Good morning everyone and welcome to Coca-Cola FEMSA's second quarter 2017 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 up the conference for question-and-answer 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 upon current available data. Actual results are suspect to future events and uncertainties which can materially impact the company's actual performance. At this time, I would like to turn the conference over to Mr. Hector Trevino, Coca-Cola FEMSA's Chief Financial Officer. Please go ahead, Mr. Trevino.

Good morning everyone and thank you for joining us to discuss our second quarter 2017 results. In the second quarter of 2017, we continued to deliver solid topline results in the face of a challenging consumer environment in some of our territories, supported by our portfolio and pricing initiatives, our point-of-sale execution and the rollout of our affordability initiatives and financial discipline across our operations. As we previously announced, commencing February, 2017, we have started consolidating the Philippines' financial results in our financial statements. As a result of this consolidation, our results for the second quarter of 2017 will reflect a reduction in our share of the profit of associates and joint ventures, accounted for using the equity method, particularly recorded in our Mexico and Central America divisions. In the face of challenging macroeconomic and consumer environment, we rely on our affordable presentation and multi-serve presentations started during the quarter. Except for Argentina, our volumes performed better than our transactions across our territories. Behavior was reflective across our core carbonated soft drinks and noncarbonated beverage brands. Building on the previous year's growth of more than 7%, Mexico reported stable volume performance for the second quarter. This performance was offset by a contraction in volume mainly in South America, driven by a difficult consumer environment in Brazil, Colombia and Venezuela. In the Philippines, we saw a slight contraction in volumes and transactions from the back of a strong 2016 which grew volumes by 10%. As a geographically diversified company, we face different economic challenges in each country. In the first half of 2017, Mexico continued to experience higher inflation that impacted our consumer and higher fuel costs. However, when jointly inflationary pressure in South America, which was not consistently reflected in consumption growth across the region. In this environment, we were…

[Operator Instructions]. We will take our first question from Pedro Leduc from JPMorgan.

Hello everybody. Good morning. Thank you for taking the questions. Quickly on South America. First you mentioned Brazil, June being the first positive month for volume in a while. So I want to make sure, are you talking about the comparable volume growth? And then second, what has been driving that? Is it more than promotional activity, better macro, more rational environment? And assuming this continues, what do you expect to have margins in the second half of the year? Thank you.

Good morning Pedro. Yes. That number that I mentioned is compiled excluding the numbers of Vonpar. I think that mainly has to do -- I think this is multi-factored. One very important that has to do with us is that now we are at the top of the scale in execution metrics in the Coca-Cola system. Remember that two or three quarters ago, we were kind of in the lower ranks of the execution metrics and now we are at the top at the number one. Volume for the month of June without Vonpar basically increased a little more than 5%. I think that also has to do with some microeconomic data. We are seeing inflation in Brazil coming down to close to 3%, interest rates coming down importantly also. And I think that this bodes well for our expectation that the second half of the year in Brazil, we will see a better macro environment and potentially a better performance of our operations there. The integration of Vonpar goes very well as mentioned in the opening remarks. We are increasing prices importantly Vonpar, what kind of an outlier in the pricing front compared to the rest of the Coca-Cola system. So we are bringing on this prices to a new level. And also very importantly, which has also help us in the whole Brazil is for affordability through returnable presentations. So I think that Brazil is in good shape to start to improve market. My feeling, Pedro, is that we have hit the bottom and from hereon, we will see better performance in Brazil.

Our next question comes from Benjamin Theurer from Barclays. Please go ahead.

Hi. Good morning and thank you very much for taking my question. I would like to follow-up on the performance in Mexico. And I remember, in the past we have talking a lot about the focus on transactions and the growth there. Now could you elaborate a little bit what was driving why on the sparking category and specific transactions during the quarter were actually down, but at the same time you get an increase in volume. So was that a consumer habit to go to large bottles? Or what was driving the decline on transactions while at the same time still reaching a minor increase on volumes? Just a little bit of clarification here on the Mexico performance, that would be much appreciated. Thanks.

