Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q2 2014 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Coca-Cola FEMSA's Second Quarter 2014 Conference Call. As a reminder, today's 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 can materially impact the company's actual performance. At this time, I will 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, and thank you for joining us today. In the second quarter, our company delivered 14% revenue growth based on our operators' ability to navigate through consumer environments through a balanced combination of volume and price growth, depending on the conditions of each of our markets. Excluding the recently integrated territories, revenues grew 3%. The strength of our returnable packaging portfolio enabled us to continue connecting with cost-conscious consumers across our franchise territories. This is especially true in Mexico, where consumption remains affected by the new tax environment as well as bad weather conditions. As in the first quarter, lower PET and sweetener prices in most of our territories were partially offset by the other depreciation of the currencies in our South America division and Mexico. Consequently, our organic growth margin expanded 80 basis points. Operating expenses in most of our territories decreased as a percentage of revenues despite market pressures, such as higher labor and freight costs, especially across our South America division. In addition to our market net investment, our system's sponsorship of the 2014 FIFA World Cup enabled us to strengthen the brand activity of Coca-Cola while continuing to increase our connection with consumers, which will yield positive results in the future. For the quarter, our organic EBITDA margin expanded 250 basis points, highlighting our operators' ability to deliver increased profitability in challenging conditions. As a reminder, as of the first quarter 2014, we decided to use the SICAD exchange rate in Venezuela to convert these operational results into Mexican pesos. This exchange rate was 10.6 bolivars per U.S. dollar as of the end of June. Now let's discuss each of our operations. In Mexico, we continue to face cost-conscious consumer with lower disposable incomes affected by the new tax environment and price increases across many categories. In addition to the effect of price increases implemented to pass along the excise tax at the beginning of the year, our territories face much lower temperatures and very rainy weather conditions, which affected our organic volume performance. Hence, our Mexico operation's organic volume contracted 7.7% for the quarter. As previously noted, at the end of the first quarter, we implemented an additional price increase that allows our average price per unit case, which is presented net of taxes to grow ahead of inflation. During the quarter, our returnable portfolio continued to prove resilient. Its volumes remained almost flat as compared with last year while gaining 250 basis points to reach 38% of our sparkling beverage mix. Not only within our returnable base, our 500-milliliter returnable glass presentation grew 25%. Our 1.25-liter returnable glass presentation grew 18%, and our recently introduced 3-liter returnable PET presentation grew significantly, playing an important role by serving consumers with lower disposable income in a segmented way. The strong performance of our returnable packaging base continues to underscore the current reality of cost-conscious consumers looking for increased value in every transaction. Organically, while regular sparkling beverage declined 7%, our low-calorie sparkling beverage declined nearly 1%. This modest decline was driven mainly by Sprite Zero and Sidral Mundet Light along with Coca-Cola Zero, which grew 2%. We're affirming its position as an affordable low-calorie value proposition for the consumer. Organically, our noncarbonated beverage category contracted 13%, while our water category declined more than 8%, including jug water, which is highly sensitive to bad weather conditions. To ensure our success, our operators continue to work diligently to impact our marketplace execution and ensure the coverage and availability of our returnable and low-calorie presentations that enable us to intensify our connection with consumers. Sequentially, our market share indicators continued to improve month after month, confirming that our company is on the right path to strengthen our leadership in the Mexican market. On the operational side, during the quarter, we continued to downsize our headcount in Mexico as part of the adjustments necessary to compensate for the negative impact of the excise tax. We remain committed to successfully perfecting the profitability and cash flow generations of our Mexican business. Organically, operating expenses in absolute terms was down almost 2% in the quarter. We will continue to focus on controlling expenses and making selective investments. In our Central American operation, we have implemented an acceleration plan with considerable yearly results. Consistent with this plan, we have introduced our Magic Price Points strategy in each country, increased cooler coverage significantly, and raised execution standards. During the second quarter, our volume grew more than 7% in the region. Growth in this region was mainly driven by brand Coca-Cola, which grew 8% during the quarter, along with 8% growth in flavored sparkling beverages and 14% growth in bottled water. Our noncarbonated beverage portfolio growth resulted mainly from the continued strong performance of Powerade, which grew 15%. For the quarter, reported revenues in Mexico and Central America division grew 2%, supported by the integration of Grupo Yoli in Mexico. Organically, the division's revenue declined 2%, reflecting the volume contraction resulting from the price increases implemented to pass along the excise tax in Mexico as well as bad weather conditions in May and June. Organically, our division's gross margin expanded 200 [ph] basis points on the back of lower sweetener and PET prices, which were partially offset by the depreciation of the Mexican peso as applied to our U.S. dollar-denominated raw material costs. Notably, our division's organic operating cash flow margin expanded 270 basis points for the quarter, resulting from lower raw material prices and our tight control on operating expenses, which declined 2% on an organic basis. Looking to the second half of the year. Our operators will continue to focus on enhancing our marketplace execution, reinforcing our returnable presentation base and presenting our consumers with the right packaging alternatives, increased transactions and accelerate volume growth in order to build on the positive market share trends that we have seen so far this year. In our South America division, organic volumes increased 4% in the quarter, supported by the very positive performance of our Colombian operations and continued growth in Venezuela and Brazil. Including the Spaipa and Fluminense franchises in Brazil, the division volumes grew 24%. In Colombia, after 3 years of having implemented our strategies to resonate [ph] for capital consumptions, configuring -- like configuring our portfolio and pricing architecture, we continue posting strong volume growth. In the quarter, our volumes grew 12%, successfully building a 9% growth in the second quarter of last year and extending this operation's positive performance to 7 consecutive quarters of growth above mid single digits. Brand Coca-Cola grew 13%, supported by the performance of our 1.4-liter one-way PET presentation and our seasonal [ph] cap and returnable glass bottles, which at the Magic Price Points of COP 2,000 and COP 500, respectively. That's being very well received by the conscious consumers. Our flavored sparkling beverages, which have been struggling in the past year due to intense competition, increased more than 8% in the quarter, supported by Quatro, Sprite and Kola Roman. Our noncarbonated beverage grew 43%, mainly driven by growth of del Valle, Fuze Tea and