Coca-Cola Femsa SAB de CV (KOF) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to Coca-Cola FEMSA's third 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 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 on 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 afternoon, everyone, and thank you for joining us to discuss our third quarter 2016 results. This quarter our company continued to deliver solid top line results. This performance was driven by our focus on transactions and pricing, supported by our strong point of sale execution and market share gains across most categories and territories.

Our transactions continued to outperform our volumes in key markets such as Mexico, Brazil, Colombia, and Argentina. As we leveraged our operating focus and pricing flexibility, our average prices per unit case grew ahead of inflation in most of our markets.

Our top line performance, coupled with our financial discipline, enabled us to better weather a general volatile currency and raw material environment, especially higher sugar prices, and mitigate margin pressures.

For the quarter, our consolidated comparable revenues rose 6% and our comparable operating income grew 7%, while our comparable EBITDA decreased slightly as a result of certain one-time non-cash expenses recorded in 2015.

I will briefly discuss the highlights of each operation. In Mexico, our volume growth continued its positive momentum, even as we started to hit tougher comparable growth for the second half of 2015. Our transactions once again outperformed our volume growth by 1 percentage point and our average price per unit case continued its mid single digit growth, ahead of inflation.

Notably during the quarter, our volume of Coca-Cola Zero grew close to 14%. Together with the strong brand equity of Coca-Cola, this enabled us to maintain our leading market share in the cola category. Our Naranja&Nada and Limon&Nada, our successful sparkling orangeade and lemonade, again drove our flavored sparkling beverage growth, supporting market share gains in this category.

Ciel flavored water continued to grow significantly, almost doubling its volume and gaining close to 7 percentage points of market share in this profitable segment. Noncarbonated beverage volumes continued to grow at a double digit pace, driven by Vallefrut orangeade, del Valle juice, and Santa Clara dairy products.

Mexico's solid top line results, combined with our operating discipline and operating expense control, enabled us to mitigate gross margin pressures resulting from currency volatility and higher sugar prices.

In Central America, our volumes grew 3%, slightly outperforming our transaction growth. By country, Guatemala's volume grew by more than 9%, Nicaragua's grew 7%, and Costa Rica's increased 3%, compensating for a decline in Panama. Our transactions outperformed our volumes in both Nicaragua and Costa Rica.

Our South America division continues to face a very tough consumer environment that has affected our volumes. In Brazil, our volumes contracted 7%, but our transactions outperformed this decline by close to 5 percentage points as consumers continue to embrace our affordable portfolio alternatives.

Importantly, our focus on enhancing our execution levels and amplifying our portfolio has enabled us to sustain our momentum in market share gains across every category. While we have achieved improvement in every aspect, we continue to see opportunities to improve point of sale activation and price compliance indicators.

Notably, our returnable presentations' volume grew close to 4% this quarter, continuing to gain in our mix of sparkling beverages, now representing close to 20%. Within the flavored sparkling beverage category, Kuat continues to outperform, achieving double digit growth for the quarter and driving market share gains.

Year-to-date, our local pricing and revenue management initiatives, coupled with our focus on cost control, have enabled us in Brazil to expand EBITDA margins by 20 basis points for the year.

In Colombia, our volume declined 6% as we continue to face a tough consumer environment and operating disruptions due to a national trucker strike. Despite declining low single digits, our transactions continue to outperform our volumes by more than 4 percentage points.

Notably, our volume of brand Coca-Cola grew 3% in the quarter, driven by our strategy to reinforce affordability through a 2-liter returnable presentation. Moreover, Brisa personal water continued its double digit growth during the quarter.

Our pricing initiatives, implemented to compensate for the increased rates of inflation, the devaluation of the Colombian peso, and higher local sugar prices, together with our operating discipline enabled us to mitigate margin pressures at the EBITDA level.

In Argentina, consumers continued to experience constraints on disposable income in an environment characterized by high levels of inflation. In addition, we faced certain operating disruptions that affected our volumes for the quarter.

Our volume declined close to 20%, while our transactions outperformed this contraction by 5 percentage points. Despite this performance, our focus on execution and segmentation, coupled with our robust portfolio offering, continued to drive market share gains across every category.

This quarter we accelerated our pricing and revenue growth management strategies to catch up higher levels of inflation. Combined with our proactive hedging strategies and operating and financial discipline, these initiatives continue to yield EBITDA margin expansion.

In Venezuela, we continued to face shortages of sugar. While we successfully reinforced our portfolio with calorie-free alternatives, higher levels of inflation and certain consumers' preference for sugar drove a volume contraction of more than 40%. Despite this exceptionally challenging environment, we remain committed to satisfy our Venezuelan consumers' various needs.

