Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q3 2012 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Coca-Cola FEMSA Third Quarter Earnings Event Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] At a request of the company, we'll 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 managements' expectations are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. At this time, I will now turn the conference over to Mr. Héctor Treviño, Coca-Cola FEMSA's Chief Financial Officer. Please proceed. Héctor Treviño Gutiérrez: Good morning, everyone, and thank you for joining us today. In line with our expectations for the second half of 2012, our company delivered solid double-digit top and bottom line growth and margin expansions in both divisions for the third quarter. During the third quarter 2012, we continued to integrate the results of Grupo Tampico, Grupo CIMSA and Grupo Fomento Queretano in our Mexican operations. Their performance contributed positively to our Mexico and Central America division and our consolidated results. Organically, our company's performance continued to be supported by our operator's ability to lever on our new commercial model and to capture the industry's value opportunities through point-of-sale execution, selective price increases and the strength of our multi-category diverse portfolio, which, once again, is led by innovation in our still beverage category and the many alternatives that we present to our consumers in our sparkling beverage portfolio. During this quarter, our reported consolidated revenues reached more than MXN 36 billion, up 20% from last year. Organically, excluding the newly merged territories in Mexico, our consolidated total revenues grew 10% for the quarter, underscoring our geographically balanced franchise portfolio. This increase was driven by average price per unit case growth in every operation and volume growth mainly in Mexico, Venezuela, Brazil and Central America. Our consolidated sales volume grew 18%. Organically, excluding the recently integrated territories in Mexico, our volumes grew 1%. As in previous quarter, innovation in still beverage contribute to 15% volume growth in this category. Specifically, the fresh brand orangeade in Venezuela, Jugos del Valle line of business in Mexico and Brazil and the recent launch of Fuze Tea and PowerAde drove this growth. The strength of brand Coca-Cola, especially in returnable package and single-serve presentations, reported growth in our sparkling beverage portfolio. In addition, our single-serve water portfolio grew in almost every country, although all of these increases compensated for a volume decline in our bulk water portfolio in Mexico. In the third quarter, lower PET prices and sugar costs in most of our territories more than offset 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 60 basis points to 46.9% in the third quarter. Our consolidated operating income grew 27% to MXN 5.5 billion. Organically, our operating income grew 18%. We continue to experience higher labor cost in Venezuela, combined with increased labor and freight costs in Argentina and Brazil. As in previous quarters, we continue to register expenses related to the development of information system and commercial capabilities in connection with the implementation of our commercial models, and we continue to invest in the development of new lines of business and categories. Building on our gross profit expansion, our operating income margin expanded 80 basis points, and more notably, on an organic basis, our operating income margin expanded 110 basis points. For the quarter, our consolidated net controlling interest grew 54%, reaching MXN 3.5 billion. Now I will elaborate on the performance of each division. In the third quarter, as reported, our Mexico and Central American division volume grew 30%, reaching 478 million unit case. As reported, our Mexican operation's volume grew 33%, including 106 million unit cases from our recently merged territories. Organically, our volume in Mexico grew 1.4%, successfully building on the 5% volume growth in the third quarter of last year. Our increased volume was led by a close to 2% growth of brand Coca-Cola. Consistent with our strategy to foster consumption of returnable and single-serve presentations, we've recently reinforced our 500-milliliter returnable glass offering, reflecting our strategy to bolster our presence in the flavored sparkling beverage category, our volumes grew 3%, led by the Sindrel Mundet brand and the rest of our core flavored sparkling beverage. The still beverage category grew 11%, mainly driven by the continuous success of our Valle Frut orangeade, which now serves more than 40 million unit cases annually and has consolidated its position as this category's leader. Also contributing to our growth in still beverages, our launch of complementary packaging alternatives supported by the success of Fuze Tea by presenting a wider array of options to our consumers and building on the positive growth momentum of this brand. Additionally, PowerAde continues to deliver very positive results, growing more than 40% and gaining an important share of its beverage category. Our water portfolio, excluding bulk water, grew 5%. These increases compensated for a 4.5% volume decline in our bulk water portfolio, and we to continue to work to achieve higher efficiencies and profitability in the jar water business. In Central America, our volume grew 3%, building on 10% growth during the third quarter of last year. This increase was driven mainly by 15% volume growth in the still beverage category, supported by the del Valle [ph] portfolio and the continued success of Fuze Tea and PowerAde; 14% growth of our water portfolio and 1% growth in our sparkling beverage category. Our division's reported total revenues grew 35% to MXN 17 billion. Organically, the division's total revenues grew 9%. On the same basis, our average price per unit case increased 7% during the quarter, underscoring our operator's ability to capture the industry value potential by leveraging our new commercial model. With regard to our profitability, lower sugar and PET prices offset slightly higher fructose prices and the devaluation of the average exchange of the Mexican pesos. As a result, our reported gross margin remained at almost flat at 47.7% for the third quarter of 2012. Organically, our gross margin expanded 50 basis points. Our operating income increased 44% to MXN 2.7 billion. We continue to book certain restructuring charges related to the integration plan for the new territories in Mexico. Organically, our operating expenses increased due to the investments related to the development of information systems and commercial capabilities in connection with the implementation of our commercial models and to investments related to the development of new lines of business and categories. Nevertheless, our reported operating margin expanded 100 basis points, and our organic operating margin expanded 210 basis points. Our Mexico and Central America division deliver strong results this quarter. In a more stable commodity cost environment, we continue our disciplined marketplace execution, implementing our benchmark commercial model, fostering single-serve consumption and reinforcing our returnable base in the sparkling beverage category and focusing on innovation to complement our wide portfolio beverage. Now I will briefly expand on the newly merged territories in Mexico. We have worked diligently to enhance the operational structure of these territories. We have strictly and smoothly integrated all of them. As planned, we have also continued with the restructuring of the manufacturing and distribution networks, the generation of operational efficiencies and the implementation of the IT platform to support our commercial models. As with every integration that we have undertaken, we know that the migration of talent and the cross utilization