Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q4 2014 Earnings Report, Transcript and Summary

Good morning, everyone. Welcome to Coca-Cola FEMSA's Fourth 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'll 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 this morning to discuss our fourth quarter and full year results. As you saw in our earnings release this morning, there is a critical change in the exchange rate that we have used so far to translate our Venezuela operations results into Mexican pesos. Given the increased uncertainty and lack of liquidity of U.S. dollars in Venezuela and to more accurately reflect the continuation of this operation towards consolidated financial statements, we have decided to use the previously denominated SICAD II exchange rate to translate these operations fourth quarter and full year 2014 results. As per the last official option of this mechanism at the end of 2014, the rate is effectively VEF 50 per U.S. dollars. Consequently, Venezuela's contribution to our consolidated result is now considerably lower. After these adjustment, Venezuela represents 7% of our consolidated volume and 6% of both our consolidated revenues and the operating cash flow. We would like to underscore that Coca-Cola FEMSA remains fully committed to continue producing, selling and distributing the highest quality products for our Venezuelan consumers that they enjoy daily throughout the country. For the fourth quarter, as reported, in Mexican pesos, our consolidated revenues and EBITDA declined 9% and 5%, respectively. For the year, our reported consolidated revenues declined 6% and our EBITDA decreased less than 1%. These declines were driven by the negative translation effect resulting from the use of the SICAD to exchange rate. For the full year, despite a tough economic and consumer environment in most of our markets, we've delivered organic volume growth in Brazil, Colombia, Venezuela and Central America. This growth almost compensated for the volume contraction in Mexico resulting from the excised tax along with a marginal volume declining in Argentina. Coupled with these volume performance, our local revenue management initiatives enable us to increase average price per unit case ahead of inflation in most of our territories. On an organic currency neutral basis, we delivered revenue growth in every operation but Mexico, which experienced, as I mentioned, volume contraction due to the exit price related to price increase. Lower PET and sweetener prices in most of our territories were partially offset by the average depreciation of the currencies across our operations. Consequently, our organic gross margin expanded 70 basis points during 2014. Despite certain restructuring charges, mainly Mexico and Brazil, and higher labor and freight cost across our South America division, operating expenses remained under control. Underscoring our company's ability to deliver profitable results in challenging conditions, our organic EBITDA margin expanded 170 basis points for the full year. Building on the strong brand equity of Coca-Cola and our compelling portfolio of returnable and attractively priced one-way presentations, we continue to generate increased transactions across our territories. These top line performance, coupled with our financial and operating discipline, enabled us to close the year on a strong note in every market. In Mexico, we successfully faced structural changes and an exceptional difficult consumer landscape, driven mainly by increased taxes on most of our beverages. Our organic volume outperformed our initial estimated volume contraction of 5% to 7%, despite a 16% price increase designed to pass along the excise tax to our consumers in Mexico. More importantly, our operation's ability to react quickly to this tough environment containing cost and expenses while adjusting our operating structure, yield an operating cash flow margin expansion of 150 basis points for the year. In Brazil, despite a continued soft economic and consumer environment, we made significant investments to upgrade our manufacturing and distribution infrastructure. In lieu our sales and operations planning, we enforce our portfolio to offer affordable packaging alternatives for our consumers and successfully integrated 2 franchises to reinforce our leading position in the Brazilian Coca-Cola system. Our organic volume increased 3% and our average price per unit case in local currency grew in line with inflation, generating revenue growth of more than 10%. Notably, our organic operating cash flow margin expanded 190 basis points. In Colombia, we continue to see the results of our reconfigured portfolio on pricing architecture, and we extended the positive performance of this operation to our second consecutive year of 8% volume growth. In the fourth quarter, we started to execute selective revenue management initiatives to improve our local pricing, while maintaining our margin price point strategy. We also continue to invest in our marketplace, execution and remain focused on containing operating expenses to mitigate expected short-term pressure on our operating cash flow margin. In Venezuela, despite the complex operating and consumer environment, our team improved its execution standards across the operation, growing volumes by a remarkable 8% while achieving record volume and market churn levels for the year. Thanks to our local revenue management initiatives and increased productivity levels, our operating cash flow margin expanded importantly during the year. In Argentina, our company continued to invest in manufacturing and workhouse industry infrastructure to improve our operating performance and to meet demand in peak seasons. Although our volume declined slightly for the year, we gained both share of market and share of sales across every category. On top of these outstanding performance, our financial and operating discipline enabled us to improve our operating cash flow margin by 160 basis points. In Central America, we united an acceleration plan to trigger higher per capita consumption and volume growth rates, while capturing the full potential of our 4 regional operations. For the year, Costa Rica and Panama, whether an economic slow down to each, grew volume by 3%. Importantly, Nicaragua and Guatemala, which have relatively low historic growth rates, each grew volume by more than 8%. In the Philippines, in the face of natural disasters that affected the country's infrastructure and in part, our operations, we continue to advance successfully on the total transformation of this franchise. We continue to simplify the portfolio focusing on the highest potential SKUs, while expanding the coverage of Mismo, our exceptional popular one way, 250-milliliter and 300-milliliter presentations. We also include the coverage of Kasalo, our attractive 750-milliliter, returnable [ph] glass presentation in the region of Luzon and Davao. We further converted more than 60% of the country's volume to our new route to market. We're gaining direct contact with our customers and achieving 70% volume growth across those transformed territories during the year. Additionally, we continue investing in our operations' infrastructure, installing 4 new high-speed bottling lines in our Manila and Mindanao bottling facilities, including 2 of the fastest bottling lines in the world. Our core Sparking beverage volume in the Philippines grew more than 8% over the course of the year. With regards to our performance per category, I would like to share a few relevant highlights for the year. As our consumers stays evolved in the complexity of our categories, end markets increased. It is increasingly relevant to measure daily interaction with our consumers across our territories. Throughout the 10 countries where we operate, we served more than 351 million consumers and record an average 70 million transactions every day. Indeed, our transaction growth outperformed our volume performance in every market, demonstrating our portfolio's ability to connect with consumers in a tough economic and disposable income environment. Thanks to our operators, capable execution and our packaging innovation, Coca-Cola once again proved its resilient outstanding brand equity across every market. For the year, brand Coca-Cola grew 15% in Venezuela, gaining 3 percentage points of market share. In Central America, we delivered 6% growth as well as market share gains across these countries. In Colombia, Coke grew 7% and gained more than 3 percentage points of market share. In Brazil, Brand Coca-Cola generated more than 3% organic growth, while increasing its already benchmark share in the cola category. In Mexico, despite excise tax-related price increases and a fierce competitive environment, Coca-Cola gained market share while contracting less than 4% in volume. In Argentina, despite the 5% decrease in volume, Coke gained close to 2 percentage points of market share during the year. Moreover in the Philippines, Coca-Cola volume grew more than 8% for the year. More importantly, Coke gained more than 5 percentage points of market share in Manila and more than 3 percentage points of market share on a national level. In the Flavored Sparkling Beverage category, our branch volume grew by double digits in Nicaragua and Colombia. In Costa Rica, Guatemala and Argentina, the category's volume increased in the low to mid-single-digits. In Brazil, despite very aggressive price reductions from our competitors, our flavored category declined only 1%. In Venezuela, due to raw materials constraints, we prioritized our production as the fastest moving SKUs to, so our flavored soft drinks declined 3%. In Mexico, these categories' volume contracted by high single digits in line with the industry. And finally, in the Philippines, our core flavored brands grew by 10%. In Argentina and Central America, we gained market share in these categories in flavors. In Mexico and Manila, we maintained our share of the market. In Colombia, we lost 2 percentage points of market share, while we lost 1 percentage point in both Venezuela and Brazil. In the personal water category, we gained market share in Venezuela, Central America, Manila, Argentina and Brazil. Despite a soft pricing environment, we maintained market share in this category in Mexico and we were down only 1 percentage point in Colombia. In Brazil and Argentina, personal water volume grew in the high-teens. While in Central America in Venezuela where volumes grew 12% and 10%, respectively. In Colombia and the Philippines, our personal water volume grew 4%, while declining 1% in Mexico. In the Noncarbonated Beverage category, we gained market share in Venezuela, Argentina, Mexico and Colombia, while maintaining share in Manila and Central America and losing only 2 percentage points of sales in Brazil. Colombia delivered an impressive 35% volume growth in this category, driven by the del Valle Fresh oranges, Powerade and Fuze Tea. In Venezuela, del Valle Fresh and Powerade supported 11% volume increase. In Argentina, Powerade and Fuze Tea more than compensated for declining juices to drive 8% volume growth in the Noncarbonated Beverage category for the year. In Brazil, the Jugos del Valle line of business supported our 2% organic increase in volume for the category. In Central America, our volume grew 3% of Powerade and Hi-C drove the category's performance. In Mexico, our noncarbonated beverage categories volume declined 9% as consumers shift their disposable income to sparkling beverages. Notably, we increased distribution of Santa Clara portfolio of milk and value-added dairy products through our home-delivery platform reaching 65,000 households with this premium offering. Moreover, Powerade also continued to gain share across the country, now reaching 48% market share through our territories in Mexico. Finally, in the Philippines, our ready-to-drink Noncarbonated Beverage portfolio grew 5% during the year. Moving on to our consolidated financial position. Our strong balance sheet, along with our reaffirming investment grade credit ratings, continues to underscore the financial strength and flexibility of our company. As of December 2014, after adjusting for the negative translation effect resulting from the use of the SICAD II exchange rate, we had a cash balance of MXN 13 billion on our -- and our total debt was MXN 66 billion. For the year, our operating cash flow was MXN 28.4 billion. In 2014, our operating cash flow to net interest coverage ratio was 5.5x and our net debt to operating cash flow ratio was 1.87x. During the second and fourth quarter of 2014, we've made dividend payments in the total amount of MXN 6.2 billion demonstrating our company's ability to return capital to shareholders while deleveraging our balance sheet, capitalizing on our financial liquidity and continuing to invest in the future of our company. Our comprehensive financial results for the year was impacted by the acquisition of financing of Spaipa and Fluminense, which was brought into Brazilian reals; a foreign exchange loss related to our U.S. dollar denominated net debt position; and a loss on the monetary position of Venezuela resulting from the effect of high inflation on these operations' monetary position. During the third quarter, we registered a onetime effect from the settlement of certain contingent tax liabilities at our Brazilian operations under the tax amnesty program offered by this country's tax authorities. As a result of our work, our effective tax rate for the year was 26%. Our net income was MXN 10.5 billion during 2014 resulting in earnings per share of MXN 5.09. As always, we took proactive steps to further strengthen our capital structure and financial flexibility. Our increased focus on financial discipline across our organization from more efficient, prudent and stricter working capital and capital investment management to the development of the talent and capability to carry out in-depth financial and profitability analysis on many fronts to the implementation of an organizational transformation duly increased efficiency in every process across our territories to make more better informed decisions, enable us to continue reducing our net debt position while maintaining our company's strong cash flow generation. Despite structural changes in recent years, particularly in Mexico and Brazil, we continue to transform our company's talent and management capabilities and our growth portfolio in operations. While investing in our supply chain infrastructure, our packaging innovation and our route to market and commercial malls to meet our consumers' ever-changing needs in the face of an evolving challenging market environment. Going forward, our financial discipline, our teams operating and strength and ability to adapt to the changing market dynamics of our geographically diversified portfolio [ph] dollars. And our company's capacity to create a leaner, more agile and flexible organization will enable us to capture the long-term growth opportunities that we envision in the beverage industry. We are proud to enjoy the opportunity to continue creating sustainable value for [indiscernible] now and into the future. Thank you for your continued trust and support in Coca-Cola FEMSA. And operator, now I would like to open the call for any questions, please.

[Operator Instructions] We'll take our first question from Antonio Gonzalez with Crédit Suisse.

Two quick ones on Venezuela and then 1 -- also a quick on Brazil. First, what is the rate going forward that you expect in Venezuela? Because I just wanted to know if your auditors would allow you to use SICAD II in 2015 since in 2015, the rate is no longer available and it has now been merged into this so-called SIMADI rate. The second thing is until when do you think you will have access to the VEF 6.30 rate to import your raw materials in Venezuela? And just finally on Brazil, do you have any comments, maybe very difficult to quantify, but any big picture comments on what you think would happen to the operations in Brazil in case of electricity and water rationing across the board specifically if the mom-and-pops have any disruption because they ran out of water or electricity? Héctor Treviño Gutiérrez: Let me start -- am going in the order of your questions. With respect to the rate, as you can imagine, we have long and very lengthy and difficult discussions with our auditors, the auditing committee, the finance committee and finally, yesterday with the Board of Directors. We've decided to use the VEF 50 rate, as you correctly pointed out, that was available as of December 31, with the idea of trying to better reflect what the numbers of Venezuela would be [ph] Coca-Cola FEMSA. As of February 15, SICAD II, VEF 50 per dollar is no longer an official rate. We saw that when they were merging SICAD 1 and SICAD II, they wouldn't -- we thought that they would go for another, maybe it was one to reflect better, and now they are [indiscernible] who use for companies to translate financial statements. Unfortunately, the only rate remaining was SICAD I at VEF 12. And then they have this margin of -- this scenario -- this margin of the market, so far they got very, very few dollars trading on that. There are no clear indication of the debt of that market. As a matter of fact, last week, we presented 3 different beats [ph] for a total of $0.5 million. We were not assigned any dollar at all. We still don't have any clear idea of the amount of dollars that were assigned in this bidding process, this market process last week. So with all that information, the dialogue with that will always perceive that. We are using VEF 50. And on lead, there is a clear -- a very clear move -- official rate during the first, second and third quarters. We will continue to use VEF 50 per dollar [ph] [indiscernible]. That is our expectation. Once -- remember that the first, second and third quarter, we only have a limited review by the auditors and there's not a full audit and there's no feeling from the auditors. So the auditors feel comfortable with that. Once we get to the fourth quarter of next year of this -- '15, excuse me, 1 year from now, we will have again to review with the auditors in a very in-depth process again, what should be the rate to be used to close the book for the year. With respect to the VEF 6.30 exchange rate, we continue to have access to that. I have to say that last year, we received around $120 million at that rate for our raw material needs. You can notice a declining trend as the year advances. So a lot of that was during the first semester and the lower amount is due the second semester. During January, we received $750,000. December, we received a limit in excess of $5 million. So we are still refilling the funds that we needed to work with our operations. And obviously, we have a very important dialogue with our suppliers for them to have patience, the same [indiscernible], so that the 2 of us can work in this environment in Venezuela. So the dialogue with our auditors is that as long as we have the proper documentation with the central bank and that we have been granted access to the so-called [indiscernible] forex, exchange rate which [indiscernible] VEF 6.30, which would vary to our cost at VEF 6.30, and that's what we are doing right now. With respect to Brazil and the potential for electricity and water shortages, it's very difficult to quantify the effects on the trades and the mom and pops in case we're going to rationalize in mood [ph]. Our strategy is to be present in the marketplace even if the growth is not gold [ph] but we have to be there in the marketplace. From our production and distribution point of view, we are not foreseeing any problem because of the wealth that we have in our plants and the supply of water that we have in our plants. The largest plant that we have in Brazil, which is in Gerais [ph], which is near São Paulo, and that plant is the one that is a little more [indiscernible] because they live [ph] to São Paulo. We've done -- we feel that with 30%, 35% rationalization in water, we will not have any problem because of the different supply of water that we have with our wells or because we can use all of those from plants that are around the São Paulo area, including some in the former [ph] Fluminense and former [indiscernible] part of our operation. So we can the supply the São Paulo market and the regional markets, maybe we will need a higher transportation cost or not maybe, certainly, with a higher transportation cost, but we will be able to supply 100% of the market. With respect to electricity, we feel very comfortable because we do have generation in our plants. We will divert the electricity that we are using for declaration of CF2 and some of the process, we can use that for our production lines. In addition to that, we are connected to a high-voltage network. And in the words of our engineers, we will still have electricity even if the airport in São Paulo doesn't have. So they feel very sure that the electricity will not be an issue for our production plants. But again, we have a good network of plants. We have different climate conditions in different regions in Brazil and the water. And therefore, electricity scarcity is not the same in individual regions, and we can always, with some additional transportation costs, supply our needs for our consumers. I hope that, that answered your questions, Antonio.

And next, we'll go to Jeronimo De Guzman with Morgan Stanley.

So my first question, I just wanted you to ask about Mexico. How are you seeing the country at the start of the year now that you're lapping the excise tax increases? Are you seeing any changes in the consumption? And also how are you seeing the competitive environment, given that you mentioned that it has been more aggressive -- it was more aggressive last year? Héctor Treviño Gutiérrez: Good morning, Jeronimo. I think that from my perspective, the very good deals in Mexico is that even in this very complicated environment of a 15% price increase during the -- to pass along the tax increase to soft drinks, we were able to deliver volume declines that were lower than what I was anticipating at the beginning of the year. Remember that I mentioned 5% to 7% on soft drinks. We ended up our foreign accounts 4.6% decline in soft drinks. We were able to pass -- in addition to the tax, we were able to pass inflation to -- as a price increase to the consumer. And therefore, you see the important improvements in profitability of -- and the margins of the company. At the end of the day, we ended up for the full year with an EBITDA growing 4%, 5% in the Mexico operations, which I think is a tremendous, tremendous achievement for our operation. For the beginning of this year, we are seeing some interesting trends. Very good January. Very, very good January. Obviously, nothing as difficult a January as last year, which was not the same in every part of the territory. And it's important to note for you to remember that, the different -- that we changed prices to the consumer at different base in the different territories and different -- more so, that's are operations in Mexico. February is a little bit softer. It's very similar to what we -- a little better than what we have last year, but not the same kind of growth that we saw here in January. So February, we haven't finished the month, but that's basically the trend that we are seeing. So it's a little bit surprising because we are seeing some other industries with good performance at the beginning of the year even the retails, the so-called [indiscernible] indexes that they support are showing good trends. I think that the positive for Mexico is the fact that the U.S. is starting or is showing strong signals for growth. So that's positive -- that will be positive for Mexico. We have a lot of issues where the -- still the political and the security environment that we have in Mexico. But I think that everything included, January was a very good month. So it's a little bit better than last year, but not as high growth as we saw during January.

And you're able to take pricing more or less in line with inflation for the year? Héctor Treviño Gutiérrez: Yes, yes. We are still shooting for that. I can tell you that for this year, what we are seeing in January and as of the end of the last fourth full quarter, we are 1 -- there are 1 or 2 borders. We are one of those in Mexico that are increasing market share in spite of increasing prices.

Okay. And another question I had was related to the -- your growth or your inorganic growth. I mean, starting maybe with the Philippines. It seems like you've made some good progress on the volume on growing the top line and the go-to-market strategy. I wanted to see kind of where you stand right now in terms of the margin, kind of when you think you can focus more on increasing that profitability and where you are in terms of evaluating other opportunities in Asia? And then, I guess, related to that, and I know it's a long question, just given that Coca-Cola company has given more details about Bottler refranchising in the U.S., I wanted to see if you have any thoughts on -- any new thoughts on whether you would be interested in this market, given the economics that they've shared. Héctor Treviño Gutiérrez: All right. Let me start with the Philippines, Jeronimo. I think that what we have accomplished in the Philippines is important in the sense that the strategies as we described with respect to portfolio and go-to-market are starting to work for us. And that's why we are seeing important growth, especially in the areas where we have deployed the go-to-market initiatives. You see very important growth in terms of volume, quality index for our produce, out of stocks, capacity utilization, all those indicators that have to do with supply chain network improvement. And as you can imagine, as we have focused a lot on one way presentations, we are shifting little by little, the niche approach and one way, now we're presenting around 40% to 42% of our niche when they were more around 30% a couple of years ago. Having said that, we are now, as of the end of last year and certainly the beginning of this year, we are now moving into how do we translate that into better margins and better profit for the operation in the Philippines. 2014 was a very tough year because of the disruptions that were caused by the typhoons, because of what we described in previous calls about the truck bank and the additional -- the increased costs that we have in our operations. We are better controlling that and we are now increasing prices at levels that should bring about better profitability. Currently, we have to continue to adjust those price increases according to what we see in the Philippines. Our expectation is to substantially increase the profitability. Remember that the Philippine market is a market that has been struggling with profitability for many years, basically breakeven. So whatever we can do will probably show a high increase in those numbers are small, and it's important to remember [indiscernible] that we still have 4.5, 5 more years on this call option to exercise the 49%, to provide the remaining 49% of the Philippines. I think that in my perspective, that will be the first stage in whatever we do in Asia. And given the structure that we have on that call option, the way it was sculpted together with the Coca-Cola company, it makes sense -- it makes a lot of sense for us to delay that exercise until we feel very comfortable there. The carrying cost for that option is very small and financially, it makes a lot of sense to wait until the end of that -- of 7 years up to -- from the acquisition point. Having said that, we are confident that what we are doing in the Philippines is going in the right direction. We are focusing a lot on the core products for being above of the powders and the lower brand equity brands, increasing market share. For the first time in Manila, we have fully achieved with brand Coca-Cola along the -- remember that before with brand Coca-Cola above cola with the 2 brands we have a difficult position. But now brand Coca-Cola alone is the #1 brand in Manila. And I think that the achievements we have in the marketplace signals that we are going in the right way in the Philippines. Once we see that the acquisition is fully implemented [ph] in the Philippines, we will think about all the potential expansion we mentioned. With respect to the U.S., we know that the Coca-Cola company is thinking of increasing the speed of this process and do process out [ph] 2015 and '16. We have not any specific proposal in our plate but we are certainly interested in analyzing whatever is presented to us. If that is presented to us in the future and go from there, we would have to analyze the economic conditions of a potential acquisition in the U.S., together with the commercial relationships that we'll have with the Coca-Cola company and to speak with the stakeholders in an operation like that. But there is nothing right now, in the process, okay?

Let's go to Andrea Teixeira with JPMorgan.

I mean, the first question that I had was about volume which you were able to respond. And I guess, I mean, on the pricing front, I just want to reconcile the first question. Reconcile when you said you took pricing. If you can give us like a sort of magnitude that you -- the pricing that you took and if you saw a little bit more leaning of your main competitor doing the same. And the second point is about raw material because I think we haven't discussed that in the call yet. For the outlook and its impact on margins. I mean, we heard some other bottlers that they can try to mitigate the peso devaluation with more HFCS but I'm assuming you've done most of it from conversations before and from the call before and -- but I wonder if the lower PET and if you have some way of maneuvering that to keep your margins flattish or otherwise. Héctor Treviño Gutiérrez: Let me clarify and maybe just to be very clear about the pricing index. We felt that these prices during the past year and we have moved our -- as we focus more and more on transactions and trying to move to single serve presentations, we are moving a little bit more of the mix of our products to packages that have a better pricing formula. In January, we have not increased prices of the individual packagings, but we have -- when you look at the equation of volume divided -- revenue divided by volume, the total price per unit case is increasing just to be very clear with that. Our idea is to move pricing with inflation. And obviously, we need to look at the correct time during the year, when to do that. Probably March would be the first movement in prices or maybe even packaging. But our people continue to work in increasing pricing, the total pricing for the company, meaning going to more single serve presentations, etc. [ph]. I would expect to the -- FX impact is certainly something that we need to consider in all of this. We know that some of our peers and competitors have mentioned that they want to increase value of our limiters [ph] from pressure on the FX front. I get that they were a little bit surprised by the magnitude of the changes in the FX in the different countries in Latin America. We have the positive effects of raw materials in dollar sense coming down a little bit versus what we had last year. And that's being probably compensated or a little bit more than compensated because of the movement in the foreign exchange. For us, we have around 30% of our needs for Mexico and around 28%, 29% of our needs for Brazil already hedged at very good prices. We did that a few months ago. So the impact, that would be probably small, around 70% of our needs on those countries. In Colombia, we also have some changes. Always be Argentina and Venezuela is very difficult to work with any effects hedged. So I think that the combination of raising price, combing down [indiscernible] completed numbers. Will sugar slowly -- sugar is slightly below the pricing that we had last year or flat. With the effect of the FX, we have still a very stable raw material environment during 2015.

Great. And in Brazil, would be the same, Héctor? I mean, they also look for pricing, you think, like given the strong -- I mean, given the very hot weather there, that you're able to pass on some of the pressures on the real, even though as you mentioned, like you don't -- it's only on 70% of your dollar COGS. Do you think that you can find a way to press on price increases there that are linked to inflation or it's still quite competitive? You've done so well, I mean, just from a volume standpoint, sequentially being able to pass on the price increase, especially in the summer. Héctor Treviño Gutiérrez: It's a tough question in Brazilian real, but certainly our expectation is to continue moving with inflation [indiscernible] the expectation for inflation is moving, the target is moving every day. It's difficult to grasp, so I agree with, and in different economies on a number for inflation, but we have made in our business plan, the idea of increasing prices with inflation. Remember that in Brazil, we are focusing a lot on the so-called magic indiscernible] prices. BRL 1, BRL 2, BRL 3 and BRL 4 for different presentations and they will turn our 2 liters now in Brazil. The formula has been a little bit different than Mexico. When you look at the other price per unit case, it's sluggish and some months, we'll see them a bit down, so it's more an effect of the link [ph] because we are again, introducing this and the return of our presentation is gaining a lot of traction in Brazil. So within the different presentations, the idea that we have is to pass along these price increases. Remember that we have a new production plan that we expect to have efficiency from that, both in transportation and in efficiency adjusting in the cost of producing our products, because it's a much more modern production facility. So all in all, I think that we would be able to continue with our magic price points and fostering the 2-liter returnable presentation and increasing that penetration. The competitor [indiscernible] in past especially [indiscernible] cost and we would need to check the competitive environment continuously just to see if we can pass along these prices but our expectation... [Audio Gap] ...yes, do we pass along this inflation to the consumers in the form of price increases in every product.

And if I may, one last question, Héctor, on Venezuela. I know you've, in the first question, you elaborated a lot, but just on -- I mean, I think the concern now is like a transaction impact of the FX, right? How far in advance you're still buying on a monthly basis at 6.3? Do you see -- I mean, obviously, in a way, a risk of not being able to source with the dollars. I know you printed in your press release saying you're still buying at 6.3, but that's like on a monthly basis, right? I mean, you're being been able to buy your raw materials at this currency? There is any systemic issue there like... Héctor Treviño Gutiérrez: No. I think at -- yes, I think, Andrea, that in our P&L, the majority of the raw materials, it registered at 6.3. When we don't receive an authorization from the Central Bank to import a specific product for whatever reason, all -- and the majority of the cases is more with the spare parts. We need to buy at a much higher rate and we've registered that right in our P&L, so a very small portion of our P&L is affected by higher rates and sometimes it's close to 170. As we mentioned, we are still receiving authorizations from the central bank to import these raw materials at the same forex rate which is 6.30. The risk, what is the risk? The risk is that our product the different risk. One is that the central bank says now the same forex rates is 12 or 20 or whatever and we would have to register these new rates in our cost structure. Another risk is that they say, "You, Coca-Cola FEMSA, you would no longer have access to the same forex rates" and then we'll need to see how to work with that. What we are doing internally is to work with all the suppliers, all the suppliers and basically in 3 categories -- 4 categories as the Coca-Cola company will concentrate that is coming from Brazil. PDU [ph] or the resin that is only produced in a few countries around the world, no chance of producing that locally at all. Caps, plastic caps where we got some local producers that did not have a very good quality but we are working very closely with them so that to combine them and for them to move investments so that we can source plastic caps locally and reduce the amount of dollars that we are requesting from the central bank and the other category is spare parts. And spare parts, every industry in Venezuela is coming forward because it's difficult give the proper maintenance to the equipment in every industry, so we are starting dialogue with the Coca-Cola company to see if we can have some local sourcing of concentrates. We are working on that but there is no assurance that we will be able to do something like that. We are working the plastic bottle converters to see ways to improve or to reduce the number of dollars that we demand. And one of the alternatives, for example, that right now resin from China is substantially lower in price than from where we are sourcing the resin in Venezuela but we don't have authorization in Venezuela to import the resin from China. So we are working on getting the proper authorization from the authorities so that we can import resin from China. And that by itself would be a 25% reduction in price in resin in Venezuela, therefore, a 35% reduction in the dollar that we demand for PC [ph] in Venezuela. So all of these fronts, we are trying to work. As we try to express in the press release the risk that we would not be able to use in this study in the future, yes, but that's the risk that we have. So far, because we have all the recommendation in place to have access to the same forex rates. We're also localized [ph] in Venezuela, with our young wives, army young wives [ph] globally spelling [ph] of you have to use the spelling because this is a -- this is the focus straight [ph] for that. And in the meantime, as I tried to explain in this very long, [ph] I'm just -- we are trying to find ways to reduce the number of dollars that are needed to run the operation in Venezuela. If we could ever get a moment where we charge for U.S. for our products, I know [ph] you'll use what we worked [ph] for our cost, then we don't have any problem in terms of growing importantly, our operation. Right now, we have capacity constraints and we are selling everything we produce, and that's why in flavors, we have production in bottles because we basically favoring brand Coca-Cola that is growing a lot. Should we invest in more production lines or more plants? It's very difficult. Maybe we get dollars to import the production lines but then the amount of resin and the amount of caps and labels will also increase, and we need we have assurances that it's not only the dollar for the production facility but also for the future raw materials that will be needed. Again, so we are in an environment where we use bolivars, only bolivars in our P&L in terms of our revenues, our [indiscernible] raw materials [indiscernible] then we can grow and in bolivars we have a lot bolivars there and it's a great profitable operation. The only movement that we're doing at this moment is translating those bolivars from Venezuela at a different rate in a consult in the Mexican peso consolidated figures that we present.

Next, we'll go to Gabriel Lima with Bradesco.

My question is also related to Venezuela. It's a quick one actually. Just a follow-up in the first question. I just wanted to make sure of how much cash position you are currently holding in the country, Héctor. And if the changes implemented in the currency exchange system recently in February, right, changed, by any means, your ability to cash out money from the country. Héctor Treviño Gutiérrez: Before moving to 50 bolivars per dollar, the cash balances were close to $800 million. At 50, it is more or less around $200 million. That's what we have right now in our balance sheet, yes, in the balance sheet that we reported today. So it's $[indiscernible]. We have, for several years, a request for dollars or dividends to the central bank that has never been granted. If we find a way of buying dollars in this marginal market and for what is the current [indiscernible] in this money market, we will certainly buy some dollars and pay those dividends that have been there for several years. I think that right now, only that we need to be sure that we have enough bolivars to run our operations properly in Venezuela, but we think that we have more than enough right now.

Okay, I see. So if you had the option, you would cash it out at 1 70, right? But you're not executing that, that's pretty much what you're saying? Héctor Treviño Gutiérrez: Yes, I think that -- and we certainly [indiscernible] the 1 70 market is moving. As I mentioned, we put 3 different bids to buy $0.5 million at that market and we were assigned fewer dollars. So we're doing that in order to have some cash balance just in case we need emergency spare parts or something like that. But yes, we would value [ph] that. As we mentioned for all these previous quarters, we have acquired some real estate also in Venezuela as a way of hedging our position [indiscernible] bolivars because we have organic -- a lot of bolivars in Venezuela and just with inflation around 80% or 90%, cash balances will lose value, will be worth 1/2 after 1 year. So we have been buying some, earlier, a couple of years ago, we bought our offices. And last quarter or the last 3 or 4 months, we bought a couple of workhouses that were important for us for our operations. It's also a way of hedging part of that position that we have. And obviously, when you go to buy a real estate property in Venezuela, everyone is using the 1 70 as a reference to price these properties in bolivars, yes? Okay?

Okay, no, that's clear. And I just want to make sure of another thing you mentioned in the call. So you're using -- we're going to be using VEF 50 per USD in 2015, but there is nothing on the table yet of what currency is going to be used going forward, right? Héctor Treviño Gutiérrez: Yes. That's basically what we discussed with our Board directors and with our auditors and the auditing committee in the last week basically, to continue using the [indiscernible]

Now we'll go to Alex Robarts with Citi.

I wanted to go back to Brazil and really, it's 2 questions. First of all, on pricing, kind of telling us definitely the goal was to try to get to inflation this year in Brazil. Can you talk a little bit about just this tax that we've seen? It's now formal. It's law. It's starting in May in Brazil on cold beverages. Can you comment a little bit on what you might need, if any, to pass on to the consumer starting in May in terms of price, that would be great. The second question is back on the cost and expense structure. You've made it pretty clear that we'll have some currency-related issues on the raw materials, but if we look x raw materials, I guess I see the partivity gains from the Minas plant coming through. I see the synergies from the 2 acquisitions, but I also understand that on the concentrate price, if it's not up for renewal this year, the negotiations on Brazilian currency trade, if I understand it correctly, are beginning. So if you could try to just talk about those non-raw material elements of the cost structure in Brazil and how we should think about that going forward. Héctor Treviño Gutiérrez: Let me start with the pricing part in Brazil. Our objective in our business plan is to have prices move with inflation. We only [indiscernible] deliver what [indiscernible] the real versus dollar rate evolves during the year because that has an impact on our cost structure, but we've seen that what I described with the work [ph] impact is coming down and sugar price is stable or down versus the previous year. We've seen that we would have a stable general raw material prices in Brazil. So assuming that, that's part of the formulas is as stable as we are assuming our business plans, then we will continue with this idea of increasing prices with inflation in Brazil. The patch is moving from a very complicated formula that have some surveys done by the government with respect to the price at which the state system was selling the products to the consumers and then having a strange formula there to compensate for the taxes that we were taking [indiscernible]. Now we are moving to ad valorem tax which is very clear for everyone. And in theory, if you do the numbers, this ad valorem tax could be a little bit larger than what we had before, but without the mess of adjusting every 6 months the formulas. So all in all, it's very straightforward and that ad valorem tax would be paid by the consumer and we will just deal with the net price that is staying with us. Other than the raw materials, we don't have any dialogue at all with the Coca-Cola company with respect to concentrate in Brazil. We do have the element of the synergies in Brazil that we activated with $52 million after 24 months. What we can say there is we are very much in target at a faster pace so that's helping this year. We have attracted a lot of synergies and I have to say that we are also using some of the best practices that [indiscernible] and spite taka [ph] also use those especially summation with respect to accounts receivables and the way they work in capital work being managed and we are using that in the oil in the form of Coca-Cola FEMSA. So in they synergy front, we are moving very well and as we've already pointed out [indiscernible] we are moving way from our very own plant, very complex because it had different levels. It was more like a pyramid, a bit of U.S. dollar flat piece of land. And now we have what we consider is a very modern, state-of-the-art facility that is starting to work to produce commercially in November. And we think that we can derive some benefits from that. Especially on this highly returnable fees [ph] in capacity to that region that was not being served property with that package because it was -- we didn't have the capacity there. So with all those numbers in place, I think that what we are seeing in Brazil is important improvements in margins. We heard that last year we got important reductions in margins so if we are getting back to the levels that we had in 2012. So we feel very good about this because I think that the fact that given the tax impact in Mexico and the fact that Mexico was able to deliver growth at the EBITDA and EBITDAR [ph] level. And having Brazil returning to the profit levels that we have in 2012 or improving those margins even that we still have some room to improve but is getting closer to the levels that we have in 2012. When you remember that in Brazil, there was a very strong change in the tax law for raw materials that impacted significantly our cost structure, and we have also the so-called transportation law that increased our cost of transportation. So just as we solved 2 issues we lost in 2013, we lost 3 to 4 con [ph] from the basis points in margins. So we are recovering that. So the fact that Mexico and Brazil which is the bulk of our operations are having the strength. I think that is a very good achievement for this year.

And now we'll go to José Yordán with Deutsche Bank. José Yordán: Most of my questions were -- my main questions were answered, but just a follow-up on the concentrate in Mexico. Obviously, we're coming up on the 10-year anniversary of the very contentious negotiations back in '06, if I'm not mistaken. How are you guys going to be approaching that this year? Is the conversation going to be preempted or brought up ahead of time? Or has Coke indicated that given the difficulty in the markets, et cetera and the margin pressure that, that it's just off the table and maybe indefinitely? So any color you can you give us on that would be great. And then just a more technical question. On Venezuela, you have given us -- every year in the annual report, you've given us a breakdown of Venezuela operating P&L because it was, I guess, deemed as relevant or material by the auditors. Will that still be the case for the 2014 annual report or not? Héctor Treviño Gutiérrez: Let us start with the concentrate piece. We have, in 2017, is the 10-year anniversary of this, of the increase that we have in Mexico. We are having some conversations as industry with the Coca-Cola Company just to start trying to find a way of doing something that is a win-win situation. We understand the need of the Coca-Cola Company to also increase their profits, but they also understand that we are going to -- 2014 was a very difficult year because of the tax for the industry in Mexico. So I think that all in all, we have a good dialogue, nothing complete yet. And what I want to say is that our idea is that we should find a win-win situation where we can find ways to get increased profits from the marketplace and not from 1 company to the other. So with respect to Venezuela, we will continue to present in the annual report. I mean, you look at the notes of every quarter that what we present to the board [ph] [indiscernible] we do have -- we open some of it main lines of the channel [ph] and the balance sheet for Venezuela and then we will continue to do that because I think it's important for everyone to have a very clear idea for how to compare once -- now that we've changed the group to 50. One of the things that we are debating [indiscernible] we should present probably with some clarity, not only in the segment section of the notes, but just bring it to the front of it of the press release and to do some comparisons rather to be liquid [ph] to have a better understanding of the Venezuelan situation.

And now we'll go to Martha Shelton with Itaú.

It's regarding Mexico. I'm just curious to know how much leaner your Mexico operations can become. Is there any room for additional SG&A efficiencies, given how well you've done throughout 2014? Héctor Treviño Gutiérrez: 2014 was -- given the circumstances again about the tax and all the impact that we're expecting, we've reduced substantially the workforce. And then basically, we reduced 1,400 people from our workforce [indiscernible] 2014. We are going into a second phase of what we call effectiveness and efficiency application. That's basically the idea of reducing layers and increasing expanse of control in all the organization. We expect that this will bring about some additional savings. It's still very difficult to quantify that and we are -- we will be executing this country-by-country [indiscernible] 2015. The idea is to focus our organization in 2 centers of excellence. In Commercial where we have people that -- because I think that -- we think that this is one of the top priorities for companies or everything that has to do with commercial practices and supply chain. Because we think that in order to compete in this market, we need to be very efficient. So we are focusing and we are reorganizing our structure using these 2 pillars. So for example, in the past, a person that was in charge of sales, they will be in charge of making sure that the product was arriving on time to the warehouse, in charge of the maintenance of the trucks and the forklifts as well as in charge of selling products in the streets. Now sales personnel will only be in charge of selling and having contact with our clients and our consumers. And supply chains will be in charge of everything else and through service level agreements with their people, have the product that is needed on time, et cetera. That implies some changes in the organization that we think will have some important efficiency for us. Again, the idea is to be more effective and to be more efficient both in our organization and in the marketplace. Obviously, at the same time, we have a group of people that is thinking in everything that has to do with IP innovation. And how can we use technology, especially mobile technology to improve or to potentialize our sales personnel in the streets. And then we have handheld computers with every person but these computers are kind of old. Not all of them are connected in real-time. So we're analyzing what we can do in terms of improving our sales force capabilities basically in the market, which I think that we'll also have at the end the day, bring some efficiency to our PNS.

And you're unable to quantify that what I understand unable at this point to quantify the effects of this delayering process? Héctor Treviño Gutiérrez: Yes. Right now, it's still too early. It's something that will be evolving during 2015.

At this time, we have no further time for questions. I'll would turn it back over to Mr. Treviño for any additional or closing remarks. Héctor Treviño Gutiérrez: Well, thank you for your interest in Coca-Cola FEMSA. And as always, we are open for any additional questions you might have. Thank you.

That does conclude today's conference. We thank everyone again for your participation.