Moving on to our Philippines operation, we delivered another strong set of results. Importantly, our volumes and transactions grew 7% and 6% respectively. Our core sparkling beverage portfolio continued to drive our top line performance for the quarter.

Our renewed 12 ounce and 750 milliliter returnable glass offerings continue to deliver transaction growth, while our flavored sparkling beverages are supported by Mismo, our one-way single-serve PET presentation.

Additionally, our noncarbonated beverage volumes, including water and powders, all grew by double digits. Our Philippines business operational and financial results remain encouraging, as we deliver sustained margin improvement.

This quarter, our comparable net income grew 30% to MXN0.99 per share. This result was affected by the depreciation of the Mexican peso as applied to our Brazilian real and US dollar denominated interest payments and, to a lesser degree, a foreign exchange loss on our dollar denominated net debt position.

The aforementioned variables were partially offset by a lower effective tax rate as we continue to capture tax efficiencies across all of our operations.

In addition, we have proactively moved to reduce our consolidated dollar denominated net debt. Consequently, our current exposure is approximately $550 million. This should mitigate the effect of foreign exchange volatility on our net income going forward.

This quarter we achieved another important milestone on our way to capturing the next wave of growth for Coca-Cola FEMSA. Through our Brazilian subsidiary, we agreed to acquire Vonpar, one of the largest family owned franchises in Brazil. This franchise territory not only represents an important opportunity to generate synergies going forward, but also enables us to consolidate our leading position in Brazil, serving now more than 88 million consumers and close to half of the Coca-Cola system volume in the country.

Furthermore, the form of payment of this transaction underscores the flexible approach we take to mergers and acquisitions. It ensures that our company will continue to enjoy the financial flexibility to capture the next wave of growth in our industry while continuing to invest in our company's organic growth.

Year-to-date, we have delivered a strong set of comparable results in the face of high currency and raw material volatility, together with a very tough consumer environment in South America. Supported by improving point of sale execution, our focus on transaction growth, coupled with our ability to leverage our pricing and revenue growth management, will continue to play a key role in reinforcing our leading market position while protecting our profitability and cash flow generation going forward.

Looking ahead, the Philippines top and bottom line growth should positively add to our consolidated results as of 2017. The transformation of our operating model through our centers of excellence set the cornerstone for improving our organic business performance, providing significant opportunities to generate top line growth, operating efficiencies, and savings, and driving innovation while fostering talent development across our organization.

We continue to enjoy the strategic and financial flexibility to capture both organic and inorganic growth in the future and continue delivering increased value for our shareholders. Thank you for your continued trust and support.

And operator, I would like to open up the call for questions. Thank you.

Thank you. (Operator instructions.) Lauren Torres, UBS.

Yes. Hi, Hector. I guess I'd like to just address South America and, I guess to be more specific, Brazil. We're seeing some still notable volume declines, and I think in the past you've addressed the fact that there is price package opportunities as ways to protect margins, or even improve margins. How do you see this market, either just thinking about the rest of this year or, more importantly, going into next year? Do the trends seem tougher? Can you protect margins in light of what's going on?

And then I guess the second part just on Brazil, Vonpar seems like a bottler that you always had interest in. If you could give us any sense of what the addition of this bottler could mean for you, synergy impact, things like that would be helpful. Thanks.

Good afternoon, Lauren. The way we are looking at Brazil, and we had it in our budget, we knew that we were going to have a tough third quarter. It's been a little bit tougher in terms of the consumer sentiment and the volumes that we are seeing.

We believe that fourth quarter will be a little bit better in terms of comparison versus last year. But really to start changing the trend that we see in Brazil, our expectation is that we will see that in the second part of 2017.

So, third quarter and fourth quarter, our hypothesis is that we will see a return in the growth that we are expecting in Brazil.

I think that the acquisition of Vonpar will bring around $65 million in synergies. It's a -- as usual, it will take probably around two years to do that. I think that the number is -- it's very achievable. I think it basically has to do with cost synergies that we think are very -- that we can control.

And in this specific case, Vonpar was a territory that was selling products at a substantially lower price than the rest of the bottlers in Brazil. So, in a way that will also help us, even in the bordering territories that we have with Vonpar, to improve our pricing there, because with Vonpar having those prices, we were in a way kind of forced to sustain these lower prices in the territories that were next to Vonpar to avoid any transshipment from clients.

Vonpar is a territory that has basically three plants, five distribution centers, around 4,000 employees, a little bit less than that. And very importantly, with this addition the 88 million people that we serve in Brazil, now it's much larger than the number of people that we serve in Mexico. So, we do see that as a very important element for growth in the future.

But again, we believe that we are still going to see a very sluggish Brazil for the next three quarters and, starting third quarter of next year, to start to recover. We think that we can protect some of the margins there.

