Good morning, everyone, and welcome to Coca-Cola FEMSA's Second Quarter 2018 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 it should be considered as good faith estimates made by the company. These forward-looking statements reflect the 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 Gutiérrez: Good morning, everyone. I'm sorry for the delay. We had some technical difficulties with the line, but we are ready. Let me begin by saying that we are enthusiastic about our acquisitions of new franchises during the second quarter. First, during April, we announced the ABASA and Los Volcanes transactions in Guatemala, two bottlers that increased our volume in Central America by 28%. We have started including the results of these franchises as of May 2018. Second, in late June, we announced the acquisition of MONRESA in Uruguay, expanding the geographic footprint of Coca-Cola FEMSA. Starting July 2018, this territory will be reported within our South America division, increasing our volume in the division by 4%. Therefore, incremental volume for KOF, driven by additional territories is 2.4% on an annual basis. Before going into our operating and financial highlights, it is important to note that the comparability of our year-over-year results for the second quarter was affected by two main factors. One, as previously announced, due to a change in the reporting method, the results of Coca-Cola FEMSA de Venezuela are no longer included in our consolidated financial statements as of January…

[Operator Instructions]. And we'll go first to Isabella Simonato of Bank of America.

I have two questions. First of all, in Brazil, there were news recently that the government lowered the tax benefit for concentrate productions in Manaus. And I was wondering if that's already effective for Coca-Cola. And therefore, you're already seeing pressure in costs in Brazil. And also for Mexico, what's the outlook that you see for volume -- for consumption for the second half of the year and 2019, if you expect any acceleration in the region? Héctor Gutiérrez: It's almost 12 -- it's almost noon in Mexico, so I'll say good afternoon, Isabella. Brazil -- let me start by Brazil. What are the facts there. There is -- the government passed this regulation lowering the tax -- one of the taxes. And this is strange, but by lowering the taxes, it increases our cost because it increases -- it lowers the taxes of the -- of products that are coming from a tax-free zone in Brazil that has a positive effect in our cost. However, right now, it would be very premature to discuss the impacts from that because this is -- it looks like this is not a final disposition. There is a lot of discussion between the -- especially the Manaus' state that is the state that benefits from this tax reduction -- from this tax, excuse me -- from the tax-free zone. The authorities -- the tax authorities in Brazil that want -- that are looking for revenues. For us, the facts are that we have a 90-day period to -- that -- where nothing happens. It's like a standby period. And our expectation -- since there is still a lot of discussion between these two parts of the authority, the tax authority and the State of Manaus, our expectation is that something different of what…

And we'll go next to Luca Cipiccia with Goldman Sachs.

I wanted to go back to Brazil. We've seen somewhat mixed signal across the sort of beverage companies that reported in this quarter, suggesting that some are doing better, some are still suffering. We saw also for Ambev today, in Pepsi or in the Coca-Cola Company overall in the last few weeks. And the Coca-Cola, I think, overall reported decline in volumes. And it seems that you have outperformed at least the system overall. My question is, if you could maybe update us on where do you think the market stands in terms of recovery? What is working? What is working less? The -- I think there has been a big push to improve affordability and maybe where we stand on that process as well as a little bit on the outlook data. Generally, views on your execution but also on the market, on the soft drinks category overall in Brazil and how you think that is evolving or is getting better. Hopefully, it's getting better after a pretty tough couple of years. That would be my question. Héctor Gutiérrez: Good afternoon, Luca. I think that generally, I'll say that, first of all, Brazil is one of the markets that we have also deployed our digital platform. So we feel very strongly that we have this capability in place to benefit from that capability. Second, since fairly 1.5 years or maybe two years ago, we have started to fight to get to the top of the rankings in terms of execution. And we are very good in that ranking. We are now #1 for the Coca-Cola system in Brazil. So that certainly helps because execution measures, the cooler penetration, the position of the cooler, if you [indiscernible] the picture of success, et cetera. Third, in Brazil, we have focus in…