Powerade. We remain on the right track to grow the per capita consumption of our partners in Colombia, improving our marketplace execution, expanding our cooler coverage, and maximizing our opportunities to connect with our consumers. Moving on to Venezuela, our operations volume was up 7%, successfully dealing on a 9% growth in the second quarter 2013. Brand Coca-Cola grew 8%, while our flavored sparkling beverages grew 4% driven by heat. Our noncarbonated beverage category grew 34%, mainly driven by del Valle Fresh orange juice, which grew 36% in the quarter. Additionally, our recent launch of Burn has enabled us to rapidly gain market leadership in the [indiscernible] energy drink segment. Despite the challenges constantly faced by this operation, our team has successfully launched innovative new products, delivered positive volume growth and gained market share by focusing on the precise execution of our desired picture of success at the point of sale. Moreover, our team has improved productivity and service levels by properly [ph] pricing production on the fastest-moving SKUs in our portfolio and increasing distribution efficiency. Importantly, in the first half of the year, we received close to $110 million of -- at the official exchange rage of 630 bolivars per dollar to pay our suppliers. In our Brazilian operation, we registered 2% organic volume growth for the quarter. We continued to focus on affordable single-serve entry packages and returnable multi-serve presentations to offer additional alternatives to our consumers in a weak economic environment. The price compliance indicators for our 200- and 300-milliliter one-way presentations as well as our 2-liter returnable PET packages, continuously improved, ensuring the success of these presentations in the market. Our 2-liter returnable presentation for brand Coca-Cola grew 11% in the quarter, reinforcing our ability to connect with cost-conscious consumers. We recently started to allow this practice in our Minas Gerais territories to complement our portfolio in that region. During the quarter, our sparkling beverage portfolio grew 1% driven by brand Coca-Cola and flavored sparkling beverages, where we have tactically addressed a more intense competitive environment. Our bottled water volume grew 15%, and our noncarbonated beverage grew more than 2%. For the first half of the year, Coca-Cola FEMSA contributed 70% of the system's volume growth in the country [ph]. With regard to the integration of Spaipa and Fluminense, as of today, we have captured 50% of the synergies started for this year [ph] on track to meet our yearly goal. Looking at the second half of the year, our operators will continue to focus on capturing operational efficiencies, integrating Spaipa and Fluminense, and enhancing marketplace execution to capture more opportunities to connect with our consumers to a more competitive portfolio. Moving on to Argentina. During the quarter, we continued to face a relatively weak consumer environment in which disposable income remains affected by increased real inflation rates. Our quarterly volume was down 2%. Despite this decline, our Argentine operation continues to gain both share of market and share of sales in all categories and across most channels. Driven by Bonaqua, our bottled water category grew 8% in the quarter, partially compensated -- compensating for declines in our sparkling and noncarbonated beverages. In contrast with these declines, I would like to highlight the performance of Powerade, which grew importantly in the quarter and continued to gain share as we captured consumers attracted by value innovation. Going forward, in addition to our focus in revenue management initiatives and cost discipline, our Argentine operations will actively work on a comprehensive returnable packaging portfolio strategy to reconnect with consumers under the current market environment. During the quarter, our South American division's organic revenue grew 9% on the back of revenue management initiatives in Venezuela, Argentina and Brazil and volume growth in Colombia, Venezuela and Brazil. Organically, lower sweetener and PET prices in most of the regions were offset by the low valuation of the Colombian peso, the Argentine peso and the Brazilian real as applied to our U.S. dollar-denominated input costs in the division. Despite ongoing labor and freight cost pressures in Venezuela, Argentina and Brazil, our organic operating cash flow margin expanded 270 [ph] basis points during the second quarter of 2014. In the Philippines, our volume remained flat for the second quarter of 2014. Brand Coca-Cola grew 8%, and we successfully reconfigured the portfolio composition to focus on selected SKUs to improve the portfolio base. We have recently expanded our single-serve one-way PET offering by launching a 250-milliliter presentation to cover the PHP 10 price point for brands Coca-Cola and Sprite. We are also introducing a 400-milliliter PET presentation for those core brands to complement our single-serve portfolio offering. As we move forward with the introduction of one-way single-serve PET presentations, we are setting the stage to create and capture an increased number of untapped consumption occasions in the Philippine market. Volume in the greater Manila area grew 4% in the quarter, highlighting the successful implementation of our new local market model, which enabled us to provide higher levels of service, better execution, and greater market control when implementing our strategies. To support our PET capacity during the quarter, we installed 2 new high-speed production lines to serve the demand for these presentations that we are seeing among Filipino consumers. Now I will discuss our consolidated financial position. As of June 30, 2014, we have a cash balance of MXN 19.2 billion, and our total debt was MXN 60.3 billion. Our net debt to EBITDA ratio is currently at 1.34x, underscoring the strength and flexibility of our balance sheet and our commitment to delever the company. Our complicated financial result for the quarter was impacted by, first, higher interest expense due to a larger debt balance, second, salary interest rates on our Brazilian real-denominated debt, and third, a larger monetary position and higher inflation rate in Venezuela. The effective tax rate, as a percentage of income before taxes registered in the quarter, are mainly affected by changes to the income tax law in Mexico and the larger contribution of operations with higher effective tax rate to our consolidating income before tax. During the quarter, our net income reached MXN 2.7 billion, reflecting a 5% decline as compared with last year. In summary, our Mexican operations have successfully protected the profitability and cash flow generations of the business despite the volume contraction driven by the excise tax imposed in Mexico. In Central America, our top line acceleration plan is on track with positive results in volume, share and finances. Volume performance is above plan in Colombia with a key shift in flavored sparkling beverage volume trends and gaining share in brand Coca-Cola. In Venezuela, despite facing a complex operating environment, we remain committed to continue investing in the marketplace, enhancing the strength of our portfolio and strengthening the capabilities of the business in order to support the demand for our products. Despite facing a tough economic environment in Argentina, our operations are gaining market share across categories, adapting to the current consumer dynamics to continue protecting the profitability of these operations. Our preferred strategy is proving to be successful in Brazil. We are focusing on integrating our new territories and improve marketplace execution while increasing productivity and efficiency levels. And we are confident that our strategy in the Philippines, although challenging to implement in the short term, is changing the business model to create a platform for sustainable and profitable growth in the long term. With this, operator, I would like to open up the call for questions.