So far, and it's kind of curious because last year, with all the hedging activity, we had a lot of savings in terms of the hedges that we had versus the spot price. With the appreciation of the real this year, this has been a year of the reverse outcome, because as you can imagine, as we were fixing exchange rates six months ago or nine months ago and paying for a carrying cost around 14%, the positions that we have in those hedges are at a substantially higher level than the spot price right now.

On the other hand, the hedges that we did with sugar prices are very favorable and we are saving a lot versus the spot -- the present spot price in sugar. So, all in all, when you take the proportion that we have with raw materials and -- the position that we have in raw materials and the position we have with respect to FX, more or less one has killed the other and we have a neutral effect.

So, we think that we can protect the levels of profitability we have. We believe that we can improve that little by little. And certainly our expectation is that starting third quarter of 2017, we'll increase that more importantly. We are moving in terms of pricing, in terms of launching returnable products, in 1.25 and 2 liters.

And a very important element that I would not like to forget, even with this volume performance, we are gaining market share in every category. It's more an industry-wide trend. And I think that's important for you also to know, that we have not had any market share erosion to the country. We are increasing a little bit the market share there.

I hope that this clarifies some of the doubts on Brazil.

Yes, that's very helpful. Thank you.

Thank you, Lauren.

Isabella Simonato, Bank of America Merrill Lynch.

Thank you. Good afternoon, Hector. Good afternoon, everyone. I have two questions. First, in Mexico and Central America, Hector, if you could, discuss the outlook for raw materials going forward, regarding both currencies and sugar prices and what we expect in terms of margin performance in Mexico in the coming quarters.

And the second question, in South America, I appreciate your comments on the outlook for Brazil. But if you could also discuss the expectation for Colombia and Argentina, mainly in terms of volume performance going forward, that would be great. Thank you.

Good afternoon, Isabella. Let me start with Mexico, and this is to a certain extent to all of the countries with respect to the raw material outlook.

This year we have suffered importantly, some countries more than others, with respect to sweetener prices. In Colombia, we had increases, and we mentioned that last quarter, of around 25%, 27% on the prices of sugar. In Mexico, we are at levels around -- close to 20% increases on sugar price.

The outlook that we see for next year is an outlook where sugar prices will have a mid to high single digit increase in prices in local currency. With respect to high fructose, we have already arranged with some of the suppliers or pre-bought, if you will. Some of the contracts are pre-agreed with the suppliers at prices that are low single digit increases versus what we have. That's basically for Mexico.

And with respect to PET prices, which is another element, we are seeing also low single -- low to mid single digit increases. Obviously, it will depend on oil prices. And everyone will have a difference opinion on where oil prices will be, but our expectation is that oil prices will increase a little bit for next year.

All of our operations are cognizant of these trends and are working actively, together with the Coca-Cola Company, to find ways of using our pricing leverage and start moving prices on those packages where we see opportunities to leverage and where we feel that the competitor has -- our competitors will have a lesser chance to affect our market share.

So, no question about it, we are facing an environment that is not that complex, because we are not seeing very large increases in prices, but that we'll see some pressure from cost.

Currencies will be another factor. It is very difficult to predict. And I just explained that, in the case of Brazil, most of our FX hedges are at a higher price or a higher cost than the spot prices right now, so that's causing a problem.

Today we had our Board of Directors meeting, and we discussed thoroughly our strategies, especially Brazil, given the high carrying cost. But we expect that the Brazilian rates will come down, and we'll move our hedging strategies accordingly with those movements.

In the case of Argentina and Colombia, let me spend a few minutes. We are seeing -- let me start with Colombia, a difficult environment where, again, you saw it's a 6% reduction in volume. It's a little bit tricky because colas is growing around 3% in the quarter, and that's a very good trend for us because we are super leaders in colas.

So, we are gaining market share and colas is growing, which is beneficial for us. On the other hand, water is declining but personal water is growing, so that's also very important from the profit pool point of view.

The issue we see there is very high increases in sugar prices. We have expressed in the past that the sugar industry moves a little bit like a cartel. And even though they were fined $100 million for price fixing, they increased the prices. And now the consumer or the end user of the sugar is paying for this fine, which is kind of strange, that things like that happen.

But at the end of the day, Colombia -- or the outlook for Colombia in 2017 will depend a lot on the outcome of all the process that is going through Congress and the Senate in Colombia with respect to a potential tax on sugary drinks.

What they have proposed to Congress, and it's going to be voted in the following weeks, is a tax of around COP300 per liter, which will be equivalent to around 25% of the current price. So, in other words, that will be a tax that is kind of double the size of what we experienced in Mexico in 2014. In addition, they are passing -- or they are proposing a regulation to increase the value-added tax from 16% to 19%. In theory, they will reduce corporate taxes in exchange for that.

