Good morning, everyone and welcome to Coca-Cola FEMSA's Fourth Quarter and Full Year 2018 Conference. As a reminder, today's conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation. During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. And now at this time, I would like to turn the call over to Mr. John Santa Maria, Coca-Cola FEMSA's Chief Executive Officer. Please go ahead, sir.

Good morning, everyone. Thank you for joining us to discuss our fourth quarter 2018 results. Constantino Spas, Hector Trevino and Maria Dyla Castro are all with us today. We completed a historic year for our company as we celebrated the 25th anniversary of Coca-Cola FEMSA's incorporation and stock exchange listing. At the time of its IPO in September 1993, our company was valued at MXN1 billion. Today, our company is valued at almost MXN13 billion, 13 times its original market value for an annual total return to shareholders of over 19.2%. In 1994, we took our first step abroad with the acquisition of Coca-Cola Buenos Aires in Argentina. In 2003 we see the leadership position of the beverage industry with the transformational acquisition of Panamco, expanding our presence to nine of Latin America's most important markets and multiplying our volumes six times. From 2008 to 2016, we strengthened our company's leadership position in Brazil. With the acquisition and integration of four significant franchises that expanded our presence to more than 50% of the Coca-Cola system countrywide. Correspondingly, we bolstered our footprint in Mexico through our merger and integration of four bottling franchises from 2011 to 2013. Moreover, we remain at the forefront of the total beverage portfolio evolution. First, our joint acquisition of Jugos del Valle in 2007 captured the potential of a powerful brand that is now one of the Coca-Cola system's a $1 billion brands. Second, we established a partnership with Leao in Brazil to develop a broad portfolio of stills beverages. Third, we began our journey into the value added dairy category through our joint ventures in, with Estrella Azul in Panama, Santa Clara in Mexico and Verde Campo in Brazil. More recently, we entered a new plant-based beverage category with our joint acquisition of AdeS in…

Thank you, John and good morning, everyone. For me and for our company, it has been a very impressive 25 years Journey. Throughout this journey, we sustain our company's strong capital structure and financial flexibility, maintain our disciplined approach to capital allocation while capitalizing on our operational excellence to smoothly and successfully integrating new territories and various categories into our company. Consequently, we are now the largest non-alcoholic beverage company in Latin America, creating value for our shareholders by multiplying the original value of Coca-Cola FEMSA by 13 times. Coca-Cola FEMSA cross through a successful grown, growth story and I am thankful for all the people with whom I interacted, they play an important part in my career. And with that, I would hand the call over to Constantino.

Thank you, Hector and good morning, everyone. I'm very honored to have the opportunity to continue with the legacy that Hector has built for this organization. Hector is not only a phenomenal CFO, but also a great, mentor and friend and has been very helpful for me and my transition into Coca-Cola FEMSA. I would like to share my five key priorities as I take the role. Number one, ensure we maintain our solid financial foundation and a disciplined approach to capital allocation in order to continuously improve our return over invested capital. Number two, continue evolving the finance function with a business partner mindset working collaboratively with our operations and other functions to ensure that they're fully equipped to drive our top and bottom line results and maximize shareholder value. Third, guarantee that we continue attracting and developing our talent base in the finance function. Number four, continuing with our approach of transparency, fair disclosure and continuous communication with our stakeholders. And finally, support John and the senior leadership team in our continuous journey of cultural transformation reinforcing our DNA elements. Number one, our obsessive focus on customers and consumers. Number two, our operational excellence focus. Three, continue creating owners' mentality across everyone who works at Coca-Cola FEMSA. Number four, putting people first in every decision we make. And finally, agile decision making and agile organization as something that is very critical in a volatile uncertain complex a environment that we face. Turning to our operational and financial highlights. It is important to note that several factors affected the comparability of our year-over-year results for the fourth quarter. Number one, as previously announced, due to the change in the reporting method, the result of Coca-Cola FEMSA Venezuela are no longer included in our consolidated financial statements. As of January…

Thank you. In an ongoing effort to promote our leadership talent, starting this year, we are pleased to report the following organizational changes. Fabricio Ponce, former Chief Operating Officer in the Philippines, is our new Chief Operating Officer for our Mexico operation. Prior to his assignment in the Philippines, Fabricio served as the head of our Colombian operations, Managing Director of our Central American operations, Managing Director of Argentina and Brazil and Colombian operations and Strategic Planning, Director of our Latin American operations during his 30-year career with Coca-Cola FEMSA, and now it is coming back from Philippines to start applying what we learned over there to the Mexican market. Xiemar Zarazua, former Chief Operating Officer in Mexico, is our new Strategic Planning and New Business Officer. Prior to joining our company, Xiemar served for more than 30 years in the Coca-Cola Company. His different positions included, Chief Executive Officer of the Brazil business unit from 2008 to 2016 and Chief Executive Officer of the Latin America business unit from 2006 to 2008. He also served in different areas in Mexico and Central America. At Coca-Cola FEMSA, we are committed to continuing our legacy of entrepreneurship, innovation and operational excellence, strengthening our capabilities to become a bigger, better and bolder bottling company to achieve our joint vision of beverages for life and generating economic, social and environmental value for all our stakeholders. In closing, we continue to focus on becoming a total beverage leader in our current and future geographies, continuously pursuing sustainable profitable growth and enhancing our capabilities to remain as a beer market developer in the Coca-Cola system. Operator, I would like to open the call to questions. Thank you.

