Coca-Cola Femsa SAB de CV (KOF) 2016 Q1 法說會逐字稿

Good morning everyone and welcome to Coca-Cola FEMSA's First Quarter 2016 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 first quarter 2016 results. Our Company started the year on a solid note. Despite ongoing currency volatility, we generated robust top line results in local currencies across the world and strong defensive bottom line results in almost every operation.

While transactions outperformed volumes in key markets such as Mexico, Colombia, Argentina, and Brazil, we continue to exercise our pricing power and flexibility in every country to build on the strength of the Mexican consumer environment and to address prevailing consumer weakness in Brazil, continue operating economic complexity in Venezuela and inflationary pressures for our consumers in Argentina. Our operating discipline, our proactive hedging strategy and favorable PET prices have enabled us to deliver strong defensive margins so far this year.

For the quarter, our consolidated comparable revenues rose 9% and our comparable operating income grew 10% while we increase our comparable EBITDA by more than 8% and our comparable net income by 11%.

This quarter positive transaction growth was driven by our operations, continued emphasis on strengthening our point-of-sale execution, our focus on amplifying our beverage portfolio to provide consumers with the right beverage alternative, whether it's sparkling or still, and our push for relevant innovative packaging to satisfy our consumers' need for affordability.

As a result, this quarter we generated more than 6.7 billion total transactions across our 10 markets. Not only we achieved solid growth in our core sparkling beverage transactions highlighted by 9% gain in Colombia, 6% and 5% increase in Mexico and Central America, respectively, and 17% growth in the Philippines.

Moreover, we continue to strengthen our market position across the still beverage category and maintain or gain market share in the sparkling beverage category across most of our markets highlighted by Mexico, Brazil, and Argentina.

Powerade continued to expand its leading position in Mexico and Costa Rica while extending its track record of gains in Argentina to reach more than 30% of market share today.

Each operation delivered a solid set of operating results for the quarter. In Mexico, we continue to enjoy a positive consumer environment supported by strong remittances in US dollar terms, low levels of inflation, and improved employment data.

Our revenues grew 11% on the back of a strong 6% increase in our average price per case and solid volumes, which expanded by more than 4%, highlighted by 14% growth in the Northeast and 6% gain in the Bajio region.

By category, our sparkling beverage volume grew by close to 6% and our non-carbonated beverage volume increased by more than 15%. Within this sparkling beverage category, brand Coca-Cola grew more than 4% and Coca-Cola Zero grew 11%. Flavored sparkling beverages grew 12%, mainly driven by Sidral Mundet and our recently launched sparkling orangeade and lemonade, Naranja & Nada and Limon & Nada. For the quarter, these new beverages accounted for more than 60% of incremental volumes in flavored sparkling beverages. More importantly the (inaudible) captured close to 40% of the category.

In the water category, as we continue to improve growth profitability, we saw volume declines in both personal and bulk water. In the non-carbonated beverage category Valle Frut orangeade, Jugos Del Valle, and Santa Clara all delivered double-digit volume growth.

Once again, as we continue to expand our point of sale coverage in the traditional sales channel, we more than doubled the volume from our dairy business selling more than 5 million liters this quarter.

Additionally, Powerade continued to expand its leading position in the sports drink category across our territories. Our solid top line performance combined with our currency hedging strategy and our operating discipline enabled our Mexican operations to maintain almost flat EBITDA margins in the face of currency volatility and a spike in local sugar prices. In Central America, we grew our volume by 7%, successfully building on 6% volume growth for the first quarter of last year. By country, Panama grew 5% and Costa Rica increased close to 10%. Not only Nicaragua delivered more than 13% growth extending its track record of growth to nine consecutive quarters. These increases compensated for a decline in Guatemala. Our volume growth together with our local revenue management initiatives and operating discipline enabled the region to deliver a 40-basis point EBITDA margin expansion for the quarter.

Despite Brazil's challenging economic and consumer environment, our operation continued to outperform the industry in terms of volume implement by increases and revenue management initiatives and maintain our franchise profitability. Due to date, we have gained market share in both colas and flavored sparkling beverages reaching now the 23rd consecutive month of gains. Furthermore, we have delivered important market share gains in tea, water, and juices.

Our ongoing focus on affordability for our consumers underscored by the expansion of our one-liter and two-liter returnable presentations enabled the volume of our multi-serve returnable presentations to grow 10%, helping our returnable package to gain 114 basis points in the sparkling beverage category.

Our Guarana strategy continued to deliver positive results this quarter. Our [Kuat] brand grew significantly across our Brazilian franchise almost fully compensating for the clients in the rest of our flavored sparkling beverages portfolio, while continuing to gain market share.

In the still beverage category, we continue to focus on the increased [plain coverage] together with packaging and brand innovation for our water, tea, and juice brands. Not only we achieved double-digit volume growth in the tea category led by Leao Fuze helping those gain more than 12 percentage points of share in this category.

During 2015, we reinforced our juice portfolio to offer our consumers more affordable price points. This quarter, we started seeing the result of this initiative as we delivered 3% growth in the juice category coupled with market share gains.

