Welcome to Coca-Cola FEMSA First Quarter 2017 Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions]. During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as good-faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties which may materially impact the company's actual performance. At this time, I'd like to turn the conference over to Mr. Héctor Treviño, Coca-Cola FEMSA Chief Financial Officer. Please go ahead, Mr. Treviño.

Good morning, everyone. Thank you for joining us to discuss our first quarter 2017 results. In the first quarter of 2017, we continued to deliver solid top line results, supported by our pricing initiatives, our point-of-sale execution and the rollout of affordability initiatives across our operations, despite of complicated consumer environments in our territories. As we previously announced, commencing on February 1, 2017, we have started consolidating the Philippines' financial results in our financial statements. Our results for the first quarter of 2017 and our future results during the year will reflect a reduction in our share of the profit of associates and joint ventures, accounted for using the equity method, as a result of this consolidation. Mexico had a positive performance in terms of volume, despite of a difficult comparable versus the previous year. This performance was offset by the contraction in volume, mainly in South America, driven by the difficult consumer environment in Brazil, Colombia and Venezuela. In the Philippines, we had a contraction in volume and transactions mainly driven by external weather factors. In this quarter, our transactions outperformed our volumes in Central America, Colombia and Argentina, even when we had a contraction of volumes in these countries. In Mexico and Argentina, our pricing strategies are letting us to increase our top line while in Brazil and Colombia, we have been able to partially offset volume declines. For the quarter, our consolidated net reported revenues increased more than 38% and operating income increased 24%. These figures include results of the Philippines and the recently acquired territory of Vonpar in Brazil. During the same period, the consolidated comparable revenues rose 2.7%, driven mainly by price increase in Mexico, Brazil, Colombia and Argentina while the comparable operating income grew 7.2% as a consequence of better profitability in Mexico and…

[Operator Instructions]. And we will take our first question from Antonio Gonzalez with Credit Suisse.

Actually, this is Mariana on behalf of Antonio. I have actually 2 questions regarding the agreement with Heineken in Brazil. First one is it was not clear to me whether there will be a transition service agreement of some sort. Or do you expect an immediate termination? And the second is, if you could please comment whether the economics of the relationship between Heineken and yourself had changed in the last two years in terms of incentive for the sales force or the margin that you were capturing. Or any other significant change in the relationship? Were you showing good progress, in your opinion, in this business? Or was there something fundamentally missing?

Heineken, basically, what we can say right now is what is public. The -- we received this formal notice yesterday. We're evaluating that notice that we received. At this moment, we're currently assessing, as we said in the press release, next steps and possible actions. In the meantime, we will continue our normal operation. As you know, there's an agreement in effect until 2022. The conditions on those agreements have not changed, if I understand your first question -- your second question, excuse me. And the idea is just to continue our normal operation. So we don't have a specific date on -- in what we received as a termination. What we can share is the public information we have out there which is in the 20-F. Revenues of -- for beer in Brazil accounted for MXN 7.8 billion, is close to 18% of the revenue we have in Brazil. Given this situation, perhaps it's much better not to continue commenting on this until we assess the next steps and, as I've mentioned, possible actions [indiscernible]. Thank you.

And we would take our next question from Benjamin Theurer with Barclays.

Staying in Brazil, quick question in regards to the integration on Vonpar, et cetera. Could you share a little bit of view how -- a little bit more detail about how the 2 regions, the former Vonpar region and the former your region, on a separate basis, have performed on a year-over-year basis? So it seems like on the numbers, there's a lot of -- at least on the transaction data, it's because of that, so just more of the underlying. And then I have one follow-up question on pricing in Brazil as well as in Mexico, but maybe that one first.

Sometimes, it's kind of difficult to isolate the performance of the 2 companies. The 2 companies have been fully integrated. Obviously, we have our internal analysis where we do some -- where we assign some of the cost structures to the Vonpar territories. What I can share is the performance in the 2 territories is very similar. We have started to take prices in Vonpar because they have lower prices than what we have in the other -- in the old Coca-Cola FEMSA territories. So one of the opportunities we saw in the acquisition of Vonpar was to -- precisely to start capturing some prices. We're also doing some investments. And in the Board of Directors' meeting that we had yesterday, it was approved there for us to invest in returnable PET capacity in Vonpar. Freight cost in Brazil is very high, so it pays to have a better structure of production plants closer to the markets, especially when you deal with [indiscernible]. So in general, I would say the performance is quite similar with respect to volumes. Vonpar [indiscernible] better prices because it was lagging in prices versus the old Spal -- what we call the Spal territories or the old Coca-Cola FEMSA territories. And we're starting to do a push for affordability in Vonpar with introduction of returnable PET. And those are the main changes that I see in the 2 regions.

