Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q1 2013 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Coca-Cola FEMSA's First Quarter 2013 Earnings Conference Call. As a reminder, this conference is being recorded. [Operator Instructions] 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 may materially impact the company's actual performance. At this time, I would now turn the conference over to Mr. Héctor Treviño, Coca-Cola FEMSA's Chief Financial Officer. Please go ahead, Mr. Treviño. Héctor Treviño Gutiérrez: Good morning, everyone. Thank you for joining us today. First, I'd like to apologize since we had some technical difficulties with the conference system, but we are here to start. Sorry for the delay. In the case of tough weather conditions, fewer selling days across most of our markets and the highest currency volatility we have seen in many quarters resulting from the depreciation of the Venezuelan bolivar from 4.30 to 6.30 and the depreciation of currencies in Argentina by 17% and Brazil by 11% combined with the stronger Mexican peso, appreciating 4%, our operators delivered currency-neutral double-digit top and bottom line growth. During the first quarter of 2013, we continue to integrate the results of Grupo FOQUE in our Mexican operations, and Grupos Tampico and Grupo CIMSA's results are now fully comparable. Their performance, coupled with the synergies that we have achieved from their integration, contribute positively to our Mexico and Central America division and our consolidated results. Our company's results reflected the balanced geographic footprint of our operations across Latin America, our operators' skillful market execution and their ability to identify and capture both pricing and volume opportunities through different commercial initiatives, supported by the strength of our multi-category portfolio and innovation in still beverages. In the first quarter, our reported consolidated revenues were close to MXN 34 billion, flat when compared to the previous year despite negative translation effects resulting from the devaluation of the Venezuelan bolivar, the Argentine peso and the Brazilian real combined with the stronger Mexican peso. On a currency-neutral basis and excluding the noncomparable effect of Grupo FOQUE's results in Mexico, our total revenues grew 11%, driven by volume growth in Venezuela, Colombia and Central America and growth in the average price per unit case in almost every operation. Our consolidated sales volume grew 4% despite bad weather conditions in Mexico, Brazil, Argentina, Costa Rica and Guatemala and fewer selling days in the quarter. Our organic volumes were slightly up, driven by growth in Venezuela, Colombia and Central America, which offset declines in Brazil and Argentina. In the first quarter, lower PET and fewer [ph] Costs in most of our territories, combined with the appreciation of the Mexican peso, more than offset the depreciation of the Venezuelan bolivar, the Brazilian real and the Argentine peso as applied to our U.S. dollar-denominated raw material costs. Consequently, our consolidated gross margin was up 100 basis points, reaching 46.3%. During the quarter, our operating expenses continued to register higher labor costs in Venezuela, increased freight cost in Argentina and higher labor and freight cost in Brazil, mainly due to changes to the transportation law, which went into effect during the second half of 2012, and higher marketing expenses in our South American division. In addition, our other operating expenses net line registered the effect of the devaluation of the Venezuelan bolivar on our U.S. dollar-denominated accounts payable in that country, as well as certain planned restructuring charges in Grupo Tampico and Grupo CIMSA in Mexico and certain operations in South America. Our consolidated reported EBITDA grew 11%, expanding 20 basis points as compared to the previous year, while our organic currency-neutral EBITDA grew close to 13%. During the quarter, we recorded an implied tax rate of 33.7%. For the year, the normalized tax rate should be in the range of 32%. For the quarter, our consolidated net controlling interest income reached MXN 2.4 billion. Excluding the effect of the devaluation of our local currencies in combination with the stronger Mexican peso, our net income would have reached MXN 2.7 billion, representing a 1% increase as compared to the previous year. Now I will discuss the performance of each division. In the first quarter, as reported, our volume grew 6% in Mexico, including the noncomparable effect of 25 million unit cases from Grupo FOQUE. Organically, our volume in Mexico remained flat, tightening 3% of that organic volume growth in the first quarter of 2012 and despite cold weather in March and fewer selling days in this quarter. Organically, our still beverage category grew 4%. This growth was supported by Valle Frut oranges, the continued success of Fuze Tea, which grew 12% over the previous brand, and the continuous strong performance of Powerade, which grew close to 30% and continue to gain market share in Portugal, now accounting for well over 1/3 of this important beverage category in our territories. In the sparkling beverages, Sidral Mundet grew 28%, building on its launch in our new franchise territory and the recent introduction of a 2.5-liter returnable bottle that offers our consumers an affordable way to enjoy this brand. This launch was also coupled with our strategy of strengthening our portfolio of returnable packages. In brand Coca-Cola, our 500-milliliter returnable glass presentation grew close to 45% while our multi-serve returnable options continue to grow. Our water portfolio, excluding bulk water, grew 5%, supported by packaging innovation in our Ciel mineral water brand. This increase compensated for a 5% volume decline in our bottled water portfolio, which is showing encouraging results in terms of operational efficiency. In Central America, our volume grew 2%, successfully building on 9% growth in the first quarter of last year despite fewer selling days in this quarter and bad weather conditions in Costa Rica and Guatemala. This increase was driven mainly by 11% growth of our still beverage category, supported by the inclusion of Del Prado, one of the Fuze brands inherited through the acquisition of Estrella Azul in our portfolio; 80% growth of our del Valle Fresh oranges; and the continued success of Fuze Tea, which grew more than 60% over the previous brand. Our water portfolio grew 10%, and our sparkling beverage category remained flat. Our division's reported total revenues grew 9% to MXN 16 million. Organically, our division's total revenues grew 3%. On the same basis, our average price per unit case increased 4% during the quarter. Selective price increases implemented in our territories over the past several months more than offset a negative translation effect resulting from a stronger Mexican peso versus our Central American currencies. Lower sugar prices, along with the appreciation of the Mexican peso in the first quarter, resulted in our reported gross margin expansion of 180 basis points, reaching 48.7%. Organically, our operating expenses increased as a result of certain restructuring charges booked in the other operating expenses net line related to the integration of Grupo Tampico and Grupo CIMSA, which results are now fully comparable. Nevertheless, our reported operating margin expanded 140 basis points. Our division's