Most importantly, in a very complex economic and consumer environment, excessive (inaudible) close to 40% devaluation of the currency, our pricing initiatives, our currency hedging strategy and our focus on cost control enabled our Brazilian operations to maintain EBITDA margins for the quarter.

In Colombia, we marked 14th quarter of volume and transaction growth. Our sparkling beverage growth was driven by 7% increase in brand Coca-Cola, a double-digit gain in Coca-Cola Zero and the continuous strong performance of our flavored sparkling beverage brands.

In the still beverage category, we achieved 17% volume growth driven again by del Valle Fresh orangeade and Fuze tea. Our personal water category continued to perform strongly, growing 27%, thanks to the innovative one-way PET packaging for our Brisa brand.

We continued to navigate a tough volatile currency environment and increasing inflation rates. To compensate for these pressures, we are proactively implementing pricing adjustments that coupled with our currency hedging strategy, which will enable us to defend our Colombian operation margins this year.

In Argentina, consumers are experiencing pressure on the disposable income resulting from the usual effect of the beginning of the year salary revisions lagging regular price increases in the market as well as the removal of government subsidies.

For the quarter, volume was down 5%, while transactions remained almost flat. Water continued to perform strongly growing more than 30% reported by our Aquarius flavored water brand and BonAqua brand. Non-carbonated beverages grew 11% driven by Hi-C orangeade and Fuze tea. These increases partially compensated for the decline in the sparkling beverages. Our robust portfolio, our operating and financial discipline and our infrastructural investments continue to deal positive market share gains across every category highlighted by gains of more than 2 percentage points in both colas and flavors, 4 percentage points in water and continued gains in isotonics, where Powerade has now reached more than 30% of the market.

Our revenue management capabilities, our currency hedging strategy and our operating discipline continue to deliver solid improvement in our gross profit and EBITDA margins, which expanded by close to 300 basis for the quarter.

In Venezuela, tough operating and economic environment, we continued to experience raw material shortages leading to volume declines of almost 80% for the quarter. In the face of high cost and expense inflation, we continued to protect the profitability of our Venezuela franchise through our focused revenue management initiatives, efficiency gains, and production of the most profitable and faster rotating SKUs.

Our Philippines operation has started the year with solid 17% volume growth. This performance was driven by the growth of brand Coca-Cola and our core flavored sparkling beverages coupled with a more balanced mix of one-way and returnable presentations at the competitive prices for our consumers.

More importantly, thanks to our ongoing strategy transformation, our business in the Philippines is delivering positive operational and financial results this quarter. We are encouraged by this profitable improvement as we continue the evolution of our business in the Philippines.

Moving onto our financial performance. As of the end of the first quarter, our net debt to EBITDA ratio including cross-currency rate swaps was 1.57 times remaining flat as compared with 1.56 times at the end of 2015. For the quarter, our comparable net income grew 11% to MXN1.13 per share. Foreign exchange loss resulting from the devaluation of the Mexican peso as applied to our US dollar denominated net debt position was offset by a gain in our financial instruments position and a lower tax rate resulting from the recalling of certain tax efficiencies across our operations, and lower effective tax rate in Columbia as a consequence of moving parts of our local production to our new clients in that tax-free zone and ongoing efforts to reduce non-deductible items across our operations.

Going forward, we expect these initiatives will continue to have a positive effect on our consolidated tax rate. We continue to relentlessly reinforce our point of sale execution, our supply chain, and our diversified portfolio products and packages to meet our consumers' ever-changing needs across our operations.

Our Company's focus on operating and financial discipline enabled us to successfully navigate an evolving challenging market environment with extreme currency volatility. To this end, we maintained a disciplined approach to capital allocation as we continue to focus on maximizing returns on invested capital by optimizing our maintenance, growth, and strategic capital expenditures to deliver sustainable profitable growth for our shareholders.

We started 2016 on the right foot to continue delivering comparable top line and bottom line growth for our shareholders. Transactions continue to outperform volumes in key markets such as just Mexico, Brazil, Colombia, and Argentina. We successfully increased average prices per unit case aligned with or above inflation in almost every market while maintaining or improving our market share across all of our countries and most of our categories. Driven by our positive top line growth and supported by our active hedging and procurement strategy, we defend EBITDA margins across the world, highlighted by expanded margins in Argentina, Central America, and flat margins in Mexico and Brazil. Our Philippines operation performance remains encouraging as we generate solid transaction on volume growth in our core beverage portfolio, continued to [yield] important cost and expense savings through our improved logistics and manufacturing capacity and ultimately delivered consistently profitable results.

These results also enabled us to drive accelerated net income growth.

Innovation remains a key driver of our portfolio positive performance. In Mexico, our sparkling orangeade and lemonade, our new Ciel Exprim flavored water and Ciel mineralizada continued to yield strong results while we look to launch even more packaging alternatives so that our consumers can enjoy a wider variety of sparkling beverage choices. In Brazil, returnable presentations drove incremental transactions and volumes despite a tough consumer environment. In dairy, we more than doubled the volume from our Santa Clara portfolio through our expanded client coverage in the traditional trade channel and our home delivery platform.

