, I appreciate about your view on volume this year, but I, maybe just sticking to the topline outlook in Mexico, the other side is price and you've done a good job in the last quarter and frankly last year in getting average pricing on a comparable basis couple of points above inflation, as you think about the better consumer in Mexico as you qualify them in this year, how do you reconcile the need to continue to pass on the dollar COGS pressures, but at the same time, as you said earlier there is some areas where you need to bring in some affordability, where you feel I guess in the portfolio in Mexico that you're higher than you'd like to be pricing wise. I mean would it be fair to assume that it's in the jugs and in the non-carbs where perhaps you want to bring the affordability to the customer. And if those are the areas, again how do we think about that juxtaposing that with the need to and have handle this internal cost and inflation that you talk about, which is in large extent related to the FX. So, just kind of thinking about the ability to get pricing beyond inflation this year in Mexico and where the areas you are looking to inject the affordability.

Good morning Alex. I think that your question describes very well a lot of the dynamics that we have in Mexico. As I mentioned in the previous question, there are different Mexicos on this industry. Mexico cities have very tough environment, because you have all competitors converging share, there are competitors in Mexico cities they are not present in other large cities of the country like Monterrey, Guadalajara, some of them are not facing (inaudible), but some of them are getting closer to problem and those are some of the things that we need to bother.

And we think the consumers -- you also find opportunities, we have (inaudible) that is getting a little more relief of the economy, which is improving and they start to expend a little bit more on single-serve presentations that as you know bodes very well with our equation for price mix.

The other areas of the country of the city or the country also where you need to provide an affordable price point to the consumer and as you start to have pressure on the cost structure, because of the depreciation of the currency, you need to start also trying to change the fact of the presentation to maintain a price point. For example, we are moving 600 milliliters is very important for us in the whole country. We are also launching 5,000 milliliters (inaudible) at an attractive price of where you having that presentation and then go in that presentation still below the MXN10 per bottle to the consumer. So those are the studies that are very important. We need to continue with, to have a turnover with (inaudible) in some of the poor areas of Mexico City or the poor areas of the country, where affordability is very important. I think that the opportunity that are recovering the economies could bring into fact that the pricing mix while it differs mainly if different SKUs that we have brought about this for many quarters. We do have a very complex portfolio, but at the same time that give us the flexibility to provide to the consumer and to the different price points with consumer occasion. And we had been improving in analyzing data and having a more beautiful platform in our commercial structure, we do have much better information that we can take advantage in terms of improving the topline of our operation.

So Mexico is a place where we feel that we have the capacity to balance, precisely what you're saying. Having an affordable product for the areas of the city, areas of the country where we need an affordable package and taking the opportunity of revenue growth management in the areas and the consumption occasion where we see this opportunity. All in all, that will call out for Mexico to have a price point, a final price formula, but when you look deeper it is mixed effect closer price increase that we will do to compensate for this, where we will see a pricing that is one make the business that we'll grow in (inaudible). We should not forget about NCVs and the growth of your (inaudible) a better price formula for us. The Powerade, the Santa Clara, the dairy efforts that we are facing, those are also efforts that's giving a lot of complexity to our structure, but I think that we are very good at managing that complexity and we are very prepared on that front. And conceptually on paper, this number, this complexity issue being also better pricing formula for us as we improve on the NCVs execution. Rather you have always for many quarters now you have seen declining volumes in water and that's basically a reflection that we are reducing commercial terms to the trade and improving pricing through the consumer, because simply water is a very low margin SKU, a product or category. Compared to CLVs, we are trying to grow execution in that category. That was what we are doing in terms of launching water with some huge content like (inaudible) flavored water or the sparkling (inaudible) that we are doing in Mexico to have a very nice large bottle in restaurants, it was successful in that we also bring some profitability to our water business that is as I mentioned (inaudible) opportunity to improve the margins. So with that I hope I gave you a good explanation on this set.