reported EBITDA increased 22% in the quarter, expanding 220 basis points, while our organic currency-neutral EBITDA grew 19%. Our operators in the Mexico and Central America division delivered solid results for the quarter. We continued to execute our integration plan for the new franchises in Mexico. The synergies from these mergers would increasingly contribute to our profitability while we identify incremental efficiencies in our combined territories. We are confident that our commercial strategies will continue to give positive results in an encouraging economic environment in Mexico as we continue to see a benign sweetener price scenario and a stable PET price environment for the rest of the year. Now let's talk about our South American division. Our South American division's total sales volume grew 1%, reaching 294 million unit cases in the first quarter. This increase was driven by volume growth in Venezuela and Colombia, offsetting a 4% decline in Brazil and a 2% decrease in Argentina. Our Venezuelan franchise delivered 11% volume growth in the quarter despite fewer selling days in this quarter. Brand Coca-Cola grew 20% on the scoring consumer's preference for this brand while increasing market share. This increase compensated for a decline in flavored sparkling beverages. Innovation remained an important driver of growth for still beverages. Our del Valle Fresh oranges grew 70%, driving this category growth. Our water category grew 48% in the quarter. We are certain that our reinforced cooler coverage and our local operators' skillful marketplace execution will continue to support this operation's performance in the future. In Columbia, our volume was up 6% in the first quarter. Sparkling beverages grew 6%, supported by a 15% increase in flavored sparkling beverages and 3% growth in brand Coca-Cola. This performance of our flavored sparkling beverage portfolio resulted from the continuous success of Fanta and the strong performance of Quatro, which grew 32% during the quarter. Our focus on reinforcing single-serve consumption and increasing affordable returnable presentations to our 1.25 liter returnable glass package, which grew 19% in the quarter, continued to drive incremental volume growth of brand Coca-Cola. Our Brisa water brand supported 8% growth in this category, including bulk water. Together, the del Valle Fresh oranges, which grew 10%, and the continuous success of Fuze Tea, which grew 20% over the previous brand, drove 10% growth in the still beverage category. In Brazil, we faced bad weather conditions in February and March along with fewer selling days in the quarter. Consequently, our volume declined 4% compared with last year. Our sparkling beverage category decreased 4%, while our bottled water category, including bulk water, decreased 3%. Our still beverage category grew 3% driven by the Suco del Valle line of business and the Matte Leao tea brand. In Argentina, our volume declined 2% compared with 11% volume growth in the first quarter of last year. We experienced cold weather conditions, especially in March, and fewer selling days during the quarter. We continue to roll out the Bon Aqua water brand in the quarter with very good results, selling more than 1.3 million unit cases and gaining market share in this category. For the quarter, our South American division's reported total revenues decreased 6% to MXN 17.9 billion. On a currency-neutral basis, excluding the negative translation effect of the depreciation of our division's local currencies combined with a stronger Mexican peso, total revenues grew 16%, mainly supported by our revenue management initiatives. Lower sugar and PET cost across the division offset the earlier devaluation of the Venezuelan bolivar, the Brazilian real and the Argentine peso as applied our U.S. dollar-denominated raw material costs. This resulted in a gross margin expansion of 10 basis points, reaching 44.2%. Operating expenses in the division were affected by higher labor cost in Venezuela, higher freight cost in Argentina and higher labor and freight cost in Brazil and increased marketing expenses across the division to support our marketplace execution, reinforce our affordable, returnable alternatives for consumers and prepare our Brazilian operation for upcoming sporting events this year such as Copa Internacionales [ph] as well as the World Cup in 2014. In addition, our other operating expenses net line registered the effect of the devaluation of the Venezuelan bolivar on our U.S. dollar-denominated account payables and certain restructuring charges according to division. Our division's reported EBITDA decreased 16%, while our currency-neutral EBITDA grew 9%. To date, in our value-driven commercial model, we will continue to refine our clients' picture of success to capture industry opportunities. In Brazil, we will continue to develop our channel segmentation initiatives and focus on increasing the attractiveness of our single-serve portfolio while reinforcing our multi-serve returnable client bottles. In Colombia, we are on track with our strategy to reinforce the brand equity of our products, delivering affordable options for our consumers while focusing on marketplace execution. In Venezuela, we constantly adapt our operation to meet consumer demand for our growth, capitalizing on new commercial model to accomplish these goals. In Argentina, we continue to foster returnability and focus on the profitability of our business. With regard to our Philippine operations. As of February, we are incorporating its performance via the equity method on an estimated basis as we continue to work on the acquisition balance sheet. In line with what we previously shared, these results do not have a meaningful impact on our consolidated results. Since we began operating this franchise, revenues are up mid-single digits versus the comparable period of last year. We have been working together with our partner, The Coca-Cola Company, and a talented local team of professionals on the pillars of the strategic framework for the Philippines: portfolio, route to market [ph] and supply chain. In the portfolio, we have identified SKUs that are subject to deleting and have started to rationalize some returnable glass presentations and one-way PET packages. These rationalizations will free up capacity at our plants. Additionally, we have launched Coca-Cola in a 750-millimeter returnable glass presentation called kasalo, which means sharing in Tagalog, at a competitive price point than we would not previously covered. In the route to market [ph] , we are testing our segmentation and service model to gain greater insight into this traditional trade channel before rolling out a larger effort. And in the supply chain front, as part of our manufacturing master plan, we have been working to ensure high levels of service and quality in our plants. This will contribute to the success of the commercial initiatives we are -- deploying. During March, our shareholders approved the payment of a dividend in the amount of MXN 2.90 per share to be paid in 2 equal installments as of May and December of this year. This increased dividend is consistent with our commitment to capitalize on our financial flexibility while continuing to invest in the future of our company and increasing the cash we return to our shareholders. Thank you as always for your continued trust and support. And now, I would like to open the floor for any questions that you may have.