And maybe if you can also comment quickly on the portfolio in Brazil. And if you -- the breadth of the portfolio and how that may be out being or may still need sort of enhancements or increases given the current state of the market. Or if there has been any change there that is visible in helping sort of volumes return into more positive territory? Héctor Gutiérrez: Yes. The main change we see in the portfolio is with respect to flavor -- colas and flavors. The two of them are more or less -- colas is outperforming flavors, but -- and flavors is suffering a little bit. Water is growing. The ancillaries are growing. In terms of individual packages, I think the most significant change is that returnable presentations continue to grow important. If I remember correctly, for -- I mean, for this year, for example, for year-to-date on these first six months, returnables have grown double-digit compared to last year. So it's a very important element of our strategy.

We'll go next to Antonio Gonzalez with Crédit Suisse.

Just had a question on Argentina. First, I wanted to see whether you've considered -- or you think you can consider in the coming quarters changing to inflationary accounting in Argentina given the quick spike in inflation they're in. I understand that there are certain rules related to cumulative inflation and so on that dictate whether or not the contribute, classified for such category, but there are some judgment factor in there as well. So I just wanted to hear your thoughts on that. And also, I guess, more strategically on Argentina. Obviously, you've gone through many cycles there. And you've increased returnability, as you were just describing for Brazil, and implemented a number of strategies to mitigate, I guess, the impact of decline or potential decline that we're already seeing in consumer demand. Can you just give us a little bit of, I guess, perspective on how you feel you're entering this part of the cycle in Argentina compared to other episodes where there has been a rapid deterioration in consumer dynamics? Héctor Gutiérrez: Antonio, hyperinflationary accounting. We have been meeting with our auditing committee and our auditors. The big firms and the technical communities of these firms have agreed that Argentina is now hyperinflationary. We are still evaluating exactly what's the impact for us. But the most probable output is that, starting July 1, we'll have to account Argentina with hyperinflationary rules. What's the implication for that? Basically, the implication is that every month, we'll have to adjust every line in the P&L and our balance sheet to the month in Argentine pesos using the monthly inflation. So we'll report, let's say, equivalent to Argentine pesos in real terms. And then we had to translate that in Mexican pesos using the year -- the month-end exchange rate. It…

And we'll go next to Luis Miranda with Santander.

The question is on Mexico, and I just wanted to understand a little bit with your geographical footprint in the different regions. We mentioned in the last quarter that you were seeing stronger growth in the central part of Mexico. I want to know if you had seen any material change with the performance of the different regions here. And if I may ask also, if there is any evolution or we could expect some news in the short to medium term regarding any conversation about the Philippines and the call option? Héctor Gutiérrez: Good afternoon, Luis. There is not much difference in the -- I think that -- again, let me restart. Last quarter, I said that the performance of Central Mexico was very different from the Southeast of Mexico. That continues to be the truth. If you look at Villahermosa or Tabasco, it's the state with the highest unemployment. But it's starting to turn around a little bit in the second quarter. I think that the big challenge here is or the big question mark, more than challenge, is with the new administration that is coming into place in Mexico in December 1, and some of the promises that they have to start helping those that are in more -- that need the most help in terms of economic support. Those areas are certainly the Southeast of Mexico, which have been suffering of high levels of poverty, underallocation, et cetera. So whatever is done to benefit that area, I think, is going to help positively our company because that's a very important geographic area for us. The states of Querétaro and Oaxaca continue to perform very well, very well compared to the rest of the markets. Northeast, some security issues in Tamaulipas, but that is doing fine. And as always, Michoacán and Guerrero, with security issues also in terms of the distribution. But I think that there is not that much difference versus the first quarter, what I described, Luis. But the question mark is if the new administration is going to help more that geographic area, given all the promises during their campaign. With respect to the call and the put, we continue to have conversation with the Coca-Cola Company. That's where we are. As we mentioned, we have the full of 2018 to decide on the put, and a couple of years more to decide on the call. We are continuing analyzing that and having conversations with Atlanta with respect to the Philippines -- to the options on the Philippines.