Finally, supported by our commercial manufacturing and distribution and logistics centers of excellence, we continued to transform our management and operating models to deliver solid improving top line and bottom line results for our shareholders. As always thank you for your continued trust and support in Coca-Cola FEMSA.

And operator, I would like to open the call for any questions at this moment.

(Operator Instructions) Lauren Torres, UBS.

If I could ask two questions, the first, Hector, you talked a lot about protecting and defending margins, and in light of the macros and currency volatility that we're seeing, just curious to get your perspective, if you feel as things get tougher in some of your markets, which markets do you think are most at risk where you won't be able to protect margins or we should see some pressure, just trying to get a better sense of that? And the second question is more general, just an update on consolidation in the US process? We heard more from Coke last week on signing agreements, potential interests from bottlers, so if there is any further detail you could provide on that, that would be great? Thank you.

I think that with respect to the first question, protecting and defending margins, I think that as we're facing, as I mentioned, currency volatility in not all of the territories basically, we have been -- as you see from the numbers -- very active in trying to increase prices to the consumer either through new launches or any new packaging sizes -- smaller size with a higher price and in some cases launching returnable presentations like in Brazil because of the very tough environment, we feel that with the success that we have with returnable PET in two-liters, the strategy that help us the possibility to increase prices in other transactions, in other packages.

And the strategy in general is try to continue with these price increases in every market. I think that we are facing a favorable market with respect to PET prices going forward. We will certainly have some pressures in sugar in most of the territories, we're feeling that. We, in the case of Brazil, that is where we can actively do some hedges with sugar, some good hedges that would protect some other profitability in Brazil going forward. It's not the case in Mexico because the price in Mexico is very different from the international prices and this is not possible to do hedge. We do some pre-buys and some agreements with the suppliers. So, I think that we have good pricing in Mexico also, but we'll suffer a little bit more from the volatility in sugar prices. So all-in-all, with all these, I think that we'll focus a lot on increasing prices in every territory when possible. I think that Argentina and Brazil are tougher in that sense, in the sense of increasing prices because of the macroeconomic environment. We are seeing a consumer in Brazil that is not that well.

In Argentina, we have a consumer that is hurt at the beginning of the year, that's normal when you have prices for services like water, transportation and electricity increasing some times in excess of 300%. So, the consumer is a little bit away from all consumer approach in Argentina. But in Argentina the good news is that we were anticipating the movements in the currency since last year and most of our raw material needs in dollars already covered since prior to the devaluation. So, we have very good cost structure in Argentina, so Argentina it is very possible that we can maintain our profitability. I think that the rest of the countries including Venezuela, we have a lot of flexibility to move prices according to what we see fit and obviously trying to balance market share and competitive pressure. With respect to the USA, we heard the news about the US enter into some agreements to re-franchise some of other territories. You now basically have California, parts of Nevada, Texas, and New York, things like that. I think those are important territories in terms of volume still. There is nothing new to comment at this point. We have continued to have not that formal conversation with the Coca-Cola Company (inaudible) -- we have continued to express our interest to the Coca-Cola Company going to the US, but we have not engaged in any formal negotiations at this point.

Antonio Gonzalez, Credit Suisse.

Just two quick ones, the first one, you mentioned, Hector, during your prepared remarks that Northeast of Mexico was doing really well and the Bajio region to a lower extent was also quite healthy. Are there any comments you can share on the Southeast and are you seeing any implications from all of the weakness in the supply chain of payments, et cetera? Is that translating into considerably weaker consumer environment? That's number one and number two, very quickly, also you mentioned large increase in the milk segment in Santa Clara and your bottler in Mexico, Arca made similar comments. So, I just wanted to ask if you can give us any additional color in terms of whether you think this is a coordinated improvement, you think obviously in the context of the JV with the Coca-Cola Company, you think that the whole JV is working better or is it more bottler specific initiatives that are driving this improvement and where are you, you think, in terms of this improvement 50% through, is there more to come or you have captured most of it? Thanks.

Good morning, Antonio. I think that, in the opening comments I wanted to highlight this comment about the Northeast, because I think it's important, I think that the North of Mexico and you know that the position of the former Tampico franchise, we cover a big portion of Tamaulipas and also the north of Veracruz. We are seeing much better performance, I think that has to do with macro activity in that region and probably and we think that it will later (inaudible) Pemex activity in the southeast and also some of the regions like in Guerrero to the security and some other stores not being opened full hours and things like that, especially Guerrero and Michoacan. However -- and also I think that the north of Mexico was held also by very good weather conditions. So, when we segmented the different regions in Mexico, we see the southeast especially Tabasco and central Veracruz, somewhere around 5%, Chiapas around 7% with good growth, for the states as I mentioned (inaudible) and Guerrero somewhere around 2%. Then, the center of Mexico growing somewhere around 3%, that's basically very tough environment, more with respect to the comparative environment in some regions of the (inaudible) of Mexico where we are seeing basically volumes growing slightly below 2%, which is very different from what we are seeing in the northeast. So, I think that both weather issues and economic activity play a role in this different performance with the different regions. With respect to milk, I think that this is more the effect of the fact that we are growing basically (inaudible) versus prior year, still over a very small base on the diary business. It is more the effect of our very well-coordinated JV put together with Coca-Cola Company and rest of the bottlers. We are facing some capacity constraints in our production plant in Pachuca. We are building a new facility in the Jalisco area, Lagos de Moreno, which is a very (inaudible) area, that's why we are building this new facility there. But at the end of the day, Antonio, this is the result of the strong and very profound capillarity that we have with the distribution network that all the bottlers have. So, before when we acquired this, it was basically sold in the Santa Clara stores and super markets, now wewould reach thousands and thousands of mom and pop with (inaudible) seeing this good performance in terms of [bottling].