So, we need to wait for that legal and -- the regulatory process to finish in Colombia, and that will have a very important impact on the consumer the following year. If they pass these taxes, these new taxes, no doubt that the Colombian consumer will be affected in 2017. And the disposable income available for our products and any consumer goods products will be affected.

In Argentina, we saw a very important reduction, around 20%, in volume. It's important while that -- for me to mention that in Argentina we had a three day blockage of the distribution centers, because there is a fight for the union contract that has to do with transportation.

So, the guys that are in charge of transportation want to get involved in some of the contracts that are embedded in our distribution centers, especially those that have to do with forklift operators. And the union that has the contract right now is defending that push. So, there is a fight happening between the two unions, and that situation caused the blockage of most of the distribution centers for three days.

That had an impact of around 3 million unit cases. If we hadn't had that, volumes would have declined more in line with the rest of the industry, around 11% to 12%. But still, similar to the previous quarters, the Argentine consumer pretty much affected by the increase in tariffs and services, and not being -- and the consumer not having necessarily the improvement in salaries in the same proportion. So, that's the situation that we have in Argentina.

It's also important to mention that in Colombia there was a trucker strike for 42 days that partially affected our operations. And the estimate that we have, it's also similar to around 3 million unit cases in the case of Colombia during the quarter.

So, all in all, I think that I feel positive about the Argentine operation in the sense that the adjustments that President Macri did at the beginning of his mandate are now older, in a way, and we'll -- sooner we'll be getting out of these adjustments. In the case of Colombia, it will depend a lot on the new legislation on taxes and the potential impact that that might have with the consumer.

Thank you, [Simon].

Great. Thank you very much.

Jeronimo de Guzman, Morgan Stanley.

Hi. Good afternoon. First, I wanted just to ask a follow up question on the FX impact. Do you have any FX hedging already in place for -- moving forward for 2017 in Colombia, Brazil, or Mexico? And at what -- more or less at what levels?

Yes, Jeronimo. Good afternoon. We do have some of these hedges in place. More or less, I'll say, we have around -- for the full year, around 25% of our dollar needs in Mexico at levels around MXN18.6. Something like that is more or less the hedges that we have.

In Brazil, we have similar amounts but the numbers are a little -- a bit out of the money, around BRL3.80, more or less -- BRL3.70, more or less, is the average. And we'll have somewhere around 20% already covered.

As I mentioned, during the Board Meeting today we discussed that, and we are probably going to stay with that level of coverage without increasing the exposure in Brazil just because of the carrying cost until we see some reduction on the carrying cost. And Colombia, we have a lower amount, probably closer to 16%, 17% for the year at around COP3.15 -- COP3,150, more or less, Colombian pesos.

The way we look at this, Jeronimo, has always been similar. It's we look at the market, we see what the previous year FX was, we see what the budget for the year is, and if we see opportunities to start fixing some of these costs in local currency -- I mean in raw material costs that will help us postpone price increases, then we move together in a decision that is taken together with the Chief Operating Officer of each country to try to fix that, because -- why it's important, because in every country we have a price gap versus our competitors that we want to protect as opposed to -- protect meaning that we should not -- we want to avoid increasing the price gap that we have versus our competitors.

And if we can fix some of the raw material costs at similar levels that we have in our budget or versus previous years, then we can assure that price gap differential to be maintained. And that's basically the philosophy we have here. As some of the currencies have appreciated, the effectiveness of these hedges have diminished versus what we had in 2015.

So, I guess the way you think about Brazil margins for next year, on average maybe the FX is more of a tailwind, but the sugar becomes a headwind for next year and then -- because of the hedges that were favorable this year. And then in the end, you think you can still protect margins, or could you have some difficulties there, given the sugar increases?

Yes, Jeronimo, the budget that we are working with our guys in Brazil calls for increasing margins in 2017. And that would have to be done through price increases and a change in the mix [towards] single-serve presentations that will help us improve on that.

It's always a very difficult balance. Returnables help us a lot because we can maintain the affordability with a good margin. And that will give us the space to improve pricing on some of the more on-demand consumption, which is also very profitable for us. But certainly the idea is to increase margins in Brazil in 2017, in spite of price increases in sugar and other factors.

Okay. Thanks. And then also, just in Brazil on the Vonpar transaction, I just was wondering if you do see this transaction as maybe a catalyst to open up new consolidation opportunities in the country. Do you think it could accelerate some of the talks with other bottlers in the country?