Our next question comes from Alex Robarts with Citi.

I wanted to go to the still segment. And it's approaching 10% of cost curve of volume. And it is showing, as a segment, the biggest drag in the quarter on your volume growth. But it's very mixed, down 40% or 50% in the Philippines and growing nicely in Mexico and Brazil. So I guess, the question is twofold. How important to you is stills going forward as we look to some of the changes or the messaging that has been going on in Atlanta? And does there come a time where, particularly in Latin America, the joint venture model of economics changes to a different model. I mean, I hesitate to say incidents. But -- so kind of the first part is big picture, stills within the KOF portfolio looking out over the medium term? Second piece is really just kind of breaking down the three big markets. Is it just safe to assume that in the Philippines, this decline is around the tax? Or is there a structural change there? And in Mexico and Brazil, where we are seeing still good growth in the stills, is there a particular category that you could perhaps highlight that's been a driver? I know AdeS or Monster has been quite helpful but if you could talk to the specific drivers in Mexico and Brazil about stills. Héctor Gutiérrez: NCBs, stills. What are the reality? The reality is stills discuss a bunch of different categories. You have teas, you have power or energy drinks, you have even dairies included there. In the case of the Philippines, you have powders that you mix with water to prepare a beverage, given the low income per capita on the region. And that powder is an important element. So in general, I'll say, stills are growing…

We'll go next to Miguel Tortolero with GBM.

I just would like to have some more color on the dynamics you're seeing in the Philippines. I think volume declined after the tax increase. At the end of the day, they have turned to be lower than initially expected. So now that you have two full quarters with the new tax, I would like to know whether and how your expectations have changed when compared to your initial expectation for the year, both in terms of volumes and profitability? Héctor Gutiérrez: The Philippines. You have correctly pointed out what -- how we feel. We were anticipating -- at the end of the day, we increased prices close to 26%. We were expecting substantially higher results one in volumes. It has not been that much. However, what I described on the sugar impact is being reflected now in the profitability. So we are doing better than expected in terms of volume, given the price increase of the product to the final consumer. And -- but we have this issue with the sugar that is just hitting, importantly, the profitability of sugar and PET prices because of oil prices everywhere is going up. So what can we expect going forward? We think that we'll still have a Filipino market that will be underperforming largely in terms of volumes, certainly because of the price increases. And hopefully -- as I described in the previous question, hopefully, the importation of sugarcane will help us reduce the scarcity of sugar and therefore, improve -- or reduce the price of sugar for us a little bit. And that help in the profitability. Still, a lot of that revenue that we are collecting is just passed to the government. That's what I was trying to describe in the conference -- in the initial remarks. Revenues, reported revenues are up 27%. But if we exclude the effect of the tax, revenues are down 1%. So that basically implies that everything -- the additional that we're collecting is just for taxes. So it's a -- market share-wise, we are doing very well. I think that we are performing better than our competitors. That's what the news is telling us. And as I mentioned, powders is a category that is not that profitable. But when you don't have sugar for 100% of the growth of the product, you dedicate those raw materials to the most profitable, basically, use that you have. That's the story in the Philippines business.

We'll go next to Leandro Fontanesi with Bradesco.