Okay, perfect. Now you actually mentioned already a couple of it. So pricing in some of the regions -- well, in Brazil makes sense now. You had a stronger pricing here on one part, so maybe that explains a lot of why you were able to somehow raise prices above inflation. But in Mexico as well, I mean, we've seen once again a very strong pricing environment. I mean, even with, let's say, challenges in the macroeconomic environment, without even having an impact negatively on volume, you were able to raise prices by over 8% which is still well above inflation which is currently running at roughly 5%. How long do you think can that go on, that you are actually able to raise prices in such an attractive way without having too much of an impact on transaction volume and basically continue to deliver here strong on the pricing side which has been the case for now a quite decent time?

Yes. I think that, Benjamin, it's a difficult question in the sense that -- but let me give you the best answer possible. What we're doing strategically and everything else and this is the same for every country, we look very carefully at increasing consumer base, increasing per capita consumption, trying to have a good performance in volume. At the same time, we'd like to find opportunities to increase prices. But it's impossible just to move prices of all the packages if you don't have a good base of products that are affordable to the consumers. And that's why returnable presentations and small-size presentations are important. So maintaining price points in every country is one of the main strategies that we operate against, having returnable products that can be priced closely or closer to our competitors, our competitors being in 1-way packages. But us with returnable packages having a price point that is similar in the transaction help us also to have a little bit more flexibility in our 1-way premium packages, where the consumer is not necessarily that concerned with the price and like -- and they are okay with paying for the convenience of the 1-way packs. So I think that this is the -- again, the magic formula that has helped us, again, to be competitive in the marketplace and be able to extract a little bit more price from the consumers when you look at the total formula. One element that has helped us, especially in Mexico, is the full rollout of the digital platform that we have. We presently have much more information from the consumer in our systems, in our databases and doing some basic [indiscernible], but there is complex analytics. And looking at our variables, we're targeting much better the promotional activity that, at the end, is also reflected in the price that is charged to our client which is the store. So just to give you an example, instead of launching a promotion for a whole city, like -- a big city like León in the center of the country, now we can much better target regions of that city that will benefit from that promotion and discarding from that promotional activity areas where the consumer or the client will not necessarily be benefited by that specific promotion. So it's a combination, again, of relative price forms versus our competitors, an affordable portfolio for our consumers that like our brands, that they see the difference on the price versus our competitors and a better handling of all these discounting or promotional activities that we do on the normal day-to-day because we have much better access to information. That digital platform is being rolled in Brazil and I will say by year-end will be covering most of our operations. And I think that is also a very important element that is helping us to deal better with this variable -- with the pricing variable in this environment.

And we will go next to Luca Cipiccia with Goldman Sachs.

Just wanted to -- maybe some comments on the performance in Colombia. We've seen that already for a couple of quarters. I think you gave an explanation last time in terms of the changes that you're making. But just as we look further in today, how should we project your promises there? And as well as maybe if you can separate what is your strategy or your self-imposed discipline as compared to the type of [indiscernible] environment that you've seen there, that would be helpful.

Colombia has proven to be a difficult market. I think that we're doing the right things in the marketplace. Let me start in the top line. Obviously, that 25% contraction in volume is very difficult to compensate. However, I do have to say that this first quarter was the most difficult in terms of comparing versus last year. Last year, we grew around 10%. Second, third and fourth quarter of last year, we have negative performance versus 2015. So conceptually, the comparison will be a little bit easier on the top line. We have been, similar to what I said in Mexico, looking for having an affordable portfolio presence in North Colombia. We have disclosed in the past that we're rolling out returnable PET that was not present in Colombia before. That is helping us to have more an affordable approach to our consumers, so I think that's one of the right moves that we've been able to do. Weather was an issue also on the top line as we have rain in cities like Bogotá doubling the amount of rain that we had last year. So certainly, weather was an effect. We have the increment in VAT and consumer confidence decelerating that were not helping here. But again, rolling out returnable PET and maintaining some market prices will help us attract our consumer to our approach. And on the cost side, this quarter, we have a very stable sugar price and PET price that didn't disturb some of the financial results. We're still looking to have a more efficient organization given this decline in volumes, obviously, calls for us within the structure that we have in every way, in plants, in workhouses and everything. So I think that we're doing the right things so that, looking back to the…

And we would take our next question from Martha Shelton with BBVA.