Good morning Benjamin. Yes. I think that, I guess, the formula that we would like to see in every territory is for transactions growing more than volume and volume growing more than the sugar content that we have in our beverage, given all the trends and the toxic implications that we have. And obviously we will like to see revenues increasing ahead of transactions. I think that that last part, the pricing front we are doing a good job. In Mexico and basically every country, every territory, except Argentina this quarter, we saw volumes growing more than transactions. Every territory has its own characteristics. But speaking especially about Mexico and related to your question, what we are seeing in Mexico is a very important growth of the 3-liter returnable PET presentation. We grow close to between 8% and 9%. We continue to see growth in some of the smaller sizes but the important growth in larger presentation is what goes away from this formula that we would like to see. We will continue to foster singleserve transactions. We are introducing, as we mentioned, small cans for some of the flavors and this quarter was importantly for us to launch the Sidral Mundet and I think that one specific characteristic that is also important in Mexico for you take into consideration. This important growth in 3-liter returnable, it happens mainly in the valley of Mexico which is where most of the competitors are present. We have PepsiCo. We have [indiscernible]. We have Jarritos and all of these brands. So the consumer is looking for this affordability for the family meal location and they are liking this presentation. It's different in the territories that we have in the north and the center of country where we a have more balanced growth. But that's basically gives the answer for your question. The important growth that we saw in clearly returnable PET, especially in the valley of Mexico.

Our next question comes from Lauren Torres from UBS. Please go ahead.

Yes. Hi everyone. Hector, I was just hoping to the extent that you can elaborate a bit about those comments you made with respect to the Heineken relationship. I understand that you do have a few more years left for the contract and in the last conference call or so, you have talked about exploring options if you lose that relationship. So can you just you talk about what you mean by this constructive dialogue? And if this relationship does go away as early as October of this year, how are you thinking about managing that distribution? Thank you.

Yes. Good morning Lauren. Remember that Heineken acquired Kirin, they mentioned that they were evaluating this alternative of using Kirin distribution system to serve the market in Brazil. So we received this letter in July. Heineken is of the opinion that they need to give us six months advice to terminate the agreement. Our position is that the contract is effective until 2022 and that's what I mean by analyzing our actions. We are reviewing all the documentation together with Heineken. We have had several meetings with them and when I say we, meaning we together with rest of the Coca-Cola system and The Coca-Cola Company in Brazil. So the Coca-Cola system and Coca-Cola company, Coca-Cola bottlers and The Coca-Cola Company are together in this and we are analyzing this alternative. We firmly believe that the contract terminates in 2022. Heineken has a different idea. And we have to look at our options there.

Our next question comes from Martha Shelton from BBVA Bancomer. Please go ahead.

Thanks for taking the question. It's regarding some of the margin pressure that we saw in Mexico during the second quarter. I just wanted to get a sense for recognizing that Mexico sugar prices are up more than 20% you mentioned earlier. But I wanted to get a sense for, to what extent you attributed the margin pressure to FX hedges? And to what extent you attributed that to the higher Mexican sugar prices? Thanks so much.

Good morning Martha. Yes. There are three main reason for the pressure on the margins in Mexico. One is these sugar prices. We have hedged our prices, especially with respect to the high-fructose corn syrup which is around 50% of our sweeteners, in Mexico. And further we have already covered the prices since the beginning of the year for the full year. In the other half, what is happening is that after all the discussions with U.S. about the dumping of sugar into U.S., there was a spike on prices of standard sugar in Mexico. And the standard sugar price for the average for the full year reduced for what is called the Contract 11 which is the contract whereby the sugarcane grows are paid in Mexico and they are paid a percentage of the price of the standard sugar price. If I am going to correct this, 156% of that price is what we pay to the guys the sugarcane. So because of this spike in sugar prices that we have seen during the last quarter, that has affected the cost of the sugarcane that is being bought by all the mills. So all the mills will have a cost increase, that only means they will translate that to the final consumer. So I hope that I explained this correctly that you will translate this measures correctly. A spike in the standard sugar price that is affecting the formula whereby the industry, the sugar mills pay to the cane growers. That's one of the reasons for this margin contraction. The other one has to do with the fuel price increases that at the beginning of the year we mentioned that the estimate that we have for the full year was around MXN300 million. But because of the fuel increase…

Our next question comes from Isabella Simonato from Bank of America Merrill Lynch. Please go ahead.