[Operator Instructions] And we'll take our first question from Fernando Ferreira with Bank of America.

My first question would be related to Mexico. Just wanted to understand a little bit better your pricing strategy year-to-date. It seems that you've increased prices by more than your peers and competitors. So I just would like you to comment on this and if you're planning any additional promotional activities or maybe discounting during the second half in order to revamp volumes or not really. Héctor Treviño Gutiérrez: Fernando, yes, in Mexico, in general, I'll say that with the new excise tax that started at the end of the year, we basically increased prices to try to compensate for that. We worked a big chunks of compensating for that float [ph], the inflation that we anticipate for the year. With the last price increase that we -- at the end of last quarter, we are now -- a new model [ph] of inflation, basically around 5% in nominal terms without taking into consideration the effect of the tax increases. A matter of fact, we are around 5% nominal trend versus last year. What I can say about the competition is that we are seeing, obviously, a lot of activity, as everyone is adjusting to this new tax environment. For other competitors, the impact of the tax was a bit larger, as you know, it was at 1 peso per liter. So if you got a lower price per liter, the impact was a bit larger proportionately. And that's why during this first 6 months of the year, there has been and there still is some adjustments to the pricing architecture of our competitors. Right now, what we feel is that we have the right prices. It's where we want to be at this part of the year. And most likely, we will stay with that. But I mean, depending on how our competitors will move going forward, we might need to revisit this strategy. But we feel that we finally got to a -- to the price point and the pricing architecture that we feel comfortable with the guidance that we have given here for the year, which is try to be equal to inflation or a little bit ahead of inflation on a yearly basis, and that's where we are right now.

That's pretty clear. And my second question would be on South America. Do you expect the same sort of margin expansion you saw in Q2, or should we expect the same sort of margin expansion for the second half? Or asking in a different way, the reduction in SG&A we saw, I mean, how sustainable is that for the remainder of the year? Héctor Treviño Gutiérrez: South America, for us, it's a bit tricky because, obviously, we have volatile activity there in those numbers because of Venezuela. In general, what I can say is -- and when we review, mark it by country by country. Brazil, the quarter was tough because we have volume growth, as I mentioned, around 2%. Most of the volume was coming from categories or SKUs that are less profitable than the -- than single-serve Coca-Cola [indiscernible]. So we are seeing growth in beer. We are seeing growth in noncarbonated drinks, and we're seeing growth in water, and we're seeing growth, strangely enough, during the World Cup, where you see an explosion of [indiscernible] in the last presentations. So Brazil, if we look at Brazil, we are seeing stable margins, and we have not seen an expansion in margins. In Colombia and in Argentina, let me go by one. Colombia, with this plan, Colombia reduced price a couple of years ago. We adjusted prices and by -- when I say adjusted price, meaning lowered prices with the Magic Price Points of COP 2,000 on price points of Columbian pesos was the presentation that I mentioned. And with that, we are seeing a very important growth, which is very well in tune with the strategy that we have for plan Colombia, which is basically create a -- we try to create a market per capita consumption in that branch [ph]. We have clearly said there are times that the per capita consumption of Columbia is half of that in Venezuela, and we're seeing that there's a lot of opportunity to increase the per capitas in Colombia, and that's what we are seeing. The nice thing about Colombia this time around is that we are seeing growth in flavored brands that you know our competition in the flavor market is much tougher than other countries, and we are seeing positive trends in those numbers now in Colombia. So Colombia, we've seen some expansion in margins that we're seeing are there to stay for the rest of the year. In Argentina, even though we have lower volumes than larger, we have good pricing mix, and we have -- because we were selling different Brazil presentations that are better in terms of margin for us, and as well as in Colombia, in Argentina, the expansion there, we are seeing -- I'm seeing that to stay in the rest of the year. And Venezuela is the one that creates a little bit of noise because of the volatility that you create when you got a very high inflation environment with prices and costs moving very fast. So Venezuela will be a case of -- very clearly, it's a case where it's very difficult to predict what is going to happen with margins because you might find an environment which [indiscernible] prices at the same pace of the increasing costs that you have. Right now, we have a favorable environment because we have been able to increase prices in Venezuela. We are growing and selling basically everything that we produce. At constant, in all of the territories in [indiscernible] not only South America, but also Mexico and the Philippines is a constant loop to find opportunities in SG&A, and I think that we are doing -- our operators are doing a very good job at finding different processes, different ways of organizing the structure or finding a different organization. For example, in the case of Mexico, we reduced the number of sales areas in Mexico from 4 to 3. That means that part of the recovery in process that we're doing in Mexico, we -- in Mexico, we have now -- basically, it's sad to say that, but what we have with our organization, we have 1,200 less workers with us because, obviously, we need to adjust our operation to compensate for the lower volumes. So at constant, in every one of our operations is this focus in trying to be more -- to improve productivity and to have a better SG&A margin. So with that -- with this very long answer, what I'm trying to say is I'm looking these margins to stay. There is volatility embedded in the numbers because of Venezuela, and it's clear with which cost and prices moving in that country, and I think that the margins are here now to stay.

We'll take our next question from Karla Miranda at GBM.