Yes, Jeronimo. We think that the answer is yes because of two reasons. Because, again, it restarted -- after three years of no activity in Brazil, it restarted the operations. And I think, very importantly, is that the owners of Vonpar that will receive shares of Coca-Cola FEMSA are very important members of the Coca-Cola community in Brazil.

As you know, Ricardo Vontobel was the head of the Coca-Cola Bottlers Association in Brazil for many years, and he has a lot of I guess prestige among the bottlers. So, I think that the fact that he is a shareholder with Coke FEMSA will help us in that process, no?

Okay, great. Interesting; thanks. And just a final question on the Philippines. So, just wanted to confirm you will start consolidating that next year, as I understand. And I just wanted to get a sense of -- I mean, you've talked about the top line trends. And it seems like they have been very positive, but just wanted to get an update on how the margin outlook -- how the margin trends are looking, how the pricing trends are also looking, and kind of what's your outlook for where margins could be this year and into next year.

Yes. Starting in 2017, we will consolidate the Philippines operation. We'll report that separate, so you will have a lot of visibility on those numbers.

So far I'll say that we will -- we'll have to prepare pro forma financial statements for 2016 so that the numbers are comparable. And I'll say that the Philippines -- the whole history of the Philippines is a story of volumes that have been increasing, brand Coca-Cola that is growing in importance and getting the other -- I don't want to call it B brand, but the private brands that were owned by the Coca-Cola Company diminishing in importance in the mix.

We are a little bit behind volumes of what we were anticipating during the acquisition, and we are a little bit behind on pricing according also to our original estimates. And the important element here is that it's an operation that is growing volumes more importantly now without moving necessarily the prices that much.

I think that it's important that we get the scale with the volume and then start moving prices a little bit more aggressively in the following picture. It's not during 2016 and maybe not during 2017. And with that, at the end of the day the profitability that we have is lower than what we have in Latin America, but it's improving little by little.

You are speaking about an operation that will have mid single digits EBIT figures and low double digits -- and by that I mean 10%, 12% EBITDA margin in the Philippines. So, our expectation is to -- but we are coming from basically zero or negative numbers. So, I think that we are moving in the right direction. It will take some time, but it is, again, moving in the right direction. And you will see that starting next year on our numbers.

Okay, sounds good.

Thank you.

Thank you very much.

Benjamin Theurer, Barclays.

Yes. Good afternoon, Hector. Thank you very much for the call. And I have a question more outlook for Mexico, so what you're expecting now with the -- well, you mentioned already there was a deceleration in volume, clearly because of the tougher comparison to the second half of last year.

But just to get a little bit of a sense what you're seeing in terms of volumes and transactions in Mexico going forward and looking into 2017, do you expect that the rate of growth for volumes should be somewhere similar to what we see now in the third quarter, or do you expect a further deceleration? What's your take on what's currently like a natural growth rate for volume in your view in Mexico? And then I have a different question, but will leave it with that one first.

Good afternoon, Benjamin. In Mexico, I think that, first of all, we are seeing a deceleration in the volumes. But as we compare to the first half, the volumes continue to grow versus last year but at a smaller pace.

So, I'll say that a good bet for Mexico is low single digit volume growth with strong pricing. That's the formula that we are looking for. And as we mentioned in other conference calls, we think that we are in agreement with the Coca-Cola Company in that respect, that it is very important for us to focus in revenues and profits as opposed to just volume numbers.

Transactions continue to outpace volume, which is an important element. And all our operations in Mexico are clearly -- they clearly have that mandate of starting to look for opportunities for price.

A lot of what we are doing with the digital -- what we call the digital transformation or the -- in our company is starting in Mexico. Right now we have around 60% to 70% of our routes already with a state of the art handheld device. That is providing substantially a larger amount of information that will give us opportunity to do a lot of analytical analysis on the operations. And that has clearly helped us on the process of improving the way we manage discounts into different accounts.

We believe that that will give us a much better granularity on our clients and understanding the dynamics of the marketplace, as we have much better and much larger information from the consumer -- from our clients, which are the stores.

So, all in all, what I want today is volume low single digits, but with strong pricing. That's what we are looking for in Mexico.

Okay, perfect. And then one other question I had on a completely different topic. Could you share a couple of thoughts and a little bit of highlights how the Monster distribution is going in the different markets? Because that's still a very young business, so just to get a little bit of a sense of how you're doing there on the energy drink sector.

Benjamin, it's too early to know. It is doing well. We just started in Mexico. I don't know, it's probably a month ago, something like that, so it's too early to start seeing trends.

But we are encouraged by the -- we think that -- our hypothesis is that Monster will be a very nice addition to our portfolio in all these countries. We launched that in Mexico. We are in the process of launching this in Brazil. Central America, we already did it, similar to Mexico. Argentina is still pending. And we will go -- we have good hopes for it, because it's a very profitable product that we could sell in all of our distribution trucks.

