Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q4 2016 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Coca-Cola FEMSA's Fourth Quarter 2016 Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] . During the conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as a good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. At this time, I will now turn the conference over to Mr. Héctor Treviño, Coca-Cola FEMSA's Chief Financial Officer. Please go ahead, Mr. Treviño. Héctor Treviño Gutiérrez: Good morning, everyone, and good afternoon, and thank you for joining us to discuss our Fourth Quarter 2016 results. In the fourth quarter of 2016, we continue to deliver solid top line results, supported by our price flexibility, our point-of-sale execution and market share gains across most of our countries. Our transactions continue to outperform our volumes in Mexico despite of a difficult comparable with the previous year. This performance was offset by a contraction in transactions and volumes in South America, driven by a difficult consumer and macroeconomic environment. However, we were able to increase our average price per unit case ahead of inflation in most of our markets, achieving higher revenues versus previous year. Additionally, our hedging strategies let us mitigate pressures coming from currency volatility and increasing raw material prices, mainly sugar. For the quarter, our consolidated reported revenues increased more than 20% and operating income increased 7.8%. These figures include 1 month of the recently acquired territory of Vonpar in Brazil. During the same period, the consolidated comparable revenues rose 3.7%, driven mainly by price increases in Mexico and Argentina, while the comparable operating income declined 8.3% as a consequence of top line pressures in Brazil combined with raw material cost headwinds in Colombia. I will briefly discuss the highlights of each operation. In Mexico, during the last quarter of 2016, transactions and volumes increased versus previous year despite of facing mid-single-digit growth in the fourth quarter of 2015. However, the main driver of top line growth was our pricing flexibility, enabled us to increase our average price per unit case well ahead of inflation. In February 2017, we launched our new Coca-Cola Sin Azúcar or Zero Sugar Coca-Cola to appeal to our consumers, leveraging the strong brand equity of Coca-Cola and enumeration of Classic Coca-Cola is available in our main single-serve presentations and the 2.5-liter one-way package. With this launching, we continue to strengthen our non-calorie portfolio consistent with our commitment to offer more innovative alternatives for our consumers. Within our flavored sparkling beverage category, we continue to successfully deliver growth, thanks to our Naranja & Nada and the Limon & Nada brand's increasing market share gains in this category. Building on our momentum, we recently launched a new Naartjie & Nada, offering another flavorful choice for our consumers. Our noncarbonated beverage volumes continue their double-digit growth, driven by Vallefrut orangeade, del Valle juice and Santa Clara dairy products. Ciel flavored water also continued to grow, achieving double-digit growth as well. During the quarter, we started distributing Monster Energy drink with positive results in just the first few months. Mexico's solid top line results combined with our execution discipline and operating expense control enabled us to mitigate gross margin pressures resulting from currency volatility and higher sugar prices. In Central America, our volumes grew 0.5%, with Guatemala's more than 20% volume growth outperforming the region. This growth was offset by a low single-digit decline in Costa Rica and a high single-digit decline in Panama. Our transactions outperformed our volumes in both Guatemala and Costa Rica. Brand Coca-Cola continued its growth in Central America together with the rest of our flavored sparkling beverage portfolio. In our still beverage category, we continue to gain market share across all of our operations in the region. Personal water and bulk water volume mainly driven by brand Alpina, enabled us to expand our volume by more than 2% in the total water category. Our South America division continued to face a very difficult consumer environment that affected our volumes throughout the region. On the bright side, we continue gaining market share in Brazil and Argentina in the sparkling beverage category, while our Colombia operation gained close to 6 percentage points in the key category. In Brazil, including 1 month of the Vonpar acquisition, our transactions declined 10% and our volume declined over 8%. A difficult economic environment has incentivized our consumers to seize upon our affordable portfolio choices. We continue to focus on enhancing our point-of-sale execution and increasing our portfolios alternatives, which enabled us to sustain our momentum in market share gains. As part of our portfolio initiatives