Hector, I have a follow-on on Brazil. It seems like you've mentioned in your opening remarks that the environment in Brazil is still really challenging. Can you give us a little more detail on what happened during the quarter because I was -- we were expecting a higher increase because of the FIFA World Cup? And what should we expect in terms of volumes for the rest of the year? Héctor Treviño Gutiérrez: Karla, Brazil is -- let me start. First, everything that I'm going to say margins is organic because, obviously, we closed [indiscernible] in spite of the numbers would show up at a very large growth. But organically, what are we seeing? We are seeing a consumer that is kind of shy, is not necessarily there. We believe it has to do with the economic environment with the kind of consumer that has a lot of debt that is cutting bad consumer expenses. The FIFA World Cup, we had a very good organization and a very good number of tourists, and it was like -- the estimate is like 600,000 visitors going to Brazil to -- for the -- joining in the space of this tournament. The number of visitors that were in the franchised areas, people that couldn't go into stadiums was close to 1 million people that visited the franchised areas. And very strangely, what we saw is a very large consumption of beer and very large consumption of soft drinks in the large practices. Our view is that people were buying the large presentations to do like a cookout in their home or like a grill in their home, and we saw a lot of these. When we look at some of the numbers, we saw a pickup in the number of meat and charcoal products, people preparing this at home and buying a larger number of returnable -- of the bigger returnable presentations. So we saw very good growth there. Also, another trend that we are seeing, and is similar to what we said in the first quarter, is that cola is losing a little bit of importance within the industry of carbonated drinks. So when you look at market share numbers, you see us maintaining share in cola and basically maintaining a little bit below in flavors. But as flavors continue to gain a little bit of traction in the Brazilian market, in the overall number, we are losing a few basis points on shares of the investors. So the situation in Brazil for this quarter was, as I mentioned, volume growth. Again, that is in organic volume growth, mainly in presentations, so SKUs that are not as profitable, like in these large sizes, like noncarbonated drinks, like juices and beer. The Heineken beer sold very well during the -- the Heineken brand was selling very well during this quarter. We are working very well with the synergies. We are seeing that -- as I mentioned in my opening remarks, we are right on target for the synergies that we have for this year, and the integration process is going very well. For the rest of the year, we are waiting for the opening of the new production facility. And the result that will bring, in my belief, important efficiencies in our supply chain in that area of the country. The opening is scheduled for September. So we should be having better efficiency number, we expect, for supply chain for the fourth quarter. And similar to Mexico, I think that with the facility strategy is paying well. We are getting to the consumer that is very cost-conscious because of all of the macroeconomic environment where they are, and it's helping us to compete without having to reduce the price of our one-way presentations. I think that that's a description of what is happening in Brazil.

And we'll go next to Antonio Gonzalez with Crédit Suisse. Antonio Gonzalez - Crédit Suisse AG, Research Division: I just have a quick follow-up on Venezuela and then a question on Colombia. First on -- we saw, obviously, MXN 400 million charge in terms of below the EBITDA line in monetary expenses in, I guess, coming mostly from Venezuela. So I just wanted to ask, we also saw a provision being recognized by the Coca-Cola Company, I guess, as a result of these new regulations in Venezuela, which is limiting profit margins. And I wanted to ask -- my understanding is that this, too, might be different reasons to have a charge in your Venezuelan operations, and I just wanted to ask if you foresee any provision to be recognized in the future in your Venezuelan operations just like the Coca-Cola company biz. And I understand, obviously, that the profitability of the Coca-Cola Company and the bottlers is very different, but I just wanted to hear your thoughts on that. And also, going back to the description that you gave of the margins of the Venezuelan operation, can you just give us a sense of how much pricing in local currency has increased versus, probably, wages, just to get a better understanding of these mismatch that you were referring to earlier? And I would just have a quick question on Colombia. Héctor Treviño Gutiérrez: Yes, so let me start with Venezuela. First, the numbers that you see in the press release on Page 8 would refer to the loss in monetary position. That basically is a number that is -- obviously, that's one of the reasons we are missing the targets on the net income level or the EPS level. This is basically this MXN 400 million charge that has to do basically with the price that we have around $300-plus million -- equivalent to $300 million in cash balance in Venezuela. We have a larger amount in cash balances that we have also from accounts payable because of the delay that we have with the Central Bank to pay some of the supplies. So the net amount is around $300 million -- $350 million. Because Venezuela being a hyperinflationary environment, we need to recognize that those cash balances are losing value as time goes by. Basically, it's the effect of inflation on the monetary assets, and that will reflect the number that is there [indiscernible] MXN 400 million. That will also wrote it [ph] down to net income. With respect to the announcement of the Coca-Cola Company, year-to-date, at this moment -- as of the end of the quarter, we have not fully registered our numbers, you see. That's still very difficult to know because this new law of -- the fair price law going on in Venezuela, here, for us, the case is a little bit different, but we have a lot of operating facilities, a lot of workhouses. Our workforce is much larger. So to the best of our understanding, we are at full compliance with the law. So I'm not foreseeing any adjustment in the second part of the year on that, okay? And with respect to local currency, I mean, where you have inflation running at a 60% -- more or less still 60% rate on a yearly basis. We are ahead of that in terms of pricing, and our cost, especially salary severance at the end of that. But I think that for this quarter, we have a little -- it's more pricing than salaries when you put it that way. I don't have the specific figures, but we have -- because we burdened [ph] since we increased prices. And there is the [indiscernible] from previous prices, and then some of the costs are catching up. These are marginally related. This will increase prices again. But that's more at the level of numbers that you will see on a local currency analysis in Venezuela. With the 60% inflation, so that's more or less what you're seeing in terms of salaries and prices. Andrea F. Teixeira - JP Morgan Chase & Co, Research Division: The $350 million, Hector, that you mentioned are taking into account the official exchange rate? Héctor Treviño Gutiérrez: It's at 10.60 if you use -- it's around VEF 3,000 million. It's $300 converting at 3 60. [indiscernible] It's a very large number indeed. Antonio Gonzalez - Crédit Suisse AG, Research Division: Perfect, understood. Yes, just very quick question finally on Colombia, I, obviously, understand that you don't disclose the margins on a per-country basis, but I just wanted to understand with these price aggressiveness on one hand and then the other hand, volumes progressing as you just described in the prepared remarks, can you just give us a sense of whether you think the margin erosion is behind us already? Or we're still kind of not reaching yet that inflection point? And what kind of, probably, a range of margins that you're seeing, something like pricing of the EBIT or low teens that you can share with us? Héctor Treviño Gutiérrez: I'll say, Antonio, that, as you described, I mean, 2 years ago, we lowered prices. We advised everyone that we were going to suffer on the operating income, and [indiscernible] for 1 year with the idea of the fee burn per capita consumption. We have -- with margins that are very stable now compared to 2013, they are a little bit lower than what we had in 2012 and '11. That's why we are reiterating those margins. And the idea is -- and the tricky part is now that we are seeing a better consumption, a better per capita consumption, the consumers and better consumption habits to our understanding is how much can we start adjusting prices of -- increasing prices on specific packages and attracting consumers to individual presentations and presentations that have better margin. And that's the second part of your question that we need to start working on -- but to your specific question, margins are basically increasing a little bit versus 2013, not yet at the levels that we had in '11. Okay.