[Operator Instructions] And we'll first hear from Fernando Olvera of Bank of America Merrill Lynch.

Hi, good morning, everyone. Thanks for the call. I have a couple of questions which are related to Brazil. I mean regarding volume, you registered a really very solid volume growth this quarter, and I think the strongest quarterly growth of the year. So can you elaborate more on what was behind such growth and how does your market share behave during the quarter? Also, how should we think about consumption this year and what is your outlook on volume grow this year? That's all. Thanks.

Thank you, Fernando. This is Constantino. Well, yes, certainly, Brazil had another positive quarter. We continue to be very encouraged by the positive performance. We have in Brazil. It's the fifth consecutive quarter of volume growth. As you mentioned, volume growth increased 4.5%. Overall weather helped significantly, especially during December. In addition to that, as I mentioned, we have a very successful implementation of affordability initiatives, additions to the portfolio. As I said during the year, we did around 100 launches in Brazil across all categories. And honestly, there is a huge focus on execution at the point-of-sale by the team and also we have been driven by some digital initiatives across our omni-channel strategy. Our market share remained steady, we're gaining some traction in market share both in CSDs, especially in Colas. But also in juices and nectars and water as well as isotonic and energy drinks. Overall, we're seeing a very, very positive beginning of the year. The outlook in terms of macroeconomics and consumer optimism in Brazil is starting to pick up again. So, we hope we continue with this trend and momentum in Brazil. Thank you.

Great. Thanks.

Next we'll hear from Benjamin Theurer of Barclays.

Yes, good morning everyone and thank you very much for taking my question. So two questions, actually, one on the outlook in Mexico. What do you expect, how do you feel about the consumer environment demand scenario and obviously the fact that you had obviously a little bit of cost pressure from the concentrate, what's your pricing strategy looking into 2019 on the Mexican market? That would be my first question.

Yes. Thank you. It's Constantino again. Well, overall, we're seeing positive trend as we start 2019. We have done very, been very effective in price management above inflation. I mean we're leveraging, we're significantly leveraging our analytics platform for the last couple of years, which, as time goes by, becomes more robust and more accurate and allows us to be much more effective, not only on pricing and developing a pricing architecture, but at the same time on being more efficient in the allocation of discounts and promotions across our different channels. So that has been and will continue to be a driver for our performance in Mexico next year coupled with significant improvements in our execution at the point-of-sale. On top of that, we're seeing a resilient consumer. It's gradually recovering confidence. January, we saw positive volumes, the start of the year, which is good, taking us in the right path, although we had some weakness at the end of 2018. But January was pretty positive. And at the same time, weather has been favorable for us throughout the beginning of the year. Our portfolio affordability is increasing. We are working very hard behind our returnable portfolio and our NCB portfolio also continues to gain traction. On the profitability side, as you mentioned, we're seeing more stable raw materials environments, sugar and PET prices significantly which were hard last year, coupled with a significant amount of productivity initiatives to protect our bottom line in Mexico. So I think that probably provides you a little bit of an outlook of what we are seeing for the Mexican market.

Hi, this is John. I just think complementing on that, just complementing on that, I think what we're seeing also is the fact that we will have increased government spending. So the short-term consumption pattern for Mexico on a consumer business, specifically in our territories is going to be very favorable.

Yes.

Okay. And with that, do you expect also transactions to somehow pickup? Because that has been somewhat weak-ish, especially in the fourth quarter, but if we take a look transactions throughout the year, were slightly negative 2018 versus 2017? So I assume you're expecting a little bit of a recovery there as well. Because what we're basically seeing was no volume growth throughout the year with some minor transaction and everything came from price. So the question is that transaction with less volume, what can drive top line growth in 2019?

Right. Good question. I think one of the things that we, we're going to start focusing on more, much more heavily this year in Mexico is single serve. Single serve in an affordable way and single-serve returnables, I think, we have a good lesson from the Philippines that we can bring into Mexico where we can go into having very affordable entry price points, okay, in a very significant manner in many markets in Mexico that requires it. So between what we're doing in revenue growth management on multi-serve along with the focus on retaking single serve, I do think, we'll have enhanced transaction growth and revenue growth behind our Mexican operation.