And would you be able to share, Hector, what's the coverage that you have in the traditional channel? Are you 50% where you'd like to be or even less than that? Are you able to share any order of magnitude there?

No, I think I don't have any specific number, Antonio, let me get back to you on that, but we still have a long way to go and as I mentioned, the issue right now is production capacity. So, we have to be careful with that because it's not good to over-extend to reach and then not being able to supply because of production capacity. So, we are moving slow in that front. But I will get back to all of you with a coverage number in the next call or so, okay.

That's perfect. Thank you so much, Hector.

Alex Robarts, Citi.

Thanks and hi, everybody. Yes, I want to go back to your comments around, first of all, Venezuela. It's one of these markets that, at least, I feel the visibility is still quite low and yet you managed to get very good pricing, good margins despite the scarcity issues and volume declines. I mean can you tell us a little bit about or help us looking out in the next couple of quarters in Venezuela. What are the kind of further downside risks or even upside risks to that market? I seem to have seen in various local commentary in the country that March saw a further ratcheting down of conditions and availability for raw materials and supplies. And so, just it would be great to get your view on the short term in Venezuela. That's the first question. Thanks.

Good morning, Alex. Venezuela, as we have mentioned, is a very tough country to operate. Basically what you have there is a very strong inflation, and especially with respect to the cost of our raw materials, because everyone that is producing locally is increasing prices locally is increasing prices importantly. So, it's an environment where you have officially numbers around 200 and 200 plus inflation. But when you look at the price points and (inaudible), we have increased prices like 400%, obviously as a way of -- as you mentioned, as a way of protecting the profitability in local currency in the country. The strategy that we have there is very simple. We know that we've a scarcity of raw materials, we focus basically in brand Coca-Cola that is our fastest rotating SKU and the most profitable SKU. So, we will sacrifice all the flavors in order for us to produce Coca-Cola, when we don't have raw materials to produce according to the (inaudible) of our needs.

Second is to continue to increase prices ahead of our cost inflation, so that we continue to [curtail] this profitability. And third is trying to move as much as possible to local suppliers. And for that, we have to have a very coordinated effort that has been here for many years with the Coca-Cola Company in terms of finding quality suppliers for (inaudible) caps, plastic caps for our (inaudible) starting this month has been produced locally. Before, we were struggling and having a very difficult time with the Central Bank for [gaining] dollars in order for us to pay for imported caps. The same like I say for labels and plastic crates, troughs, everything we are trying to localize suppliers as much as possible. I think that we have a bunch, a lot in that front.

The issues presently have to do with the scarcity of sweeteners, basically sugar, because it's not so much because local production is -- that is because the spare parts for the mills are late and sometime the mills have to stop production. And electricity is starting to be an issue also. So, sometimes we don't have electricity in our plants or in our distribution centers and obviously that causes disruption in our operations. But again, I think that what is remarkable from our team over there is that, in spite of 17% to 18% volume decline, we continue to maintain profitability in local currency. We are translating as you know everything now at the so-called (inaudible) chain rate. We used to (inaudible) 54, so that number is increasing, today is at 366. So next quarter, we'll report numbers with a higher number in that front in terms of translation and that way, we're presenting this comparable (inaudible) excluding Venezuela because of the potential noise that Venezuela could present in our financial numbers.

Going forward in the future, I think that the potential downside has to do mainly with these two issues, electricity and sugar scarcity. I think that we're very well-placed in terms of the rest of the raw materials [and our assets] for production. I think that at the end of the day, Venezuela is a large country with (inaudible - technical difficulty) future potentially could be very positive for Coke franchise. So, I see a lot of option, value on this operation in the future, okay.

Thanks very much. Very clear, comprehensive. I want to just shift gears a little bit to the kind of M&A big picture issues. We've talked about certain regions that are of interest in focus for you with varying degrees, most recently though I feel that with this change of control potentially happening or pending in the African continent with the Coke operations there, as they relate to the SABMiller acquisition, could you share like a little bit about your thinking with that region, I mean on the plus side, there's obviously some interesting go-to market and market structure similarities with Latin America and Southeast Asia and in Africa, but at the same time, it seems that there are some owners or partners that might be interested as well in kind of being on the shortlist. I mean can you comment on how and if Africa may figure into the Coca-Cola FEMSA scheme or outlook on consolidation? That's my last one, thanks.

Alex, that's a tough question, because first of all, a lot of things have to happen within the Coca-Cola Company in Atlanta and in the relationship with SAB in order for that to start potentially materialize in the future. When we do some of our planning sessions, we have a very, very clear understanding that we have contiguous territories that are very profitable to take an opportunity from -- speaking up from the M&A point of view, basically meaning Latin America.