My question is regarding the channels that you sell. If you could share with us what percentage of your sales today are through the traditional channel? And how this compares to, let's say, 5 or 4 years ago? And also, if you could comment if the reduction in, let's say, mom-and-pops in the growth areas we've seen in the modern channels, how this affects the profitability of your business and also volumes. Héctor Gutiérrez: In the now 11 countries that we serve with Uruguay, in general, we have different penetrations of modern trade. We have areas like Argentina -- and I don't have the figures in front of me, but Argentina should be around 30%. And Mexico is probably around 12%. The volumes that goes through modern trade. So you have different streams on that front. Now there is no question that convenient stores, similar, for example, to OXXO and the Walmarts of the world are increasing their share little by little. And those -- in general, I'll say that the pricing power we have with small mom-and-pops is better because you don't have such a strong negotiator on the other side. However, the flip side of that is that the distribution cost, while it was due -- going into distributors, this big client is very efficient. So it's a mixed bag of on one side, you have a better pricing, but you go to the very small mom-and-pop as I have described in some of the conference, and you have a drop size of 1 or 2 cases a week. It's quite expensive to go and distribute those two cases. On the other hand, you have the pricing power of a Walmart or an OXXO and negotiating conditions, et cetera, and longer working capital in terms of payables, et cetera. But you distribute either to a closed door, or you go to a store and you take a full truck and the drop size is 400 cases a day. So it's a mixed bag of feelings on that. The trend is that modern trade and in some areas, like discount stores, are growing fast -- a little bit faster than the mom-and-pops. Still, as I mentioned in Mexico, we're somewhere around the 12%, 14% depending -- if you -- speaking about CODs. All the categories, for example, in dairies, it's a very important modern trade, substantially more important, and that's part of the trend that we are changing. I think that's a little bit of -- I think with this, it will give you a good flavor of how the trends are in the industry on that.

We'll take our next question from Carlos Laboy with HSBC.

Hector, two quick questions. One, can you please elaborate a little bit on where we stand on the Philippines agreement at this point? And second of all, can you give us some quantifiable insight on how you see the rollout of the digital platforms impacting revenues and costs in the first half? And whether you think the impact will be greater as we roll forward into the second half? Héctor Gutiérrez: The Philippines agreement. As I explained, we are still in conversation with the Coca-Cola Company. We have 2018 to decide on the puts and a couple of -- two more years to decide on the call. And we have been working internally and in conversation with Atlanta to see if we find a way of extending this period, et cetera. As soon as we get into an agreement, we'll certainly describe it because this is an important element, an important element in Coca-Cola FEMSA. The rollout of the digital platform. As -- I've mentioned that, last week, they did the rollout in Argentina. We think it's going to help tremendously Argentina. Mexico is fully implemented, Brazil is fully implemented. So I think that, in general, what we are seeing is that, as we start using these platforms, we feel more confident on the initiatives, the commercial initiatives that we deploy, especially to the trade. And we are starting to see also some insights with the consumer. That should translate into either better volume performance or better price. We are seeing a little bit more of the latter. And let me use of the example, even though these are territories, totally different territories. But you see Mexico, we report close to 5% increase in prices, which is not necessary price to the consumers. A better selection of the discounts that you give to the trade and better margin for us in terms of the conditions we give to the trade. And if I read in, for example, the article report that I've seen that the growth volume would be at zero flat -- zero-pricing increase. So it's a different mix and probably we are reaching similar levels right now. But my expectation is that the potential that we have with this tool is to manage much better our pricing, this large conditions, this large commercial initiatives that we have in the trade and to the consumer. That once we have a turnaround in the markets that are in the area, geographic areas that we have that are softer in terms of macroeconomic barriers that, hopefully, we have a positive volume and a positive price. Okay?

We'll go next to Álvaro García with BTG. Álvaro García: My question is on Uruguay. I was wondering if you could perhaps provide some more color on why the transaction sort of went down when it did. And what sort of opportunities you see to improve profitability? And maybe to what scale do you see you can improve profitability in that market? Héctor Gutiérrez: Uruguay, why it came down. I don't know it. It's -- I mean, it has been in the hands of the Coca-Cola Company for forever. They sold -- it was Buenos Aires back in '94. And probably since then, we started discussing the possibility of doing Uruguay at some point in time. I guess, the short answer is that the Coca-Cola Company was not ready to sell. And we'd be finally moving in this direction and hope -- and happily, we ended up meeting of our minds in terms of the conditions, et cetera. The Uruguay market is not that big of a market. It's around 45 million unit cases, 3 million people. We just started to get our hands there. We -- obviously, we did some due diligence, et cetera. The main source of synergies has to do with back office because this is going to be part of Buenos Aires now. We have the quality structure in Buenos Aires, and back office is going to share from the facilities we have in Buenos Aires. We'll -- obviously, we will start looking at opportunities of portfolio, deploying the digital platform, et cetera. That, hopefully, give us some opportunities to improve. As always, supply chain is the first thing to go. I mean, procurement, et cetera, using the power of buying -- of Coca-Cola FEMSA is most larger than what they have in Uruguay although it was part of the Coca-Cola Company. But we believe that we have better raw material conditions, et cetera. So that's the reasoning behind the acquisition of Uruguay. The timing, I don't know, it's difficult to say. It just took so long, but finally, we are glad we are here. Okay?