Okay. Perfect. And then just one last question. This is really just more of an accounting one. On the filing, you've submitted that the Mexican Stock Exchange, you basically reported at MXN51.8 billion in revenues to press release throughout the whole report states MXN50.2 billion. What's the difference of that 3%, because it literally runs throughout the whole income statement. Just your quick clarification. So which number should we actually use?

Benjamin, we had a problem with the platform [Technical Difficulty]

Hello?

And just a moment. [Technical Difficulty] And you may proceed.

Benjamin, I don't know…

Yes.

What you've heard until we got cut off. But again just to reiterate we have...

[indiscernible] last one and then it got cut off. That was the last word, plus…

Yes we had, as we were loading the data to the Mexican Stock Exchange platform last night, we had very, a lot of difficulties putting that data onto the platform. And the correct data to focus on is the press release data.

Okay.

We'll be correcting the data on the Mexican Stock Exchange during the course of the morning.

Okay. Perfect. That was all. Thank you very much and I'll pass it on. Thanks.

Thank you.

Thank you.

Next we'll hear from Lucas Ferreira of JP Morgan.

Hi. First of all, I'd like to say, actually see, for Hector too, have a good look in his this new position actually, new phase of his life. And my first question is actually on the Colombia, if you guys can comment on the outlook for volumes, how this first month has been and especially considering this change in the VAT charge, if this, if volumes have been coming above expectations? And what are the sort of impact that we should expect for volumes in the first quarter and for 2019? And my second question is regarding cost. So if you guys can comment on the cost trends for the year, if you already foresee some improvements in PET in the first half of the year and also the other main cost lines, if we should expect already a better year in terms of front costs per hectoliter sold. And if we should see some improvements in margins on the back of that? Thank you very much.

Next question from Alan Alanis of UBS.

I'll be very happy to ask my question, but I don't know if they are on the line. John, are you on the line?

Just a moment.

Thank you so much. I think they have to reply to Lucas' question first, questions first and then we'll go afterwards.

Please hold the line while I reconnect our presenters.

Yes, one moment please. [Technical Difficulty]. Hello?

You may proceed.

Okay, thank you. Hello. Lucas? Hello, Lucas. Next question.

And we're on Alan.

Yes, I will, I mean, I'll ask my question but I guess we can circle back afterwards to Lucas. Sorry...

Yes, we'll go back. We can go back to Lucas.

Sure. I'm just trying to be a gentleman here. Well, first of all, Hector, congratulations. I mean as a former boss mentor, I mean you've always been a great example, and I certainly wish you the best at this new stage, you will be missed. John, Constatino, my first question has to do with the criteria for transactions in M&A post the approval of this split. How does it, how does it change the criteria, if you could just update us on your thinking now that you will be able to issue more shares for M&A? And that would be the first question and then I have a follow-up more regarding, what, I can, you can put it on the table right away. It has to do with the role of beer in your portfolio in Brazil. If our numbers are correct, we saw very strong revenue growth for the beer category in your results in the fourth quarter. I think that, given that Heineken said that there was, that they reported low mid single-digit in the fourth quarter, it indicates that you had a lot of pricing in beer in Brazil. And I just want to see if you can confirm that. And what is the overall role of beer in Brazil? And if you can give us any update in terms of the arbitration that is going on with Heineken that will be highly appreciated. Those will be my two questions.

Well let me tackle the last question first. First of all as you know, we're in the middle of a, I know everybody wants to know about beer in Brazil. But as you, as you're aware, we're in the middle of an arbitration process. So there is very little we can say about it until the arbitration process finalizes which we expect it to happen between the first half of the year or maybe the beginning of the third quarter. So just for those purposes, I'm not going to comment around our perspective on beer going forward in Brazil, and I hope you understand that, that particular,

I do.

And in terms of performance, you're right. The beer category is going to, in very positive momentum for us in our region or in the area of influence where operates in Brazil, I guess, Heineken has reported some of those numbers. And I would rather have the guidance from the Heineken relief and conversation that occurred a couple of years ago, a couple of months, weeks ago, sorry. But overall, we're seeing strong growth. The brands Heineken and brand Amstel have very good momentum. And this particular element is something that we're seeing consistently happening in the market for a while and we foresee it happening, so the premium segment of the beer category should continue strengthening from our perspective in the Brazilian market. So that's all I'd like to comment around beer. And I think the Heineken release has a significant information that can provide you guidance in that regard. On the M&A piece and the stock split, as you know, the changes that we announced just aim to give us flexibility on our capital structure by increasing our capacity to issue equity that maybe used in, as a consideration in future share-based on mergers arrival acquisitions. However, there is no project or initiative or target in mind that drove that decision. It has been something in the making for a while. Actually I have Hector on my side who has been the architect of this particular initiative, and I'll ask him if he wants to comment beyond that. But there is no change in our focus on M&A. As you know, we have been historically known by being very disciplined on our capital allocation and we'll do the investments that are right for our company and our shareholders at the proper value and at the proper time and the mechanism that we put behind those transactions is defined at the moment, we see that the target and the initiative unfolding. I don't know Hector wants to comment something on the stock split to give you a little bit more guidance.