We'll take our next question from Lore Serra with Morgan Stanley.

This is Jeronimo De Guzman filling in for Lore. I had a question on your -- when we were looking at your statements, the D&A and other noncash charges seems pretty high in the quarter. So I just wanted to understand what were the main drivers of that increase? Héctor Treviño Gutiérrez: Jeronimo, you're referring to the [indiscernible] number as well as evaluation and amortization and other relative noncash charges in [indiscernible]. That number -- I want to answer the question because I think it's important to clarify. That number is basically a reflection of 2 things: One, is that in spite, and let me start with a margin [ph] of impact. In Venezuela, despite having this year up to a [indiscernible] base, $110 million -- that is of the official exchange rate of VEF 6.3 as the official exchange rate for raw materials. We recognize during this quarter that we have $110 million of accounts payables that we know that we'll never get an official -- we'll never get authorization from the Central Bank because these are imports that we did. It was -- we were -- in order to avoid stopping production so we went outside of the importation protocol to be able to have access to the controlled dollars. These are dollars that, excluding raw materials that were imported 1 year or 1.5 years ago. So [indiscernible] we are in the process of trying to buy this $10 million at the so-called SICAD II, which is now trading around VEF 50 per $1. So if you apply this VEF 50 per $1 versus VEF 6.3 that we have in our books on these accounts payable, that's basically a reflection of a foreign exchange movement that is a nontax thing because it is in our balance. The other element, which is smaller, but it's also important, is the fact that last year, in the Philippines, we had a profit of net income of -- our [ph] 51% was around $10 million more or less. And this year, we have a loss in the Philippines, a net income loss of around $7 million to $8 million for an equivalent for our 51%. What is causing that number in the Philippines is basically the fact that we have been, in our opinion, very successfully introducing the one-way presentations to change the rules, the markets are -- the rules of the market there. Our competitors have been decreasing their prices on the equivalent to an 8-ounce glass returnable presentation. So we have been doing a rollback on that presentation also on the prices. So I'll say that around half of that impact of the loss of this quarter has to do with this price rollback. Again, we feel that as we are being very successful in GMA, where we have introduced results to market. And just as a reminder, we now have 1,000 sellers, [indiscernible] presellers that are visiting the stores, checking for the execution. And there are subtle indications that are -- indicators that are very good and encouraging to us. For example, brand Coca-Cola in GMA, in Great Metropolitan -- Greater Manila Area is going -- is up above 40%. Obviously, Pop Cola is -- part of this is cannibalizing our process, especially Pop Cola, but part of that is also cannibalizing a presentation from our competitors. So we have very encouraging results of what these strategies that we are doing. And until we roll out this strategy to other areas, we expect seeing the results and the market just [indiscernible]. But the fact is that we have a loss this quarter in the Philippines that is related to the rollback in the 8 ounce with [indiscernible]. And the second element, which is important for you to know, is that very recently, there's a new law that discretes [ph] traffic for trucks. And remember that in the Philippines' market, being a large number of islands, the ports and the congestion of the ports is an important element. And the trucks are not able to circulate during normal business hours. It simply makes logistics very complex and transportation costs more expensive as the suppliers are seeing an opportunity to increase price. So another half of these laws is related to an increase in freight cost because of this truck ban in the Philippine market. It's so important that we have now a dedicated team that are experts in Coca-Cola FEMSA moving to the Philippines. They are going to work there for a while just to -- and we are working also with some consultants to help us better design how we are going to move results around all these islands from our [indiscernible] plants or distribution centers. And hopefully, we'll drive a better logistics and transportation cost going forward. But that's an impact that we have basically during this quarter. And when we compare profits in the Philippine market last year, a loss on this quarter and this deal reflected also in the -- they are affecting our audit [ph] in Mexico because as we stated last conference call, the Philippines always significant on their Coke trends and which is consolidated with Mexico. So it's affecting our other audit [ph] in Mexico. We're using the [indiscernible] of Mexico [indiscernible] division. But it's a noncash charge because there is no cash movement basis. You'll see the equity measure on that. And I hope that this long explanation describes what is a number that [indiscernible] has in the press release.

Yes, yes. Just a couple of follow-ups here, so on the Philippines, just given that the rollbacks, I assume, you continue to see the impact of that and of the logistics issues. Should we expect that the losses will continue in the next few quarters? Héctor Treviño Gutiérrez: I think that my expectation is that -- it's a tough question, Jeronimo, with the pen [ph] and the competition and what it has to do with this price rollback. My expectation is that little by little, we will be compensating that with the success of brand Coca-Cola in the one-way presentations, and that this 8-ounce presentation will -- are already doing so much strategies. For example, in America, we're going to describe this. We are -- remember that we launched this presentation called Mismo, which is a 300-milliliter one-way vp package in the Greater Manila Area at PHP 10. That presentation, we are moving that to PHP 12 in order to improve the profitability. And we are introducing a 250-milliliter just to keep the market price point at PHP 10. In the area where we face a lot of competition, with this combination or these 2 packages, I think that we will rely less and less on the 8-ounce returnable glass bottle. And little by little, we will improve the margins for the company. This transportation and logistics will probably take a little longer. I will expect this additional cost to be here for the rest of this year until we adjust our logistics and supply chain to this new environment as of these new regulations with respect to the restriction of the so-called truck ban in the Philippines.