to maximize value in each segment through innovation and affordability, we've recently launched our new 220-milliliter sleek can for brand Coca-Cola, Fanta and Sprite in Brazil. Within the flavored sparkling beverage category, [indiscernible] and Sprite continued to outperform, achieving low single-digit volume growth. And currently, we continue to gain shares in the still beverage category. During 2016, our local pricing and revenue management initiatives coupled with our focus on cost control enabled us to mitigate margin pressures. In Colombia, our volume declined by close to 14% in line with transactions. This performance was affected by a high comparable versus 2015, coupled with our pricing initiatives to compensate for an increasing inflation and our cost structure. These pricing initiatives will help us to have a better position for 2017. Notably, the volume of our 2-liter returnable presentation of brand Coca-Cola continue its growth with a significant expansion during the quarter. Our flavored sparkling beverage brand Fanta and our Brisa personal water achieved double-digit growth for the quarter versus previous year. In Argentina, consumers continued to experience constraints on their disposable income since salaries in real terms are not keeping up with the rate of inflation. Nevertheless, by leveraging our capabilities to offer different alternatives for our consumers, our transactions were able to partially outperform volume contractions for the quarter. Our volume declined 8%, with our transactions outpaced this contractions by 2 percentage points. This quarter, we closed the gap with inflation by accelerating our price and revenue management strategies. Volumes in our still beverage category grew 8%, driven mainly by our Powerade and Cepita juice brands. We continue building a winning portfolio in products and packaging innovation. This year, we launched our 1.5-liter presentation of Powerade and our Cepita brand, 100% apple and orange juices. In Venezuela, we continue to focus on our non-calorie alternatives to mitigate the sugar shortages that we have experienced in the previous quarter. In the deeply affected consumer environment, characterized by lower disposable incomes, higher levels of inflation and scarcity of goods, we experienced close to 60% volume contraction for the quarter. In the face of this exceptionally challenging environment, we remain committed to satisfying our Venezuela consumers' beverage needs. Moving on to our Philippians operation. Our volume and transactions both grew close to 3%. Our core sparkling beverage portfolio continued to drive our top line performance for the quarter. Our renewed 12-ounce and 750-milliliter returnable glass presentations continued to deliver transaction growth, while our flavored sparkling beverages are supported by Mismo, our popular 1-way single-serve PET presentation. Additionally, our noncarbonated beverage volumes, including water, grew by double digits. Our Philippines' business operational and financial results remain encouraging as we intend to deliver margin improvements. Now regarding our financial results. This quarter, our reported net income increased 12.4%, reaching MXN 1.69 per share. We achieved a 0 net dollar debt exposure, mitigating the impact of currency exchange volatility on our net income going forward as part of our strategy of reducing our consolidated dollar-denominated debt. In the acquisition front, as we announced on December 6 of last year, we successfully closed our acquisition of Vonpar through our Brazilian subsidiary. We have begun the integration of this territory into [indiscernible] system, incorporating key talent into our management, generating synergies through our marketing and commercial strategies, while directly capturing top line value as well as achieving synergies in the supply chain process, from a strategic raw material sources to final distribution to our clients. Our positive performance in 2016 was driven by our focus on transactions and pricing. Our point-of-sale execution and our proactive currency and raw material hedging strategies that as a whole enabled us to mitigate the impact of a tough consumer and economic environment on our margins. We will continue to reinforce our leading market position, while protecting our profitability and cash flow generation going forward based on our operational and financial discipline. Looking ahead, our profitable transformation of our business in the Philippines should positively add to our consolidated results as we start to consolidate this operation in February 2017. Our strategic and financial flexibility, our committed team of talented professionals and our ability to adapt to different conditions and opportunities will enable us to continue capturing both organic and inorganic growth and creating sustainable value for our shareholders now and into the future. Thank you for your continued trust and support. And operator, I would like to open now the call for questions.