We'll take our next question from Sonia Vora with Morningstar.

I just had a quick question on the cola dynamic. It seems like it strengthened across a lot of your geographies. But if you could maybe -- can you describe any shift in the competitive dynamic there, particularly within Mexico? That would be helpful. Héctor Gutiérrez: Sorry, Sonia. I didn't understand the question. The consumer dynamic in Mexico, but I didn't understand the initial part of the question.

Sure. Yes. I was looking specifically at the cola category. Héctor Gutiérrez: The cola, okay. Got it. Yes. In Mexico and many countries, what we are seeing is really the power of brand, Coca-Cola. It continues to grow basically in every market. It's difficult to find a market where you see -- it's difficult to find a month where you see a reduction in brand Coca-Cola, including the extensions to Coca-Cola Light and Coca-Cola No Sugar. You have areas like Colombia, where it's growing double-digit. A lot has to do with returnable presentations going there. And you see a tremendous drop in flavors. As I described in the first quarter, part of that because of reformulation, and we are moving back to the original formulas. But it's not only cannibalizing our volume, it's also gaining share versus the competitor. And we see the same in Guatemala, Costa Rica, Mexico as well. Cola continues to grow, very little but is growing little by little. You have examples like in Brazil, where it's growing close to 4%. Mexico is a little bit -- is below 1%, but it's growing. So it's an interesting thing because it looks like if you just follow your instincts that Coca-Cola is out of fashion or whatever, it's not in Latin America. It's still a very important engine for us, and it continues to grow. A part of this, as I mentioned, added by reformulations and including Coca-Cola No Sugar and Coca-Cola Light.

[Operator Instructions]. We'll go next to the Felipe Nunez with Scotiabank.

I guess, just going a little bit deeper into the Philippines to try to gain an impact -- gain an insight into what the impact of sugar prices and the lack of availability it's having on the platform. So this won't be the first time that there's a need for sugar imports in the Philippines. And it's been opened up for imports in the past. So I guess, my base case is that it will happen. And then sugar prices should normalize. So I guess, my first question is, where do you think margins would stand or what type of improvement would you have in margins if sugar prices eventually normalize? And then in the opposite scenario, I guess, let's say, if the government takes a different stance to what has been traditionally done in the Philippines and it doesn't open the market for imports, how much further are you from that threshold where it's worth it to import high fructose corn syrup even though the tax is 2x as high? How far are you from that kind of breaking point? Héctor Gutiérrez: Good question. Some data here. We have, as I mentioned, we have to stop some production lines because -- temporarily because of the lack of sugar. Prices of sugar have increased substantially close to 28% during some of these weeks because of the scarcity. And the other fact is that we have received, as an industry, indication or an authorization -- more an indication than authorization, to start importing cane sugar from the outside. As you'd said, it has been imported in the past. The Filipino market -- the sugar -- the Filipino sugar industry doesn't have enough capacity for the whole Filipino market. So that -- I think, that was very clearly understood by the authorities.…

At this time, we have no further questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks. Héctor Gutiérrez: Okay. Thank you for your interest in Coca-Cola FEMSA. And as always, myself and my team is available to answer any of your remaining questions. Thank you.

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.