Okay, makes sense. And then on Venezuela and what you mentioned, just wanted to ask, one, the fact that you had to purchase some of these raw materials at MXN 50 or at the SICAD II rate, isn't that really a cash impact because you are really buying them at that higher FX rate? And then the second question related to Venezuela is also, I know it's still a small mountain compared to $120 million that they had to purchase outside of the official FX rate, but do you foresee continuing as you go to rely on getting dollars outside of SICAD II just because you're getting too many delays on the approvals from CADIVI? Héctor Treviño Gutiérrez: Yes, your first question, the MXN 50 1-liter, that corresponds to some raw materials that we purchased and used basically 1 year ago, and we have an accounts payable that has not been paid. So for our BMN [ph] 1.5 years ago, 1 year ago, we used the MXN 6.30 cost. And now we have this accounts payable that we disclosed that amount to our auditors. And being an FX movement on an account payable that as of this moment we have not fully paid because we are in the process of, as you might know, this account due [indiscernible], also a lot of availability from one sector from the other, and I said I guess was -- so we combine all these very small amounts, as little by little we are compensating for that. At the end of the day at some point in time, we'll use that cash separately. But as we disclosed then, we are the auditors because of the IFRS on being an account payable and the FX on an account payable, it is very [indiscernible] as a noncash item. With respect to the -- we should just -- I understand the second part of your question, if we should be using the MXN 10.60 as the current -- as the exchange rate to convert all other numbers into Mexican pesos. We have disclosed that a lot also with the auditors and with other companies that are power plays in Venezuela. Obviously, everyone -- there were a lot of rumors that the 3 systems are going to convert into, for example, based on FX, but we are not seeing anything like that still. So the number that -- the official number that we have to use is the SICAD rate. whether SICAD I or both, which is VEF 10.6. And that's the -- the number is what we are converting [indiscernible] moving to adjust our P&L and our balance sheet in the future. And we'll do that, and we will display the number when and if that happens.

Yes. I guess the question was more since you did have this instance where you did have to buy some raw materials at the -- outside of the official FX rate. Do you foresee this happening more and more if you're having more delays in getting access to the official dollars? Héctor Treviño Gutiérrez: Sorry, I misunderstood your question. As a matter of fact, the delivery of [indiscernible] FX indiscernible] versus last year. And basically, all of the requests for this year, most of that I'll say that 90% of the raw material requested we have asked. We have received authorization from the authorities. So on that front, I'm not seeing any specific problem right now.

We'll take our next question from José Yordan with Deutsche Bank. José J. Yordán - Deutsche Bank AG, Research Division: Hector, I guess my question was partially answered. I had the same questions that Jeronimo was just talking about. But -- so I guess the conclusion here is that this payable when you're done paying it, it will become a cash item. And I was just wondering how does that get sort of reclassified in the next quarter when it's no longer a noncash charge? And if you can give us what the actual amount of this particular item was? And then just a more general question, I mean, I can see that you're saying you're sequentially gaining market share, and I think a lot of that comes from the fact that the B brands, especially Big Cola and others are collapsing or they're down 20% or so, if I remember correctly from Big Cola in the first quarter. But your Coke versus Pepsi market share is really falling, and I was just wondering what your thoughts, what your operators were thinking about that, and whether that was a sustainable share by the competition? Or is this something that they think is more a 2014 issue related to the reaction to the new taxes, et cetera? Héctor Treviño Gutiérrez: Let me answer your cash flow item in the first question. With respect to this movement is -- again, just on -- and just to be clear, we have to buy some raw materials outside of the normal protocol to be able to have access to the sustaining [ph]. That happened earlier in [indiscernible] more than 1 year ago. And therefore, not to stop production without basically some caps and some labels that we needed to buy. And we welcomed 2000 [indiscernible] in place so the HVP [ph] will follow the necessary protocols to target utilization for that. So at the cost 11, when those raw materials were used, we use -- we're using the MXN 6.30 [ph]. And now we have this account payable, but -- to the suppliers that now we are recognizing at 50. And then we decided that we have all this monitor basically a year. We will not have access at the MXN 6.30 or at the MXN 10.60 is difficult. So we are binded by these numbers. But according to the explanation that is used from the auditors because of the nature of being an account payable, and this deal on the FX effect on the money is not going to be recognized as a cash item. Okay? We can [indiscernible] that. Again, I'm not making the [indiscernible] from the auditors, but that's -- you ask the same question that you asked, and that at the end of the day, we will use some cash to pay for that. But because of the nature of the account on being a balance sheet account -- a balance sheet item that is not account payable and DBM [ph] effect not recognized because of the rules of the IFRS rules is not recognized as a cash item. With respect to market shares, obviously you were referring to Venezuela, but let me just give you a flavor of... José J. Yordán - Deutsche Bank AG, Research Division: No, to Mexico. Héctor Treviño Gutiérrez: In Mexico, what we are seeing, and it's -- we are seeing colas basically being flat versus Pepsi and RED Cola and Big Cola. So they were losing a few market -- a few basis points in flavors, and we've been losing a little bit more than a few basis points in juices -- in juices and nectars. [indiscernible] Homex 1 and 2 are very aggressive. Strike one, we're individual in the single serving in pesos. They didn't pass along the statement of prices before the tax, let me you put it that way. So they are -- they didn't pass along the price -- the tax increase to the consumer. And in that case, in that specific case, in juices and nectars, not the other juices, but we are doing well [indiscernible], but we are doing great in Mexico. In juices and nectars, we are losing a few basis points. I don't see any specific movement in the cola segment that you described. These are numbers we have to make what we have. We still don't have the recent numbers for the group. But that's basically the trends that we are seeing. José J. Yordán - Deutsche Bank AG, Research Division: I mean, I was just referring to the fact that Curitiba just had flat soft drinks and bottled water volumes. And I realize their territories don't overlap completely with yours, but when you add up, you and Arca, I mean, the 2 systems -- I mean, definitely the Coke system seems to be losing share, just assuming those were the only 2 players in the market. So that was more my question. Héctor Treviño Gutiérrez: Well, let me revisit that. Let me just clarify one point, which might be important also. But the numbers that I calculated from Brazil is sort of share of market. And there is one issue which has created some volatility in the numbers, and it's [indiscernible] -- as we have this move back and if everyone passed the tax to the consumer, which we believe is the case in the case of sparkling drinks. The prices for our competitors were a bit higher proportion on these numbers. So when you look at the share of sales numbers, you might see some erosion in that number, but we will be [indiscernible] profit because as I said, there's a lot of volatility with everyone adjusting prices this year. So I don't know if I'm clear with this [indiscernible]. Can we talk [ph] higher prices on our competitors, and then everyone increased MXN 1 per liter. The price increase of our competitor was a big margin. So you can argue that as a percentage of the money that is being spent, we might be losing a little bit of share because our pricing [indiscernible] affect. José J. Yordán - Deutsche Bank AG, Research Division: I get that, but then -- yes, but then in terms of volumes, they had to raise prices more. I would assume they would lose volume share, which just doesn't seem to be happening. But I get the point that the timing of increases and all that might have changed the equation here, but... Héctor Treviño Gutiérrez: Okay. Well, [indiscernible] is what I'm telling you. In colas, we have a flat market share. In flavor, we are losing 0.1 percentage points, so which is basically flat. That's all for me.

