Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q2 2012 Earnings Report, Transcript and Summary

Good evening, everyone, and welcome to Coca-Cola FEMSA Second Quarter Earnings Event Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management'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 CFO. Please go ahead, Mr. Treviño. Héctor Treviño Gutiérrez: Good afternoon, everyone. Thank you for joining us today. As some of you may have had little time to review the press release we just sent out, I would like to use this conference call to discuss our results and operational trends and allow our team to revisit additional questions after this call. In the face of a continued challenging cost environment, coupled with the volatility of our main currencies and tough weather conditions in some of our territories, our operators delivered double-digit revenue and EBITDA growth in both of our divisions. During the second quarter of 2012, we continued to integrate the results of Grupo Tampico, Grupo CIMSA and, since May, Grupo Fomento Queretano in our Mexican operations. Their performance contributed positively to our Mexican & Central America division and our consolidated results. Organically, the main drivers of our company's performance continued to be our strategy of selective price increases implemented over the past several months. The executional skills of our operators and the strength of our multi-category beverage category or portfolio, led by innovation in our still beverage category and our extensive sparkling beverage portfolio. In the second quarter, our reported consolidated revenues reached more than MXN 36 billion, up 28% from the second quarter of 2011. Organically, excluding the integration of our newly merged territories in Mexico, our consolidated total revenue grew more than 16% for the quarter. This increase was driven by average price per unit case growth in every operation and volume growth mainly in Venezuela, Argentina and Brazil. Our consolidated sales volume grew 16%, including our newly merged territories in Mexico. Organically, our volume remained flat. However, once again, innovation contributed significantly to 12% volume growth in the still beverage category. This growth was driven by our recently launched Fresh brand orangeade in Venezuela, our consumers' preference for the Jugos del Valle line of beverages in Mexico and Brazil, and the launch of Fuze Tea in most of our territories since May, replacing Nestea and reinforcing the Coca-Cola systems fed on this fast-growing beverage segment. The performance of our strong portfolio of flavored sparkling beverage brands such as Heat in Venezuela and Fanta in Brazil, coupled with the growth of brand Coca-Cola in Argentina, Mexico and Central America, compensated for overall volume declines in Colombia, and a decrease in volume from our water portfolio in Mexico. During the quarter, savings arising from lower PET cost in most of our operations and lower sugar cost in South America division were only partially offset by increased cost of fructose in Mexico and Argentina, combined with the average depreciation of our main operation's local currencies as applied to our U.S. dollar-denominated raw material cost. Consequently, our consolidated gross margin expanded 10 basis points to 46% in the second quarter of 2012. Our consolidated operating income grew 8% to MXN 4.7 billion in the second quarter. Organic operating income remained flat. As in the previous quarter, we continued to reinforce our marketplace execution and investing our returnable packaging base. We continued to experience higher labor costs in Venezuela, in combination with increased labor and freight costs in Argentina and slightly higher freight costs in Brazil due to changes to the transportation regulation in that country. We've registered additional expenses related to the development of information systems and commercial capabilities in connection with implementation of our commercial models, and we made certain investments related to the development of new business lines. Most of these expenses will recur going forward as we continue to prepare our company to capture more opportunities in the future. During the quarter, as a consequence of a change in the labor law in Venezuela and changes to labor tenure among other areas, we'll register a one-time-provision in our other net operating expense line. During the quarter, tax shield related to interest on capital included in the dividend declared by our Brazilian subsidiary resulted in a lower effective tax rate at the consolidated level. For the quarter, our consolidated net controlling interest income remained almost flat at MXN 2.7 billion. Now, I will spend some time talking about the performance of each division. In the second quarter, as reported, our Mexico & Central America division sold more than for 504 million unit cases of beverages. As reported, our Mexican operation's volume grew 28%, including 106 million unit cases contributed by our newly merged territories. Organically, our volume in Mexico declined 1%, cycling a 7% volume increase in the second quarter of 2011. An 8% volume decline in our water portfolio, mainly driven by our efforts to improve the profitability of our Europe [ph] water platform, offset the increased volume of brand Coca-Cola, driven by the performance of our single-serve platform and returnable multi-serve presentations, and the 6% growth of our still beverage category, led by the consumer's preference