Thank you.

Good morning. As Constantino mentioned, this has been in the making for many years actually. Since the Vonpar acquisition, we started to define this need. And if you remember, we had this convertible that was issued with respect to that acquisition and that requires this structure to be in place. It took a lot of time, because we were looking for, and in conversation with the authorities, so that we can have a single unit trading as opposed to having Series B and Series L with a split trading that, in our opinion, will create some liquidity and issue, pricing problem for us. So we finally got the authorization at the end of last year. We were caught with the Christmas break and the change in the government and finally, we got final approval in January. But as Constantino said, it's basically talking of what we'll develop and plan for quite basically for 3, 2.5 years. The Series B shares will now have some volume rise which I think are very good for our shareholders and that [indiscernible].

Alan, this is John. I think as you go through these three acquisitions of Coca-Cola FEMSA, sometimes you use the large component of debt and sometimes you use the, a large component of equity, but always trying to maintain our ratios within region. And some, and what we have here is incremental flexibility, okay, to make sure that as we see opportunities when they come up and sometimes are not necessarily projectable that we have the financial strength and flexibility to do something that is reasonable and conservative for our shareholders. Assuming that we did whatever transaction we have going forward is accretive. And I think this allows us a broader spectrum to go out there and feel comfortable that we're in a great financial position and also in great capital position to continue down the path of doing further transactions.

Got it. That's very useful. Thank you so much.

Thank you, Alan.

Thank you, Alan.

And Lucas, your line is reopen, you may pose your question again at this time.

I think you, I'm not sure if you issue listen to the questions, but the first one was related to the elasticity in Colombia, if this is coming better than expected. What sort of impact you guys are expecting the volumes for the first quarter and full year? If you can comment at least versus your expectations, initial expectations. And the second question was regarding the costs, wanted to know and what part of the curve we are in terms of pressures, especially from PET which I think should be to remain the one of the lines pressuring your costs. So can we expect already better cost base in the quarters to come, and what about the full year 2019. Thank you.

Lucas how are you? Regarding Colombia, obviously the elimination of the tax benefit that we had in and our plant is a very, very large impact for us. And to change our short-term strategy of want to going out there and restructuring our Colombian operation in a lot of different fronts. The first one was pricing, which we took up immediately in January, we took up over 6% pricing. Secondly, we had a resize, beginning to resize our operation, we've taken out 200 people in Colombia, basically staff people to resize that operation. Thirdly, we're looking at redeveloping our route to market, plus our supply chain distribution network, because all of our benefits are stuck in the Tocancipa plant and we're looking to we reallocate those to the different plants that we have. So I think the first four to five, six months in Colombia are going to be very focused on restructuring to make sure that we're facing the environment in the correct manner. in sizing our company to that manner. What we think about elasticity is we've taken up the prices and we're better than what we thought. So, we have, at the 6% rate, we're not looking, we're not seeing the same type of elasticity as we had before in the VAT was taken across the whole country couple of years ago. So we're much better off than what we thought. And we're encouraged by what we're seeing in terms of savings. And obviously, it's a very challenging year for Colombia, but I think we're on the right track with the right portfolio and with the right management as well.

Now, Lucas, and around, and to your other questions regarding raw materials, PET and sugar, we are seeing a better curve going forward in 2019 compared to 2018 . So overall, our outlook in that particular element inline in our P&L should be more favorable this year than in the previous year.

Thank you very much.

And next we'll hear from Antonio Gonzalez of Credit Suisse.

Hi. Good morning, everyone. Thank you for taking my question. First, similarly, thank you for everything Hector and congrats on a truly remarkable career and Constantino, best of luck on this new role. I have two questions. The first one on dividend, you mentioned in today's press release that the Board has proposed the dividend of MXN3.54 per share, which is 5.7% growth versus last year. And obviously there has been a debate recently up there, you exited from the Philippines on whether you could substantially increase the payout. On the other hand, obviously, flexibility on the macro side in Mexico, I guess, has diminished significantly. So I just wanted to pick your brains as to what is the latest thinking with respect to the payout policy? Do you think we will remain at similar levels for the next couple of years or do you actually see a room for a substantial increase, and if so, in which time frame? And then secondly, I just wanted to ask very quickly, what triggers, is there any specific events that triggered their write-off in Panama and is there any long-term learning here that would extrapolate your diary ventures elsewhere or is it more of a specific situation? Thank you so much.