Good afternoon everyone. Good afternoon Hector. Just one follow-up regarding the contract with Heineken. Just so we try to understand a little bit better, since you received from Heineken to terminate the contract, do you understand that on their side, do you already know how to do it? Or are you still discussing if there is going to be done on a bottler basis? What the expectation of the penalty fee breaking up the contract? Or do you still think this is up for discussion and very preliminary? And even if it is preliminary, do you think this date could be postponed? I mean they said October 31, but eventually this could be delayed. This will be my first question. Thank you.

Good morning Isabella. We have been having meetings with Heineken, as I mentioned, together with some of the rest of the bottlers, just to discuss the different alternatives and for every party position to put their position forward. Their position in that they can terminate the agreement with six months notice. And our position is that we still have five more years to go and it is very difficult at this point to predict what is going to happen. One alternative is, if we are at an impasse, the contract might not be terminated on October 31, but that will depend on how these conversations works. And obviously an important element of these conversation is, in any case is what the compensation for an early termination would be. But this is still very preliminary. So we will keep you informed as we advance in this negotiation. Thank you Isabella.

Next question come from Antonio Gonzalez of Credit Suisse. Please go ahead.

Hi. Good morning Hector. I wanted to follow-up on the comments that you give in the press release about your enhanced commercial platform and you made some comments about improved POS execution on expense savings, et cetera. So I wanted to ask where are you in the implementation in the rest of the countries outside of Mexico? And if there is any chance you share with those what are the specific themes or enhancements that have particularly relevant through that implementation? And just finally, in the case of Mexico, do you see upside, you already disclosed the margin outlook for the country and so forth, do you see upside for these commercial platforms to lead to you flattish or even improving margins in Mexico in the short-term? Or given the dynamic that you described earlier, the most peaceful outlook would be still to see margin compression for the remainder of the year in Mexico? Thank you.

Good morning Tony. Let me try to explain in nutshell. It's a complex theme. Everything that has to do digital strategies, but let me start with commercial digital strategy. What we have is that for every point-of-sale that we have, for example, in Mexico, which is around 800,000 different clients, that we visit two or three times a week, we have many different data. Even some of the information we have that has to do with whether a locations and socioeconomic levels around the area, we close to 7,000 data points for each outlet. So we roll up that information. We are working together with external consultants in mining that information and the idea to have a much more granular segmentation. What do I mean by granular? In the past, we were doing promotional activities for large areas of a city or even the whole city. And now we have information, with all the information that we have from the resellers and the delivery guys that now have an intelligent device, look like an iPhone, it's a different device but it's something intelligent smartphone. They give us a lot of information that give us the possibility of starting to answer very quickly promotional activities that before we needed like one month to prepare and more than, call it, short-term approach. Now we can do very granular targeted promotional activities and answer this threat in three days. We do more social activities and we learn and see the information to start learning what kind of promotional activities are having results and which ones are just giving some extra money to retailer with no additional effect on the final consumer. So the combination of the reseller and the delivery guy having an intelligent phone and all this data that we have that…

Our next question comes from Felipe Ucros from Deutsche Bank. Please go ahead.

‎Scotiabank, yes. Thank you. Hector good morning. Thanks for taking the questions. I guess my question, it's regarding Colombia and Argentina. It seems that Colombia is till suffering quite a bit and maybe the comments were a little more geared towards the weather issues that have been happening in the country. But I wanted to ask you, do you feel that the VAT effect is subsiding? We talked about the consumer companies that seem to feel that the VAT effect is finally kind of fading off and that they really expect things to get better in the second half of the year. And then the second one is Argentina, where it seems like the opposite is happening to you guys where talking to some consumer companies that are still suffering quite a bit but it seems that you guys are doing fairly well. I wanted to see if you could get a little deeper on those two operations. Thank you.