for the Jugos del Valle line of products and the launch of Fuze Tea, our system's led [ph] to continue winning in this important and growing beverage segment. In Central America, we generated 2% volume growth in the second quarter. This increase was driven mainly by 6% volume growth in the still beverage category, supported by the Estrella Azul portfolio, the launch of the Fuze Tea brand and the performance of brand Coca-Cola, which grew 2%, supported by our returnable base. Our division's reported total revenues grew 30% to MXN 17.6 billion. Organically, the division's total revenues grew 6%. Our strong point-of-sale execution and our ability to deliver the right package at the right price for every consumption occasion supported a 7% organic increase in our average price per unit case in the division during the second quarter. With regard to our profitability, this quarter, we experienced the higher volatility of the Mexican pesos in 2009 at a valuation of more than 15% on average. This depreciation of the peso as applied to our U.S. dollar-denominated raw material cost, in combination with higher -- high fructose prices in Mexico, offset savings resulting from lower PET prices. As a result, our gross margin was 47.5% for the second quarter of 2012. Our operating income increased 5% to MXN 2.7 billion. In order to achieve our net synergy target, we continue to incur expenses and make investments related to our newly merged territories in Mexico. Among others, these include costs related to restructuring, the distribution and manufacturing network and certain one-time-charges, such as legal and banking fees related to the merger. Organically, our operating expenses increased due to continued reinforcement of our marketplace execution to bolster our competitive position. Moreover, we made investments related to the development of information systems and commercial capabilities in connection with implementation of our commercial models. In addition to this investment, certain other items, many of which are related to the development of new lines of businesses, affected our year-over-year comparability. Our Mexico & Central America division continued to deliver positive results despite the challenging environment. We continued to foster single-serve consumption of our sparkling beverages, especially brand Coca-Cola. We led the Coca-Cola system efforts to launch Fuze Tea with excellent results, doubling the historic point-of-sale coverage we achieved with the previous brand. Additionally, the brand equity of our products and our operators' ability to implement selective price initiatives enabled us to partially mitigate the effect of the Mexican peso volatility. Furthermore, we continued to benefit from the investment we have made in return of our presentations, which, once again, contribute significantly to our sales volume for the quarter. In our still beverage portfolio, consumers' preference for our Valle Frut orangeade continued to grow. We also heavily leveraged the strength of our sales, marketing and distribution to successfully launch Fuze Tea. Moreover, in Panama, on top of our existing distribution of the Estrella Azul line of products in our red trucks, we complemented our offerings with Del Prado, the leading juice brands in that country. Now I will briefly expand on the integration of our newly merged territories in Mexico. With regard to Grupo Tampico and Grupo CIMSA, which we rapidly are completing integrating into our Mexican operations since the fourth quarter of 2011, we have already launched the Sidral Mundet brand, increased cooler coverage and raised prices to par with the rest of our territories. We accomplished all of these while restructuring the distribution and manufacturing network to further improve the efficiency of these new territories. Since May of this year, we have already incorporated Grupo Tampico -- Grupo Fomento Queretano, excuse me, franchising to our Mexican operations with even greater speeds. We launched the Sidral Mundet brand, raised prices of certain products and reinforced the local sparkling beverage brand, Victoria. Our in-house teams have done a tremendous job so far and, consequently, we are well on track to meet the MXN 800 million of net synergies we outlined for you at the end of 2011. Should currency volatility recede, we look forward to a more stable cost environment for the second half of 2012. In addition, the following factors will provide a more stable sweeter outlook for 2012. Sugar prices in Mexico have been sequentially stable. We continue to benefit from our stake in Grupo PIASA, and we have locked in prices for most of our fructose consumption needs. Furthermore, we have seen a more moderate PET pricing environment, which should remain in place for the rest of the year. In this improved cost environment, we are confident that our operators' discipline and superior skill sets will continue to deliver positive results for our company. Now, let me talk about South America division. Our South America division total sales volume grew close to 1% in the second quarter, reaching close to 256 million unit cases. This increase was driven by volume growth in Venezuela, Argentina and Brazil, which compensated for a volume decline in Colombia. In our Colombian franchise territory, volume was down 6% in the face of tough weather conditions during the quarter and 10% volume growth in the second quarter of 2011. In Argentina, we continue to see a positive volume growth momentum despite