We have this opportunity in Asia and I think that the fact that we are improving substantially the performance marketwise and financial-wise in the Philippines is also helping us position ourselves also to be a player in other countries in Asia and acquiring the other 49% of the Philippines that we don't know.

The US market is an attractive market as we have mentioned because we believe that there are very good opportunities do better market activities and better market performance in that territory. And clearly, Africa is there and it's attractive in the sense again of the low per capita, the similarities that you described with Latin America and certain issues, the fragmentation of the retail system, but that would be more towards the end of all this that I described in other regions of the world.

I think that we have many, many opportunities that are strategically better for Coca-Cola FEMSA including also continue to grow in other categories in the markets where we are, before we move into really analyzing this. I think that the first element is obviously for the Coca-Cola Company to define what the future of this continent is with the partners they have right now and then if something evolves there, we would certainly look at it, but I think that there are many, many other geographic areas that are closer (inaudible) for Coca-Cola FEMSA.

Okay, fair enough, thank you.

Benjamin Theurer, Barclays.

Hi, good morning, Hector. Just one question to your comments you made on this volume growth on brand Coca-Cola and Coke Zero, et cetera. So it's kind of interesting that low teens growth here on the Zero category. Can you give a little more detail where it's coming from, do you think it's shift in consumer habit or is this really something which is more due to seasonality or whatever, and basically what does this category now represent within the Coca-Cola segments, the lights and the zeros, in the lives of the world, I know they are very small, but what's roughly this year now and the growth, how has that evolved over time, so that would be my first question.

Good morning Ben. I think that we have not seen the growth of the low-calorie products as one might expect, we don't know if that is clearly above the calorie content of brand Coca-Cola. We have moved to have very clear labeling of the calorie content of our products and strategically, in most of the territories we decided to -- and especially let me speak for example, the example of Mexico, but it is similar in other countries. After the tax in Mexico -- the tax was implemented a couple of years ago, we decided to increase this price increase to the consumer in all of the products, including Coca-Cola Light that didn't have a tax. So Coca-Cola Light because of the premium attached to that brand, we also maintained a small price premium of (inaudible) with brand Coca-Cola depending on the partition in the region. But for Coke Zero, we did increase the price. So right now, increasing Coke Zero and most of the few brands that we have, we have Fanta Zero and Sprite Zero also in some of the markets. We are using that as a way of having an affordable low-calorie product and also to try to foster the growth of the low-calorie product. And that's what is happening basically two years after we have this strategy going on. We are seeing a better growth of this brand, but still very, very low penetration of these brands in most of the markets. Mexico, for example, lights and zeros account for less than 3% of the total brand Coco-Cola. Coke Zero 0.6% or something like that (inaudible). Do you have markets like Argentina where the consumer and granted that we basically serve the greater Buenos Aires area where we have larger disposal with the income of the consumer compared to the country. So, in Argentina, (inaudible) are closer to 8%, 9%, Brazil is somewhere around 5%, but still very, very low compared to the US or other countries. But basically what the message that I want to say is the (inaudible) strategy is to maintain prices below brand Coca-Cola or below Fanta, regular Fanta and that's why we're seeing a factored growth than the rest of the brands. Okay?

Okay, perfect, very clear. And then just more technical question. So, first of all, your tax rate in the first quarter was pretty low in comparison to what we're used to see in the past, it usually was around about really that 30%, 30.5% then, clearly went down here in the first quarter. Was that because of any special taxes carry for whatever you may had or anything related to Venezuela if you could explain a little bit what happened to you on the tax rate.

Benjamin, I think that, this is basically a reflection of two important elements. One is that Venezuela represents around 2% of our net income -- the consolidated net income. Before it was representing a larger portion and Venezuela is the one that has the higher effective tax rate closer to 40%. Second is, the point is that and we have the (inaudible) plant in Colombia, we have also -- it's like a tax free zone where some of the value added taxes are zero or very small. But also we have a lower income tax number for the company that owns that production plant and as we're shifting more volume to that plant, where total Colombia effective tax rate is also coming down. And the rest is basically looking for efficiencies in every country in trying to be as efficient as possible as always complying with lower, with the tax lowering in every country now, but the two main impacts is Venezuela is now -- is moderate portion of our consolidated number and the fact that this production plant in Colombia has a special treatment with respect to income tax. Going forward, for everyone to be clear, before we were saying that somewhere around 30% was a good effective tax rate, I'll say its somewhere around 28%, 29% would be my new expectation going forward.

Okay, very clear on that and if we're talking about expectations on guidance a little bit on just very quickly on CapEx which was well down by about 25% compared to what you spent in the first quarter of 2015. There as well for full-year, if you could give a little bit of an idea what you are planning to spend in terms of investments, PP&E, et cetera so that we get a better sense on CapEx here as well just by having seen that 25% drop on a year-over-year basis. So that would be great.

Yes, I think that -- in the CapEx front, it's important for everyone to have a very clear picture. We have like three or four years where we were building a new plant in Brazil and a new plant in Colombia and especially the last three years, we were closer to $800 million, [$850] million CapEx. This year, I'm expecting somewhere around $650 million because again we have this big two plants that would not require us to do a lot of investment in production. Obviously, we will continue to invest in coolers, trucks, bottles, and cases and things that are more happens every year, but given the large increases that we have in capacity in Brazil and Colombia, we will have a few years of lower production CapEx.