Good morning Felipe. Yes. I think that Colombia continues to be a matter of important focus of management. I think that it's important first to say that in Colombia, we saw growth of brand Coca-Cola versus last year, which I think is very important. We are seeing gains in market share which clearly signals to us that the consumer is still not there. I think that the effect has, as you say, subsiding a little bit because first quarter, we have a contraction of around 25% in volumes and this quarter was basically a contraction of around 11%. So when you take, at the end of the day, with all the cost control that we have in Colombia and all the efforts that we have had there, at the end of the day, it's a topline story. We are increasing prices. We have good affordability because of the introduction of returnable PET over the last two years. But you have a net 11% contraction in volume, a little bit better pricing and when you take that contraction in revenues and times the margin contribution, that's basically the reduction that you have in operating income. That clearly signals that Colombia is in good shape on the cost and expenses side. It's basically for us to find the opportunity to start growing volumes and start receiving more consumers. That is the strategy where we are focusing. I think that the consumer in Colombia is still suffer from this 3% increase in value-added tax. It is probably shying a little bit away from our category and going more into natural juices or water, tap water and things like that. But it looks that although the volumes are still decreasing, they are decreasing at a slower pace that what we had in the past. We were unfortunate to have this onetime event for the sewer system in Colombia where it's a very long pipe that we had since 2010. So we finally brought this agreement with the authorities and a settlement and we are taking that heat and let's turn the page on that front. In Argentina, we feel that things are better than in Colombia in the sense that the consumer is coming back to the category importantly even though we have a 1% reduction in volume compared to last year but the first quarter of this year we have an 8% decline in volume. So we are confident that Argentina is doing the right, still after Colombia that we have the right strategies in the marketplace to start recapturing consumer occasions and recruiting more consumers and going to consumer base. Similar to Colombia, costs and expenses are very well controlled in Argentina. We have the impact of very tough labor negotiations. Argentina always, union negotiations are always tough. But we have good margins and increasing margins in Argentina, which give us confidence that things are managed in an appropriate manner. Thank you Felipe.

Our next question comes from Alex Robarts from Citi. Please go ahead.

Hi everybody. Thank you very much. I wanted to focus my question around the Philippines, please. You mentioned in the prepared remarks that you expect for the year a mid-single-digit growth of operating income from a softer second half. And I guess, if I am looking at the press release, right, if you are up 23% first half, is it fair to assume that you are expecting a measurable decline year-on-year in the operating income in the second half in the Philippine? Or am I just not getting that correct? And about your characterization for a softer second half in the Philippines, is that year-on-year comp related or is there an operating trend or trends that you could share with us? And finally, locally we are hearing that sugar tax hike is something that the Philippine Congress is looking to potentially vote on in the very short-term. Any indication that you are getting around this from your operators would be appreciated? Thanks very much.

Good morning Alex. Let me clarify that. Well, probably in the prepared remarks, I was not that clear. What I was referring to in the Philippines is that what I am expecting is mid single digit margins of EBIT during the full year. And I mention this because remember at the very beginning when we consolidating the Philippines, I mentioned that I will expect between 4% to 5% EBIT margin for the full year and we have a 6% EBIT margin in the first quarter, 9% in the second quarter and I am still looking at that important growth, now coming back to your question, important growth in EBIT but with margins around 5% to 6% for the full year. That will call for margins in the second half being smaller than what we have in the first half. Basically I didn't want to leave everyone with the impression that we will continue to grow margins at the rate we showed in the first and the second quarter. We will see double digit growth in operating income but with margins around 5%, 6% is my call for the full year. What is going to happen, what usually happens in the second half is normally we have much more range because of the typhoons. We are struggling with this idea of being able to import high fructose from China that was helping us at the end of last year and the beginning of this year with the cost of sweeteners. There is a big push by the sugarcane producers in the Philippines to stop this importation of high fructose. So that's being discussed also with the government authorities. And as you said, the Congress is reviewing this proposal to have a tax on drinks. There are several versions and it's difficult…

Our next question comes from Jose Yordan from Deutsche Bank. Please go ahead.

Hi. Good morning. My main question has been asked but thanks for enforcing the one question rule. I guess the question I would ask now is just it seems like things are also turning a bit negative in Central America. So if you could just give us a little color as to what to expect for the second half of the year and next year in this market? Where should we expect volumes and profitability?