an economic slowdown in the country and 9% growth in the second quarter of last year. Sparkling beverage growth was driven by a 5% volume increase in brand Coca-Cola. Aquarius flavored water was the driver behind the 8% growth of our water portfolio. In the still beverage category, Hi-C Orangeade grew more than 30%, successfully building on its 2011 launch, while the Cepita juice brand continue to grow at a healthy pace. In Venezuela, we also continued to see positive momentum, as exemplified by our 7% volume growth for the quarter. Our still beverage volume almost tripled due to the success of our Fresh orangeade and the launch of Fuze Tea. In the sparkling beverage category, our volume grew 2%, driven by our flavored sparkling beverage brands. Also, the bottled water category generated 8% volume growth. Consistent with our commitment to innovation, we continue to present our consumers with relevant beverage and packaging alternatives while reinforcing our marketplace execution, especially our cooler coverage. Our volume in Brazil grew more than 1% as compared to 2011. We faced a tough start to the quarter, mainly due to bad weather conditions, but experienced volume recovery in May and June. Our water portfolio volume grew 16%, driven by the performance of the Cristal brand. In the still beverage category, our volume grew 12%, driven by the Jugos del Valle line of business and the Powerade brand. Our flavored sparkling beverage volume grew 6%, supported mainly by the Fanta brand. In the second quarter of 2012, our South American division reported total revenue growth of 26%, reaching MXN 18.7 billion, mainly as a result of double-digit revenue growth in Venezuela, Argentina and Colombia. Our strategy of selective price increases implemented over the past several months across the division accounted for the majority of our incremental revenue growth. Lower sugar cost in the division, combined with lower PET cost across most of our operations, offset the average devaluation of the Brazilian real and the Argentine peso as applied to our U.S. dollar-denominated raw material cost. These resulted in a 180 basis point expansion of our gross margin, which reached 44.7% for the second quarter of 2012. Our South America division's operating income grew 12% to MXN 2.1 billion. Operating expenses were affected by higher labor cost in Venezuela, higher labor and freight cost in Argentina, higher freight cost in Brazil and increased marketing investments across the division to continue reinforcing our point-of-sale execution and commercial models. Our South America division delivered solid top line results in the second quarter of 2012 despite bad weather conditions in some of our franchised territories. Continuous innovation in the still beverage category allow us to capture opportunities through the Jugos del Valle platform, while the launch of Fuze Tea would certainly reinforce our offering in a growing beverage segment. We continue to reinforce our sparkling beverage portfolio with single-serve and returnable alternatives, while our strong portfolio of flavored sparkling beverage brand continues to deliver incremental volume growth. Furthermore, we constantly reinforce our execution capabilities and we expand our efforts to improve cooler coverage in order to support our wide portfolio of beverages. As we face the second half of the year, we see international sugar prices remain flat sequentially, mainly benefiting our Brazilian and Colombian operations. In addition, PET prices should remain stable for the remainder of the year. However, we'll closely monitor currency volatility, which has been offsetting the benefits of lower U.S. dollar-denominated raw material cost. Finally, I will briefly talk about our financial performance for the quarter. This quarter, our company continued to deliver increased cash flow from the geographically bounded [ph] portfolio of territories, providing us with the continued financial flexibility to look for opportunities in the beverage industry. As of June 30, 2012, we have a cash balance of MXN 9.2 billion, and our total debt was MXN 21.2 billion, while our net debt to EBITDA ratio was 0.5x and our EBITDA to net income ratio is 18.7x. With regard to the potential Philippines transaction, which we previously shared with you, our on-the-ground team have nearly completed the evaluation of these operations. On a parallel track, a separate team of our executives is working on the financial valuation model. During the second half of the year, we should be able to reach a decision as to whether we should move forward with this undertaking. The Coca-Cola system, through Jugos del Valle in Mexico, has taken an additional step in the dairy category in Latin America by acquiring Santa Clara, one of the leading players in this category in the Mexican market. This transaction will broaden our portfolio of beverages. Moreover, we at Coca-Cola FEMSA are enthusiastic about the opportunity to share our joint lessons from the Estrella Azul joint venture in Panama with our partner, The Coca-Cola Company. We remain confident despite the volatility we faced during the first half of the year. Our operators' capabilities, our wide beverage offering and our commitment to flawless execution and continuous innovation will allow us to continue delivering increased value for you, our shareholders. Thank you as always, for your continued trust and support and now, I would like to open up the call for any questions that you may have.