We'll take our next question from Luca Cipiccia with Goldman Sachs.

Just a quick follow-up on Brazil if I may. Just to understand, when you -- when we consider the World Cup event, just clarify, was it -- did you think, would you say it was a net positive or a net negative in terms of volume? So in other words, when we look at the volume growth that you delivered in the quarter, how did it progress along the different months? And specifically for this event, was it below, in line or above your expectations? And the comment that you made over the competitive environment, again, did it reflect more bigger pressure during the World Cup or so in the last month of the quarter on commercial execution, on certain specific item or was more broad-based on pricing, so we should continue to expect that for the rest of the year? Héctor Treviño Gutiérrez: Luca, no, in general, I'll say that I think that volume-wise and in terms of this presence of the brand and the sponsors of the brand to the consumer is very positive. I think that the FIFA World Cup events, I think that in terms of the logistics and how -- and the sponsors that the World Cup creates in the series where we have events, it was a negative effect because, for example, in Sao Paulo or Belo Horizonte, whenever Brazil was playing [indiscernible] workers, and in some cases, if Brazil was playing in Belo Horizonte, it was a holiday for the whole states of Brazil [ph]. So we had a number of days that we couldn't work because of this holiday decree. And when we were working, we were confronting a lot of traffic and problems in the logistics and not reaching the point of sale. I think that it was, in general, it was good because of the big event, the presence of the brand, the impact that we brought. From the competition point of view, we saw a very, very aggressive [indiscernible] in the pricing front during the month of the World Cup, during the end of June and beginning of July, basically with Page 3 and Page 2 campaign, which is a huge discount. So from that space, it was a tough environment during the World Cup. We've seen that that's basically gone now, and we will expect normal activity starting now.

Okay. But if I was to -- if you were to comment on the bottom just for April and May compared to the rest of the quarter, was it -- did June bring an incremental positive contribution, or it's not worth making a distinction? Héctor Treviño Gutiérrez: It's a very similar trend. It's low single-digit growth in April and May for us.

We'll take our next question from Alex Robards with Citi.

So I just want to start by going back to this what you're calling operative noncash charges in the quarter. I mean, as I look at this, I get the impression that the magnitude of the incremental noncash charge is roughly MXN 700 million year-on-year. And is that in the ballpark? And my guess, whether these are operative or not is outside of the scope of this call, but I'm just trying to do some of these numbers here around this $10 million raw purchased materials in Venezuela. And I'm not -- you say it's the biggest piece of these -- of the increase in the noncash charge, but I'm wondering if you could give us a sense exactly kind of how much was the noncash charge related to the $10 million purchase of raw materials in Venezuela? And I mean, do you expect us to see -- or can we expect to see more of this potential increase in noncash charge in the rest of the year? So that's kind of the first question, please. That'd be great. Héctor Treviño Gutiérrez: The first -- that effect with respect to Venezuela, which is this $10 million account payable that we had registered 6.3, and we now recognize during this quarter at 50, is basically big numbers, a 44 difference in mature rate times 10 is MXN 440 million impact, onetime impact during this quarter. That will explain more than half of this 6 -- 786. The other impact has to do with the fact that 1 year ago, we have roughly a 10 million equity cost because of the Philippines during the second quarter. And now we have a $700 million loss because in negative participation that we have in the Philippines. With those 2 numbers, you have basically the color, the full impact of this line. The first one, the difference in Venezuela is a onetime event going forward. Depending on the number of the Philippines, we will register whatever is the -- on the Mexican pesos, the impact of the Philippine operation.

Okay, okay. That's very helpful indeed. So I guess, just the 2 operating questions I had, one on Brazil and one on Philippines. The Coca-Cola Company says in their release that the macroeconomic environment deteriorated in second quarter. And I'm wondering if you could kind of help us understand from your beverage consumer point of view, what are the kind of things that you're seeing this deterioration expressed in? I mean, is it just kind of spending? Is it incremental taxes? What -- I mean, how would you qualify the Coca-Cola consumer as having deteriorated or at least the economic environment? And do you think we can see and -- or do you think the conditions are set such that it doesn't continue to deteriorate in the second half? Or do you feel like there's some stabilization here that we can look forward to? And then the tag on here, sorry, is just when we have this beverage tax hike in 5 weeks, I know you alluded to kind of taking some -- passing on some price ahead of that, but specifically, what are you expecting on this beverage tax increase for soft drinks in 5 weeks, and what might be the magnitude that you'd seek to pass on? So that's kind of -- and then I have one last one on the Philippines. Héctor Treviño Gutiérrez: Great. What we're seeing, Alex, in Brazil is a consumer that is not spending a lot of money. Our belief is that they took on some debt in previous years, and now they are not spending as much. There's no doubt that inflation on basically staples has been high in Brazil. And [indiscernible] is on the high side of the estimate that the government wants it on the 6% or 6.5%. So because of that, we have been introducing these Magic Price Points on presentations of an SKU that we sell at BRL 1, at BRL 2 and BRL 3, and we have 2-liter bottles that always weigh well the effect of the consumer that is very cost-conscious. We are selling that at basically around BRL 3.50 for the 2-liter in our presentation. There was a lot of null [ph] with this adjustment to the tax that is done periodically in the field. It was delayed. We just have to wait and see when the authorities will adjust this tax. Basically, the nature of the tax is we try to adjust this tax to us basically with inflation, always on the prices of the soft drinks and beer, it is also being held at the tax. But in fact, priced to reflect and tax to adjust this tax -- the priced to adjust the tax according to the price increases that [indiscernible] or [indiscernible] business have passed to the consumer. So the government, they have basically stopped the passing of this new tax and to analyze the numbers. We need to wait and see how that -- what the new number would be for this price adjustment or tax adjustment.