Okay, perfect. Thank you.

And we do ask that you please limit yourself to one question in the interest of time. Again, that's please limit yourself to one question in the interest of time.

Alex Robarts, Citigroup.

Hi, everybody, and good afternoon. Thanks. So, I guess my one question would really go back to Mexico. And I'm just trying to get a sense more of what's going on in the short term. I mean, I can't remember the last time we saw 160 basis points contraction in your Mexico/Central American margin, in that EBITDA margin. And I guess when you look at it compared to the first half, right, I mean, it's been a notable step down in that level of profitability.

And I appreciate the top line is decelerating, but I'll still trying to get my head around this very sharp step down in that margin. And I'm thinking -- to what extent can you help us break this down between this seemingly kind of recent spike in the sugar price versus what seems to be incremental pressure at the gross margin level from the currency hedge? And I'm wondering if you could just help us break it down in those two buckets.

I mean, operating deleverage is clearly an issue. And as we think about in the fourth quarter, should we be thinking about a recovery from these current margin levels of 22.5%, or do we kind of stay down in this zone and think about what can happen again to the currency and the sugar? So, just getting a sense of really this short term margin trend, what was going on this quarter, and how you're thinking about next quarter.

And kind of the last bit of this, what hedge -- what dollar hedge price were you at on average and how much coverage were you in Mexico in the third quarter, and where are you in the fourth quarter? Thanks very much.

Good afternoon, Alex. I think in general when you dissect the Mexico results, you have to take into concession the following. It's we have good volume, good pricing, and we were basically affected by an important increase in sweetener prices.

So, to give you an idea, standard sugar in Mexico during the quarter had a 28% increase; refined sugar, as I mentioned during the call, around 18% to 20%. And high fructose in dollar terms was more like 1%, 2%, so it's very stable but in dollars.

And then the raw materials that have a dollar -- that are dollarized so that they're in US dollars, we also had an impact on that. The rest of the variables in Mexico are improving. So, it's basically raw materials and the FX exchange that is impacting this.

Also important to consider that the EBIT figure is positively affected by one-time events that are non-cash that happened last year, mainly had to do with write-offs of some of the plants that were acquired as we continue to transform some of the operations after the acquisitions of some of the Mexican bottlers.

So, last year we had the impact of -- a non-cash impact that is reducing the EBIT of last year. Therefore, the EBIT comparison looks a little bit favorable this time around. But these being non-cash items, it's also -- I mean, in other words, the EBITDA number is a better representation of the performance for the quarter.

And with respect to the FX, during the third quarter we had basically hedges at around -- a little bit below the MXN18 per dollar, around MXN17.85, more or less. And for the fourth quarter, some of the hedges that we have is in the low MXN18. It's like MXN18.15 more or less. And we have hedges for around 60% of our needs for the fourth quarter. That's basically the stats where we are in that front.

Now, I mean, that's clear and I get it that it's the FX and sugar. Just thinking, then, about fourth quarter, would it be safe to assume that you perhaps trend sequentially stable in the margin, or do you feel that there could be some improvement sequentially? I guess that's the last bit.

I think that fourth quarter we have the potential to improve a little bit our margins. We are looking to increase prices in November. So, November, it's kind of the middle of the quarter, and we'll see what the impact is for the end of the year. But certainly it will help -- that price increase will help us to start the year on the right foot with respect to the pricing of our products. Okay?

Okay, fair enough. Thank you.

Thank you, Alex.

Pedro Leduc, J.P. Morgan.

Hi. Thank you very much for the question. And it would be more related to the US territories, if you can give us an update on how those ventures are looking.

And on a broader perspective, KO obviously has been seeing volumes suffering across the region. How are the interactions been happening with you? Is there any strategic change that has been tailored? And can you elaborate a bit on how we should see marketing expenditures evolve in light of these lower volumes? Thank you.

Good afternoon, Pedro. In the US front, there are no news probably. Let me give a little bit of the recent, I guess, developments.

It's we are looking during this fourth quarter to have conversations with the Coca-Cola Company to see if we agree to the basic principles of a potential acquisition in the US. As I have explained in the past, the first part of this process was for us to understand the way the US system works and the governance within the US system.

We are pretty finished with that process. So, assuming that we continue and the calendar of the Coca-Cola Company has started, we will -- basically means that we might be reaching a nonbinding agreement with them with respect to the next step, which is starting due diligence. We probably finish this closer to November or maybe December. At that time, we'll probably have to announce something to the market saying we have reached this agreement or we didn't reach an agreement.

At the end of the day, the Coca-Cola Company is looking to close -- to potentially close a transaction towards the third quarter of next year. Assuming that we will have full documentation and due diligence, that's basically six to eight months on that process.