Thank you. Thank you, Antonio. Let me address the dividend issue first, we are taking back our dividend policy to about for the 2019 year in payout to the, to about 20, 21% those was historically. We would have increased dividends further, but we wanted to, but we want to make sure that we have the cash on hand to pay off a $500 million Yankee bond that comes due in February, okay, of 2020. Okay? So we didn't see any economic benefit of going out there and borrowing to report, to go out there and do a such a short-term transaction to bring down the Yankee. So we wanted to keep that cash on hand. So going forward, once we're over that hump, we do have a possibility of increasing the dividend policy going forward for Coca-Cola FEMSA and that would be our objective. However, we also would be very constrained, we're very concerned with how market conditions continue to evolve and what we want to make sure that we have enough financial flexibility and strength on our balance sheet to be able to ensure that whatever future dividends that we're going to go out there and increase are sustainable. Secondly, in terms of the write-off of the Panama operation, the Panama operation is the first real foray into value-added dairy that we had. And I think what we've had is a lot of delays on the plant, the law in terms of up, bring up the plant into a, and respect, this was neither a remake nor a Greenfield or around we have a what we saw a Brownfield that we're just making the plant within, a new plant within the existing plant. So that, if you have ever remodeled your home, is a very difficult situation. So we've encountered delays and we are also learning a heck of a lot more about how to manage dairies. Because this is really the first time when we've gone into cold and value-added dairies with yogurts, okay, ice creams. So it's been a very large learning process that we don't have anywhere else, okay? In Mexico, we are basically all UHT, or even in Brazil where it is chilled, but it is on a separate basis. So I think it's a very specific thing to Panama that you really cannot go out there and project any place to us. Now that being said, we just came back from Panama couple of days ago, and I'm very encouraged to see exactly how the project is coming along, the momentum is gaining and how the, our production platform is coming on stream nicely.

Gracias.

You're welcome.

And before we take our next caller, I would like to remind you to please limit yourself to one question and one follow-up question, allowing others a chance to ask a question. Next we will hear from Carlos Laboy of HSBC.

Hector, congratulations and thank you for 25 years of forthright honesty and straight shooting which has been I think very helpful for everybody. John, the catalog of achievements that you listed at the start of the call, we all get it, it's what makes you maybe the most valuable bottler Coke's ever had anywhere in the world, almost 25 years for driving next frontier execution. But it all makes for a really great eulogy, if you can exceed your cost of capital on a sustained basis. When you look at the pressures you're facing in Brazil and you look at the pressures that you're facing with non-core profitability with the marketing maybe of effectiveness at driving growth for your core brand. Can you exceed your cost of capital without these things getting fixed? And the follow-up to that then is, you said that you're going to evaluate geographic and category opportunities, but you're also increasing the dividend, so are you willing to consider geographic opportunities for asset sales, not just for purchases, if you're staring at situations where you can't get from your partner what you need for exceeding your cost of capital?

Hello?

Yes.

Carlos, a couple of things. Yes, over the last couple of years, we've had a series of, we've had a series of years where we are not making our cost, we are making or slightly under the cost of capital for Coca-Cola FEMSA, and I think that's a true reflection of the market in terms of how we've gotten the value Coca-Cola FEMSA. We get, it's just not been increasing shareholder value. Now there is a couple of reasons for that and I think there's the valuations, there is incremental cost for raw materials, and yes, importantly, there has been also incidence increases that had also been affecting us to the tune over the last three, four years of about $154 million, that continued to give us headwinds. There has been consumer headwinds and there's been tax headwinds as well. So I think overall, being close to cost to capital has not been bad, but it is not what we need, okay? The issue is how do we go out there and continue to grow cost, achieve our cost of capital, couple of things. First, in the general picture, we need to go out there and amplify our portfolio. Well, firstly, we need to just to get our CSD portfolio back on track and I think it was very encouraging to see during 2018, that Coca-Cola brand, Coca-Cola grew almost 2%, okay, in terms of volume. And I think we've put also a lot more revenue into the Coca-Cola system by growing both revenues and volume and transaction fees over the brand Coca-Cola. And secondly, we need to go out there and fix on our non-carb business or make it not fixed. I would say let's make it more profitable. Okay? Right now, where we are, it is growing, but it's not nearly as profitable as our growth business, but it is as I would argue is marginal to the whole process. So, or to the whole structure, so the more we go out there and grow, the more margin we do enhance. Now when we bring down the Coca-Cola, the non-carb business, it is what non-carb business, you want to talk about. Because within the non-carb business, there's a series of large business, of businesses that are very profitable, energy, key, low...