of best practices are key ingredients to success. This has been no different with these territories. As many of the talented executives of Grupo Tampico, CIMSA and FOQUE now occupy different positions in lower [ph] to U.S. territories. And actually that these family-owned bottlers have come to identify as a unique benefit of the Coca-Cola FEMSA coalition [ph]. We have not delayed making any investments or incurring any expenses near to capture the synergies that we have previously identified. Indeed, we are pleased to announce that we have increased the synergy target from MXN 800 million to MXN 900 million, to be fully captured at the operative cash flow levels as of 2014. Beyond this timeframe, we will continue working to capture additional opportunities to increase the productivity of these new territories. This quarter sets a positive tone for a more robust second half as we have anticipated the last time we talked. We have taken advantage of some additional pricing opportunities in certain packages, and we have locked in the prices for PET, fructose and sugar in our Mexican operations and secured the foreign exchange rate needed to purchase our dollar-denominated inputs [ph] for the remainder of 2012. Our operator will work diligently to meet the business plan that we have established for our company for the remaining of the year. Now let's talk about our South American division. Our South America division's total sales volume grew 1% in the third quarter, reaching more than 280 million unit cases. This increase was driven by volume growth in Venezuela and Brazil, with Colombia and Argentina remained flat for the quarter. In our Colombian franchise territory, volume was flat compared with 9% growth during the third quarter of last year. In Argentina, on top of a 13% volume growth in the third quarter of 2011, we experienced soft weather conditions in August and September of this year. For the quarter, this franchise, as I said, remains flat. In Venezuela, we continue to grow, as exemplified by a 2% increase in volume for the quarter. Our still beverage category was the main driver of volume growth, which more than doubled, thanks to the success of our fresh orangeade. Brand Coca-Cola continue to generate positive results as well, growing more than 3%, supported by the launch of 2 new packages and consumer preference for this brand. Consistent with our commitment to invest in the business, we've started to roll out our new commercial model in this country, reinforcing our marketplace execution and especially our cooler coverage. In Brazil, despite soft weather conditions in September, our volume grew 1% as compared to 2011. Our water portfolio volume grew 22% driven by the performance of the Crystal brand. In the still beverage category, our volume grew 9%, driven by the Jugos del Valle line of business. Our flavored sparkling beverage volume grew 4%, supported mainly by the Fanta brand. In the third quarter, our South America division reported total revenues grew 10% to MXN 19.3 billion. This increase resulted from double-digit revenue growth in Venezuela, Argentina and Colombia, despite a negative translation effect due to the devaluation of the Brazilian real. On a currency neutral basis, our division's total revenue grew 17%, mainly supported by selective price increases implemented over the past several months across our franchise territories. Lower sugar and PET cost across the division offset the average devaluation of the Brazilian real and the Argentine pesos as applied to our U.S. dollar-denominated raw material costs. This resulted in a 120 basis points expansion of our gross margin, which reached 46.3% for the third quarter. Our South America division's operating income grew 13% to MXN 2.8 billion. Operating expenses were affected by higher labor costs in Venezuela and higher labor and freight costs in Argentina and Brazil. Despite these incremental cost pressures, our South America division's operating margin expanded 50 basis points, reaching 14.5%. In the face of bad weather conditions in some of our franchise territories, our South America division delivered solid top line results in the third quarter on the back of selected price adjustments to offset local inflation pressures and increase taxes. As part of our business plan, we continue to focus on returnable presentations as a key driver of our sparkling beverage growth. We also actively -- we are also actively fostering single-serve consumption in these categories. Our still beverage category will continue to give positive results, supported by Jugos del Valle platform and our continuous innovation. We are confident that the full implementation of our new commercial model in Argentina and Venezuela will provide us with a clear picture to better capture the industry's value potential. As we face the final part of the year, we see international sugar prices remaining flat sequentially. Our Brazilian and Colombian operations have hedged the majority of their sugar consumption needs for the fourth quarter. In addition, PET prices should also remain stable for the rest of the year. With respect to currency volatility, which has offset the benefits of lower U.S. dollar-denominated raw material cost, especially in Brazil, we have hedged the majority of our foreign exchange need for the remaining of 2012. With regard to the potential Philippines transaction, we expect to reach a decision as to whether we should move forward with this undertaking and communicate it to you before year end. Looking forward at 2013, we see a benign commodity environment with sugar and PET prices remaining stable sequentially in U.S. dollars terms. For fructose, we see slight upward pressures in dollar terms. In light of this outlook, we have hedged an important part of our sugar needs in Brazil and Colombia to prevent volatility in our input costs. With regard to foreign exchange, we have already started to hedge our foreign exchange needs for the first half of 2013 in our Mexican operations. Our business plan for 2013 continues to build on our long-term strategic framework for growth. To achieve the full operating potential of our 16 operations, we remain focused on enhancing our competitive position by proactively implementing our commercial model and by fostering returnable and single-serve presentations across our markets and categories. There's still great work growth potential for us to capture both by increasing per capita consumption in every territory, and by achieving a larger share of the non-carbonated beverage business. Our strong pipeline of innovation is an integral part of our company. Accordingly, we have been working, not only to compliment our winning brand portfolio with new packages and non-carbonated beverage alternatives, but also to develop efficient and effective business models to seize the opportunities in the vending machine channel and in our coffee platform. Capitalizing on our presence in Latin America's largest cities, we have the capacity and the potential to grow these lines of business rapidly and profitably. We maintain a disciplined and flexible approach to growth through mergers and acquisitions. Over the years, we have developed a very capable prepared and talented pool of executives and operators we can rotate into any new territory without affecting the performance of our existing franchisees. As we take steps to build a long-term emerging market platform, we continue to focus on the opportunities presented by the Latin American beverage system. We have come to represent a valuable alternative for bottlers in Latin America, with a balanced and reached geographic footprint, relevant growth opportunities in the beverage space and a transparent investment vehicle, led by strong management, with a proven track record of value creation. Thank you, as always, for your continued trust and support. And now, I would like to open the call for any questions that you may have.