[Operator Instructions] And we'll take our first question from Lauren Torres with UBS.

Héctor, I know on many occasions, we keep hearing about this pricing flexibility and just curious as you're thinking about your markets. For 2017, it seems like a lot of the macro and currency headwinds are still working against you. So is this still kind of like your biggest lever to pull, I guess? I mean, is there room for, again, pricing above inflation? I assume, if you hold market share, you'll withstand some volume losses. I'm just trying to get the volume price mix algorithm right for this year, because it looks like -- so we are heading into another challenging year in several markets. So how do you think about using that pricing option as kind of really -- kind of keep you whole and to keep margins as whole as possible? Héctor Treviño Gutiérrez: Yes. I think that we have said in previous conference calls, the pricing, it's a very important lever. It's not the only lever that we will use going forward in terms of trying to continue to deliver value to our shareholders. But as I have mentioned, I believe that this time around, probably for the last 2 or 3 quarters -- and we have mentioned this on those conference calls -- we have had an aligning with the Coca-Cola Company that volume is important, but it's more important -- the value equation and pricing also plays a very important role. In other words the Coca-Cola Company is aligned with our view that we should use the pricing lever also to try to get a better profitability out of this equation. And we are starting to have dialogues of [indiscernible] of the category, et cetera. That is why you see this movement to smaller SKUs, higher prices, et cetera. In every operation, and I think that's one of the things to highlight during 2016, in all operations, basically -- and when I say basically, so the 10 countries, only Guatemala and Philippians are slightly below -- the price increases have been slightly below inflation. In the other 10 countries, we have been very active on the pricing front. We have areas like Mexico, where we are basically increasing prices on average, including water and everything, at 2x the rate of inflation. Nicaragua is more than that. In Brazil, it's close to 1.5x inflation. So -- and inflation is just a reference of a number that is publicly available, et cetera. Colombia, we have increase close to 3x inflation. However, Colombia, for example, we are just catching up with a lot of discounting activities that we have in the last 3 or 4 years. So even though we have actively increased price in Colombia, we are seeing the decline in volumes, we are still below the prices that we have 3 or 4 years ago when you compare in real terms. And obviously, difficult part of this process -- and believe me that we are very conscious of the complications, but we feel that we are on the systems and the information we have, we have a better track of the opportunities that we have in certain areas of the countries, difficult processes. How do we continue to increase the penetration of our products and the consumer? How do we increase the consumer base, which is a very important element in our equation? But at the same time, how do we pass along the cost inflation that we are seeing with some of the players and very important volatility that we are seeing in the FX markets. Part of that volatilities cover with the hedging -- with the active hedging activity, but there is certainly a cost that has to be passed to the consumer with this. On the other hand, as you all know, we have been actively -- and I'd say very actively promoting returnable presentations. And returnable presentations brings affordability to the consumer. So we are not losing our focus in trying to increase the consumer base. And for those consumers that are suffering the most, we have an affordable product through returnable presentations. So basically, in every country, you will see or you are seeing an important increase in the mix of returnable presentations. So at the end of the day, if I have to summarize this, Lauren, in our budgets, we continue to believe that is important that we have prices ahead of inflation, because that's a way of maintaining our profitability. We have to be very careful with the cost structure because sometimes some of the raw materials are increasing ahead of that inflation, especially some dollar-denominated raw materials. But at the same time, we like to keep this balance of continuing to increasing the consumer base. And all those variables play in this difficult balancing act that we have to perform in every country. We are very, very keen that the pricing lever is an important lever that we have to play going forward.

Great. That's very clear. If I could sneak in one other question, Héctor. The Coca-Cola company keeps updating us on moving forward quickly with the refranchising. So I'm not sure if there is much you could say or will say at this point, but any update on your front with respect to U.S. interests? Héctor Treviño Gutiérrez: Yes. Well, as most of you know, we're always looking for acquisition opportunities, I'll say it's part of the DNA of Coca-Cola FEMSA. As I mentioned, I guess, certainly in the previous conference calls and some of the meetings that I have had with some of you, the Coca-Cola Company has mentioned and has basically presented a plan to us that is divided in 3 stages. The first stage is to fully understand how the Coke U.S. system operates, with respect basically to borrowing and coordination with the rest of the bottlers. The second stage is basically to -- for us to perform evaluation process and try to reach an agreement and sign, what, a nonbinding letter of intent. And then we would reach that agreement, start the first stage, which is perform a due diligence and prepare final recommendation and close. The Coca-Cola Company has explained that they would like to finish that third stage by the end of this year. But we're still in the second stage with this process. That's a big moment and basically, we don't have nothing additional to share at this point in time.

And moving on we'll take our next question from Antonio Gonzalez with Crédit Suisse.