I think that our center of excellence for supply chain is doing a very good job in finding efficiencies and we are very strict in measuring efficiency in every plant and at the end of the day, if we can improve the production efficiency by 1 percentage point, (inaudible) some CapEx for two or three years. CapEx meaning you don't need another production line because you have extra capacity as you improve efficiency. So, somewhere around $600 million to $650 million, $680 million should be a good number for the following two or three years with respect to CapEx.

Okay, perfect. Thank you very much.

Andrea Teixeira, JPMorgan.

Hi, thanks Hector for taking the call. I just wanted to ask a question regarding margins and costs, and I understand you explained about the sweeteners, so wondering how you're seeing that for the rest of 2016. And also regarding in some of the explanation you gave to previous questions about M&A. So, obviously we've seen you being very active in the past in Latin America and now you deleverage the balance sheet, assuming that you deleveraged to the level that you wanted, I was just wondering if you're still looking into doing and to be more aggressive into the rest of LATAM, specifically in the (inaudible) region, it seems the missing piece for you and if you were to rank, understand obviously LATAM stood top of the list for you in terms of M&A, and if and how, but you might end up with Asia depending on another franchise in Asia depending on how the opportunities arise or would you be able to negotiate with Coke to wait on that in order for you to be able to participate in and more interesting or more synergic acquisitions in LATAM or even in the US? Thanks.

Good morning, Andrea. I think that the rest of the year for 2016, I think that margins what we have in the first quarter is a good reflection for the rest of the year. I think that as I said we will continue to monitor the internal cost that we have because of the volatility of the currencies. Reminding everyone that we have an active hedging team so we could have some protection in that sense going forward. And we have been very active in the pricing front and I am sure that when we compare with other peers in the industry you would see that our pricing activity and flexibility has been there. So, the margins that we have -- improvement in margin we have I think are here to stay for the rest of the year. In the cost front, I am worried a little bit about sugar prices and as I mentioned I am seeing a benign environment in PET prices in dollar terms. And again, we will try to continue to be proactive -- we would continue to be proactive in the hedging front.

With respect to M&A, I think that there are still some pieces of characterizing in Mexico, Brazil and in South America. I think that those are potentially very attractive for us because of the synergies and the knowledge of the market. I think that the fact that we are having a good performance in the Philippines is giving our Board of Directors more confidence into continuing best in Asia, meaning when the time comes, executing the other 49%, the option that we have to buy the other 49% of the Philippines and certainly to look at adjacent territories, but more importantly I think the Coca-Cola Company is also convinced that we are doing a very good job in the Philippines. Remember that we have a tough start of operations there as we were changing to market and portfolio, and pricing and different SKUs. And we started our -- our start in the Philippines was with some ups and downs. Now, everyone -- my feeling is that everyone (inaudible) is convinced that we are doing a good job in the Philippines and that also bodes well for potential opportunities in other adjacent territories in Asia.

And finally the US, we have mentioned this an attractive market and we would like to be a player there and we have communicated that to the Coca-Cola Company very clearly.

But how can you prioritize those? I mean if you were to prioritize many of those what would be your wish list? And just have follow up on the hedge if you can remind us how the hedges are for the second quarter and ahead?

Prioritizing, that is kind of difficulty because (inaudible) time by the end of the day and (inaudible) that. I think that the US is very clear with Coca-Cola Company and wants to finalize this first 2017. So, I think that there is no question that it is going to happen, meaning, let me rephrase that, there is no question that the Coca-Cola Company want to move ahead in refranchise and there is no question that we have expressed, we like to be there and take a look at the values and the operating model and all of that.

The rest of the Latin America, I think that whatever we can do there is very easily adjustable by our operations. We have evolved a lot our management capability, our processes to be able to take on the regional franchise and just compare everything to our KOS way of doing things. So, when I say that, I am speaking about supply chain, commercial initiatives, administration, treasury, everything is so well prepared that it would be very easy to do it in Latin America. We know most of the markets in Mexico and Brazil, no question about. So, if someone arises -- we know that someone is willing to sell at least double prices, in Mexico, Brazil it is one of the very easy and we have the debt capacity and we can ease the shares also, it was the case in Mexico in the past. So, I don't see any specific problem to move in that direction. I think that we have a management bench strength also to deploy some of our knowledge to these areas in Latin America.

Asia is a little bit farther down the road, mainly because the option that we have for the other 49% (inaudible) 2020. And from the financial point of view, just from the pure financial point of view, it make sense to wait until the end because these are very low cost call that we have on that. In the meantime, if some of the adjacent territories were to be for sale, we certainly will take a look and see if it makes sense to move in that direction before owning 100% of the (inaudible). But in terms of the timing, if you were in the timing that I see for these transactions, the US, the Coca-Cola Company is dictating the phase because they say that in 2017, they want to finish.