[Operator Instructions] Our first question is coming from the line of Lauren Torres, HSBC.

Héctor, I'm not sure how much more color you could give us with respect to the Philippines. But it seems like earlier this year, you were targeting a September, October close. Now it's maybe moving to year end or closer to year end. I don't know if there's anything, as I said, you could share on the learning process of what may be taking more time, if you're thinking about it, any differently as far as adding it to your portfolio, the potential of that market. Like I said, any commentary would be great. Héctor Treviño Gutiérrez: Lauren, I think that what I can say right now is that we have pretty much finalized our analysis on the opportunity. We think that this has very good potential because, again, we're speaking of very large population, close to 100 million people. A very important base of the pyramid, a very young [ph] population, a very fragmented retail system. I think that there are lot of challenges because the operations have been struggling in the past in terms of profitability, but we think that there are many opportunities. We are basically in the process of finalizing negotiations with the Coca-Cola Company which -- they are the owners of this franchise, as you know. And basically, we feel very confident now that in these 2.5 months that we have before year end, that we would be able to finalize that negotiation process. And as you can imagine, as they say in the baseball, it's not over until it's over. And sometimes, the detail of the negotiations and the contracts call for a lot of -- for some time delay. We are pretty much on target of what we have announced at the beginning of the year. I mean, we are still in October. To be very honest, we are at the very end of October. But I'm very certain that before year end, we will be able to announce if we go or not go. And if we go, what are the terms and conditions for that for [indiscernible]. So it's more, I'll say, during the normal delayed process of the negotiation and documentation of this process.