Just have two quick ones on Brazil; the first is, apologies if I missed this during the prepared remarks, can you give us a little bit more color on what was the organic volume trend in Brazil excluding the Vonpar acquisition? And how do you see volumes progressing in Brazil throughout the rest of 2017? And secondly, I don't know if you will be -- I understand, if you are not able to comment a lot at this point, but after the consolidation in the beer industry in Brazil, Heineken and Kirin just announced, I understand that they are still figuring out how they will reshuffle distribution, et cetera. But I just wanted to see if you can comment on what the capacity that you would have eventually to absorb incremental beer volumes, if that's a solution that Heineken brings to the table? Do you just have the physical capacity to distribute more beer? And can you just remind us, big picture, what are the margins that you are making in that distribution business and whether you would be keen on increasing your exposure to beer in Brazil at the moment? Héctor Treviño Gutiérrez: Antonia, let me start with Brazil. When you exclude this month of Vonpar, basically, volumes for the quarter declined around 18% in Brazil. It was very tough quarter. For the full year, we have seen a decline around 9% on an apples-to-apples basis without Vonpar. And start -- the first part of the year, we are seeing still negative volume for a much lower number, probably in the mid-single-digit decline as opposed to the very high double-digit that was in the quarter. My perspective in Brazil is that we'll have and I have experienced that and I continue to believe in this thesis, is that we'll have a first half of the year, but we believe that second part of the year will present some operating opportunities with respect to our traditional business, and I'll move into the beer business in a second. You have seen how the Central Bank has been reducing interest rates. It looks like we are basically turning the -- turning point in Brazil, but my expectation is that the first 6 months will be still tough on the operations in Brazil. We have been increasing prices as well. I think that we have a good pricing that will help us for most of the 2017, because a lot of this pricing activity that I described in Lauren's question have to do with pricing activity that we have at the end of last year that will help us. Going on to the second part, the same reference to returnable presentations. It's important in Brazil. Brazil is still, I'll say, kind of underdeveloped on returnable PET, just to give you an idea, what in Mexico we have returnable representing close to 35% of our mix. In Brazil, we are more -- and it's still close to 20%. It's still below 20%. So I think that that strategy that we have been developed with Brazil to have an affordable product with 2-liter returnable PET and the 1-liter glass returnable is helping importantly toward affordability prices in Brazil. With respect to the Heineken and Kirin, our concern here is that we are right now in conversations with Heineken and together with the Coca-Cola Company, discussing if and how, another -- which circumstances the Kirin beer could be added to the agreement that we have with Heineken. Those meetings just started to happen as we speak basically this past week. I don't have a lot of information just to share, just preliminary meetings. But for us, in general, I get the sense is I think that for the 3 parties for -- certainly for Heineken, certainly for the bottlers and I believe that certainly for the Coca-Cola Company, it will be good if we can reach an agreement on the economic and the commercial conditions to handle Kirin, because it will increase the truckload, the delivery, the number of cases delivered to each outlet. That will certainly dilute some of the fixed cost structure that we have. And I think that it's a very important move with respect to the competition environment in the beer industry and in Brazil also. So I guess, my perception in this is that we would look for Heineken because of the popularity that we have in reaching so many places. And I think it's one of the [indiscernible] coke system because of the possibility of increasing drop site [indiscernible] et cetera and what that represents in terms of savings and diluting some of the fixed cost. Okay?

And moving on we'll take our next question from Luca Cipiccia with Goldman Sachs.

I wanted to follow up on Brazil, not to sort of overstress that market. But I'm curious, the level of tolerance on this volume decline because as you mentioned earlier, it was 18% in the quarter, but at the same time, you are seem to be willing to do pricing well above inflation, inflation has been moving back could be maybe a time to recuperate volume. So let's say, going forward, how much are you, how much -- how advanced are you in the level of pricing that you think you should have? And how should we model this gap between volume and prices? Is this really been a step change in how willing you may be to do pricing and tolerate even this large sort of volume declines? Also considering how you are thinking about scaling the operations, you have the integration of Vonpar. You've been since the long-term, I guess, set up for Brazil, maybe more consolidation to come. So just maybe for us, contextualize this double-digit volume decline. I would assume some of that is expectable given the price increases that you've been doing. So just maybe some direction on that part will be helpful? Héctor Treviño Gutiérrez: Luca, yes. I think that -- I mean, again, if -- as I mentioned in the first question it's a difficult balance that we do together with our operators locally and we receive a lot of feedback. We check up also a lot with the Coca-Cola Company [indiscernible] fact that we have done a big push for returnables in Brazil have helped us to sustain this pricing activities that we have seen in Brazil. I agree with you. Inflation is coming down very fast. Our expectation is that we would continue to increase prices ahead -- slightly above inflation in Brazil probably not as much as we there -- in 2016. Because, again, we have some of the prices being executed in the last part of 2016 and that will help us to carry a good price for 2017. But in general, I mean, if I remember correctly, our [ project cost] 1.5 to 2 percentage points ahead of inflation in the pricing front. That obviously is a mixed approach. We have different categories. We have water. But in general, the structure that we have is to try to, again, to move ahead of inflation a little bit. Very importantly, Vonpar has a substantial gap prices -- substantial gap in prices with respect to the rest of the operations and when I say a gap meaning that they were below the prices that we have. And the idea is probably to start increasing prices there importantly. We already started there. It was a problem for us in the past because of potential transhipments. It is one of our contiguous territories. As a matter of fact, we announced that we were expecting something like BRL 65 million in synergies on this acquisition. We are shooting for a higher number. We now, again, after thinking over this, we're thinking more probably BRL 100 million in the 24-period time frame. Basically, again, because we are seeing more pricing opportunities in v [indiscernible] territories. Vonpar didn't have any return, zero returnability. So we are introducing also the 2-liter returnable PET and that will help us sustain the pricing gaps what we have with our competitors. The goal of returnables is basically -- just as a reference to everyone -- is to have an affordable product with which compete on the -- where we see competition tougher. And that open up the opportunity for us to price higher for the convenience of one-way presentations with no returnable PET and just maintaining a huge gap, competition is very tough. So that's why we emphasize -- the emphasis on returnable is important