It revolves around the market share -- your market share performance in Brazil. If you could give us some color regarding how your market share has been performing. I know it's been pretty good for the past couple of quarters. And then the second question, an aside from that, would be an update regarding a potential entry into the U.S. Are you still looking at California?

Market share, in most of our territories, this quarter, we're seeing a slight increase in market share or a small reduction on very stable market shares. We don't have any single point where we see preoccupation with respect to market share. In the case of Brazil, we're seeing very small reductions in CSDs. Colas is basically flat; flavors, a small reduction. Juices, we see a little bit more erosion of market share, but that is -- but juices is very small. Teas, we're increasing market share. So the message that I want to convey is we don't have any specific area where we feel worried about market share. Even with the 25% reduction of volumes in Colombia, we're not seeing any market share erosion. We're actually gaining market share in Colombia which also signals how the consumers is affected over there. With respect to the U.S., what I can share is we're still in this second stage that I described in the last conference call. It's a phase of very deep and thorough evaluation of the opportunity. As soon as we have something that -- we continue to be in the process and as soon as we have something to announce on this matter, obviously, we'll make it public. Thank you, Martha.

And we would take our next question from Alex Robarts with Citi.

Alex Robarts at Citi. I had two questions and I -- they're both around Brazil. I'd appreciate your comment regarding the nonalcoholic ready-to-drink segment, that's fact that you actually outperformed that segment in the first quarter. But kind of as we started this year and the quarter, a 12% reduction in volumes for your business in Brazil was probably not on the radar screen. And I guess, when I think about the macro data, it's still pretty mixed. You've got double-digit unemployment, but inflation coming down. Can you give us kind of your assessment of the state of the CSD industry in Brazil right now? I mean, did CSD -- did it fall less or more than the NARTD segment? Did you feel also that the 2 [indiscernible], the B brands are -- are they changing their competitive pricing or packaging? How is it that with trading down, you're able to keep your market share? And then finally, on this question, do you feel comfortable still with your messaging in the last couple of conference calls that a meaningful recovery in CSD in Brazil is unlikely before third quarter? Or might that kind of be something a little bit too aggressive? So that's the first question. Then I want to come back to a Brazil beer question.

Brazil. I think that the data that I have for Brazil in CSDs is a contraction of 11%. Last conference call, I mentioned that we were expecting a recovery for the second part of the year. We still firmly believe that. We have seen some signs of better macroeconomic environment. I mean, if you look at how the environment and the expectations and the macroeconomic feeling was mid-year, last year, when we're in the midst of Dilma's impeachment and the Lava Jato was starting, obviously, the political front and some of the reforms that had been passed made us comfortable with the future and optimistic on the future in Brazil. We're seeing a very fast reduction in inflation. Actually, inflation in Brazil is now lower than in Mexico. Interest rate is starting to decrease, importantly. Some economists are calling for the [indiscernible] rate being around in the 8% -- between 8% or 9% by the end of the year. Remember that we were close to 14% a few months ago. So all of that, obviously, will help our consumer as all of these bodes well for improving disposable income. What kind of signs are seen there? Well, first of all and importantly, we're seeing an important growth of our returnable presentations. They are increasing in our mix. Mix was around 17% for internal growth in the previous months. Now we're getting close to 18%, 19%, so we see very good penetration of our returnable PET strategies which, again, is bringing affordability to our consumer. And those lid cans that we described is growing super importantly as we -- I mean, the penetration of single serve -- the mix of single-serve presentations are increasing importantly and that also bodes very well for our pricing equation. And we serve single-serve presentation that…