I think that with respect to the region, I assume that you're referring more to Latin America. And we are -- volume pressures in Latin America certainly there. I think that very important, and I have stressed this in the last two or three calls, the Coca-Cola Company and ourselves are now pretty much in tune and looking revenues and profits, and not so much the volume figure per se.

We both agree in improving coverage of our products, improving the performance of our coolers and continuing to invest in coolers. We both agree in providing affordability to the consumer through returnability. And we need to look also at opportunities to capture a richer mix of products with single-serve presentations and to try to target certain consumption occasions.

So, I feel confident that we are in agreement. There is always a lot of back and forth in trying to agree to these strategies, but we feel that we are pretty much on the same page with the Coca-Cola Company in that respect.

Great. Thank you very much.

Luis Miranda, Santander.

Hi. Good afternoon, Hector. My question is on Mexico pricing. When we take a look at the strong pricing that you have been seeing, especially in the third quarter, can you tell us some color on how much is mix, how much is a direct price increase, and how do you see it going forward in the short term? Thank you.

Good afternoon, Luis. I didn't quite follow your second question, but let me answer the first question.

It's in Mexico we saw increases around 5% in prices. Around 3% to 3.5% has to do with direct pricing impact, and the rest is basically mix, improving the mix of products.

We have been -- as, for example, in flavors, almost 100% of the growth that you are seeing has to do with the Naranja&Nada and Limon&Nada, which have a very important component of single-serve one-way presentation. We are selling a little bit less water. We are improving in colas.

So, I think that mix is moving in the right direction. And that accounts for basically 2 percentage points of these price increases, as we saw during the quarter.

And I didn't quite follow your second question.

Yes, my second question was if you think that these trends could continue. I mean, I guess that your direct price increases for the midyear should be also in line with inflation and we could expect some improvement in the mix (multiple speakers).

Yes. As we are seeing a new price increase in November, I think that will help a lot in our pricing strategy, especially for next year. As I mentioned, during the fourth quarter it will have an impact on December, which is a good month normally. But we'll start with the right pricing for the beginning of next year. Okay?

Perfect. Thank you, Hector.

Alvaro Garcia, BTG Bank.

Hi, Hector. Thanks for the call. My question is on Colombia. I was wondering if you could just repeat what you had said earlier in the call regarding the potential impacts on the tax reform there. And maybe talk a little bit about the price elasticity in Colombia vis-a-vis Mexico and some of the initiatives you might put into place going forward given the potential impact of this move by the Colombian authorities. Thank you.

Yes, good afternoon, Alvaro. In general, I think that the tax that was proposed to Congress was COP300 per liter, which is basically equivalent to 24%, 25% of the average price that we have there. Our expectation is that, given the per capita we have in Colombia, that we will have a tougher -- or a stronger elasticity as compared to Mexico.

In Mexico -- in Colombia, I guess the consumer is not as used to drinking our products or any sugary drink because they have other substitute products. And our expectation is that the elasticity will be higher than what we experienced in Mexico, no? So, certainly Colombia is something that we need to worry about, okay?

Sure, that's clear. That's clear. And just repeating what you said earlier, the COP300 per liter would be roughly 25% of your average price. And then on top of that, you said that VAT would increase from 16% to 18%, if I heard it correctly.

16% to 19% is the proposal. They say that they will lower corporate taxes. That VAT increase has -- will partially affect us directly because remember that we have the new plant. It's in a free trade zone. That has no value-added tax there.

So, vis-a-vis the rest of the operation, we will have that benefit of this extra price, if you will, because -- or we could lower the price and still be with the same economics because we will not be affected by this VAT. But our preoccupation is that the consumer will be hurt in their pockets with this increase in VAT, no? Okay?

Of course. No, that's very clear. Thank you.

Carlos Laboy, HSBC.

Good afternoon, everyone. Hector, with consumer down trading across so many categories in Brazil, can you give us some additional insight into your market share gains?

Yes, Carlos. Good afternoon. Every category in Brazil has improved in market share, and let me give you some numbers. In colas, remember that one of the strongest market shares that we have of the 10 countries that we operate, we are slightly improving the market share, around 10 basis points. In teas, it's a super performance, growing closer to 14 percentage points improvement in market share versus last year.

So, when you take all -- when you take everything into account, all CSDs is basically increasing around 1 percentage point, a little bit less than that. That's according to Nielsen and the information we share with the Coca-Cola Company. The only category that has a negative trend is Powerade and the so-called isotonics, the sports drinks. We are losing a couple of percentage points in that market.