How much do you think -- how much do you think the breadth of the portfolio in Brazil could also sort of amplifies these volume swings. In other words, you think if your portfolio was wider in the current consumer environment you may have been able to sort of compensate a bit better between still, sparkling, other categories. Maybe -- and how should we think about that going forward for Brazil specifically? Héctor Treviño Gutiérrez: No. I think that we have a wide enough portfolio now that, I mean, basically for the last year, 1.5 years since we started to push for the [indiscernible] presentation. We do not have a strategic launchings of different sizes or different flavors. I mean, there are the normal activities that we have. I think that this 18% reduction in volumes is basically a reflection of the difficult environment that the consumer is facing in this territories. As a matter of fact, when we read the market share numbers that we did in Brazil, we are basically increasing in every category, every single category that we have except in the sport drinks. The rest of the categories, we're increasing market share which signals to us that it is more macroeconomic environment, a consumer that is hurt kind of situations rather than us being affected because of lack of portfolio opportunities.

[Operator Instructions] And we'll take our next question from Carlos Laboy with HSBC.

Héctor, what proportion of your Brazil earnings might be beer now? And does the language of the beer agreement hold any risk for you that Heineken could take all of its beer brands away when that distribution agreement expires? Or is there some kind of a renewal option that's up to you? Héctor Treviño Gutiérrez: Carlos, a big -- a proportion of the earnings sometimes is kind of difficult to estimate because you have to assume some fixed cost absorption. But on a marginal basis, assuming that you cannot construct [ph] any other cost structure of -- or assuming that beer is totally marginal, let's put it that way, it will represent between 12% to 15% of our earnings. In theory, if we were not to have that beer operation, we could reduce some of our expenses on the fixed costs structure. Now, you can adjust that or start to -- and you would not need to change the structure if you are delivering -- if you are not delivering the [indiscernible] approach. The agreement that we have has an [indiscernible] that works both ways and for us until 2020. In theory, each of the 2 parties can cancel that agreement and we need the 2 parties to agree to renew the agreement. It's not totally on our hands. I think that the conversations that we are having with Heineken and as I mentioned, the Coca-Cola Company are moving that direction. And then as I mentioned, we believe that is good for the 3 parties, the Coca-Cola Company, for us and for Heineken. I think, again that the popularity or the way we execute in the marketplace on the REITs that we have in so many stores is also good for Heineken. I think that it would be difficult to replicate for them, but for that certainly is an alternative that they can also explore. I think that these negotiations [indiscernible] is going to be important to shape up the relationship with Heineken in the future. So I hope that we can reach an agreement on this one.

Also on the execution side in Brazil, Héctor, could you expect -- could you comment on your execution scores, on your price compliance scores? Looks like there were some big improvements there in Brazil, specifically. Héctor Treviño Gutiérrez: Yes. Execution: It's a very important focus of our strategy in Brazil. At some point in time, we were at the very bottom of the table of the scores that the Coca-Cola Company reviews with all the bottlers or the information we shares with all of the bottlers in terms of execution. And we have improved significantly the latest that we have is that we are now the second bottler with those scores that are mentioned by the Coca-Cola Company. And just to clarify, Carlos, in this -- when I was referring to the beer importance, we think the Brazil operation, when I was saying somewhere between 12% to 15%, I'm referring to the fee that we receive compared to our revenues. The profitability should be lower than that. Let me do some analysis on that and I'll get back to you.