In Latin America, the volatility that we see and normally you also see the owners of these franchises are a bit more nervous if this is the right time to move or not, and it was both ways, sometimes people say no, right now it is not the time to sell and sometimes they say, I rather sell before these things gets worse. And as I mentioned, Asia probably a little bit farther down the road. With respect to the hedges we have -- with respect to currency hedges, normally you will find that, for example, for the second quarter of 2016, we have somewhere within 50% to 65%, 70% of our needs for US dollars already covered. And as you go farther down the road, for example, fourth quarter it would be more around 30% to 45%. Those are more than the ranges that we use in this. We are starting to do something for the first quarter of 2017 but that even represents probably around 10%, in all the (inaudible).

Thanks, Hector. But that's only for the FX, right. It's not related to the price of sugar or the price of fructose.

It's only for the FX what I am referring. In some cases we pre-negotiate, for example, in Brazil we do enter into hedges because the so called Contract 11 for sugar, it's a very good ceiling for the prices in Brazil. So, I'll say that we have somewhere around (inaudible) somewhere around 30% of our needs in for 2016 or probably a little bit higher than that and again the next quarter for probably closer to 60% of our mix and going down all the way to the first quarter of 2017, somewhere around 15%, 20% for the sugar geography, and then with suppliers in Mexico, fructose or sugar, we try to pre-negotiate the following three or four months and we agree on a price and delivery date from (inaudible) discuss basically parts of the normal commercial practice that we have with suppliers in the rest of the comps.

Very, nice. Thank you so much, very useful, and congrats on the results.

Isabella Simonato, Bank of America Merrill Lynch.

Hi, good afternoon everyone. Thanks Hector for the questions. First question is, back to Venezuela. If you could -- if you have any visibilities, your raw material supply would at some point normalize and volumes start recovering or this is your view for the remainder of the year? And also given the ongoing volatility and lack of visibility in this business, does it still make sense for the Company to continue to fully consolidate debt under results given the volatility of the numbers there? That's the first question.

Good morning Isabella. In Venezuela, I think that it's tough to predict the volumes for the year. My feeling is that given the scarcity with sugar and electricity potentially in the summer months, will have some shortages and days that we would not be able to work 100% of our production plants or distribution centers. So, somewhere around, I would say, 15%, 20% below volumes of what we had last year, that's basically my estimate for Venezuela. I think that, as I mentioned, we would continue to increase prices importantly to cover for the costs that we have so that we maintain the profitability in local currencies. We have reviewed the whole issue of Venezuela with our auditors and even with some advisors that are experts in accounting and because we operate under the international financial rules of the US GAAP, the fact that you have a very complicated macroeconomic environment and scarcity of currency is the reason good enough to de-consolidate the operations and that's why you have seen a number of companies including, for example, PepsiCo, Kellogg and Unilever, and Delta and some of those companies consolidated Venezuela. There is not a single example of a company on the IFRS rules that has been consolidated because while we have this done with our auditors, they say if you do it I'll give you a qualified opinion, which you cannot (inaudible) problems. We have even paid some dividends and (inaudible) purchased some dollars at the (inaudible) rate and then at the parallel rate and in transactions that are totally open and we have used those to pay some spare parts and just we paid some dividends of very small amount. So, according to our auditors, there is no reason right now for us to reconsolidate the numbers of Venezuela. So the best we can do in terms of explaining the performance of the Company is to present numbers as reported and then numbers that are comparable meaning excluding M&A transactions or excluding country like Venezuela that can distort some of the consolidated numbers because of the volatility. Okay?

That's very clear. Thank you for your answer. And the second question is regarding the refranchise in the US, if you have any update since the Coke is accelerating the process. If you have any updates on how you stand on that?

Yes. As I mentioned, we have expressed very clearly our interest to the Coca-Cola Company to participate. If I look at the map that is basically California, Texas, New York, and Nevada and parts of Arizona. And on the Mexico, we have not engaged in a formal process with the Coca-Cola Company, other than having a continuous dialog of expressing our interest and they say that they want to move fast in a new franchise. Okay?

Luca Cipiccia, Goldman Sachs.

Hector, I'm sorry, I'm going to ask another one on consolidation and M&A, but actually wanted to ask a little differently and not so much and would you be interested in buying PET, rather what you may be interested in selling if the opportunity is right. And I think my question specifically refers to Argentina, it seems to me that there is a process also rationalizing the structure of the distribution across markets in countries and where possibly have (inaudible) bottles if possible in one particular region, one particular market. I think Argentina seems to be a little bit the odd one out with four different bottlers there. So, should there be an opportunity for you to, say, exit that market, say, in exchange of maybe territories in Brazil. How would you look at that opportunity, how strategic would you think Argentina is for you or rather if you said you have an ambition to expand, how attractive you consider Argentina for you as an M&A opportunity as a whole if not in its single parts, maybe swapping Argentina and Brazil specifically.

Good morning, Luca. Where to start? Argentina. I think that Argentina as you say, we have four bottlers there. Changing territories, it is always a possibility, no question about it. It has not been done in the past, although done very small things a long time ago in (inaudible) small pieces of territory that really makes sense to those of the changes in the past. I think that's a possibility we haven't explored that at this time. I think that one important element that we have is that we believe that owning a very large city is very important and strategic. So you have a very, very profitable Mexico City. I don't have any doubt that Buenos Aires is the most profitable territory in Argentina because of the concentration, et cetera. The same is true for Bogota and Sao Paulo. That's why Belo Horizonte was very important for us. It was the third -- fourth largest city in Brazil. So, I just want to mention that likely it is not only the size of the population or the number of cases you service, the profitability of the cases that you serve in a big city is important.