Isotonic.

Isotonics. And one, we have to start, I think getting better returns on just basic juices and nectars. And there's two ways of doing that. One is going out there, getting better formulations, okay? And secondly, there is also case is going up and doing a better portfolio by premiumizing it. And I think Brazil as the last time you were down there, you saw how we premiumize the juice, the juice portfolio, making sure that we're going out there with higher premium category glass products and they're doing very well and there is a lot of margin involved in that. So I think from that end, we're starting to advance on the portfolio and getting it much more accretive for our Coca-Cola FEMSA, Coca-Cola FEMSA shareholders. Secondly, I think it's in water. In water, we have to go out there and figure out exactly what we just did in juices in terms of developing a portfolio of premium brands, okay, to be able to really develop the brands and to make sure that we have enhanced profitability over what we have today. Today, in most, most countries, we play with a core brand which is CL in some places, Crystal in Brazil, that tries to play gamma across premium value and four mainstream. And what we need to do is go out there and develop those brands differently. We need, we've just launched Smartwater in Brazil, we've launched Smartwater in Argentina in the Mississippian basis. But those are the type of initiatives we need to continue to develop fully and aggressively to make sure that, that portfolio becomes as profitable as carbonated soft drinks. And in carbonated soft drinks, and I just said this on another question, we need to refocus on engaging on transactions on single serves. And I think there we can do that by going back into glass and returnables, okay, in a way that I think our competitors can't, okay, both in Brazil and Mexico and elsewhere. So I think there is a good story let's say that we're well poised to be able to go out and increase our profitability and our margins to cover our cost of capital and grow at the same time. We turn to Brazil, you're saying whether Brazil, beer is something that we need to do and we don't need to do. Obviously, we can't comment on the existing arbitration but the world is moving toward more and more integrated platforms. And Brazil is an example, I think there's other countries that are also examples. And I think it's more compelling in Brazil than any place itself, and for us it would be very important for us to be able to have a beer solution in Brazil. I don't know if that covers all your questions, Carlos?

Yes. The final question is that you had mentioned that you're going to continue to evaluate geographic and category opportunities, but everyone assumes that, that means that you're going to consider more asset sales, but more asset purchase but what you've done mostly recently is sales, the Philippines. Or do you look at your existing portfolio of territories to sort out well, maybe there's something in here that we shouldn't have.

Sure. Let me be clear about this, I mean the thing with the Philippines was a very specific transaction structure for the Philippines and Asia and the way it was set up the deal was set up, and that's what we negotiated at the time is that we'll go out there and we are putting the call. And we had to go out and exercise the call to be able to further acquire territories and in Asia. And given what's happened in the Philippines with the tax on sugar, we couldn't find a way that make whole of the prices that we had in the original transaction. And so, therefore we instead of going out and modifying the whole transaction, but we, what we landed up doing was just putting it back to the company. That philosophy is not in Coke FEMSA's DNA, okay? We're not going, we're not asset sellers, okay? I don't have it in vision to go out there and sell assets at this point, any pesos. And later on from, in the Philippines, we just went out there and acquired two franchises in Guatemala and one in Uruguay, that I would say, gives you the pace of where we want to go in the future. We will continue to look at opportunities both on a category basis and a territory basis, Carlos, okay? Again just making sure that we're not going out there and destroying shareholder value.

Thank you.

Welcome.

Next we'll hear from Alex Robarts of Citi.

Yes, hi everybody. Thank you. And I did want to start out by saying to Hector, thank you very much for the financial stewardship through the years. And I hope the best in your well-deserved retirement. Two questions from my side. One on the operating deleverage in South America. And then the second on non-carbs. I guess we kind of came into the quarter thinking about lower sugar in South America, but then higher PET. But what seem to kind of really explain or at least impact a lot of the deleverage, right, you show us comparatively 12% top line in South America, growth in the quarter with 2% EBITDA growth and that difference seems to kind of go to the, what you call the raw material hedge, the unfavorable hedge there, could you give us some more color as to what specifically was behind that raw material unfavorable hedge? Was it a particular input, was it several? And might we expect some relief in this seasonally strong summer here in the first quarter or might that continue to be unfavorable? So, that's the first question. The second one relates to non-carbs and interesting trend, you talked about it with us in the fall in New York when you came up. And now with the full year numbers, we can kind of see how those non-carb volumes fall. Then when you look at Mexico and Brazil, it's kind of a tale of two cities, flat non-carb volume growth in Mexico last year and I guess the kind of the impact there is bulk water coming down. The question is, is that going to continue to be a focus for you or is that something that you want deemphasized and should we continue that for, to see that decline? The other side is Brazil where your mid-teen non-carb growth. A lot of it is stills also waters, but it strikes me that it's 20% of the volume of non-carbs in Mexico. And so does M&A become something that you would look at this year in non-carbs in Brazil to kind of perhaps more right size that kind of growing piece of your volume? And the final piece on the non-carbs last week Coca-Cola Company talks about in the conference that new products accounted for about 17% volume growth last year. How does, how do you think about just generally new products and the impact it can have on your growth this year. Would it be like Coke's number of mid-teens? Thanks very much. A lot of kind of sub questions, but I appreciate the time.