And moving on, we'll take our next question from Alex Robarts with Citigroup.

Sorry to go back to Brazil, but I do have one more on Brazil and then a second question on Columbia. So I appreciate the transparency around the volumes in the fourth quarter and the comments that you're making about recovery this year and how you see it. But I guess, I'd be interested to know 2016 was probably a multi-decade-trough-year for not just the category but frankly, for other fast moving consumer goods companies. When you think about what happened during the year in terms of your channel mix, I'd be interested to know kind of modern versus traditional. We've seen a big growth right, in the cash and carry. To the extent that that's shifted during the year, could you comment as to what is your split kind of at -- what was your split at year-end, traditional versus modern channel in Brazil and how that changed in the course of the year? And when we think about this year, can you perhaps, work at that channel mix to help the margin recovery in the second half? In other words, is your view that the second half will be better namely a comp -- an easier comp rationale or are there some other things that you think can happen in the second half that get the volumes and the category back on track to a growth path. So that's the first question. Héctor Treviño Gutiérrez: Alex, if I understood your question correctly, let me answer about Brazil. Channels, we have seen an increase in the so-called atacados [ph] and the modern trades. And clearly, this is a reflection of the consumer trying to look for against more affordable options for the shopping activity. That has hurt a little bit the margin or the pricing [indiscernible] the margin of our mix because, as you can imagine, those clients you have more discounts and more promotional activity. I think that for the second half of this year and our expectation and our view on this and you see that in our budget is that the consumer want to come back with more disposable income, especially as the interest rates continue to drop at the speed that they are dropping. And our expectation is that, again, part of this -- probably consumers will move again to the small store and the small mom and pop. I don't think that the channel is other than the effect it has on the discounting and promotional activity in our P&L. It's important but it's not something to worry about. I think that the second half of the year is more of recovery of the consumer. And that is also the case for Columbia with the state [ph] recovery on Brazil and Columbia, also as we enter this year's comps for 2016. Columbia will start the year with very good first quarter and then second quarter was not as good, but it was positive and then third and fourth quarter very, very complex. You also -- if I understand correctly, you also asked about Columbia and Columbia is starting the year with the fact that the value-added tax on everything increased from 16% to 19%. So there is 3 additional points on everything that the consumers is confronting and that there will -- that is causing our consumers to be at least, more cautious at the beginning of the year. But the second half of the year, for Brazil and Columbia, will be compared with each year's comps with respect to the top line growth that I think also will help on this case.

Okay, yes. I mean, if you can't care the actual split in Brazil between modern and the traditional channel, would it be fair that there was, in fact, a channel mix shift? And that in the course of the year, the modern channel gained in the channel mix, is that fair? Héctor Treviño Gutiérrez: Yes. More or less, the recollections I have on this and it's very close to real, I'm sure, it's somewhere around 64%, 36%. 64% in the traditional and 36% in modern. So basically 2/3 and 1/3. And what I don't remember exactly is where we were a couple of years ago when modern trade was lower. So both streams have increased, it's important. But let me do some research on this and I'll get back to you. But the picture that we have at end of the year is more or less 2/3 traditional trade and 1/3 modern trade.

And moving on, we'll take our next question from Pedro Leduc with JP Morgan and Chase.