The next question is coming from the line of Antonio Gonzalez, Crédit Suisse.

Héctor, I just have 2 quick questions. First, I wanted to ask on Brazil. I guess, you've been following that different strategy, especially in terms of pricing from what other Coca-Cola bottlers appear to be doing, and you guys, I guess, have been moving ahead or in anticipation to the tax hike that have been announced and some other bottlers are not doing that same thing. So I was wondering if you could give us some more color on how do you feel with respect to your market share in your particular franchise territory, and how different do you think you are from the rest of the Coca-Cola system in Brazil that you can have this stronger pricing recently? And that would be my first question. Héctor Treviño Gutiérrez: Yes, Antonio. With respect to Brazil, I think that -- let me make first that comment on the -- on your specific question. I think that, in general, from what I understand from others we have seen and information we share with other bottlers, we have very good market shares and we have increased -- basically, in every category, we have increased our market share versus last year. The only exception that we have is United Energy Drinks and a little bit of this [ph], that is an area of focus because obviously we have a very important, deep presence after the acquisition of Matte Leao. In the other categories, we have continued to increase market shares. We are -- if not -- if we don't have the largest market share of any bottler in the system, we are very close or maybe tied on the top with other bottlers. I haven't seen the latest information recently, but it's -- that kind of market share is at the top of the Brazilian participants. And different than other bottlers, we have also been active on the pricing front. We have seen other bottlers that have stayed with prices and have benefited from larger volume growth. In our case, as I mentioned, our share of sales have continued to increased, even though we have been active in the pricing front because of, as we discussed over the last 2 quarter conference call, the pressure on raw materials was there and was important for us to recover profitability. We basically started with this pricing activities since the end of last year, and we have had some price -- we have been touching the prices of our products in March and July, et cetera. So when you compare our prices versus some of the other prices in similar packages for our peers in the system, usually you will find that our prices are on the high side. The important element of this is that we have continued to improve our share of sales and participation in these territories. I think that in the Brazilian market, you will find different levels of activities geographically, as the economy is softening a little bit in terms of growth. We are not seeing the same growth in our territories that we were seeing in economic terms, not necessarily in our industry, but in general, in the economic activity. We have had some changes on the tax laws that have implied for us to also take some pricing. And we are basically passing those movements in taxes to the consumer. We have suffered a little bit from the so-called [indiscernible] motorist or the transportation regulation that have made -- have increased the cost of our logistics and freight within our territories, and we have basically also tried to pass those additional costs to our consumers with price increases. And I think that, that -- those comments I gave you, I think, are very good flavor what's happening in Brazil vis-à-vis some of our peers.