[Operator Instructions] The first question comes from Lauren Torres.

Actually, I have 2 questions, one on volume and one on margin. Just somewhat curious to hear more about the sparkling beverage category. You reported flat, I guess that's comparable volumes for both regions. And I know you spoke about bad weather and the less selling days, I guess, in the quarter. Just curious to get your impression, other than those items, if that category is showing a slowdown, particularly in Mexico? And then secondly, on the margin side of the business, I think you were guiding for this year to hit basically flat margins for the total company, but seeing some steep weakness in South America, I was just curious if you could talk about the ability to actually deliver that for the full year, and how do you plan to do that? Héctor Treviño Gutiérrez: Let me start first with the volume question. I think that in general, we have seen some weaknesses on the volume maybe as a result of what I mentioned, the weather, but especially the fewer selling days. That has to do with the Easter holiday that last year happened in April and this year, it was during March. And the fact that last year we have -- it was a leap year and we had 1 extra working day. When you start looking at what we use in the industry when you compared the average daily sales, which is a measure that we track internally, the numbers look fine, obviously with the still beverages growing faster and water growing faster than CSDs. But we still see healthy growth in our CSDs volumes. Probably the only exception to this is Brazil, where obviously, we were impacted by the fewer days and the weather also, but we are seeing some trends that will point towards certain, I guess, wariness in terms of what the future looks like for us in that sense. I think that the consumer in Brazil is at this moment with larger debt because of some of the activities that we're financing in the past, but I still feel confident that for the year end, we'll meet our target. It's a challenging -- it's a challenge, because obviously, Brazil is, as I mentioned, is substantially lowest in budget, but I think that we are catching up in Brazil. One of the trends that strikes me in Brazil is that in addition to seeing this decline in volume, we are seeing a shift from single-serve presentation to multi-serves, which also doesn't help in the profitability of the business, and also a trends from traditional trades moving volumes towards modern trade. That also does not necessary helped us in our profitability. I think that John Santa María's team are focusing a lot on regaining preference for single-serve and taking care of the traditional trade and helping in that sense, so we are focusing in having market price points with single-serve that will again recapture that growing single-serves. In general, I think that we have very good market share performance, with some minor basis points being lost in CSDs in markets where we have a tremendous advantage in market share. I mean, we've got a very large number. So it's not to worry on that sense. We are seeing a very good market share improvements, as I mentioned, in isotonics. I have mentioned this in the past. It is a very positive trend, and we are now above 30%, 35% of, depending on the country and the region, on isotonics with Powerade with a brand that's basically in a category that we were not present a few years ago. So volume wise, I think, Lauren, that when you look at all these strengths as positive in the sense that we will need to get to our estimate for the year, again, my only question mark in that is in Brazil, given the volume base that we have during this quarter. With respect to margins, I think that what I want to highlight is that when you isolate the effect of the currency movements, margins are behaving well because we have a good environment of raw materials. We have had important efforts in every one of the countries in terms of operating expenses. I think that it's important to highlight that, as I mentioned, especially in Brazil, as I mentioned in the past, that we were again looking at the basics of the business, and I've seen the efforts that the team has put there, and they are increasing basically in every measure in terms of productivity per line; efficiency in our sale system and deeper sale systems; the fill rate with the modern freight has improved dramatically; stock-outs, it's reduced by 3x of what we had versus last year. It's, I mean, it's not that last year was totally out of proportion. It was in a good number but it was out of the average that we use in Mexico. So when you look at some of the basics in Brazil, I see improvements in all of these basic indicators that are good for the business in the medium to long term. Brazil, in terms of the profitability, was additionally hit with the so-called [indiscernible], which is the transportation regulation in Brazil that has implied for us a higher workforce and a higher number of trucks because of the restrictions in times and traffic zones, et cetera. And also strong changes in tax law in Brazil have implied that some of our raw materials are a little bit more expensive. So Brazil was impacted mainly because of that, and the team is looking at ways of recuperating part of that profitability. So all in all, a very long answer trying to say that volumes for CSDs are still growing. When you take into consideration this number of selling days, of the fewer selling days that we have in the first quarter, I think that the numbers look fine. As I mentioned, growing at a slower pace than water and still beverages, but that's normal. And margins, I think that we are basically in every country doing very well in the expectation for margin. The only, again, question mark is in Brazil because of the sharp fall in volume and this -- the transportation law and the tax changes in Brazil that impacted the profitability during the quarter. So I think that in general, I am still positive that we'll get to the number that we are estimating in our budget for the year.