[Operator Instructions] Your first question comes from the line of Lauren Torres from HSBC.

Héctor, my question is relating to the operating margin pressure we saw in the quarter. It seemed it was like more than we were expecting, maybe you were expecting too, heading into the quarter. And I was just curious if some of these expenses were basically borrowed from the second half or how should we think about the second half? Are they trending higher? Both in Mexico and Central America and South America, why was this, I guess, more than you had initially anticipated or at least we were initially anticipating? Héctor Treviño Gutiérrez: Yes. Certainly, the 4 areas, I'll say, where we are having a lot of pressure during this quarter has to do, first of all, with the raw materials and FX movements that we saw during the quarter in most of the countries, and certainly, the one that I have more at the top of my head, in Mexico. The depreciation of the Mexican peso, but it was verging there to other currencies, was close to 15% during the quarter because we were facing the highest number on the exchange rate this year versus the lowest point that we have last year. So that put a lot of pressure on some of the raw materials. So even though we had PET prices in dollar terms coming down, we couldn't benefit because of that because when you sort of lay that into Mexican pesos or Brazilian reals or Colombian pesos, we were impacted by that. Raw material prices, like I mentioned PET having a more stable environment, actually coming down. Raw material prices as our price was more on high fructose corn syrup. We had some increases in sugar, especially standard sugar. Refined sugar, in some other countries, we had lower prices. Certainly, it was the case for Brazil. But high -- in the market where we use high fructose, especially in the Mexico market, that definitely impacted our numbers. In -- that's with respect to the cost of raw materials and FX. The other important element has to do and impacts many of you first in Mexico. The other important element is the expenses related to the merger of these 3 territories. If you look back, Queretano happened basically 2 months ago, so we are just in the process of having a lot of our people doing all the takeover of that and, certainly, reducing the headcount in these territories where we are moving very, very fast. In the 3 areas, we have already reduced around 750 people in headcount with no labor issues at all, not a single note in the newspaper, so that certainly will help us going into the second half of the year. We have some other expenses that are not as significant, but you have a lot of these small things like, for example, some of the expenses related to doing the due diligence in the Philippines. We have that as our expenses in the corporate headquarters, which are recorded in the Mexico area. We have -- maybe some of you know, we will be moving to a new building, a corporate headquarters, at the end of September, very close to our offices here in Mexico City. It's basically, I don't know, less than a mile away. But as we already contracted the new building, which is -- which we are leasing, the same that we have, we are, at this moment, paying double the rent because we haven't left the building where we are. So these are small things that are piling up and certainly not helping in this quarter that was very difficult on the raw material environment. We have and we mentioned that during the first quarter, Lauren, and that's important for everyone to understand, we have -- and let me go back one step, and this is for all these territories. In 2010, we received this news by SAP that the system that we have had for many years was no longer -- they will no longer support because it was also late for them, so we needed to change to -- all of our systems to the new SAP platform. That expense that was incurred, basically during 2 years was capitalized and we are now in the phase of amortizing those expenses. That's something that we will have in the future. But certainly, it's an expense that is needed just to support the tremendous number of SKUs on all of our commercial practice. We have some expenses related to businesses that we are developing, like the BlaK coffee line of business that we are experimenting with equipments and amortizing some of these equipments. And that, so far, if you look at the CML of the BlaK coffee alternative or the BlaK coffee initiative, we have probably around $1 million that is affecting this quarter as an expense, if you were to look at P&L, isolated for BlaK. So when you add up a lot of these little things, that's basically what is not helping us in the SG&A numbers. When you move to South America, which is also very important, it's very important that everyone have in mind that the labor regulations in Argentina and in Venezuela are very tough and that we have tougher increases in salaries and compensations for middle-level workers and even their white-collar workers in our offices that are substantially above inflation. And that's something that is changing -- that's the situation in those countries. We have been able to increase prices importantly in those 2 countries and we think that we basically compensated part of that but not all of that. Some of those labor cost increases affect also the third parties that give us service for freight, plus some of the gas prices that have been increasing. So when you add all of this stuff, I think that the fact that we have pressures on FX plus raw materials to whether, with some of these elements of one-time-charges, and then this -- a bunch of the small things that start piling up in a quarter where the head -- the wind was not in our tail but in -- we were headwind. So my expectation is that the second half of the year, some of these one-time-charges will be isolated and removed. I expect that the FX environment, although today was a very tough day, will be a little bit more better for us. We are expecting prices of cane sugar and PET to remain stable. I'm a little bit concerned with corn because of what we have seen with corn prices and the potential impact on high fructose. But I think that, all in all, I do see a second half of the year that will be better on the margins than what we are presenting in this quarter. It's probably a long explanation, but I think that the results that we have merit that I extended on this answer to all this extent.