We're changing countries a bit, Argentina and Colombia and also weak volumes at the end of the year, but would like to hear your thoughts on how you envision this '17, especially in Argentina. It seems to be some more elevated hopes and then Columbia, if they need more pricing there and if you think it's more accommodated by now, even though there's tax increase in these countries. So just your outlook for these 2 countries and how you're seeing the year start over there, that would be great. Héctor Treviño Gutiérrez: Pedro, let me start with Columbia. Columbia, we are seeing, given this increase in the value-added tax that we're seeing, we are starting the year kind of on a slow note, but with a very tough comp because the first quarter of last year was very good in terms of volume. But in addition to that tough comparison, we have the feature of the tax. I think that financially, we are better prepared in Columbia because we increased prices importantly towards the end of the year. As I mentioned in one of the questions, we were increasing close to 3x the level of inflation that we have in Columbia around the full year. But still, we are at lower pricing in real-time versus before we start in the so-called plan Columbia where prices were reduced in the price war with our competitors. So I'm seeing that a more benign environment with respect to pricing but the volumes in our expectation will grow low single-digits for the year. And on the profitability front, it's important to understand that Columbia has been confronting some one-time effects of charges in 2016. There was an issue where a judicial process that was started even before we acquired Panamco, that was lost in the fourth quarter of 2016. And you always -- we have to register the penalties that we have to pay has to do with the water and sewers service. And so we were paying some extraordinary expenses that during the fourth quarter of 2016 that would not be present next year and will help on the financial results. In Argentina, we are seeing more -- an improvement on the volume that we're seeing. Remember the consumer in Argentina, the effects that we are seeing [indiscernible] important devaluation of the currency. We have salaries increasing but not as fast as the inflation rate and especially with cost of services that were increased when President Macri took office which we think are the right moves in the right direction. But the consumer, as mentioned before is in a very difficult environment because salaries have not increased as high. The inflation rate, our estimate for 2016 is basically close to 40%. We are seeing that reducing practically to a high-level, but our expectation is somewhere around 20% for next year. So with that, we think that the consumer will come back to the category and we're expecting a low to mid-single digits growth in volumes. That together with the pricing activities because as I mentioned in the opening remarks, by the fourth quarter, we were able to basically reach inflation again on the price. In other words, we were able to increase close to 40% in nominal terms the pricing -- the prices in Argentina. So all in all, we see a good environment, an improving environment for Argentina for next year.

Okay. That's very helpful. And still in Argentina, the salary increases you mentioned were for yourself or that you're seeing in the overall market? Just for us to get a sense on how margins will fare. Héctor Treviño Gutiérrez: No. I was referring to overall market, but our salary increases were pretty much in line with the overall market.

And moving on, we'll take our next question from Luis Miranda with Santander.

A question changing now to the Philippines. You mentioned the 2% growth and pricing below inflation. I thought you could give us some color in terms of the profitability during the year. And what could we expect in terms of -- what should we expect in the strategy and profitability in the Philippines in 2017? Héctor Treviño Gutiérrez: Luis, in the Philippines, we are following the strategy of trying to maintain prices. We have low inflation economics. I mean, it's basically around 5%. So we are with this idea that we would like to see better consumption patterns still the per capita are very, very low. So we are maintaining prices in nominal terms. That basically means that we are having some reductions in [indiscernible]. We are changing some of the packaging sizes for us to maintain some price points but reduce the size of the package. For example in this Mismo which started at 300-milliliter PET one way presentation. In some areas, we are having in 250-milliliter PET presentation as opposed to the 300 and maintaining the price, the same price that we have in the 300. So all-in-all, at the end of the day, if prices in the Philippines have been slightly below inflation and assume a strategy to try to increase per capita and then later on, moving the prices. Remember that we have 2 very strong competitors and the market is basically divided in 3 equal parts. We have been gaining share in some of the areas so we feel comfortable with our strategy. At the end of the day, we feel we are improving substantially in profitability from negative operating income levels that we have when we acquired to positive numbers. But still, those numbers compared to the rest of the operations. We will start seeing those numbers as we start to consolidate Philippines in February. But in general, the number that we have for 2016 was a low single-digit EBIT margin, basically around 3%. We are seeing improvements in that but maybe increasing 100 basis points or 150 basis points for next year. So in Philippines, it's a story of a very important sizeable market. We sell close to 580 million unit cases, 570 million unit cases for last year. So it's an important market in terms of size, with very poor consumers where prices are low, per capitas are low. And the strategy is to foster consumption per capita and start bringing some pricing ability in the future, not at this moment. We need to first work on this per capita. And so clearly in the direction our operators have there is to start looking for opportunities to continue to impact very low margin that we have in that operation. Okay?