Okay, very helpful. And I appreciate that and I know there's still a lot of top-down issues in the economy. But look, I mean, the second piece of the Brazil question is around beer and I appreciate you sharing with us the fact that -- I mean, well, the new news that, in fact, the Coke bottlers were officially contacted yesterday with the intention of Heineken to terminate the distribution deal. I mean, I guess last week, we heard about them, their interest to leverage the Kirin, but it wasn't clear exactly what that meant. And now we have the definitive news which, as we understand it, I guess, this is a nonbinding agreement that you have out into 2022. And this could be interesting because the reality is that Kaiser and Coca-Cola have been together for 30 years since the '80s and kind of cross-selling of beer and Coca-Cola has -- as part of the Brazilian cold beverage industry. So how -- I mean and I appreciate there's still kind of dates to be set here, but how do you think about going to market in the nonalcoholic ready-to-drink space in Brazil without beer? Like we can all kind of calculate what the sales adjustment would be, but we think about your customers and your advertising. How -- like, what does the disintegration mean as far as your go-to market for your products? And is it safe to assume, in fact, that we might see -- or you might look to another beer company and maybe sell another beer company's products, given that there is, I think you've mentioned, before some idle excess capacity, both -- well, mainly in distribution right now. So kind of a top-down question around beer.

Yes, Alex. Well, first of all, as I mentioned, we received this notice yesterday. So first of all, I just want to clarify, we do have a binding agreement until 2022. So we're evaluating next steps on possible actions. So we're trying to -- I prefer not to cite on this intention until we have a more clearer picture of all the different angles to this. I think that I don't want to jeopardize the -- anything that had to do with the next steps and actions that we might take in the future. Once we have a clearer picture of this, we certainly can share what will be the future actions in the marketplace. In the meantime, we're focusing and continuing with the normal operations because we still have a binding agreement with Heineken until 2022. And we [indiscernible] notice we received yesterday. I ensure that you will appreciate that this is a sensitive issue.

[Operator Instructions]. We will take our next question from Isabella Simonato, please proceed, with Bank of America.

I have two questions. First, also a follow-up on Heineken. If you could disclose to us if there is any fee or any penalty for Heineken to anticipate the termination of the contract? If you could disclose that to us. And also, regarding the Philippines, I think the margins surprised us to the upside despite the weaker top line. And you mentioned efficiencies and also lower raw material costs. What can we expect in terms of margins going forward for the end of the year? And also, what's your goal for the next 3 years?

Sorry and the second question, actually referring to the margins in Brazil. I was not clear on the question, sorry.

No, in the Philippines.

In the Philippines, okay. Let me start with the first question. Fees, with respect to cancellation of this contract, that's precisely what we're evaluating our next steps and possible action. That's what we're doing. Second, in the Philippines. The Philippines, given the level of low per capita disposable income of the consumers, the strategy that we have there is very similar to the rest of the countries, but very, very focused on affordability. Affordability takes a very important role in country like the Philippines where disposable income is so low. So we have been introducing returnable PET, having [indiscernible] price points with a smaller size consumable presentations. So all of these basically translates into prices being more or less stable in nominal sense. So in real sense, we're lagging inflation. And that has been very well compensated from a P&L perspective, from cost of raw materials and efficiencies that we have obtained as we have -- as we have described in the past, we have invested very heavily on transforming the production capacity and the distribution capacity in the Philippines, to give you an idea. Since we arrived, we have introduced close to [indiscernible] 17 production lines -- new production lines, including everything, PET, returnable glass, Tetra Pak for juices and all of that. So it's a very large number of new production lines that transformed the production capacity to have more and more efficient network. In terms of raw materials, we have benefit from lower cost of sugars or sweeteners and lower cost of PET, that has helped us to support this pricing initiative that we have maintained in the Philippines. And when you look at cash flow, we have been able to attract a significant amount of working capital as we have better managed of [indiscernible] inventories and…

And we will take our next question from Pedro Leduc with JPMorgan.

Regarding Mexico and Central America margins, starting at the gross margin level, 110 bps decline year-over-year, one of the smallest contraction bases you've had in a couple of quarters. Could we imply from that, that from now on, this was the peak of the FX-related costs and pricing has helped stabilize it? And what is the outlook for the gross margins in the remainder of the year for Mexico and Central America?

With respect to Mexico and Central America, we're seeing some pressure on the sugar prices. I think that -- everything that has to do with the foreign exchange volatility has somehow improved a little bit compared to the very strong volatility that we saw in November of last year. So that will help us a little with the stability of the raw material prices. We have some hedges already in place. But because of the appreciation of the Mexican peso, have a negative mark-to-market right now. But again, the objective of these hedges for raw materials have to do much more with giving stability to our operators with respect to the cost of raw materials. So on that front, we do see a little bit of pressure on sugar, PET prices are okay. And FX, looks like is a bit more stable. So I think that the gross margin there is going to be kind of stable in the rest of the year for these territories.