Okay. That's really helpful. Just one quick follow-up on Brazil. You mentioned the weaker consumer, but are there newer increased competitive pressures that are weighing on your volume, or that's not -- that wasn't a particularly new impact to the first quarter? Héctor Treviño Gutiérrez: I think that it's worth mentioning and then -- another some of your companies, especially our competitors, have not reported, but there is additional pressure, and let me explain why. There is now, in São Paulo and some of the large cities, a very tough law with respect to drinking and driving that has made an important dent on the consumption of beverages, especially for beers. And obviously, for us, on-premise volumes have also decreased because fewer people are attending bars and that kind of beverage consumption at night because -- it is called the zero tolerance alcohol consumption, and it's really -- what I understand is that even with drinking 1 beer, if you're driving, you're in trouble, as opposed to other countries where there's a probably a more flexible, if I may use that word, level of alcohol in the blood levels. That has put a lot of pressure on the beer companies. Our beer volumes are -- Heineken volumes that we saw were also affected by that. And that has created a little bit more pressure on the CSD front, because the competitors are also looking to recuperate part operate of that, I guess, volume being lost in beer. So we are seeing a little more competitive pressure there, but I don't think that it's something to worry about at this point.

The next question in the queue comes from Antonio Gonzalez. Antonio Gonzalez - Crédit Suisse AG, Research Division: I wanted to ask couple of questions as well. First, are there any preliminary comments that you can make on the talks that appear to be now very frequent in Mexico about the possibility of excise taxes? I guess this is a sensitive subject, so I understand if there's limited information that you can share, but I wanted to ask specifically whether you think the industry's participating as they always have, both Coke and Pepsi bottlers, with authorities or whether you maybe can comment on if you had a sense that the industry's not being so active maybe as we saw in some other reforms that were recently approved, the telecom reform in Mexico, for instance, in which industry participants were very explicitly mentioning that they were not part of the negotiations. So I just wanted to have a sense on whether you can make some comments on that, Hector? And then I'll have a follow-up question, but I'll make it later. Héctor Treviño Gutiérrez: There is an important point here with respect to all these issues about obesity and et cetera. I think that we have been doing very important efforts to better communicate those issues to the consumer, and obviously, to Congress in Mexico, which is the area you're referring specifically. There were a lot of comments during the past -- at the end of last year that's when they passed the new laws for -- new fiscal laws for 2013. And at the end of the day, the decision was that, that there was no on excise tax on soft drinks. So our understanding so far is that next time we'll confront that is next September, when they start again to review the taxes and the fiscal budget for 2014. So in theory, Antonio, we should not have any surprises with respect to excise taxes from here to September. But let me tell you, importantly, we have been having, obviously, important conversations together with all the Bottler's Association, including Pepsi, as you mentioned. I think that The Coca-Cola Company, together with the bottlers, are also -- we are also helping a lot in that front. When you visit Mexico, you will see -- and I think this is more global. It's not only Mexico. You will see a lot of new advertisements on brand Coca-Cola that are really giving information to the consumer about the caloric content of our products. We are presenting, very importantly, that a can of Coca-Cola has 149 calories. And there's very important advertisement campaign communicating that because with -- before this advertisement -- before this campaign, excuse me, we did some testing, and the consumer does not necessarily have the correct information. So a lot of the efforts are presented towards communication so that the people understand exactly the calories that they are taking with our products. Communicating that, more than 30% of our brands have fewer caloric content and more than 40% of our SKUs have low caloric content in Mexico. So there's an option for the consumer with a very ample portfolio. We are communicating a second element, which is through modern physical activity, which is also -- you'll see a lot in the campaign. And the third element is prevention and, I guess, food and nutritional education. So a lot of the campaign is focused on that, and I think that The Coca-Cola Company has done a very good job in organizing internally and dedicating a team of professionals to conduct those campaigns on a global basis, but I'm speaking to you more about what we are doing in Mexico. So the short answer for this, Antonio, is we are not expecting any activity on the excise tax front from here to September. In September, there will be additional debates, but with all this campaign that we have in terms of information and having the right, I guess, communication with authorities and the consumer, we think that we have good chances for not to have a discriminatory tax on soft drinks, because at the end of the day, there are many different products that have sugar in their formulas, including bread and chips and snacks or whatever. So that's a lot of our focus on this campaign. Antonio Gonzalez - Crédit Suisse AG, Research Division: If I may just very quickly, can you -- do you guys operate -- I guess you mentioned already that in certain markets in which you do have very large market share for sparkling beverages, you saw some small market share losses. I was just wondering if you could refer to Mexico in particular? And whether obviously, with these new competitors coming to market recently, you did mention some comments last quarter about seeing some more aggressive activity from competition. Is there any chance you can mention, Hector, whether you're seeing your efforts from the Pepsi stem more directed towards the mom-and-pops or more of a generalized tougher competitive environment, or would you make -- or would you say that at this point, it's still somewhat constrained to key accounts and some very visible accounts you've mentioned in the last few quarters? [Technical Difficulty] I'll just repeat my question in case it didn't go through. Hector, I was just wondering whether you could give us an update on the competitive environment and, yes, did you get the question, or would you like me to... Héctor Treviño Gutiérrez: Sorry, I was cut out from the call. You were saying about the competitor being a little bit more aggressive, and you wanted to -- I understand that you wanted to speak a little about, also speak about Mexico. Antonio Gonzalez - Crédit Suisse AG, Research Division: Yes, exactly, just if you have some update that you can share. I guess, over the last few quarters you mentioned that you saw competitors a little bit more focusing on really visible accounts. And I was wondering if you could mention if maybe you're seeing more of a generalized competitive environment escalating in Mexico, or do you think it's still somewhat constrained to these very visible accounts? Héctor Treviño Gutiérrez: So far, Antonio, we have seen, basically, activity in the -- what we call "key accounts", like the amusement park and some of the cinemas. Pepsi increased a little bit of market share in colas, but with numbers that are still below 10%. So it's very little improvement on that. I think that the positive news here is that they have been a little less aggressive on the pricing front. We still have very important price gaps. If you go to a supermarket, you will find our cans being priced more than double of a can of Pepsi-Cola, which is a very high price gap for a single-serve presentation. In the multi-serve, they have been a little less aggressive. But on the other hand, what I would like to point out is that in isotonics, the large number that I had for 2013, we are increasing between 7 and 8 percentage points our market share, basically reaching to 35%, as I mentioned in the conference, with Powerade, which is, again, as I expressed in the past, a very important advancement of our branding there. So I think that in general, Antonio, I would say that there's no specific change that I can report to you versus what we disclosed a couple of months ago when we had the last conference call.