And moving on, we'll take our last question from José Yordán with Deutsche Bank. José Yordán: Quick question on Venezuela, right. We had been talking about 170 million unit cases for the year, and that fell short by almost 20 million obviously, with a 40% EBITDA margin, you could almost say, who cares, if there was that shortfall? But I guess, I would just want some color as to what your operating plan is for Venezuela for this year. How many cases can you sell of non-sugar product, if there's going to be any change in the supply of sugar to allow you to start ramping up regular product, again? And I guess, while this is not necessarily up to you, how long do you think this margin can continue? I assume that as long as the currency, the FX rate doesn't change and inflation keeps going at 100-plus a year, the dollar price of the product can continue to grow significantly. But just any color on how you see Venezuela unfolding this year, although, I know it's a difficult -- very difficult projection to make. Héctor Treviño Gutiérrez: Let me give you flavor in Venezuela. Venezuela is a market that as you say, we were selling close to 240 million unit cases in the past. We were assuring for somewhere around 170 million, we reached basically 143 million. We are seeing volumes still declining. The name of the game in Venezuela for us is how to survive with the operations that we have, try to maintain the optionality that we have in this operation. At the end of the day, it's a market that we think that loves the brand, but the consumer is very, very poor now. Prices of everything has been increasing substantially. You can argue that everything is dollarized, not in the sense that they pay with dollars, but that everything has increased to whatever -- the prices of everything has increased to whatever the parallel market is which is around in the 3,500 close to 4,000 bolivares per dollar. So our strategy there is not so much of maintaining the EBIT margin that is very low -- I mean, because we are registering now everything at the parallel exchange rate. We are using whenever we need to buy some raw materials, they are dollar denominated -- we use brokers and use our bolivars to pay for that. We haven't been injected any U.S. dollar currency in Venezuela. For the full year last year, we ended up moving around $3 million or $4 million, basically to pay for some systems and IT [indiscernible] to do it in bolivar, or it's impossible to do it in bolivar. Very few with respect [indiscernible] dollars with respect to raw materials. So in our accounting we have basically everything register or very close to the parallel rate. And with that, you get to a level of around 4% to 5% EBIT margin which is just to maintain our number there, our profitability. At the end of the day, the plan that we have for 2017 and [indiscernible] forget how the numbers look in the P&L because -- and I'll explain why. And just try to survive and be free cash flow in bolivars positive or neutral, and just maintain the labor peers, maintain the operations, do not risk us being appropriated or whatever and continue with a good relation with the government authorities and with the labor unions over there. What I'm referring to this, we will [indiscernible] that we have over there that are doing a terrific job. The signal is not to worry that much about how the P&L looks because sometimes, we will have variables that are outside the control like the exchange rate of which you could buy raw materials whenever you need -- basically, it's some PET that we need to input. Why are we saying that? Because obviously, the managers are proud of their P&L and in some instances can be their variable compensation is linked to the performance of the operation, et cetera. But we are changing all of that to maintain free cash flow and maintain the operations. That's the task that they have. It's a difficult environment, it's a very difficult environment. I think that we have increased prices of our products so much and we're seeing that inflation is rounding -- is around 400% or close to 500% per year. And then we have prices ahead of inflation that means that price for one of our products could be 5x or 6x what it was a year ago. And what we are seeing now is that -- which is different than last year -- we are seeing a lot of scarcity in the shelves from the supermarkets, but you'll find Coca-Cola and everyone was buying Coca-Cola. And now you continue to see the scarcity and you continue to see Coca-Cola but you are not seeing the same level of expenditures, I guess, or same levels of purchase from the consumer because prices of everything has increased so much that they don't have the courage to pay for this. With respect to the sugar, right now, it's kind of a forced change into non-caloric beverages. We have the same Coca-Cola sin azúcar or sugar-free Coke in the same red label that you are seeing in the 1-brand strategy. And that those sugar-free Cokes now represent close to 80% of the portfolio because we don't have availability of sugar to continue working with the regular coke. So part of this decline in volumes have to do with the consumer broadly preferring a sugary drink, but parts and I think the majority of the impact has to do with the fact that the consumer is hurt because prices have increased so much and that's why I referred to a consumer or the economy being dollarized not in the sense that you use dollars again, as a currency but dollarized in the sense that everything is increasing prices so fast. So tough environments, but again, a very good job from our operator there. And the message that I want you to keep there is we are going to focus on free cash flow, maintain the operation so we have enough cash in bolivar to pay salaries, to pay raw materials, to pay our taxes. And we are breakeven or positive on free cash flow, that would be great and call for better times, and maintain this optionality that we have on this which I think is a very important market in the future for us.

And that concludes today's question-and-answer session. Mr. Treviño, at this time, I would turn the conference back over to you for any additional or closing remarks. Héctor Treviño Gutiérrez: Well, thank you, everyone, for doing this with Coca-Cola FEMSA. And as always, our team and myself are available to whenever you visit Mexico or to answer any questions or remaining questions you may have. Thank you.

Once again, this does conclude today's conference. Thank you for your participation. You may now disconnect.