Okay. So you don't think you need to make additional pricing in Mexico to stabilize margins. Just as the FX comes in and sugar prices come down, you should stabilize these gross levels?

Yes. I mean, we will continue to find and to fine-tune [indiscernible] it's more correct -- to fine-tune the price architecture that we have. It's something that our operators base a lot of their strategies on that. As I described, we have the digital platform that give us a lot of information. So we -- my expectation is that we would see some result in pricing activity more, not so much because increasing prices to the consumer, but because we better manage our discounting activity with the trader.

And we would take our next question with José Yordán with Deutsche Bank.

My question's just about the -- your expectations for Venezuela volumes for the rest of the year. I think at some point last year, you had talked about 170 million cases being the sustainable amount of noncaloric drink that you could sell, given the shortage of sugar, et cetera. But sequentially, the volume numbers have been falling 20%, 30%, 40% per quarter and 12 million for the first quarter this year. I get it that seasonally, it's a weak quarter, et cetera. But I mean, where do you see the steady-state in Venezuela? And that, at what point does it not become worth it to keep the operation open?

Venezuela, it's a very complicated case. You're correct, yes, you point out to these volumes. And during the quarter, we're close to 13 million unit cases. We have 4 production plants. We have -- we're selling basically around 4 million unit cases a month. That's well below the numbers that we have in the past. We were selling close to 20 million unit cases at some point in time. Right now, we're convinced there is totally the effect of the consumer not being there because of the macroeconomic conditions that we have there. In the past, we have some shortages of raw materials. Now we have good inventories for most of the raw materials for a number of months, because now volume is so slow -- so small, that we sell inventories for the majority of raw materials. So for us, the name of the game as I mentioned last quarter is to maintain the operations of the Venezuelan operation that we have there, maintain that working and maintain the workforce, maintain the production plants, maintain the trucks, everything, with the cash flow generation that we have. So the objective of the Chief Operating Officer that we have there is to be cash flow neutral and maintain the operations and maintain the optionality we have over there. Now -- in the past, you will not find Coca-Cola in the shelves because we didn't have sugar or we didn't have PET. Now you find Coca-Cola in the shelves but the product is not moving because the consumer is not there. I mean, they still go to supermarkets, you get information that the average Venezuelan spends between 7 to 9 hours in lines at a week -- for a week, excuse me, 7 to 9 hours per week doing the lines in the supermarkets. So it's a tough environment. I think that what our operators are doing there is a terrific job. And again, the strategy is maintain the workforce, maintain the jobs and maintain our operation [indiscernible] that we generate in the operations [indiscernible] cash flow neutral in that operation. We opened the information in Venezuela since many quarters ago, so that everyone has very clear [Technical Difficulty].

Hello?

Yes, still here, sorry.

And we would take our final question from Alvaro Garcia with BTG Pactual.

Alvaro Garcia from BTG Pactual. My question's on the other operative expenses line in South America. We saw a gain of MXN 323 million. I was wondering if there's any particular one-off on that line in particular? Or something that we should extrapolate maybe for the rest of the year?

Other operative expenses, it's an area where we basically throw everything that have to do with the operations, but it's kind of nonrecurring. Let me give you some examples. We have reserved that we recalled or that we canceled because of continued [indiscernible] we had in the past. Sometimes, this has to do with M&A activity, when we do have an acquisition and we open a lot of -- we do the opening balance sheet. We do reserve according to the best estimates that we have from our lawyers, our tax people regarding as they perform due diligence and going to change the status of these contingencies. We have to reverse some of these results. We registered there severance payments when we consider it's not part of the normal operating business. We also record there which is important, is this quarter, when we have accounts payable that are dollar denominated and we have a currency -- a foreign exchange appreciation of what we gave this quarter. We registered there a foreign exchange gain which is totally operational because it's an accounts payable. We register also donations that we do for charity. But in this quarter, mainly have to do with foreign exchange gains on operating accounts, like accounts payable. And reversing some continuously the work registering in previous years. So we try to have everything safe and affecting the EBIT numbers, so that we have a clearer [indiscernible] but try not to [indiscernible] but below the operating line. And these other operating expenses kind of connects most of these normal nonrecurring things, okay?

And that concludes today's question-and-answer session. Mr. Treviño, at this time, I will turn the conference back to you for any additional or closing remarks, sir.

Thank you for your interest in Coca-Cola FEMSA. And as always, we will be available to answer any remaining questions. Thank you all.

And ladies and gentlemen, that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.