Yes. That's very detailed and helpful. Just can I ask around that answer? I think previously, you had talked about an operating margin being relatively stable this year, with a better second half. Do you think you could still hit that target? Héctor Treviño Gutiérrez: I think that the good news, Lauren, here is that we are increasing the top line at a faster pace than we were anticipating, which is very good. I mean, when you look at the revenues growing 30%, it's a very important movement. So with that in mind, I think that margins will be slightly below what we had last year, but what I like to think is that once we recapture the profitability of some of these territories and start having all these synergies embedded in the systems, we'll certainly start seeing that kind of growth in the bottom line. The fact that revenues are growing at this pace, even if it's because of acquisitions, but the fact that we can immediately start putting new pricing architecture in these territories, continue growing volume, continue to penetrate on coolers and market share, I think that it's good news for the future. Every single market where we are operating, we have had increase in market share. The only exception is a small reduction in Brazil in colas. All the other territories in every category, in every geography, we have positive behavior in our market churn on. We have positive behavior in brand awareness. So I think that the base is there for us to start producing the bottom result that this company deserves. I think that for the end of the year, given the fact that the volume, the revenue is growing faster than what anticipating, I think that it's possible that we see a reduction in some of our margins. Remember, also just to -- one final point here, as we are new categories, remember that water and sometimes juices, when the raw material is expensive, and certainly in milk and dairy products, the profitability is just smaller than what we have in softdrinks. So I will also focus on how our amount in dollars in terms of net income or operating profit is increasing as well as margins, but it's normal that as we change the mix of our approach, we see some pressure on the margins.

Your next question comes from the line of Alan Alanis with JPMorgan.

I have a question regarding your working capital. I mean, we saw deterioration of MXN 1.8 billion during the quarter and, on my calculations, your operating cash flow is substantially below last year second quarter and the first quarter of this year. What's driving this? Are there some recurrent or non-recurrent elements? And that will be my first question. My second question has to do with accretion and dilution of the acquisitions. When do you expect them to be accretive? Héctor Treviño Gutiérrez: Yes, Alan. I think that, in general, we might have some impacts here on the non-carbonated drinks and some of the inventories there. But other than some adjustments that we have done in Brazil, on working capital, for the group, was suffering a little bit during the last quarter, I don't have anything in my radar screen that strikes me as all in working capital. Let me give you some numbers. When we look at -- if I look from the 1st of January to the first half of the year -- during the first half of the year, free cash flow as the ultimate measure of generation power of cash of this company, where CapEx are involved or working capital is involved also, it's growing importantly. We have generated close to $400 million of free cash flow, of which we paid close to $400 million in dividend in May. We paid down some of the expense, some of the indebtedness that was embedded in the pre-merger, especially Queretano, because maybe some of those happened -- probably Tampico happened before year end, but some of those things happened during the first part of the year, and a CapEx program that is very aggressive. So I'm not that worried with working capital. We follow very closely these indexes. We have had some increases that had to do with some inventories, but is basically 1 or 2 days, but nothing major to move. I think that with respect to your second question, Queretano is still in the works because we just finalized. We closed the transaction in May. I feel very confident with Tampico and CIMSA. As I mentioned, we are increasing prices to the pricing architecture that we have. We are closing down some of the facilities, production facilities, adjusting some of the warehouses. As a matter fact, we just have a board meeting where we have an approval to move one of the returnable PET lines from one of the plants in Tampico to our -- the Hermosa plant for better logistics. So those are the savings that will start to accumulate in the second part of the year or beginning of next year. And we also get approval to move 2 production lines from CIMSA to the new plant that Queretano built very recently, so that Queretano will be an important center of production for us. So we are very well ahead and very active on moving things around in these territories. So if you ask me right now, are these operations accretive? Yes, these operations are accretive already. I think that Queretano will need a little bit more time to mature. And as I mentioned, adjusting close to 750 people is expensive, but we already have done that, it's part of our results for this quarter, and we will start benefiting from that starting next quarter.