And Alex, Let me see. Let me just try to take the last ones first and then I'll let Hector or Constantino, talk about the hedging question that you asked. I think, let me talk a little bit about bulk water, because bulk water is a good place to start on this conversation. We do have a very large bulk water business in Mexico, okay? And that is, it's profitable, but it's not necessarily as profitable as we'd like it to be, and we've been working on maintaining or growing our profitability on primarily the 19, 20 liter jug business. And there what you'll be seeing and what we're going to be emphasizing is obtaining better margins on that business. In light of the sacrificing volume, what we'd like to do is continue to price up, okay, and continue to gain better margins, and obviously also become much more efficient in our operation that we have and there, and I would say the focus of this would probably be more Southwest of Mexico and then we have at any place else. So the 20 liter jug business in Mexico is a big deal and the profitability on bulk water 5-liter business is also something you're going to be looking at to make sure that we have the proper returns on that business. So, that's something we'll focus on in both Mexico, Colombia is also an issue with that in terms of the 5 liter and 6 liter bottle, 6 liter bag business and how do we start making our profitability a little bit better on those packs. On the non-carb business in Brazil, as you said, and I think one of the things to understand is we restructured that whole business in a big way. Other than 100 SKUs that…

Sure. If I understand your question, what you're asking was the biggest impact in South America regarding the cost for the quarter. But I would tell you is that PET was the main driver in across all markets, particularly in Brazil and Argentina. We had significant price increases in dollar terms in Brazil, almost 30% increases in PET costs in Brazil. Part of that was unhedged, but if you couple that with devaluation in Brazil, there was a significant impact for us in that particular operation that considering the size of Brazil in our South American region that has a, an important impact for us. We also had some labor cost increases in a couple of markets, Argentina and Brazil. And that explains most of the impact in cost that we had in the fourth quarter for Brazil. I don't know if that tackles your question?

I guess, sorry, Constantino, specifically the raw material hedge, I mean, which you talk about in the press release, was there, it was the hedged, it was the dollar hedged price for certain raw materials, correct? And that is something that will roll…

Yes.

Okay, and the question is, will that roll off, is that going to continue into the first quarter? The question was, sorry, on the actual hedge. Yes.

Yes, actually we have a very, say, very disciplined approach toward hedging both on currency and on raw materials. I don't know if you're aware of our routine. But we have monthly routine with every single operation and probably CRM process. We redefine, and we define bands and coverage levels for our critical raw materials, sugar, PET, aluminum, et cetera. And we also look at the coverage from our currencies, especially in such a volatile environment. So yes, the question is, yes, it will continue. It's part of cost disciplined approach on the operation management and a way in which the finance function supports on our operations. So yes, it will continue. I reiterate that answer for you.

Luca Cipiccia of Goldman Sachs.

Hi, good morning, thanks for the time and taking my question, Hector, congratulations and best wishes. Just two follow-ups from my side. One, I think in your introduction remarks, you made some reference on the investments you're making on digital capabilities, and I was hoping maybe you could qualify a little bit better some of this or little bit more rather some of this initiatives, how relevant are they for your operation, for your partners and also how are these being rolled out across markets? Are you starting from Mexico and then implementing them across the board or is this, I'm just trying to get a sense of how relevant are much of a step change, how much of the incremental benefit there could be from some of this measure that you made reference to? That's the first question. And then secondly on the portfolio and on the dairy strategy, also in light of your comments on Panama, do you think the system overall in dairy, would, could benefit from a more organic strategies across, strategy across market or in other words, do you think that there would be a rationale for a Jugos del Valle type of structure or transaction or addition given that the execution and the portfolio itself can appear not entirely consistent across all markets, the dairy presence is stronger in certain markets, weaker in other, and in some, there isn't any, both of your franchises and other franchise. So I don't know if you have any comment on that I'd be interested in hearing your views. Thank you.