The next question in the queue comes from Lore Serra.

I wanted to just ask a little bit about Venezuela and then a little bit on Brazil. In Venezuela, could you give us a sense of your ability to get raw materials at the official exchange rate and kind of how you see that playing out over the next 6 to 12 months? Do you see any kind of risk to being able to maintain your margins in that country? And then I guess in Brazil, and maybe this is a question more generalized, but you've taken a lot of pricing in South America, and I guess with some systemic inflationary pressures, you might need some more pricing. And I'm just wondering, it sounds like when you're talking about Brazil, and I'm not sure if it's the consumer or the competitive environment, but you're sort of suggesting that the pricing environment isn't as good as it's been. So I wonder if you could sort of talk to those 2 points, please. Héctor Treviño Gutiérrez: Let me start with Venezuela. First of all, we have in place what is called a certificate of nonlocal production in Venezuela so that we can have access to the official exchange rate, which is now 6.3%. And so far for this quarter, around 98% of our applications for this have been accepted, and the dollars have been supplied at the official -- at the 6.3% exchange rate. So in that front, we feel very confident because we have all of our paperwork in order to get the certificate and to continue going in that direction. I think that -- and that had been the case, basically, in Venezuela for most of the 2 or 3 last years. In general, I don't recall a specific case where we are being denied a specific raw material authorization. Sometimes we get delayed with the authorization over the dollars, and then we have to work with the suppliers to work on longer paying terms, but given the circumstance in Venezuela, I think that we have a very good dialogue with our suppliers to work on that front. Right now, what we are facing, and it is probably the more challenging issue in Venezuela, is that the inventory levels for some of the raw materials are very low. In some cases when there's shortages of sugar, for example, we have been -- with very low inventories, but so far, we have not stopped production because of this issue. Our management there has to learn to work under this difficult environment, but so far, so good. I don't think that will have any impact on the margins because of that specific issue going forward in Venezuela, I mean, in terms of not having the availability of dollars for raw materials. In Brazil, with respect to prices, you're right. We have inflation at a higher level, probably, than what was anticipated by some of the government officials and the economists, and in general, we still feel confident that we will be able to increase pricing with inflation, and that's what we have been trying to do in Brazil. I think that the issue of our mix of product moving from single-serve to multi-serve is creating some pressure on our total pricing volumes, so when you look at the average price per unit case, we are having some pressure because of that. But in general, the prices that we have for every SKU have been increasing with inflation to the consumer. Our job, as I mentioned previously, is to find strategies to reverse that trend so that we'll continue to increase single-serve presentations and, again, to foster traditional trader support to the key accounts. That, as I mentioned, would be done through trying to find market prices for single-serve presentations, a package selling at BRL 1 or BRL 2 or BRL 3, and see -- and we will share how we work with that in the future once we have some strategies in place. [Technical Difficulty] Héctor Treviño Gutiérrez: Operator, is there any additional question? [Technical Difficulty]