I guess Rio de Janeiro would be equally -- I guess Rio would be very attractive right? That makes sense.

Certainly, there's the potential, yes. So, you have Andina, you have [Arca] and you have a small independent bottler which is David Lee, which is basically next to Buenos Aires and there is literally a street that differentiates one franchise from the other in Buenos Aires. So, doing something with Andina in exchange for territories in Brazil either way could be a possibility. Yes, certainly there will be a possibility. Does it make sense strategically? Yes, probably it will make sense from a synergetic point of view. So, if you ask me, I don't know what Andina would answer to this, but if you ask me, I will say yes, if the price is right and the conditions are right, there is certainly a possibility. And then if you find this done correctly, you said question is, is Andina a potential target as if what I want understand, I do see Andina as a large company that is just trying to consolidate. We have very good relationship with them and I see Andina staying independent for many years, I don't have any specific point of view there, will it be attractive? I think it would be attractive for everyone.

Absolutely, many thanks, I think it is very clear. I think my question precisely was partially this, I mean you've been talking about the US, you've been talking about Asia, you've been talking about opportunities in Brazil in your existing territories and I was wondering how much really can you take on even in terms of real -- how much of an appetite there is to take on maybe regions if we move more further (inaudible) not aware today even if they were to come up as opportunities when in fact, you still have Brazil to close and potentially the US and Asia longer term. So, I would assume maybe that's not the top of your priority list going back to that idea of what comes first?

I think you're right. I mean at the end of the day, we feel that what I described as potential territories, I'm not seeing all of them happening at the same time. I think that we have been building a strong management team and we have very young talent that we have been fostering for many years in the organization. I think that something in Latin America will be doable very easily because of knowledge of the market and again, moving talent along will be much easier. In Asia, we have been now for three years. I think that we're building a good Filipino talent and international talent in the Philippines of different nationality that (inaudible) region. And the US -- potentially the northeast, certainly my feeling is that not all of these would happen at the same time.

Jeronimo de Guzman, Morgan Stanley.

I had a few follow-ups, maybe just starting with Venezuela, just a follow-up on the availability or the purchasing of raw materials. I wanted to get a sense of how much of the raw materials you are still purchasing at the official rates or some of the controlled rates versus how much are you already purchasing locally here with the implied parallel rate?

In Venezuela, I'll say that most of the suppliers we're paying local currency; it is not necessarily at the official exchange rate, in other words, we might be buying some products that differ -- at the equivalent and differ in exchange rate you were to buy these from the outside, in other words if someone is worth, if a product, let's say, plastic cups, if you were to buy a $100 worth of plastic cups, it would not be worth a penny (inaudible) locally, if they would charge you more, but (inaudible) the local currency. So, (inaudible) expensive raw material, when you translate that as the official rate, but the official rate is not available to buy in this (inaudible) so that's the point of the matter over there. So, right now most of the raw materials we are buying from local source. There are still few, very few amounts of imported raw material that are coming from other parts of the world, that we are still in the process of negotiating with the Central Bank to get the dollars and obviously the payment period for that is much longer, because the waiting time to get these orders at the Central Bank is getting longer and longer.

So, at this point you see, I guess limited downside if we were to lose access to whatever remains that you're buying at the official FX rates, is that fair?

Yes, basically what we're saying, what we're doing is, participating in some of these buying dollars at the (inaudible). Sometimes, we buy dollars at that rate and we used to buy spare parts or some of raw materials that we don't get authorization from the Central Bank. For example, last year we ended up acquiring somewhere around 11 to 12 [million] dollars at that rate and that's embedded in our cost structure in the P&L, because that's the official rate that we used to buy those raw materials. So, it's a little by little we have been shifting most of our raw materials to local sources. So right now, I'll say 95% is local.

Okay. Very helpful. And then just on the Philippines, you mentioned the volumes and you also mentioned that the profitability is improving, which is encouraging. Just wanted to understand what is driving that profitability improvement, is it efficiencies and are you seeing already maybe a better or more rational pricing environment from the competition?

It's more the first part of your question is, more efficiencies, cost of structure, better supply chain. We are still seeing very tough pricing environment from the competitors. But as we launch new presentations and moving to the returnable presentation, the three-quarters of a liter presentation, that's the one that we call Kasalo, that is having a lot of success. We are reaching the competitive price on with returnable products and trying to cover the good pricing on our one-way presentations. So, it is balancing this -- having a good balance between returnables and one-way presentation. So, from the pricing front, we still have some room to improve. It's more the latter(inaudible) having the efficiency, et cetera.

That will conclude our question-and-answer session. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you everyone for your time and attention to this conference and as always Coco-Cola FEMSA and the team is available to answer any remaining questions you may have. Thank you for your support.

That does conclude today's conference. We thank you for your participation, you may now disconnect.