Sure. That was very comprehensive, so the 2.5 or the kind of GDP type of volume growth in Mexico was associated with pricing ahead of inflation. That's fair and clear. And thanks for that. The second question is on Asia, and I guess our read on Coke Bottler consolidation kind of suggests that this is an area where we could see some stepped up activity on the M&A front. And I think back for years ago to what Carlos said right, on the outset of your deal in the Philippines that other markets could present themselves. So the specific question on Asia, is given your, as you said the transformation has been successful in the Philippines in three years since the deal -- since you started there, does it make sense for you to contemplate taking ownership sooner than later in the Philippines, when we think about kind of Atlanta's speech are seeming to be getting asset-light quicker rather than later? And if that is the case, is it something that you would think about in the next 12 to 24 months. And when you look at big, it's clear that the some other interesting markets on that list Myanmar, Vietnam, could kind of comment a little bit about Coco-Cola FEMSA's interest there, which I think was implied by Carlos' comments three years ago. And so essentially your costs view over the next few years in Asia. That's kind of the question. Any color would be great. Thank you.

Thank you Alex. I think that the history in Asia is as follows. We clearly entered the Philippine markets as a way of us and I feel that I should say also for the Coca-Cola Company for us and Coco-Cola Company to test our capabilities and see if we are successfully embedded. The Philippine markets is the most westernized of -- in our industry the Philippine market is one of the more westernized in the Asia region because the US was present there for many years. Coke has been there for many years and we have chosen over that in the past. So, the strategic intent of us going or having a good share in the Philippines is basically the idea of expanding in the Asia market. We've have been there for three years. I think that we're improving in a lot of metrics in the Philippines in terms of execution, in terms of mark-to-market, in terms of (inaudible) portfolio, in terms of how core brand, especially brand Coca-Cola is growing in the Philippine market, and we saw it for two and half years, the revolution of the local brands, including Coca-Cola that was kind of a (inaudible) Coca-Cola and Coca-Cola being sold in restaurants. So, I think we have a lot of positive things. We have improved a lot on the quality of products and the supply chain. I think that we still need to get to affordable level of profitability in this market, very competitive, low prices. I think that we are doing a good job. But margins are not still of the level that we'd like to see. So, just to remind everyone, we have, we own 51% of the Philippines, we have an option to buy the other 49%. I think that the first step in the expansion of the Philippines conceptually should be buying that 49%. I think that unfortunately sometimes -- we still have four more years to go on that option and we have somewhere in time you are presented with an opportunity to buy some of the (inaudible) because we are now very comfortable in the Philippines and we don't doubt getting some traction in volumes which are part of the strategies that we follow in this will help the profitability front.

If I could do like (inaudible) the option in four years from now and then to have the other territories to be present for an M&A opportunity. I don't know if that's one of the timing of these things, but definitely our presence in the field things is up very, very clear indication that we are currently in those markets.

Yes, that's very clear. Thank you for that.

Thank you.

Jeronimo de Guzman, Morgan Stanley.

Hi, thanks for taking my question. I wanted to follow-up first on the Philippines, what I noticed was that your sales are growing less than the volumes. So, I just wanted to understand that what is driving that, are you having to be more promotional to drive that volume growth or is there something else that's driving that?

Good morning, Jeronimo. 2015 was a year where we -- let me go one -- still one year behind, 2014, we suffered a very, very competitive environment, because some of what -- we launched the this representation (inaudible) that was a game changer, because it was the introduction of the one-way PET presentation that during 2014 the competition reviewed the price of the some of the returnable single-serve presentation and that forces to adjust the prices downward a little bit during 2014. 2015, we have improved the price, but all the launch to mix has moved in the direction of the packages that are more affordable because the competition is still there. I think that the Philippines and that where you are referring (inaudible) the Philippine markets are starting as I mentioned we are doing a lot of transformational things in terms of core portfolio, (inaudible) the supply chain. We have a lot of indication that we are on the right platform there, but it's still a market where we need to grow volumes in order to the get a better traction in the profitability.

So a part of the strategy that we had for 2015 is to maintain price points at an attractive levels and try to get a better volume number. As the inflation grows and we've also surprised everyone, January numbers were very, very good -- very good. It was close to 20% increase in volume. I don't think that January would probably repeat every single month going forward, but we are achieving that by maintaining price points that are very competitive.