Ladies and gentlemen, I do apologize for the lost connection. Please stay connected to the call, and the speaker will join shortly. [Technical Difficulty] Héctor Treviño Gutiérrez: Yes, I know that Alan was going to do a -- make a question, but I don't -- I didn't listen anything. I don't know if you're there, Alan, if you... Alan Alanis - JP Morgan Chase & Co, Research Division: Yes, I didn't -- Hector, I couldn't listen, but I was given the next spot. Sorry about that. Let me ask you a question regarding Mexico. I mean, that -- what you've said about Brazil is very useful. But going back to Mexico, a couple of questions there, I mean, you're seeing -- you're sort of like declining carbonated soft drinks in the first quarter, correct, Hector? What do you see as -- and you explains the reason for that. What do you see as outlook for the remaining of the year in the -- and if volumes remain weak, would you be -- what you're thinking regarding taking further pricing over the 3%, 4% that you've taken year-over-year in Mexico. That would be my first question. And my second question has to do with just -- if you could remind us, Hector, how do we reconcile the numbers that The Coca-Cola Company reports? I think they said around 3% volumes up in LatAm and pretty, I guess, much stronger volumes in Mexico and in Brazil than the ones that you and Andina have reported so far. So if you could remind us how to reconcile that, that would be useful, please. Héctor Treviño Gutiérrez: Let me start with Mexico, and I think that in general, I think that the trends that we're seeing in Mexico are very positive. I think that we have -- I mean, speaking about the business, and I'll go into volume numbers in a second. What we are seeing in Mexico is a very good margin expansion. Remember that last year, we had the impact of raw materials, important impacts of -- we are -- we have a decline in the profitability numbers of Mexico last year during the first and second quarters. We are reversing -- more than reversing that. We are going to margins that are higher to the numbers that we had in 2011. So that -- I think that's very positive news and the margin expansion you're seeing there is important. Soft drinks in Mexico, we have important inroads, such as for example, as I was mentioning, with the gram index [ph] growing importantly. Brand Coca-Cola is basically flat, which you remember, we had many quarters saying that brand Coca-Cola was growing and continued to grow even though the -- all the noise about brand Coca-Cola and if we were able to or not -- if we were able or not to increase volumes in brand Coca-Cola. We continue to reinforce returnability. Flavors with some brands are performing better than others. So I would not worry a lot about the volumes in Mexico and CSDs at this moment. And I think that, again, when you look at the average daily sales that we have, we have positive numbers in that when you take into consideration that last year, we had 29 days in February, and this day, we have a negative -- 1 day less because of the Easter week. I think that, that will, that basically volumes would be growing in the low single-digit box. When you look at April trends, it's -- we are reversing all of that effect because of now is the reverse. In April we have less -- 1 less day last year than now we are catching up, and the total number is looking very well for April. So I would not worry about the trend on CSDs at this moment. I think that we will reverse that. For the pricing gaps that we have, certainly, one of the challenges that Ernesto Silva and his team have in Mexico is we have very important price gaps that we need to monitor. Again, reinforcing returnability helped us. For example, I'll give you some numbers. Again, as I mentioned, if you go to a supermarket, you will find a single-serve -- a single can of brand Coca-Cola selling at MXN 7 when Pepsi's selling at less than -- between MXN 3 or MXN 3.5. So it's a tremendous gap on single-serve. In 2.5 liters that Pepsi has is between MXN 15 to MXN 17 pesos. With -- in 3 liters, excuse me, for Pepsi, we have at 2.5 returnable selling at MXN 16, and we feel very comfortable with that. It's a returnable package with a slightly less liquid content on the bottle, but we feel very confident with that price equation. Our 3-liter Coke products are selling for MXN 24, so we have a gap on a comparable basis, but we have a returnable presentation to confront that. So we have done some price movements, especially at the end of last year and the beginning of this year, that, in theory, will call for most of the price -- the pricing that we need to compensate for inflation during this year. So we'll see how we move prices going forward. I mean, in theory, we can stay with the prices that we have right now, and we'll be flat with inflation for the year already. So I think that Mexico has very positive elements to be analyzed for the results of this quarter. The reconciliation with Coca-Cola, I'm not sure. I saw the numbers they reported. I'm not sure about the volumes of the other bottlers. I know that because of the conversation that we had at the Coca-Cola Bottlers Association, that everyone would be reporting similar to us, more or less flattish numbers on an organic basis. I'm not so sure where the numbers for -- I mean, I don't know if there's some inventory building out, et cetera, that might reflect this number for The Coca-Cola Company.

The next question in the queue comes from Luca Cipiccia.

I was hoping to add just a follow-up on Brazil on your earlier comment about a shift away from traditional channel and whether this, on your view, is more related to the dynamics that you commented on already, the changing drinking law, increased competition? Or going forward, do you see that more as a bit of a gradual structural shift? And if so, how does that may affect the investment, the strategies that you were trying to implement in Brazil. I understand that this year, you were going to put some effort in strengthening the traditional channel? And in general, if you could comment more on the outlook for Brazil in -- from a channel perspective, that would be great. Héctor Treviño Gutiérrez: Yes, I think that in general, what we are seeing is that the single-serve presentation -- that we are seeing a transfer from single-serve to multi-serve is also, in a way, fostering this change in the channels because a lot of the single-serve consumption is done in the traditional trade, more as an impulse consumption, on-the-go consumption, as we said, with your work industry or buy a single-serve presentation of Coca-Cola to drink on the street. By schedule, I believe that that's a strength. And I think that the pricing equation that we have on 2.5 liters and 3 liter, 1-way packages that serves a lot in supermarkets and those categories are growing is more related to this trend of the supermarkets gaining in importance. As I mentioned, one of the strategies that John Santa María and his team has presented to us is how to reconnect the consumer to the traditional store with single-serve presentation with market price points, and that's some of the efforts that we'll be doing. I think that right now, this strength has to do most with the pricing architecture of single-serve as with multi-serve rather than a trend that we need to -- than a trend that has to do with the channels.