Your next question comes from the line of Lore Serra with Morgan Stanley.

I wanted to ask, just as a follow-up to what you're talking about in terms of the mergers, could you give us an estimate of how many kind of "one time" expenses you've had associated with the 3 acquisitions that are in your, I don't know, second quarter or first half numbers associated with some of the issues you've mentioned and how much more is left for the third quarter? Héctor Treviño Gutiérrez: During the quarter, Lore, more or less in terms of liquidation expenses and some due diligence expenses mainly related to Queretano, the numbers are around MXN 200 million.

In the second quarter? Héctor Treviño Gutiérrez: During the second quarter, yes.

And how much do you anticipate for the balance of the year? Héctor Treviño Gutiérrez: I don't have a definite answer right now, Lore. Let me check with the plants that are [indiscernible] Mexico. I know that they are adjusting some of the division production capacity still going forward, so we might see some. But my feeling is that the bulk of Tampico and CIMSA is already done. We might still have some for the Queretano because it is very recent. So allow Tampico [ph] to review that and give you a better idea for the third and fourth quarter.

And if we look at the first 2 transactions, what kind of a run rate are you? If I remember correctly, the first 2 are about MXN 600 million of the MXN 800 million in synergies. If we sort of mark to market where are you are right now, how ramped up are you on those synergies? Should we see a lot of them sort of on a run-rate basis into the second half of the year? Héctor Treviño Gutiérrez: I'll say that around 60% of the synergies that we were anticipating for those 2 first transactions are already in place and we'll have them for the future.

Okay, okay, okay. And I guess, I would like your impression -- I mean, the pricing you've taken sort of across markets is really strong. I mean, it's very attractive given -- if we measure it historically. So I guess it's a little hard to see all the margin pressure. But when you talk to the operators, how comfortable are they with the pricing environment in the different regions? I'm going to guess you mentioned competitively, you're doing well, but maybe, particularly in Brazil, where you're going to have to take a lot more pricing I guess with some of the excise tax changes. How comfortable are you with taking pricing from these levels across your different regions? Héctor Treviño Gutiérrez: Yes, Lore. I think that, in general, the measures I want to give here is, in every market, in 8 of the 9 countries, we've been confident we can continue to improve prices slightly, as always, measuring a lot what the competitors do. I'll give you the examples of this, the largest markets. Brazil, we have some impacts with the value-added taxes over there, everyone is increasing prices and everyone should continue increasing prices in Brazil in the near term. Mexico, I think that we have flexibility, although I have to recognize that Pepsi, our main competitor, is very aggressive with some specific packages in some specific regions. But one, you would need to -- I mean, I would like to remind everyone that in areas of the value [ph] of Mexico, PepsiCo now is the third brand in corners [ph]. So they are desperate to move, to start getting some traction in volume. And the only country that I feel a little bit more cautious about pricing is Colombia. I think that Colombia, because of the reasons we have this cost for many quarters, they're very tough competition that we have with Posta Bon [ph] and the flavored brands. We feel that if we want to get the per capitas of Colombia to the levels that we have in other countries, it might be necessary to do a resetting of the prices so that we start generating a lot of volume growth. And it's something that we're discussing as we speak with the [Technical Difficulty]

Pardon the interruption, ladies and gentlemen. Your conference will resume momentarily. Ladies and gentlemen, we will now resume with Q&A. Héctor Treviño Gutiérrez: Sorry about that problem with the line. I will say, Lore, that in Colombia, it's where I feel a little bit more uncomfortable respecting the prices, mainly as a result of the strategy that we are discussing with The Coca-Cola Company that in order for us to really grow the per capitas in the market there, we are analyzing the possibility of resetting prices to product to have more accessible product to our consumers and see how that react. And we will be doing some experimentation over there. But in general, I think that the pricing environment continues to be positive as always, with the competitive pressure that we have.