I think that the name of the game in the Philippines is to get traction with the volume, that when I say traction, and an increase in volume. And trying to maintain prices with inflation. I know that we have a lot of pressure from our competitors because they (inaudible). But I feel that we have now the correct SKUs, the correct flavors, the direct prices, the correct price points and I think that we have the correct execution to start bringing the revenue management initiatives and the efficiencies in the operation that will give you a little better profitability. The profitability in Philippines is still low and you see (inaudible). So, I hope that I have answered your question with this.

Yes, that was very helpful. Thank you. And then a follow-up on Mexico, what I saw was the operating expenses, you had pressure in the fourth quarter. I know for the year, it was -- you still have efficiency. I wanted to know, if there is anything specific that was driving those that pressure given that, it was a better quarter in terms of volumes. And then with this -- these centers of excellence, I was just wondering if there was any specific areas where you see the most opportunities in Mexico for greater efficiencies?

We do not have any specific on all of the SG&A. We do have some dollar denominated expenses specially with respect to IT, everything that relates to IT is dollar rates even you are buying from services from local suppliers. Most of the big companies have operations like HP or SAP with operations in Mexico, but the pricing are dollars.

There's nothing special there other than the effect of currency fluctuation on some of this expense. The center for excellence do have this expectation that we will start to see better efficiencies how we manage some of these (inaudible).

Instead of having a production plan in each of the plants, we could have that centralized in whatever we decide to do it more than as a shared service, we are doing that now in Mexico and having the excess of production planning we are centralizing in Mexico and do that function for all of the growth competitor on the world around the ecommerce.

The same can be said about maintenance routines that they are being planned with [mad] people, people that are experts in that area. So in a way, we are reducing the workforce of all the different production (inaudible) and having a group of experts doing some of those forms on center.

I think that there is opportunity with that and will bring opportunities also for CapEx deferral with better plan within our lot of different accounts. With the commercial center of excellence, we are moving on that into the digitalization of the (inaudible) having the percentage spending more funny because rather than going to the work to with solution center every mooring and every afternoon, given the all the technology, you can leave directly from his house and start the first product (inaudible) that supposed to go in for instructions was (inaudible) with distribution center. So that will give us a better granular segmentation of our clients, better data mining and analysis of how the consumer is behaving. Especially, we see segmentation of initiatives on targeting a specific market initiatives, so that the percentage we have basically by client are specific instructions that needs to cover (inaudible) through basic, but at the end of the day he would have better salary numbers, better quality time with his client, so my expectation is that as we grow now, we are doing the initial stage of these centers of excellence especially in the format of this large part that was mainly the digital platform, we are effectively growing out best marketing decision that are in Mexico that have been successful. The way we will start to roll out that that we feel would bring with a better pricing or better volume because we would have much better analysis and control over the initiatives that we will lead to volume out of the forward plans.

Thanks. That's helpful and then just one last question and just kind of reading through some of the interest expense from the swaps and in general, just kind of a broader question of with the exposure that you have to US dollar debt being 32% of your debt, I mean how comfortable do you given the volatility in FX. What's your comfort level with this kind of exposure and then do you see any kind of debt management initiatives going forward to kind of change that mix?

One moment everyone there is a brief interruption in today's call. Mr. Trevino you're on.

Hello, Jeronimo I don't what happened but we got disconnected. I don't know if everyone heard what I was saying about last Jeronimo's question. Basically Jeronimo when you see next, we had the meeting with the Board of Directors yesterday and the finance committee reconfirmed the remix that we have maximum $700 million exposure. Right now, we have $650 million exposure. We feel comfortable with that I mean the size of the Company and the low leverage that we have. And until the next Board meeting that is in the end of April, this is the maximum amount we have -- I would anticipate that we'll stay with that level of $650 million maximum exposure during this quarter.

Okay, sounds good. Thank you very much.

Thank you Jeronimo. Sorry for the trouble with the communication.

Now we'll conclude the question-answer session Mr. Trevino. I'll turn the conference over to you for closing comments.

Okay, thank you for your interest in Coca-Cola Femsa. I forward (inaudible) me and team are available to answer any remaining questions and thank you so much for (inaudible). Thank you.

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