But is it safe to assume that the greater competition or competitive pressure that you felt in this quarter was more on the traditional channel? And the question would be if you think that is sustainable going forward? Do you think you will have to rebalance, it was just a method of your competitor trying to compensate maybe what they were losing with beer, with soft drinks? How do you see that playing out? Héctor Treviño Gutiérrez: Yes, it's difficult to -- I mean, I know that the on-premise consumption in bars and restaurants, we were down the same as our competitors. I think that the competitive pressure is both in traditional trades and supermarkets to recapture part of the profitability that they might have been lost, losing on beer. Similar to Mexico, we have a few basis points with option on shares that is not -- nothing to worry so far. And I think that similar to Mexico, we are gaining in isotonics and juices and losing a little bit of market shares from very high numbers in CSDs. So I think -- I don't think that the pressure on competition is focused on the traditional trade and that while we are moving more towards the other channels. It's just that it is more the relative pricing of our own approach that is, in my opinion, creating some of these transfers between channels. And as I mentioned, the team is going to be working on reversing those trends with single-serves. Héctor Treviño Gutiérrez: Operator, do we have an additional question on the line?

Alex Robarts.

I had 2 questions, on Colombia and then Philippines, please. Just looking at the Colombian business, it's the highest-margin operation in South America, and you've given us some good indications about how that kind of pricing reset initiative has been going on in the country. And just was curious to see about any updates that you could pass to us. I mean, just thinking about also the tax reform that's come into play this year to the extent that, that's had an impact either way on demand for your products. You've told us that 200 basis points might be the magnitude of margin contraction this year. I'm just wondering if, if you're still feeling comfortable with that kind of guidance and if Postobón Group have kind of been responding to some of your per capita initiatives there. The other question really is just on the Philippines. And I appreciate it, the magnitude here of the equity income is small, but just looking at the press release, I mean this PHP 210,000, I mean, which -- it seems to be related to negative equity income from the Philippines. Is that a safe assumption? Is that roughly the extent of your 51% of the net loss? And just kind of on a CapEx issue there, you've kind of been saying that you feel like the operation over there will make itself whole and internal cash flow will fund CapEx. Might that change, and would you have to, at some point during the year, draw down from comp resources to finance any CapEx? Héctor Treviño Gutiérrez: Let me start with Colombia. Colombia, as we mentioned, we are -- we embarked in this plan to try to foster consumption per capita. That basically implied having presentations that are more affordable to the consumer. In a way, this means reducing prices of our approach in certain presentations. I think that everything is marching to plan. In Colombia, we have 6% volume growth with reduction in prices. I think that in the competitive front, at the beginning we saw, first of all, launching a new product that was catching up importantly and now has been basically not -- has launched on this -- launched there being a new product, and it's called Espir [ph]. And so far, Espir [ph] is, again, basically back to Europe or very little activity. The group is actually losing market share and volumes in Colombia. So I think that in general, our plan is working in a scale to what we said we are expecting: a lower profitable Colombia for this quarter, with the -- excuse me, for this year, with the idea that we will increase per capita consumption in the crunch. It's the first quarter of this plan, and we will continue to monitor if everything is working according to plan or if we need to do some adjustments going forward, but so far, I would say that we are working according to plan, and actually, the resulting margin during this quarter's lower than the one we were anticipating. But we are lowering prices and increasing volumes, and I think that's the main message in Colombia. In the Philippines, the Philippines, just bear in mind that we finalized the transaction at the end of -- we closed the transaction at the end of January, so we have been working there for 2 months. The 3 pillars that I mentioned, which is portfolio, route to market and supply chain, are still there. We have started to execute some of these, as I mentioned. With the portfolio, we launched this 750 milliliter returnable glass bottle because we have a gap in our prices from the PHP 8 to PHP 10, PHP 12 all the way to PHP 25, so we had a gap there on the PHP 17, PHP 18 range that we needed to cover. It's too early to know the impact of that because you can imagine that in 2 months, we are just starting to do that, but the results are encouraging. We are testing the route-to-market initiatives that we have. We have some encouraging results, in the sense that when we do census, which is the basic of all our activities in the marketplace, we are finding a lot of clients that do not carry our product. So it's encouraging that if we find a way to serve these clients, we'll get substantially better coverage of our products. And in the supply chain front, too early to know if we're going to close these 2 centers or plants. Our hypothesis is that we will be able to close those facilities and work with a more efficient supply-chain format. We are already dismissing around 8 SKUs that will certainly help us in the supply chain as we better attain our market. These are SKUs that represent very little volume and is very complicated in terms of -- complicates a lot of our production capacities. We have already identified another 15 SKUs that we probably can drop. We have to work with the inventories that we have to deplete those inventories so that it's not as costly in the future, but all in all, we have between these 5 and 10 -- excuse me, 8 SKUs that we could already reduce and another 15 that we have. All of that is probably around 21% of the SKUs or 20% of the SKUs and represent less than 5% on the volume. I think that those movements will again indicate some of the things that we do very well, which is have our supply chain in order and I think that, that would help us in the future. Again, we have been there for 2 months, it's too early to know the results. The impact that we have on this more -- answering more specific questions but the impact that we have this quarter is a negative PHP 2 million on our participation on Philippines in our P&L. It's basically less than, I don't know, less than $150,000 for this quarter. I think obviously our expectation is that we will work to strengthen and we'll show better numbers in our P&L in the future. In terms of funding, we don't see any problem of having the resources to problem of having the resources to fund the capital needs of this operation. In the future, you can imagine, the idea is to -- for the operation to fund by itself. We will need to contribute resources. Remember that we have 51% of that, and The Coca-Cola Company is in total agreement that if we needed, we would supply resources -- or we would fund capital to this business in that proportion if it's needed, but I don't envision at this moment to have any shortfall of capital for whatever is needed in the Philippines within this year.