Your next question comes from the line of Margaret Kalvar with Harding Loevner.

I wanted to ask what results were about volumes, which seemed a little bit light. And if you could give me more color on reasons and any trends or views you have or progression during the quarter, either volumes getting stronger or weakening as we went into the successive months. Héctor Treviño Gutiérrez: In general, I think that we have to isolate some of these categories and countries. In Colombia, we suffered a little bit on the volume, but we have a very strong pricing during the first half of the year. And that certainly -- if you look at Colombia, the revenues were positive even though we have a negative volume trend. The rest of the countries were good in general. Mexico was a little bit soft. When you look organically, we were like 1% below. But it was mainly the issue with bottled water. So in general, I'll say that I still feel confident with the consumer sentiment in most of the countries, obviously Argentina is a little bit tougher to read. Venezuela, the volumes are doing very well. We changed from Nestea to Fuze Tea. To my surprise, I was expecting some reduction there, but volume trends are very good. As we mentioned, we increased coverage to the coverage that we had with Nestea. And basically Nestea was not present for a few weeks because they were struggling to get production and distribution in place as we started in May. So I feel confident with that. Obviously, macroeconomic environment affects this. For Mexico, it's important how the U.S. performs macro economically. For Brazil and Argentina, I'm a bit worried because of the commodities and the impact that will have and certainly, we have seen some kind of slowdown in Brazil and Argentina. But still, our volumes are continuing to be positive. And that's more or less the story, Margaret. I think that some products or some categories are better than others. Brand Coca-Cola continues to be strong everywhere. And as I mentioned, market share, in terms of market share, we're growing everywhere, everywhere, in every category, in every product, except a little bit of a reduction in colas in Brazil and a little bit of flavors in Colombia.

Okay. Have you noticed any of the increase in per capitas in the areas of Mexico that are below the median that had been cited as potential drivers of continued volume growth there? Héctor Treviño Gutiérrez: No, in fact [indiscernible] has been more ample. I mean, there is no specific market that is -- that has been outstanding either geographically or socioeconomic. It's more, in every category, in every consumption occasion; we have been growing the volumes. And wherever per capita is small, that is stable or an increase in our EBIT [ph], depending on some of these categories. And that's the same for the other countries. We haven't noticed any specific movement in a specific geographic area or socioeconomic area that is improving the per capita.

Your next question comes from the line of Antonio Gonzalez Crédit Suisse.

I want to ask 2 things. First, on the jug water business in Mexico, can you give us some insights, Héctor, on what do you think needs to be changed in this particular business so that your volumes are turned around? Is it the distribution channel or is it the pricing that needs to be fixed? And my second question has to do with Fuze. Would you be able to share some insights on how were you able to launch a new brand in Mexico so rapidly and with the results that you obviously showed today in terms of your still beverage portfolio? What were the main challenges that you saw there and probably held those -- this launch? Talk about the capabilities of innovation that you guys have developed over the last few years. Héctor Treviño Gutiérrez: In water, I think that the jug water business is something that, if you go back in time a little bit, Coca-Cola -- the original Coca-Cola FEMSA didn't have much. Then we acquired the business from CIMSA because they were selling jug water in Mexico City. We started to learn from that. Then, when we acquired these new territories, especially CIMSA and Toluca and Tampico, they have very good jug water penetration in their territories and they have a water business that is profitable. Some of the learnings there is that jug water cannot and should not travel a lot because distribution expenses will kill your profits. So either you sell in the main cities with a small production plant in some of those territories or you better stop serving faraway territories. And we are adjusting a little bit of that. The other important learning is that most of these other companies have home delivery, home meaning offices also. But home delivery is important. And they have good profitability in there because you keep the retailer margin. And that's an important element that we have been developing also in Coca-Cola FEMSA. When you think of the opportunity of -- if you have a crowd [ph] that is taking jug water to the house [ph] and you start putting juices and potentially dairy products and some softdrinks, I think that there is a combination for a niche business that will bring some profitability in the future for Coca-Cola FEMSA. With respect to the second question, and which is more related to, I assume, to Fuze Tea, I think that in general, having this idea that since the beginning of the year, we knew that by May 1, we would stop selling Nestea. The whole system prepared for that. The formula was owned by The Coca-Cola Company, so we didn't have an issue with the formula. The shape of the bottle was owned by The Coca-Cola Company, but the labels and the name and some other small things in the label and the shape of the bottle, some leaves, tea leaves that are embedded there, are the property of Nestle. So we were able to prepare our system to our campaign in advance, good marketing campaign, in my opinion, starting to create some traction to Fuze Tea. And obviously, some sampling. And then, we put all our sales force to start selling this product even in places where we didn't sell Nestea before. And I think that as a result, I have to be honest, we were lucky a little bit that Nestle, as I mentioned, was struggling a little bit with production capacity because they didn't have any production capacity in Mexico or the other countries, and also with distribution capacity. So they are doing some, for example, in Mexico, I know very well that they are doing something, some channels with Modelo and some other channels with Carritos [ph] to try to lever that distribution. But I think that also -- we were also held by the fact that they were a little bit late on this process.