Yes, this is super helpful, Hèctor. If I may just add quick second question. Could you share with us what's your best guess, I think, at this point of the FX rates for Argentina and Venezuela? If you're incorporating in your worst [ph] case scenario, they will leave a bad [ph] currency for 2013. And how would those impact the, I guess, the outlook, the benign outlook that you just described for raw materials and the Mexican peso appreciating in terms of margins for next year? Héctor Treviño Gutiérrez: Yes. In Argentina, it's very difficult to project, but we believe that the currency will continue to devalue underwritten. In some of our scenarios for next year, we are assuming as much as a 20% devaluation of the currency. Obviously, we do several [ph] scenarios in our planning processes, but if that's something that we think it's feasible, that might happen, no? And obviously, we're always very alert at the implications of that in our operations. For Venezuela, what I can say that, similar to what I mentioned in the first 2 quarters, that we have very plentiful access to dollars to buy raw materials. During the third quarter, that's not the case. We have been struggling a little bit with the request for foreign exchange to buy raw materials during the quarter. We expect that this will speed up in the fourth quarter. I don't know exactly what was happening with authorities in terms of those processes, but in general, we are seeing that, let me call, the scarcity of foreign exchange to buy raw materials, especially in the third quarter. Again, one of our scenarios is that we could hear a movement in the foreign exchange in Venezuela for next year, and I think that if you do an interview of any economist, everyone is expecting sort of kind of movement, no? It could be probably as much of 30% or 40%. What implication does that have for our margins and raw materials? On those countries, on top of this, let me say, macroeconomic environment that I just described with respect to currencies, those 2 countries have high inflation compared to some of the other 7 countries -- or the other 7 countries that we -- where we operate. And in those territories, when you have high inflation, you always have also the opportunity to capture or to try to maintain prices at least with inflation, and sometimes taking a little bit of advantage because of a mix change towards a richer package presentation. That has been the past history in Venezuela and Argentina. So when you look at the average price for unit case, we have seen good pricing. Again, in general, to recapture inflation but some positive moments in the mix of our process that have in reach [ph] our price. So in general, I think, Antonio, the name of the game here is to be very careful and attentive towards how do you see the movement on FX and what that implies with raw materials. And again, try to -- sometimes, when you got the opportunity, try to pass that to a consumer so for us to maintain our margins. In the rest of the countries, we see a more stable FX environment. We have seen volatility in Brazil this year, for example, basically. If we compare versus last year, we have seen close to 20% or a little bit more than 20% devaluation of the currency. I think that in general, our operators, in terms of raw materials, are trying to at least maintain flat margins on their operations. We are attentive to look at opportunities to buy some of the raw materials or to hedge some of these raw materials that -- remember that not all of them can be hedged, but in some cases, for example, with PET, we enter into agreements with the suppliers to prepurchase part of the future needs at a certain price. And so it's a physical hedge as opposed to doing a financial hedge. So in general, my sense, Antonio, is that we could continue with some of these pricing activity that we have seen reflecting our -- in our numbers. We could see flat to slightly positive margins for next year. That's like my summary after all of this explanation on the different trends in the different countries.

Your next question is coming from the line of Alan Alanis, JPMorgan.

My question has to do more -- you -- let me check if I heard something correctly. You said regarding the increase of PowerAde, you said 40%, that's 4-0? Did I listen correctly, or 1-4, in Mexico? Héctor Treviño Gutiérrez: Yes, it's 4-0.

4-0. Okay. Héctor Treviño Gutiérrez: In Mexico, I think that it's one of the success stories, Alan. If I'm not mistaken, we now are close or slightly above 25% market share in that category. Going back a few years ago, we were basically nonexistent, and the job that has been done by our operators in the marketplace is tremendous. Obviously, as in many cases, at the beginning, you suffer with the price and you have to invest a lot of marketing and then you have to work up. And so at the beginning, you suffer on the profitability, but once you start getting a level of scale and once you start taking this growth to the traditional channel and capture some volume, then you start making this product profitable.

Correct. Now in that same line of thought, I mean I did hear what you said regarding about Valle Frut and the 40 million unit cases that you've reached also basically from 0 a few years ago. Could you speak of, going forward, I mean, what are the next categories that you can talk about that you see this kind of potential, or what the status or where we are? I mean specifically, you mentioned also coffee. I mean that would be interesting to hear an update on that. And obviously on Santa Clara, on the dairy part. And if there's any other one that we should be aware that you're seeing that kind of potential in Mexico or on the other parts I would be very interesting on hearing your thoughts. That's my question. Héctor Treviño Gutiérrez: Yes. As in every industry, Alan, you have some stories of success. And clearly, in that case, Valle Frut is what's kind of -- going into a new category that was present but not very important in the marketplace in the past with just oranges. And if we lead to coffee, it's a very important success story. We have some favorable results. We have launched some projects that we thought that are very positive of them. And then, after a few months in the marketplace, we see that they are not getting any traction, no? I think that the area of focus for next year for our organization is this -- the coffee equipment that are -- not sure if everyone is familiar, but it's just basically installing equipment in some of the traditional stores, traditional channel stores, to deliver -- I mean to sell coffee. The story there is that we have been getting some volume traction, but still not very profitable. And we are twitching a little bit on the cost structure of that because we started with equipment that was very expensive as we have worked with the supplier to redo the equipment with smaller and a cheaper equipment. We potentially might see better profitability on that segment. But it is a category that we know is there and that we only have -- we have the potential to capture because we reach so many different clients with our trucks every week. But if we can serve that category properly, we will feel positive. Clearly, Santa Clara, similar to what we did in Estrella Azul in Panama, it is a category that is new for us. Santa Clara is very small in Mexico, although you can argue that it is the third brand in Mexico. It's got barely 1% or 1.5% market share. I think that our hypothesis is that the value there would be value-added approach, like [indiscernible] something like that, not so much on the fluid milk. And there you also have a potential to have a very successful story when we are just starting with that, no? Certainly in Panama, our experience with Estrella Azul has been difficult. We have been operating that for 1.5 years basically. And we are struggling with the part of the business that we didn't know before, but we have to do with collection of milk from the farms and working a lot with the quality and understanding the process that is behind -- everything that is behind during the processing of bottle -- or the bottling process that we know very well. We are learning a lot on the call time and how to do the logistics and the transportation of the stores that are more sensitive. But I think that all in all, it's a good experience that can help us also to get a lot of confidence in going into Santa Clara in Mexico, no? The other area, which is probably different than a new category for this, like a new challenge -- or a new channel, Alan, is what that -- is that within that bending, which is in our territories in Mexico and some of the other Latin American countries, we are very underdeveloped. We have other peers that have much higher penetration than us for -- in terms of equipment per thousand persons or something like that. And I think that you will see a big push on bending for -- starting in Mexico to do with the learning process there and as we find success, we'll try to copy that to other territories. Just to give you some data right now, we have around 10,000 equipments in Mexico. And we feel that very easily, easily, the target for next year should be around 40,000.