Sure. On the digital front, first thing is that what we've done in digital, it has a lot of components to it. And they have a commercial component, it has a manufacturing distribution component and it has also an administrative and back office component or SaaS component. Let me just take you through what I think is probably the most valuable piece, which is the cost commercial component. There, what we've put out is a digital platform that starts with the analytics database, okay, for, and let me just use Mexico as an example for the detail. But it goes out there in has, per account, we have about 7,000 pieces of information and we have all the detail on 800,000 accounts that we have in Mexico. And with few analytics and we also have, this is not going to do the, that model as well as purchase structure, consumer purchase structures, it gives us the insight as to how to go out there and manage down to the point of sale and making sure that we have the right pricing structure, the right packaging structure, okay? And now we're also getting into the right demand structure. But all those analytics connect to our marketing department, and the marketing department goes right into the sales department and we have immediate work orders for each one of our point of sale with independent of or would be customized promotions for them and we have the ability to send out these work orders on a weekly basis, and the feedback that we're getting obviously is weekly and we understand exactly what we're executing, how we're executing and what is working for us and not. We have the capability of launching in Mexico, 5 million consumer, customer initiatives on a monthly basis and…

Yes.

And if there is other acquisitions, potential acquisitions out there that could make sense, yes, we'd take a look at it, okay? And depending on the values that we think we can create for our shareholders, we go out there and pursue it. I think there are a lot of synergies to be had with those categories, but there are also significant differences that you have to understand which we're understanding in Panama, which is called and also the short shelf life products that are totally different business than what we have in Coca-Cola. But they are something that we'd be looking at continuously.

Hector, just thank you very much for the answer for the details, it's very interesting, just on the dairy just to the angle of my question was also across the categories, typically you have brands and brands or products that work across geographies, there is a little bit of an exception where every country has got its own in a sense. So is that something that you see should change, could change, or does it make sense to do it that way?

No, I don't think it makes a lot of sense to go out there and try to leverage dairy from one country with another unless its UHT, okay? Milk is a very regional business. And so I don't think necessarily we have a large strategy going forward on that end. I do think we have brands like AdeS that goes out there and plays in that space. But on the feed base, that is expandable and which we are expanding. okay? But dairy is more of a local business in the local, with local credentials.

And our final question for today will come from Alvaro Garcia of BTG.

Hi, thanks for the call. Most of my questions have been answered. Maybe you could provide a road map. So on the capital allocation front, we think of the MXN700 million you received from the Philippines, perhaps you could provide a road map sort of including the Yankee bond up in February next year of how much debt you expect to pay down over the next 12 months to 18 months? Thank you.

Yes, Hi, this is Constantino. Basically we've analyzed the proceeds of that transaction that we did it in the Philippines and very straightforward, our intent is to use the cash that we received to take our debt, continue our deleveraging path. And most importantly, I think that in February of next year 2020, we have a Yankee bond that is due and we'll be using the proceeds of that transaction to continue lowering our net debt ratio, which is quite healthy right now at 1.6. So that gives us a very flexible profile balance sheet going forward. So the answer is yes, we'll use the proceeds to continue deleveraging and pay our debt.

Apart from that, is it fair to assume that this year, maybe we'll see a $200 million in some pay down of debt just sort to get to that $700 million or is that Yankee bond really the only thing you have on your target.

We already used part of the proceed to repay some of the bilateral loans that we have…

Correct.

That were related to the Uruguay and Guatemala acquisition. So that's basically that with that being the $200 million plus it was $500 million [indiscernible] $240 million. That we have in February 2020, that will basically cover $700 million. And as John and Constantino were explaining, the Board of Directors that we have yesterday, this decision was that to hold to give $500 million and wait. Even the good coupon that we have on that Yankee [indiscernible] investing back those sources in a secure manner, the negative carry is basically zero and the decision was to keep this tight on the $1 million on cash given the volatility we were seeing in the markets and just wait for 2020 and do that so we pay it.

Perfect. That's very, very clear. All the best, Hector. All the best going forward.

Hope you guys treat me as well as you treat Hector.

[Indiscernible]

And that does conclude the question-and-answer session. I'll turn the conference back over to our presenters for any additional or closing comments.

Thank you all for being here today and I'd just like to take the opportunity again the Bank Hector for such a remarkable career and being such a great collaborator, friend and leader of the Coca-Cola FEMSA, and now only the Coca-Cola FEMSA company, but also a Coca-Cola Company. And also just a great trend. And I trust him and Maria they're going to have a lot of good times going forward, but will always be counting on his advice and closeness as we go forward. And to you all on the line thank you for your confidence and interest in Coca-Cola FEMSA if there are interesting times. But I'm sure that will be coming out very positively during this very challenging 2019. And our team is always available to answer questions to Maria Dyla and her team. And hope to talk to you very soon. Thank you very much for being with us today.

That does conclude today's conference. Thank you all for your participation, you may now disconnect.