Good morning Jose. Good question. Central America, although small, the four countries start adding up to a good amount for us. But let me give on a little bit in different context. Guatemala, remember that we have a very difficult union environment. I think that after more than 13 years of being in Guatemala, we finally came to agreement with unions whereby we will have capacity to be a little more efficient in our production and distribution system. And because of that, we are now in agreement with the unions that we will have presale in Guatemala. So we didn't have it. So Guatemala, we have the expenses related to introduction of the presale, in other words in a region to the delivery guy now you have a preseller. Before it was what we call compensational route that is the guy will exit the distribution center with a truck and do the sale and distribution and everything. So it's a more costly operating model and we are still not benefiting from the additional volume that presale is going to bring. It is something that we are looking in the short term to bring it up. We think that presale will bring about important growth in volumes. Nicaragua is doing very well. We are actually installing two new production lines. One for returnable and one for one-way. It's growing. We have good pricing. We have a little bit profitability. So Nicaragua is, in that sense, the star of the four countries in Central America. Panama, we have done some changes in our organization in the commercial area. We are starting to see a little bit better performance. It's a very tough environment from the retail system. The most important clients are the so-called the Chinese clients that act as a cartel.…

Our next question comes from Luca Cipiccia from Goldman Sachs. Please go ahead.

Thanks for the question. Just a couple of quick follow-ups, if I may. One on Brazil, i.e., just wanted to confirm, well, you stated that volumes were up 5% in July on an organic basis and also how does that compare for the quarter for Brazil only, excluding acquisitions, just to confirm the swing? And then the second question, maybe just a very general one, I guess more on semantics. I see that the Philippines now is reported within the Asian division, which in fact all includes Philippines or I am trying maybe to have read there, but if this is an indication that you may have more ambition to add more territories if they come up? Or is this just to refresh your views of where your stand in the idea of potentially expanding in Asia once the Philippine operations are on track and they seem to be on track, so whether there is something that you can look at with interest in a relatively short period of time, that would be great.

Good morning Luca. First Brazil. Brazil, what I was mentioning is that during the month of June, we saw a 5% growth on an organic basis in Brazil. For the quarter, that on an organic basis, we have a decline of around 10%. So that's what I was trying to signal is it looks like we are here in Brazil we will see a second half of the year which is better in Brazil with the consumer. With the Asian division, yes, I mean the answer is yes. We have this opportunity to continue expanding in Asia and its still probably a few years ahead. We have, as you said, first of all we need to recover the Philippines. As you say, we are obviously improving the operation in the Philippines quarter-by-quarter and that's good. It's a good signal. As we mentioned, we have the threat of these taxes that could derail a little bit of the profitability of the Philippines also. We are doing all the lobbying efforts that we can in that area. But the agreement that we have with The Coca-Cola Company is that assuming that exercise the call on the other 49% of the Philippines and just as a reminder, the final date for that is in the beginning of 2020. If we do that, we will have an option also to look at a preferred alternative or preferred option to look at some other territories in Asia that are owned by The Coca-Cola Company. We are still in the mood, if you ask Coke FEMSA, we feel positive about the Philippines and positive about the option of potentially acquiring some of these territories in the future. It's a challenging market. We have discussed this in previous conference calls. I think that we are doing well from a portfolio point of view, very well from the supply-chain, especially transaction point of view. We are struggling a little bit in how to serve the very small retailers with small size that will be equivalent to our bronze clients in some Latin America countries that have very more drop sizes and we are still struggling to fine tune how much would you go to third-party distributors versus having your own delivery system and having the information for the benefit of going directly. But at the expense of having the right distribution, which is sometimes it looks like, in some cases it looks high expense compared to the one case per month that some of these clients buy, which is very, very, very small drop sites. Okay. Thank you.

At this time, I would like to turn the conference back to Mr. Trevino for any additional or closing remarks.

Well, thank you for your interest in Coca-Cola FEMSA and as always, our teams are available to answer any of your remaining questions. Thank you. Have a nice day.