The next question in the queue comes from Alex Miguel. Alexandre Miguel - Itaú Corretora de Valores S.A., Research Division: Can you hear me now, Hector? Héctor Treviño Gutiérrez: Yes, sorry. Alexandre Miguel - Itaú Corretora de Valores S.A., Research Division: Okay, now my question is related to the margin at trend in South America. Should we expect that continuing year-over-year decline in EBITDA margins in South America, like, in the sense that -- how do you plan to deal with these pressures from freight, labor and marketing going forward? If you plan to be more aggressive in pricing, because what I understood, some of the issues tried to continue in Brazil, maybe somewhat with the price freeze in Argentina, so if we should -- do expect for the whole year like a margin contraction in South America around these levels? And if so, if you plan to compensate maybe that with Mexico? Héctor Treviño Gutiérrez: Alex, I think that in general, as I explained the Colombian -- what we call the Colombian plan that calls for a slightly lower profitability this year because of this idea to foster consumption per capita. And precisely the points that you're mentioning, the Brazilian situation that we explained in previous questions and the fact that we have not been able to increase prices in Argentina at the pace that we were anticipating. We are, we were suffering a little bit on the margin this quarter. My expectation is similar to what we commented in the previous quarter, to expect a flattish-to-negative -- excuse me, flattish towards small compressing in margin for South America, and I am still with that estimate. I don't see a missing field to change our estimates for the year and that -- these are the issues. It's the Colombian plan that is calling for lower profitability to, in theory, to foster better growth of volumes in the future. The difficulty to pass prices to the consumers in Argentina and all the competitive environment and the softness in volumes that we're seeing and the consumers that is a little bit more in debt in Brazil. Alexandre Miguel - Itaú Corretora de Valores S.A., Research Division: Okay, Héctor. But these -- you reported kind of 170 base points margin contract in South America. How do you think it will kind of narrow to maybe flattish to small contraction in the -- by the full year like you plan? You think you'll be -- you will speed up the pricing, or maybe your expenses will -- won't be as high as they were in the first quarter, or maybe you have further help from raw materials? I just wanted to understand how you planned to get from this minus 170 basis points to a slightly negative by the full year? Héctor Treviño Gutiérrez: Basically, it has to do with pricing activity in Argentina that we expect to target in May. We have already had conversations with the commercial authorities in Argentina and supermarkets that are also playing a role here in Argentina. We are expecting to have, as I mentioned, a lower impact of Colombia as I mentioned. This quarter, we are suffering less than what we were anticipating in Colombia. And in Brazil, we are expecting, again, pricing activity to compensate for some taxes that were -- have impacted the raw materials to everyone in the industry. There is [indiscernible], which also has impacted everyone. And I think that the pricing activity should be there, in combination with efficiencies in operating expenses. I mentioned some indicators earlier in terms of Brazil saying that most of our basic indicators in Brazil are improving all the way from brand preference to supply chain efficiency and service level to our clients. All those fronts are calling for efficiencies in the office. Obviously, these are in order to what we are anticipating for, for the rest of the year with all these challenges that we have to apply those price increases in the marketplace and efficiencies. Alexandre Miguel - Itaú Corretora de Valores S.A., Research Division: [indiscernible] And for Mexico, at the pace of margin increase that we saw in this first quarter, should we expect a similar pace for the rest of the year, or maybe the gain from raw materials would play less of an important role as you're going forward? Héctor Treviño Gutiérrez: I think that in Mexico, you should expect, Alex, a reduction in the expansion in the second part of the year. Remember that last year, the first part of last year, we were heavily impacted by raw materials, and that's why we have a very good expansion, a very important expansion this first quarter. I think that second quarter should be similar, but then there's rest of the year we'll have more comparable raw material pressure on our cost base. So we'll see some expansion, but not as large as what we are seeing during this first quarter. Alexandre Miguel - Itaú Corretora de Valores S.A., Research Division: Okay. And last question, if I may. If you can give us any update regarding the Coca-Cola plan -- Company plans to divest from -- in some U.S. territories and if Coke sees those as opportunities? How would you see that moves? Héctor Treviño Gutiérrez: Yes, we saw what The Coca-Cola Company communicated about some movements in the U.S.A. Those movements represented a very small part of what is now under Coca-Cola refreshments, so I think that if The Coca-Cola Company continues with the plans that they have expressed in the past of re-franchising some of those territories, I think that we'd certainly like to take a look at the those, and I hope that we are invited to look at those territories. Right now, our -- all of our focus is looking at opportunities in Latin America and to work on the Philippines on the plans that we have. But if those opportunities are presented to us, we certainly analyze and take a hard look at the opportunities in the U.S.

At this time, we have no further questions. I would now like to turn the call over to Héctor Trevino. Héctor Treviño Gutiérrez: Okay, thank you, all, for your interest in our company. As always, Jose and his team are able to answer remaining questions. I know this has been a complicated quarter to explain, with all the currency volatility that we experienced, and you maybe have a lot of questions on that front, but we would be glad to answer to all of our capacity any questions that you might have. Thank you.

Thank you. Ladies and gentlemen, this concludes your conference call for today. Thank you for joining us. You may now disconnect your lines. Enjoy the rest of your day.