So, I think that with the returnable presentations that we have introduced in Brazil, the price points that we have in some of the single-serve presentations, like remember this strategy for the BRL1, BRL2, and BRL3, the much better execution we have in the marketplace has helped us to -- even though the consumer is not necessarily there, for us to continue growing market share there in that market.

That's great. Thank you.

Thank you, Carlos.

Antonio Gonzalez, Credit Suisse.

Hi. Good afternoon, Hector. Thanks for taking my question. Just a quick one on Venezuela. We didn't hear a lot of comments yet on the volume deterioration we've seen so far this year. And I just wanted to ask if you can give us your, I guess, guesstimate of what's going to happen in the next several quarters after these very large declining volumes and whether obviously a 30%, 40% volume contraction leads you to reassess whether your installed capacity in the country is the correct one or you are reassessing your scale, I guess.

And then just secondly, if I may very rapidly, you made these comments about your expected elasticity for Colombia in a scenario of a potential tax increase being higher than Mexico. Do you think the same thing would apply to the Philippines? And any preliminary comments that you can make on the I guess informal proposals that have been made at this stage with respect to increasing taxes in the Philippines as well? Thank you.

Good afternoon, Antonio. Let me start with Venezuela. Venezuela was a country that was selling close to 240, 250 million unit cases. In our budget, we anticipated a strong reduction, basically to 170 million unit cases.

I guess that the -- and several factors are affecting this. One is the availability of sugar. There is no sugar available in Venezuela, and that has created a very interesting trend. We are moving -- basically somewhere around 70% of our volume is non-caloric Coca-Cola. It's not called Coca-Cola Zero. It's just the same label but says Coca-Cola without calories.

Our analysis and some of the tests that we're doing in the market, around one-third of the consumers is just not drinking that product because it doesn't have sugar. One-third is drinking that because that's what is available. And another third basically likes this product and says I'm okay with this.

The difficult part is that, starting November or December, we will have the so-called [de zafra], or the sugar mills will start producing sugar again in Venezuela and there will be some availability of sugar. So, one of the things that we need to protect is how do you switch basically the volumes now to sugar? And then, once the zafra is out, we will be without sugar again. And that's creating this problem with the consumer.

We believe that part of the problem that we are facing, in addition to the scarcity of sugar, is that we have increased prices so much to compensate for internal costs and because of inflation that the consumer is really now lacking the money in their pockets to buy these products.

When you compare the same product a year ago versus now, you are speaking about an 800% increase. So, consumers are not buying the category even if it's available in the supermarkets or the stores and even though you have scarcity of many products in Venezuela.

The good news in Venezuela is that for the first time, and this started basically in October, we are relying 100% with local currency for our raw materials. We have negotiated extensively with suppliers. Some of them have installed capacity in Venezuela. Some of them are using brokers to sell locally in local currency some of the raw materials.

So, Venezuela has -- we have been able to transform Venezuela into an operation that is self-sufficient in bolivars. And we don't require any dollar injection from the outside, which is very good. The central bank is not providing dollars also for raw materials, so that's also a situation.

But I think that this is very positive for the development. We believe that if we stay between 10 million to 12 million unit cases per month -- that will basically be a volume of around 120 million, 140 million unit cases -- we will have a break-even situation that will give us the staying power to continue looking at the optionality value of Venezuela going toward.

So, that's the story for Venezuela. It's a very tough environment; a great job from our operators there and a great job from the procurement guys trying to negotiate this price.

In the Philippines, there is a proposal by one individual in the government to try to pass a PHP10 per liter. That will be equivalent to around 30% increment in prices. It's not part of the government proposal. And they say that they are concerned with regressive taxes, and they understand that this is a kind of a regressive tax.

I think that if we were to have a tax in the Philippines, I think that the elasticity will be also higher than Mexico, no question about it. I think that the consumption per capitas are good, are very low. The good news of these taxes is that it affects the whole industry and then there is no market share movement. Everyone will have to pass that to the consumer. But our perception is that the potential elasticity for -- in case of a tax in the Philippines will be higher than Mexico.

I think that the government is very cognizant that the industry is contributing with a lot of taxes and employment right now for the country. And they are -- our feeling is that they are pretty much concerned with that, but you never know. Okay?

Thank you so much. This is very helpful.

Thank you.

And sir, with no further questions in the queue, I'll turn the call back to you for any additional or closing remarks.

Thank you for your interest in Coca-Cola FEMSA.

And as you saw in the press release, Roland is abandoning the ship and moving to strategic planning. Well, he's not abandoning us, he's moving to strategic planning in the corporate area. And Maria Dyla Castro will be joining us, and Roland and Maria will work together over a period of time just to get to know all of you personally and pass the baton to the next step.

Thank you.

Thank you. And that does conclude today's conference. Thank you for your participation. You may now disconnect.