Okay. So how many points have you passed through in terms of related to taxes this year or price in Brazil, roughly? I mean, can you give us a sense of that so far this year? Héctor Treviño Gutiérrez: Well, I don't have any specific answer for that, other than the fact -- is your question is how many points of -- we have increased the prices because of the tax -- the new taxes. I hope in the recurring taxes this -- in my recollection is that the last time the taxes were increased were 1 year ago or 1.5 years ago. So we have not adjusted taxes -- we have not passed any new tax to the consumer [indiscernible] this year.

Okay, all right. Fair enough. Fair enough. And the last thing, on the Philippines, I mean, we have a decline in the volumes, and I appreciate your commentary in the press release and such. The -- mean going forward, looking in the second half, do you think that we get back up to volume growth in the Philippines? The -- I guess there was a typhoon that hit this month. Is this something that we should be concerned about? And when we think about cost, CapEx, I understand you try to funnel back cash flow from that operation into CapEx. Are you using or supplementing that CapEx investment from what's -- from a kind of cost -- proper cost non-Philippines? That would be helpful. And if you could remind us what the CapEx is in the Philippines for this year? Héctor Treviño Gutiérrez: Yes, Alex, let me -- first to answer this. The book trends in the Philippines, I think that is, even though we have a small reduction in volume, basically, there's a 1% reduction in volumes in the quarter. I think it's important to notice that -- for me to let you know that as we have been increasing this rollout of the move out to market prices that we have, we are seeing very different trends in the different parts of the country. For example, in GMA, in, Manila, where we have fully implemented the [indiscernible] strategy, our volumes moved 4.1%. It's not the same as in North and South Luzon, where we were down 5% because we have not still done this rollout of our go-to market. So the -- for us, the encouraging thing is that this strategy that we're trying to develop, which is no SKUs or supporting structure, a new route to market, and to have a supply chain that is effective, all of these are -- looks like they are going in the right direction. It's a transformation story. It would take some time to really bring this to new stages of profitability, but I think that we are going in the right way. This typhoon that hit the Philippines and basically hit Manila, I mean, for what has been thought is the first time that Manila was hit in probably 50 years. The impacts or the impact on our production plant of cost value. In terms of CapEx, it will require around $120 million. And we are -- because of we don't have electricity or we didn't have electricity for a few days in some other plants and one of them is still without electricity, we are estimating a 2 million unit case impact in lost volume basically because we are not producing what we need. So it's not a major impact, but the fact that we have a similar impact by typhoons every year. In terms of the CapEx, the CapEx number is fully funded in the Philippines by the operations. For all these cash flows that we are generating, we are paying for that. If model is meaningful in Philippines, then the agreement is that we will fund 51% [indiscernible] Coke FEMSA and the Coca-Cola Company would fund 49%, which is the ownership that we have in that operation. And basically, the budget for the year, given the price that we are introducing, 3 [indiscernible] lines in the Philippines for PET. Mainly, It's higher than a normal view in the Philippines, but it's close to $100 million this year. As a matter of fact, we have installed 2 production lines, and these 2 production lines are the fastest production lines in the world of Coca-Cola right now. They would produce 88,000 bottles, I mean, just to give you a size of the confidence [ph] that we have at that market. And we are telling others [indiscernible] that is -- on those vp presentations. So I hope that I answered your question about the Filipino market and the CapEx that we are seeing this year.

And we'll take our last question today from Pedro Leduc with JPMorgan. Pedro Leduc - JP Morgan Chase & Co, Research Division: And regarding to Mexico in specific in regards to volume performance, sparkling beverages organic, almost down 8% year-over-year. I understand there's a weather component there, but it was substantially below what the Coca-Cola Company recorded there for the quarter. So we were wondering if it was more specifically because you took pricing. But again, you took pricing at the end of June. So how are you seeing this volume performance play out now in July as I understand weather conditions are a little bit better, and in reflection also to your price increase, and what your outlook is for the remainder of the year here in Mexico in regards to volumes, please? Héctor Treviño Gutiérrez: I think that, Pedro, the numbers that we have for mostly are the correct ones. We are basically between 7% and 8% down, which is pretty much in the ballpark for you that I mentioned at the beginning -- at the end of last year of the potential impact of the tax. If they were to increase prices 15% to 16%, we expect volumes to come down 7%, 8%. We are pretty much there. First quarter was a little bit better than that. I think that all the competitors are adjusting, as I mentioned, the pricing strategy. The Coca-Cola Company uses different periods because they report on -- not on a monthly basis, but they have a different sequence for the way they compute the volumes. And I don't know if that's clearly some differences. And also, sometimes they'll register the number of the standard units or gallons of concentrate that they send rather than the number of unit cases. But the number that you see for us is the correct one. We are seeing basically a 7.7% decline in organic terms during the quarter, 7% in the sparkling. And then water is a little bit more. It is around 8%. And then CBC [ph] is around 13% because of what I mentioned about this. Going forward, I think that around 7% decline for the industry is still a good -- and it's enough the performance of the first 6 months just confirms that the guidance that we hear at the end of last year of 7% to 8% decline in volumes is a good one. Pedro Leduc - JP Morgan Chase & Co, Research Division: All right. Okay. And then still in Mexico, just a follow-up. We saw operating expenses rising, which was below inflation rate, 2.7% year-over-year. I understand this is probably related to the day off and efficiency efforts there. Do you see this pace, below inflation for SG&A as endured for the remainder of the year? Do you have anything else big in the pipeline there that could reduce this and then help profitability? And then last, what's your outlook for raw material prices in Mexico for the remainder of the year? Héctor Treviño Gutiérrez: In this -- I think that in general, the 2.7% that you are seeing is not compiled -- I think that's maybe the effect of [indiscernible]. So when you subtract, if you do it on a running number, it will be either close to 0 and likely below, which is a lot of reflection of the efforts of reducing the number of people in the operation or trying to get the organization to the new reality of this tax in Mexico. Raw materials, we're seeing a very stable environment. We don't see any specific movements for the rest of the year in consumer or PET prices. And therefore, we think that the cost structure and then the SG&A structure, we have a lot of it that we think will be going forward.

And that does conclude our Q&A session for today. I'd like to turn the call back to Héctor Treviño for any closing remarks. Héctor Treviño Gutiérrez: Thank you for your interest in the company. And as always, the team will be ready to answer more questions that you might have. And thanks very much for the support.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation.