Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q3 2016 Earnings Report, Transcript and Summary

Please stand by, we are about to begin. Good day, everyone, and welcome to Coca-Cola FEMSA’s Third Quarter 2016 Conference Call. As a reminder, today’s conference is being recorded, and all participants are in a listen-only mode. At the request of the company, we will open the conference for questions and answers after the presentation. During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA’s future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management’s expectations and are based on currently available data. Actual results are subjective 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: Good afternoon, everyone. And thank you for joining us to discuss our third quarter 2016 results. This quarter our company continued to deliver solid top line results. This performance was driven by our focus on transactions and pricing, supported by our strong point of sale execution and market share gains across most categories and territories. Our transactions continue to outperform our volumes in key markets such as Mexico, Brazil, Colombia and Argentina. As we leverage our operating focus on pricing flexibility, our average prices per unit case grew ahead of inflation in most of our markets. Our top-line performance coupled with our financial discipline enables us to better weather a general volatile currency and raw material environment, especially higher sugar prices and mitigate margin pressures. For the quarter, our consolidated comparable revenues rose 6% and our comparable operating income grew 7%, while our comparable EBITDA decreased slightly as a result of certain one-time non-cash expenses recorded in 2015. I will briefly discuss the highlights of each operation. In Mexico, our volume growth continued its positive momentum, even as we’ve started to hit tougher comparable growth for the second-half of 2015. Our transactions once again outperformed our volume growth by 1 percentage point, and our average price per unit case continued its mid-single-digit ahead of inflation. Notably during the quarter, our volume of Coca-Cola Zero grew close to 14%. Together with the strong brand equity of Coca-Cola this enables us to maintain our leading market share in the cola category. Our Naranja & Nada and Limon & Nada, our successful sparkling orangeade and lemonade, again drew our flavored sparkling beverage growth, supporting market share gains in this category. Ciel flavored water continue to grow significantly, almost doubling its volume and gaining close to 7 percentage points of market share in this profitable segment. Non-carbonated beverage volumes continue to grow at a double-digit pace, driven by Vallefrut orangeade, del Valle juice and Santa Clara dairy products. Mexico’s solid top-line results combined with our operating discipline and operating expense control enable us to mitigate gross margin pressures, resulting from currency volatility and higher sugar prices. In Central America, our volumes grew 3%, slightly outperforming our transaction growth, by country Guatemala’s volume grew by more than 9%, Nicaragua’s grew 7% and Costa Rica’s increased 3%, compensating for a decline in Panama. Our transactions outperform our volumes in both Nicaragua and Costa Rica. Our South America division continues to face a very tough consumer environment that has affected our volumes. In Brazil, our volumes contracted 7%, but our transactions outperformed these declines by close to 5 percentage points, as consumers continue to embrace our affordable portfolio alternatives. Importantly, our focus on enhancing our execution levels and amplifying our portfolio has enabled us to sustain our momentum in market share gains across every category. While we have achieved improvement in every aspect, we continue to see opportunities to improve point of sale activation and price compliance indicators. Notably, our returnable presentations volume grew close to 4% this quarter, continuing to gain in our mix of the sparkling beverages now representing close to 20%. Within the flavored and sparking beverage category, Kuat continues to outperform, achieving double-digit growth for the quarter and driving market share gains. Year-to-date, our local pricing and revenue management initiatives, coupled with our focus on cost control has enabled us in Brazil to expand EBITDA margins by 20 basis points for the year. In Colombia, our volume declined 6%, as we continue to face a tough consumer environment and operating disruptions due to a national trucker strike. Despite declining low-single-digits, our transactions continue to outperform our volumes by more than 4 percentage points. Notably, our volume of brand Coca-Cola grew 3% in the quarter, driven by our strategy to reinforce affordability through a 2-liter returnable presentation. Moreover, Brisa personal water continued its double-digit growth during the quarter. Our pricing initiatives implemented to compensate for the increased rates of inflation, the devaluation of the Colombian peso and higher local sugar prices, together with our operating discipline enable us to mitigate margin pressures at the EBITDA level. In Argentina, consumers continue to experience constraints on disposable income in an environment characterized by high levels of inflation. In addition, we face certain operating disruptions that affected our volumes for the quarter. Our volume declined close to 20%, while our transactions outperformed this contraction by 5 percentage points. Despite this performance, our focus on execution and segmentation, coupled with our robust portfolio offering continue to drive market share gains across every category. This quarter, we accelerated our pricing and revenue growth management strategies to catch up higher levels of inflation, combined with our proactive hedging strategies, and operating and financial discipline. These initiatives continue to kill [ph] EBITDA margin expansion. In Venezuela, we continue to face shortages of sugar, while we successfully reinforce our portfolio with calorie-free alternatives. Higher levels of inflation and certain consumer’s preference for sugar drove our volume contraction of more than 40%. Despite this exceptionally challenging environment, we remain committed to satisfy our Venezuelan consumers’ various needs. Moving on to our Philippines operation, we delivered another strong set of results. Importantly our volumes and transactions grew 7% and 6% respectively. Our core sparkling beverage portfolio continues to drive our top line performance for the quarter. Our renewed 12-ounce and 750-milliliter returnable glass offerings continue to deliver transaction growth, while our flavored sparkling beverages are supported by Mismo our one-way single-serve PET presentation. Additionally, our non-carbonated beverage volumes including water and powders, all grew by double-digits. Our Philippines business operational and financial results remain encouraging as we deliver sustained margin improvement. This quarter, our comparable net income grew 30% to MXN0.99 per share. This result was affected by the depreciation of the Mexican peso as applied to our Brazilian real and U.S. dollar denominated interest payments, and to a lesser degree of foreign exchange laws on our dollar denominated net debt position. The aforementioned variables were partially offset by a lower effective tax rate as we continue to capture tax efficiencies across all of our operations. In addition, we have proactively moved to reduce our consolidated dollar denominated net debt. Consequently, our current exposure is approximately $550 million. This should mitigate the effect of foreign exchange volatility on our net income going forward. This quarter we achieved another important milestone on our way to capturing the next wave of growth for Coca-Cola FEMSA. Through our Brazilian subsidiary, we agreed to acquire Vonpar, one of the largest family-owned franchises in Brazil. This franchise territory not only represents an important opportunity to generate synergies going forward, but also enables us to consolidate our leading position in Brazil, serving now more than 88 million consumers and close to half of the Coca-Cola system volume in the country. Furthermore, the form of payment of this transaction underscores the flexible approach we take to mergers and acquisitions. It ensures that our company will continue to enjoy the financial flexibility to capture the next wave of growth in our industry, while continuing to invest in our company’s organic growth. Year-to-date, we have delivered a strong set of comparable results in the face of high currency and raw material volatility, together with a very soft consumer environment in South America. Supported by improving point of sale execution, our focus on transaction growth coupled with our ability to leverage our pricing and revenue growth management will continue to play a key role in reinforcing our leading market position, while protecting our profitability and cash flow generation going forward. Looking ahead, the Philippines top and bottom line growth should positively add to our consolidated results as of 2017. The transaction - the transformation of our operating model through our centers of excellence set the cornerstone for improving our organic business performance providing significant opportunities to generate top-line growth, operating efficiencies and savings, and driving innovation, while fostering talent development across our organization. We continue to enjoy the strategic and financial flexibility to capture both organic and inorganic growth in the future, and continue delivering increased value for our shareholders. Thank you for your continued trust and support. And, operator, I would like to open up the call for questions. Thank you.

Thank you. [Operator Instructions] And we’ll take our first question today from Lauren Torres with UBS.

Yes, hi, Héctor. I guess, I’d like to just address South American, and I guess to be more specific, Brazil. We are seeing some still notable volume declines and I think in the past you’ve addressed the fact that there are price package opportunities, ways to protect margin, there is an improved margins. How do you see this market either - just thinking about the rest of this year and more importantly going into next year, that the trend seem tougher, can you protect margins in light of what’s going on? And then, I guess, second part is just on Brazil. Vonpar seems like a bottler that you’ve always had interest in, if you could give us any sense of what the addition of this bottler could mean for you, synergy, impact things like that would be helpful? Thanks. Héctor Treviño: Good afternoon, Lauren. The way we are looking at Brazil, and we had it in our budget, we knew that we were going to have a tough third quarter. It’s been a little tougher and in terms of the consumer sentiment and that volumes that we are seeing. We believe that fourth quarter will be a little bit better, in terms of comparison versus last year. But really to start changing the trend that we see in Brazil, our expectation is that we will see that in the second part of 2017. So third quarter and fourth quarter, our hypothesis is that we will see a return in the growth that we are expecting in Brazil. I think that the acquisition of Vonpar will bring around $65 million in synergies. As usual, it will take probably around two years to do that. I think that the number is very achievable. I think it basically has to do with cost synergies that we think are very - that we can control and in this specific case, Vonpar was a territory that was selling products at a substantially lower price than the rest of the bottlers in Brazil. So in a way that will also help us even in the bordering territories that we have with Vonpar to improve our pricing there, because with Vonpar having those prices we were in a way kind of forced to sustain this lower prices in the territories that were next to Vonpar to avoid any transshipment from clients. Vonpar is a territory that has basically three plants, five distribution centers, around 4,000 employees, a little bit less than that. And very importantly with this addition, the 88 million people that we serve in Brazil, now it’s much larger than what the number of people that we serve in Mexico. So we do see that as a very important element for growth in the future. But again, we believe that we are still going to see a very sluggish Brazil for the next three quarters and staring third quarter of next year to start to recover. We think that we can protect some of the margins there. So far and it’s kind of clear, because last year with all the hedging activity we had a lot of savings in terms of the hedges that we have versus the spot price. With the appreciation of the real this year, this has been a year of the reverse outcome, because as you can imagine as we were fixing exchange rate six months ago or nine months ago, and paying for our carrying cost around 14%. The positions that we have in those hedges are at a substantial higher level than this spot price right now. On the other hand, the hedges with sugar prices are very favorable and we are saving a lot versus the spot price in sugar. So all in all, when you take the exposure that we have with raw materials and the position that we have in raw materials and the position we have with respect to FX, more or less one has killed the other and we have an neutral effect. So we think that we can protect the levels of profitability we have. We believe that we can improve that little by little. And certainly our expectation is that starting third quarter of 2017 will increase that more importantly. We are moving in terms of pricing, in terms of launching returnable approach in 1.25 and 2 liters. And very important element that I would not like to forget, even with this volume performance, we are gaining market share in every categories, it’s more an industry-wide trend. And I think that’s important for you also to know that we not have any market share erosion to the contrary. We are increasing a little bit the market share there. I hope that clarifies some of the doubts on Brazil.

Yes. That’s very helpful. Thank you. Héctor Treviño: Thank you, Lauren.

And we’ll take our next question from Isabella Simonato with Bank of America Merrill Lynch.

Thank you. Good afternoon, Héctor. Good afternoon, everyone. I have two questions. First in Mexico and Central America, Héctor, if you could discuss the outlook for raw materials going forward, and regarding both currencies and sugar prices and what we expect in terms of margin performance in Mexico in the coming quarters. And the second question, in South America, I appreciate your comments on the outlook for Brazil. But if you could also discuss the expectation for Colombia and Argentina, mainly in terms of volume performance going forward that would be great. Thank you. Héctor Treviño: A: In Colombia, we have increases and we mentioned that last quarter of around 25%, 27% on the prices of sugar. In Mexico, we are at levels around close to 20% increases on sugar prices. The outlook that we see for next year is an outlook where sugar prices will have committed to high-single-digit increase in prices in local currency. With respect to high fructose, we have already arranged with some of the suppliers of pre-bought if you will some of the contracts or pre-agreed with the suppliers prices that are low-single-digit increase versus what we have. That’s basically for Mexico. And with respect to PET prices, which is another element we are seeing also low- to mid-single-digit increases. Obviously, it will depend on oil prices and everyone we will have a different opinion where oil prices will be. But our expectation is that oil prices will increase a little bit for next year. All of our operations are cognizant of these trends and are working actively together with The Coca-Cola Company to find ways of using our pricing levers and start moving prices on those packages where we see opportunities to levers and where we feel that the competitor has - our competitors will have a lesser chance to affect our market share. So no question avoided. We’re facing an environment that is not that complex, because we are not seeing very large increases in prices, but that we’ll see some pressure from cost. Currencies will be another factor. It is very difficult to predict. And then I explained that in the case of Brazil most of our FX hedges are at a higher price or a higher cost than the spot prices right now, and that’s causing a problem. Today, we have our Board of Directors meeting and we discussed thoroughly our strategies, especially Brazil given the high current cost that we expect that the Brazilian rates will come down and we will move our hedging strategies accordingly with those movements. In the case of Argentina and Colombia, let me spend a few minutes. We are seeing - let me start with Colombia, a difficult environment where we again - we saw a 6% reduction in volume. It’s a bit little bit tricky, because colas is growing around 3% in the quarter, and that’s a very good trend for us, because we are super leaders in cola. So we are gaining market share, and colas is growing, which is beneficial for us. On the other hand, water is declining, but personal water is growing. So that’s also very important from the profit pool point of view. The issue we see there is very high increases in sugar prices. We have expressed in the past that the sugar industry moves a little bit like a cartel and even though they were fine with $100 million for price fixing, they increase the prices and now the consumer or the end-user of the sugar is paying for this time, which is kind of strange that things like that happen. But at the end of the day, Colombia - or the outlook for Colombian 2017 will depend a lot on the outcome of all the process that is going through Congress and the Senate in Colombia with respect to a potential tax on sugary drinks. They are - what they have proposed to Congress and this is going to be brought in the following weeks, is a tax of around COP300 per liter, which will be equivalent to around 25% of the current price. So in other words, that will be a tax that is kind of double the size of what we experience in Mexico in 2014. In addition, they are passing - they are proposing a regulation to increase the value added tax from 16% to 19%. In theory, they will reduce corporate tax in exchange for that. So we need to wait for that legal and the regulatory process to finish in Colombia. And that will have a very important impact on the consumer the following year. If they pass these taxes, these new taxes, no doubt that the Colombian consumer will be affected on 2017 on the disposable income available for our products and any consumer good products, will be affected. In Argentina, we saw a very important reduction around 20% in volume. It’s important, well, for me to mention that in Argentina we have a three-day blockage of the distribution centers, because there is a fight for the union contract that has to do with transportation. So the guys that are in charge of transportation want to get involved in some of the contracts that are embedded in our distribution centers, especially those that have to do with forklift operators. And the union that has the contract right now is defending that push. So there is a fight happening between the two unions and that situation caused the blockage of most of the distribution centers for three days. That had an impact of around 3 million unit cases. We having had that volumes will have declined more in line with the rest of the industry around 11% to 12%. But still similar to the previous quarters the Argentine consumer pretty much affected by the increase in tariffs and services, and not being - and the consumer not having necessarily the improvement in salaries in the same proportion. So that’s a situation that we have in Argentina. It’s also important to mention that in Colombia there was a trucker strike for 42 days that have partially affected our operations. And the estimate that we have, it’s also similar to around 3 million unit cases in the case of Colombia during the quarter. So all in all, I think that I feel positive about the Argentine operation in the sense that the adjustments that Brazil market did at the beginning of this mandate are now older in a way and sooner will be getting out of these adjustments. In the case of Colombia, it will depend a lot on the new legislation on taxes and the potential impact that that might have with the consumer. Thank you, Isabella.

Great, thank you very much.

And we’ll take our next question from Jeronimo De Guzman with Morgan Stanley.

Hi, good afternoon. First, I want to just ask a follow up question on the FX impact. Do you have any FX hedging already in place for moving forward for 2017 in Colombia, Brazil or Mexico, and then more or less at what levels? Héctor Treviño: Yes, Jeronimo. Good afternoon. We do have some of these hedges in place. More or less I will say we have around for the full year around 25% of our dollar needs in Mexico, at levels around MXN18.6, something like that. It’s more or less the hedges that we have. In Brazil, we have similar amounts, but the numbers are a little bit out of the money, around 380 more or less - 370 more or less is the average. And we’ll have somewhere around 20% already covered. As I mentioned, during the board meeting today, we discussed that and we are probably going to stay with that level. Of course without increasing the exposure in that in Brazil just because of the carrying cost until we see some reduction on the carrying cost. And Colombia, we have a lower amount, probably closer to 16%, 17% for the year, at around COB3,150 more or less. The way we look at this, Jeronimo, has always been similar. We look at the market; we see what the previous year FX was. We see what the budget for the year is, and we see opportunities to start fixing some of these cost in local currency, I mean, in raw material cost that will help us postpone price increases, then we move together with in a decision that is taken together with this Chief Operating Officer of each country to try to fix that, because why it’s important, because in every country we have a price gap versus our competitors that we want to protect as opposed to - protect meaning that we should not - we want to avoid increasing the price gap that we have versus our competitors. And we can fix some of the raw material cost at similar levels that we have in our quarters of the previous years, then we can assure that that price gap differential to be maintained. And that’s basically the philosophy we have here. As some of the currencies have appreciated, the effectiveness of these hedges have diminished versus what we have in 2015.

So, I guess the way you think about Brazil margins for next year on average maybe the FX is more of a tailwind but the sugar becomes a headwind for next year and then - because of the hedges that were favorable this year, and then in the end you think you can still protect margins or could you have some difficulties there given the sugar increases? Héctor Treviño: Yes, Jeronimo. The budget that we are working with our guys in Brazil calls for increasing margins on 2017 and that would have to be done through price increases and the change in the mix towards a single-serve presentations that will help us improve on that. It’s always a very difficult balance. The turnovers help us a lot, because we can maintain the affordability with our margins and that will give us a space to improve pricing on some of the more on-demand consumption, which is also very profitable for us. But certainly the idea is to increase margins in Brazil on 2017 and despite these increases in sugar and all of that, yes.

Okay, thanks. And then, also just in Brazil, on the Vonpar transaction. I just was wondering if you do see the transaction as maybe a catalyst to open up new consolidation opportunities in the country, do you think it could accelerate some of the talks with other bottlers in the country? Héctor Treviño: Yes, Jeronimo. We think that the answer is yes, because of two reasons, because again it restarted after three years of no activity in Brazil at the start of the operations. And I think very importantly is that the owners of Vonpar that will receive shares of Coca-Cola FEMSA are very important members of the Coca-Cola community in Brazil. As you know, Ricardo Vontobel was the head of the Coca-Cola Bottlers Association in Brazil for many years. And it has a lot of, I guess, prestige among the bottlers. So I think that that he is a shareholder with Coke FEMSA will help also in that process.

Okay, great. Yes, interesting, thanks. And just a final question on the Philippines, so just wanted to confirm, you will start consolidating that next year as I understand. And I just wanted to get a sense of, I mean, talked about the top line trends. And it seems like they have been very positive, but just wanted to get an update on how the margin - how the margin trends are looking, how the pricing trends are also looking and kind of what’s your outlook for where margins could be this year and then into next year? Héctor Treviño: Yes, starting 2017 we will consolidate the Philippines operation. We will report that separately so you will have a lot of visibility on those numbers. So far, I will say that we will have to prepare pro forma financial statements for 2016, so that the numbers are comparable. And I’ll say that the Philippines - the whole history of the Philippines is a story of volumes that have been increasing, brand Coca-Cola that is growing in importance and then getting the other, I want to call it de-ramp of the private brands that were owned by the Coca-Cola company diminishing in importance in the mix. We are a little bit behind volumes of what we were anticipating during the acquisition, and we are a little bit behind on pricing according also to our original estimates. And the important element here is that it’s an operation that is growing volumes more importantly now. Without moving necessarily the prices that much, I think that is important that we get the scale with volume. And then start moving prices a little bit more aggressively in the following picture. It’s not doing 2016, and maybe not during 2017. And with that at the end of the day the profitability that we have is lower than what we have in Latin America. But it’s improving little by little. You are speaking about an operation that we will have mid-single-digits EBIT figures and low-double-digits, and by that I mean 10%, 12% EBITDA margin in the Philippines. So our expectation is to - but we are coming from basically zero or negative numbers. So I think that we are moving in the right direction. It will take some time, but it’s again moving in the right direction and you will see that starting next year on our numbers.

Okay. Sounds good. Thank you very much.

And we’ll go next to Benjamin Theurer with Barclays.

Hey, good afternoon, Héctor. Thank you very much for the call. And I have question on outlook for Mexico, so what you are expecting now with - well, you mentioned already there was a deceleration in volume, clearly because of the tough comparison to the second-half of last year. But just to get a little bit of the sense what you are seeing in terms of volumes and transactions in Mexico going forward and looking into 2017. So did you expect that the rate of growth for volume should be somewhere similar to what we see now in the third quarter or do you expect the a further deceleration? What’s your take on what’s currently like a natural growth rate for volume in your view in Mexico? And then I have different question, but leave it with that one first. Héctor Treviño: Good afternoon, Benjamin. In Mexico, I think that, first of all, we are seeing a deceleration in the volume. But as we compare that to the first-half, the volumes continue to grow versus last year, but at a smaller pace. So I’ll say that a good bet for Mexico is low-single-digit volume growth with a strong pricing. That’s the formula that we are looking for. And as we mentioned in other conference calls also, we think that we are in agreement with The Coca-Cola Company in that respect, that is very important for us to focus in revenues and profits as opposed to just volume numbers. Transactions continued to outpace volume, which is an important element. And all our operations in Mexico are clearly - they clearly got that mandate of starting to look for opportunities for pricing. A lot of what we are doing with the digital - what we call the digital transformation or the - in our companies starting in Mexico; right now, we have around 60% to 70% of our routes already with a state-of-the-art handheld device that is providing substantially a larger amount of information that will give us opportunity to do a lot of analytical analysis on the operators. And that has clearly helped us on the process of improving the way we manage discounts into different accounts. We believe that that will give us a much better granularity on our clients and understanding the dynamics of the market as we have a much better and much larger information from the consumer - from our clients which are the stores. So all in all, what I want to say is, volume low-single-digits, but with strong pricing, that’s what we are looking for in Mexico.

Okay, perfect. And then one other question I have on a completely different topic. Could you share a couple of thoughts, and a little bit of highlights, how the Monster distribution is going in the different markets, because that’s still a very young business, just to get a little bit of a sense of how you’re doing there on the energy drinks sector? Héctor Treviño: Benjamin, it’s too early to know. It is doing well. We just started in Mexico, I don’t know, that’s probably a month ago or something like that. So it’s too early to start seeing trends. But we are encouraged by the - we think that our hypothesis is that Monster will be a very nice addition to our portfolio in all these countries. We launched that in Mexico. We are in the process of launching this in Brazil. Central America, we already did it similar to Mexico. Argentina, still pending and we’ll go - we have good comps for - because it’s a very profitable product that that we could sell in all of our distribution fronts.

Okay, perfect. Thank you.

[Operator Instructions] We will take our next question from Alex Robarts with Citigroup.

Hi, everybody, and good afternoon, thanks. So I guess my one question would really go back to Mexico. And I’m just trying to get a sense more of what’s going on in the short-term. I mean, I can’t remember the last time we saw 160 basis points contraction in your Mexico, Central American margin, in that EBITDA margin. And I guess when you look at it compared to the first-half, right, I mean, is that a notable step down in that level of profitability. And I appreciate the top line is decelerating. But I am still trying to get my head around, this very sharp step-down in that margin. And I’m thinking to what extent can you help us break this down between this seemingly kind of recent spike in the sugar price versus what seems to be incremental pressure at the gross margin level from the currency hedge. And I’m wondering if you could just help us break it down in those two buckets, I mean, operating deleverage is clearly an issue. And as we think about in the fourth quarter, should we be thinking about a recovery from these current margin levels of 22.5% or do we kind of stay down in this zone, and think about what can happen again to the currency and the sugar, so just getting a sense of really this short-term margin trend, what was going on this quarter and then how you’re thinking about next quarter? And kind of the last bit of this, what hedge - what dollar hedge price were you at on average and how much coverage were you in Mexico in the third quarter and where are you in the fourth quarter? Thanks very much. Héctor Treviño: Good afternoon, Alex. I think that in general for - when you dissect Mexico results you have to take into consideration the following. It’s we have good volume, good pricing and we were basically affected by an important increase in sweetener prices. So to give you an idea, standard sugar in Mexico during the quarter had a 28% increase, refined sugar, as I mentioned during the call, are around 18% to 20%. And high fructose in dollar terms was more or like 1%, 2%, so it’s very stable, were in dollars. And then the raw materials that have - that are dollarized or that that are in US dollars, we also have an impact on that. The rest of the variables in Mexico are improving. So it’s basically raw materials and the FX exchange where that is impacting this. Also important to consider that the EBIT figure is positively affected by onetime events that are non-cash that happened last year, mainly had to do with write-offs of some of the plants that were acquired and as we were continuing to transform some of the operations after the acquisitions of some of the Mexican bottlers. So last year, we have the impact of a non-cash impact that is reducing the EBIT of last year, therefore the EBIT comparison looks like EBIT favorable this time around. But the non-cash items are also - I mean, in other words, the EBITDA numbers have better representation of the performance for the quarter. And with respect to the FX, during the third quarter we have basically hedges at around a little bit below the MXN18 per dollar around MXN17.85 more or less. And for the fourth quarter, some of the hedges that we have are in the low MXN18. It’s like MXN18.15 more or less. And we have hedges for around 50% of our needs for the fourth quarter. That’s basically the steps where we’re in that front.

Now, I mean that’s clear and I get it that it’s the FX and sugar. Just thinking then about fourth quarter, would it be safe to assume that you perhaps trend sequentially stable in the margin or do you feel that there could be some improvement sequentially? I guess, that’s the last bit. Héctor Treviño: Now, I think that fourth quarter we have the potential to improve a little bit our margins. We are looking to increase prices in November. So November, it’s kind of the middle of the quarter and we’ll see what the impact is for the end of the year. But certainly will help that price increase, will help us to start the year on the right foot with respect to the pricing of our products, okay.

Okay. Fair enough. Thank you. Héctor Treviño: Thank you, Alex.

And we’ll take our next question from Pedro Leduc with J.P. Morgan Chase.

Hi, thank you very much for the question and would be more related to the U.S. territories if you can give us an update on how those ventures are looking. And on a broader perspective, [Ciel obviously has been same volume so far] [ph] across the region. How are the interactions have been happening with you during the strategic change that is been tailored? Then if you can elaborate bit on how we should see marketing expenses of all in light of these lower volumes? Thank you. Héctor Treviño: Good afternoon, Pedro. In the U.S. front there are no news - let me give you a little bit of the recent, I guess, developments. We are looking during this fourth quarter to have a conversation with The Coca-Cola Company to see if we agree to the basic principles of a potential acquisition in the U.S. As I have explained in the past, the first part of this process for us to understand the way the U.S. system works and the governance within the U.S. system. We are pretty much finished with that process. So assuming that we continue and the calendar of The Coca-Cola Company has established, we will basically - means that we might be reaching a non-binding agreement with them with respect to the next step, which is starting due diligence. We will probably finish this closer to November or maybe December. At that time we’ll probably have to announce something to the market saying, we agreed this agreement or we didn’t reach an agreement. At the end of the day, The Coca-Cola Company is looking to close - to potentially close a transaction over the third quarter of next year. Assuming that we’ll have for documentation and due diligence we have basically six to eight months on that process. I think that with respect to the region, I assume that you’re referring more to Latin America. And we are - volume prices in Latin America certainly there. I think that very important and I have stressed this in the last two or three calls, The Coca-Cola Company and ourselves are now pretty much in tune at looking revenues and profits, and not so much the volume figure per se. We both agree in improving coverage of our products, improving performance of our coolers and continue to invest in coolers. We both agree in providing affordability to the consumers through the returnability. And we need to look also at opportunities to capture a richer mix of products with single-serve presentations and to try to target certain consumption occasions. So I feel confident that we are in agreement. There is always a lot of back and forth in trying to agree to these strategies. But we feel that we are pretty much in the same page with The Coca-Cola Company in that respect.

Great, thank you very much.

And we will take our next question from Luis Miranda with Santander.

Hi, good afternoon, Héctor. And my question is on Mexico pricing. When we take a look at the strong pricing that you have been seeing especially in the third quarter, can you tell us some color on how much is mix, how much is direct price increase, and how do we see it going forward in the short-term? Thank you. Héctor Treviño: Good afternoon, Luis. I didn’t quite follow your second question, but let me answer the first question. In Mexico, we’re showing increases around 5% in prices, around 3% to 3.5% has to do with rate pricing impact. And the rest is basically mix, improving mix of products. We have been, as for example, in flavor, almost 100% of the growth that you are seeing has to do with Naranja & Nada and Limon & Nada, which have a very important component of single-serve one-way presentation. We are saving a little bit less water. We are improving colas. So I think that mix is moving in the right direction. And that accounts for basically 2 percentage points of this price increases as we saw during the quarter. And I didn’t quite follow the second question…

The second question - yes, the second question was if you think that this trend could continue, I mean, I guess that your direct price increases for the next year should be also in line with inflation and we could expect some improvement in the mix. Héctor Treviño: Yes. As we are seeing a new price increase in November, I think that that will help a lot in our pricing strategy especially for next year. As I mentioned, during the fourth quarter, we’ll have an impact on December which is a good month normally. But we will start with the right pricing for the beginning of next year, okay.

Okay. Thank you, Héctor.

And we’ll take our next question from Alvaro Garcia with BTG bank.

Hi, Héctor, thanks for the call. My question is on Colombia. I was wondering if you could just repeat what you had said earlier in the call regarding the potential impacts on the tax reform there. And maybe talk a little bit about the price elasticity in Colombia vis-à-vis Mexico, and some of the initiatives you put into place going forward given the potential impact of this move by the Colombian authorities. Thank you. Héctor Treviño: Yes, good afternoon, Alvaro. In general, I think that the tax that was proposed to Congress was COB300 pesos per liter, which is basically equivalent to 24%, 25% of the average price that we have there. Our expectation is that given the per capita we have in Colombia that will have a tougher or a stronger elasticity as compared to Mexico. In Mexico - in Colombia, I guess, the consumer is not as used to drink our products or any sugary drink, because they have other substitutive products. And our expectation is that the elasticity will be higher than that what we experience in Mexico now. So certainly Colombia is something that we need to worry about. Okay.

That’s clear. That’s clear. And just repeating what you said earlier, the COB300 peso per liter will be roughly 25% of your average price. And then on top of that you said that VAT would increase from 16% to 18%, is that correct? Héctor Treviño: 16% to 19% is the proposal. They say that they will lower corporate taxes. That VAT increase will partially affect us directly, because if you remember that we have the new plant is in a free trade zone that has no value added tax there. So vis-à-vis the rest of the operation will have that benefit of this extra price if you will with this - or we could lower the price and still be with the same economics, because we will not be affected by this VAT. But our preoccupation is that the consumer will be incurred in their pockets with these increasing VAT, okay.

Of course, no, no, that’s very clear. Thank you.

And we’ll take our next question from Carlos Laboy with HSBC.

Good afternoon, everyone. Héctor, with consumer down trading across so many categories in Brazil, can you give us some additional insight into your market share gains? Héctor Treviño: Yes, Carlos. Good afternoon. Every category in Brazil has improved in market share and then let me give you some numbers. In colas, remember that’s one of the strongest market shares that we have on the 10 countries that we operate. We are slightly improving the market share around 10%, that’s 10 basis points. In this is a super-performance, growing closer to 14 percentage point improvement in market services last year. So when you take all - when you take everything into account, all see as this is basically increasing around 1 percentage point, a little bit less than that. That’s according to Nielsen and the information we share we share with The Coca-Cola Company. The only category that has a negative trend is Powerade and what the so called isotonic, the sports drinks, that we are losing a couple of percentage points in that market. So I think that with the returnable presentations that we have introduced in Brazil, the price points that we have in some of the single-serve presentations that - remember this strategy for MXN1.213 [ph], the much better execution that we have in the marketplace, it has helped us to - even though the consumer is not necessarily there for us to continue growing market share in the region - in that market.

That’s great. Thank you. Héctor Treviño: Thank you, Carlos.

And we will take our next question from Antonio González with Credit Suisse. Antonio González: Hi, good afternoon, Héctor. Thanks for taking my questions. Just a quick one, on Venezuela, if didn’t hear a lot of comments yet on the volume deterioration we’ve seen so far this year. And I just wanted to ask you if you can give us your, I guess, guesstimate of what’s going to happen in the next several quarters after these very large decline in volumes and whether obviously at 30%, 40% volume contraction leads you to reassess, whether your installed capacity in the country is the correct one or you are reassessing your scale, I guess. And then just secondly, if I may very rapidly, you made the comments about your expected elasticity for Colombia in a scenario for potential tax increase being higher than Mexico. Do you think the same thing would apply to the Philippines? And any preliminary comments that you can make on the, I guess, informal proposals that have been made at this stage with respect to increasing tax in the Philippines as well? Thank you. Héctor Treviño: Good afternoon, Antonio. Let me start with Venezuela. Venezuela was a country that was selling close to 240 million, 250 million unit cases. Now, we budget, we anticipated a strong reduction basically to 170 million unit case. I guess that the - and several factors are affecting this. One is the availability of sugar. There is no sugar available in Venezuela. And that has created a very interesting trend. We are moving - basically somewhere around 70% of our volume is non-caloric Coca-Cola. It’s not called Coca-Cola, still just the same label which says Coca-Cola without calories. Our analysis in some of the test that we’re doing in the market are on one-third of the consumer is just not drinking that product, because it doesn’t have sugar. One-third is drinking that, because that’s what is available. And then other third basically likes the product and says, I’m okay with this. The difficult part is that, starting November or December, we will have the so called the safra or the sugar mills will start producing sugar again in Venezuela and there will be some availability of sugar. So one of the things that we need to protect this how do you switch basically the volumes now to sugar and then once the safra is out, we will be without sugar again. And that’s creating this problem with the consumer. We believe that part of the problem that we are facing in addition to the scarcity of sugar is that we have increased prices somewhat to compensate for internal cost, and because of deflation that the consumer is really now lacking the money in their pockets to buy these products. When you compare the same product a year-ago versus now, you are speaking about 800% increase. So consumers that are not buying the category, even if it’s available in the supermarkets or in the stores, and even though you have scarcity of many products in Venezuela. The good news in Venezuela is that for the first time, and this started basically in October, we are relying 100% with local currency for our raw materials. We have negotiated extensively with suppliers, some of them have installed capacity in Venezuela, some of them are using brokers to sell locally in local currency some of the raw materials. So Venezuela has - we have been able to transform Venezuela into an operation that is self-sufficient in bolivars. And we don’t require any dollar injection from the outside, which is very good. The Central Bank is not providing dollars also for raw materials. So that’s also a situation. But I think that it is very positive development. We believe that we have stayed between 10 million to 12 million unit cases per month that basically would be a volume of around 120 million and 140 million unit cases. We’ll have a breakeven situation that will give us the same power to continue looking at the optionality value of Venezuela going forward. So that’s the story for Venezuela, a very tough environment, a great job from our operators there and a great job from the procurement guys trying to negotiate this price. In the Philippines, there is a proposal by one individual in the government to try to pass a ₱10 per liter. That will be equivalent to around 30% increment in price. It is not part of the government proposal. And they are - they say that they are concerned with regressive taxes and they understand that this is a kind of a regressive tax. I think that if we were to have a tax in the Philippines, I think that the elasticity will be also higher than Mexico, no question about it. I think that the consumption per capita are good, they are very low. The good news of these taxes is that it affects the whole industry and then there are no market share movements, everyone will have passed that to the consumer. But our perception is that the potential elasticity in case of a tax in the Philippines will be higher than Mexico. I think that the government is very cognizant that the industries contributing with a lot of taxes and employment right now for the country. And they are - our feeling is that they are pretty much concerned with that. But you never know, okay. Antonio González: Thank you so much. It is very helpful. Héctor Treviño: Thanks.

And, sir, with no further questions in the queue, I will turn the call back to you for any additional or closing remarks. Héctor Treviño: Thank you for your interest in Coco-Cola FEMSA. And as you saw in the press release, Roland is abandoning the ship and moving to Strategic Planning. While Roland [ph] is moving to Strategic Planning within the corporate area and Maria Dyla Castro will be joining us. And Roland and Maria Dyla will work together over a period of time just to get to know all of you personally and then pass the baton to the next step. Thank you.

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