Your next question comes from the line of Alex Robarts with Citi.

I have 2 questions. First, interested to hear a little bit more about the volume trends in Brazil. You talked about them just now, but we're seeing double-digit volumes in -- just down the road in Rio in the second quarter. You've got -- CSD seemed to be flat here for you guys in 2Q in Brazil. Is -- I mean, I understand -- you mentioned the weather issues, but have you been taking price such that you've been seeing some impact on the volumes? And to the extent that we've got some market share loss in colas, just curious to know what was going on there. And if we can kind of get the fuller picture on this tax increase. 3% to 4%, does that sound like what you need to do to pass on this increase? And do you expect that to be really done before the October 1 implementation date? So that's kind of the first question. And the second one relates to the Philippines. And I appreciate you've done and completed some of your groundwork out there. Can you share with us some color or what some of your findings were? The market seemed to contract, the CSD market last year in the Philippines seemed to decrease about 5%. Just wondering what the pace of the recovery of that market was this year. And any other thoughts, if possible, about your findings in the Philippines, that would be great. Héctor Treviño Gutiérrez: Brazil first. Brazil, we have increased prices in June. We are planning to increase prices again in September and probably one more at the end of the year, basically, as you say, to compensate for the additional taxes that are scheduled to be implemented, if I remember correctly, by October, as I mentioned. The estimate that we have from our operators down there is that somewhere around 4% price increase should service a level with the new taxes. So that would basically compensate for the new taxes and we are okay. We believe that the volumes will start moving prices. And when I say that we've lost a little bit of market share, probably I was being very -- exaggerating. It's just a few fractions of [ph] response in market share. But I'm being completely open with you, as I mentioned, that that's the only place where we were losing a little bit of points there. So that's -- my impression is that, that's basically what is driving some of the volume pressure in Brazil. I mean, remember, if I remember correctly, first quarter, we were around flat volumes. This second quarter, we're around a 1.5%, 2% above. But everything has to be with the [indiscernible] the economy's decelerating a bit and we are increasing prices because of this tax situation that we have in Brazil. With respect to the Philippines, we have been doing some groundwork. We think the trends look positive. With some 96 million people in Cagayan [ph], they sell around a little more than 500 million unit cases. The Coca-Cola Company reported in the recent report that they increased, if I remember correctly, 6% to 7% volumes during the quarter, so the trends are good. I think that, in general, we're enthusiastic about the opportunity. We need to complete all of our work there. And once we complete that work, to start looking at valuation processes and start negotiating with The Coca-Cola Company based on that valuation. And obviously, also as soon as we have more information that we can share, we will share that with you. But we feel enthusiastic about this idea of -- it looks like an interesting market, Alex. In many aspects, very similar to what we have in Latin America, a lot of fragmented retail market, a lot of small mom and pops. CSD consumption is good because in other parts of Asia, it's more drinks that are warm and no bubbles, not carbonated, and brand Coca-Cola has good penetration there. So I think that as soon as we can share more information, we'll certainly share that with you in the future.

I would now like to turn the call over to management for closing remarks. Héctor Treviño Gutiérrez: So thank you, everyone, for your attention to this call and thank you for accommodating this call in the afternoon. We were kind of strained, but was complicated with the agenda. And José and Robert will be available also to follow with additional answers to these questions. Thank you so much.