Well, that's a great source of margin expansion then. Héctor Treviño Gutiérrez: Yes, it's a good effort with expansion for the operation. If we are successful with that and a start that is profitable for us, we will copy part of that to São Paulo and Bogotá and Buenos Aires. And I think it's an interesting avenue of potential growth for our company.

Your next question is coming from the line of Lore Serra from Morgan Stanley.

Hector, just a couple of specific questions and then one more general one. The specific question, can you tell us how much restructuring charges were in the third quarter from the 3 acquisitions and confirm that this is the last time we'll see restructuring costs? Héctor Treviño Gutiérrez: Lore, if I remember correctly, it was around MXN 80 million, MXN 85 million. And right now, what I can tell you is that up to September, we have around 850, 860 persons -- headcount reduction. And we have continued to advance in October, which you'll see from indemnification charges around the fourth quarter. If I'm not mistaken, the number right now should be around -- a little bit more than 1,000 persons -- or 1,000 people already de-structured [ph], I guess, reduction in headcount, no? But we might see a little bit more in the fourth quarter, but it's not as large as what we have during the first and second quarters of this year.

Great. And there was a swing this quarter in other operating expenses from where you were in the last quarter. Was there any account that was responsible for that? It's going [ph] about 100 basis points from expense to income. Héctor Treviño Gutiérrez: In the other -- if you are referring to the other expense line, the main impact that we have there, Lore, has to do with the fact that on the inventories on raw materials, as you consume that, it goes to the cost of goods sold. But then you have a piece of that, that is reflected in that line because when you have an account payable that this dollar-denominated and you have an FX, a positive effect, it is reflected in that line. This quarter, as we closed the quarter with a very favorable exchange rate, that's basically a reflection of part of that line is to be reflected in the, if you will, in the cost of goods sold of this quarter. But most of that is a reflection of an adjustment in the value of the inventories for the following quarter or as you would consume in the future. In other words, if you buy from a supplier, if you receive an account payable that is dollar-denominated, you register that at the exchange rate of day that you registered. And then at the end of the quarter, if that exchange rate has improved, you have a positive impact that is reflected in that line.

Okay, that's helpful. And then a more general question, you talked about closing Philippines by the end of the year. You also talked about how you've proven in these deals that you're a good partner for a lot of the LatAm bottlers. So as we think about the expansion opportunities kind of into '13 and '14, do you see more opportunities to expand within Latin America? And can you do that concurrently with the Philippines? Is that what you're kind of transmitting with that comment? Or should we really think about the Philippines as being the major kind of initiative on the nonorganic side for KOF over the next year? Héctor Treviño Gutiérrez: Yes, Lore, I think that the message that we want to send here basically is that in terms of the capacity of going to [ph] the Philippines, over the last, I would say 4 or 5 years and this year -- and yesterday we present the same request for our Board of Directors, we have been spending around $10 million every year in terms of preparing people and talent and injecting new people in the organization. And that goes from staying -- for example, with very good executives from Grupo Tampico, [indiscernible] and Queretano. But in theory, it might not be near, if you look at the present operations. But basically, we asked for $10 million per year -- we have asked on the last 5 years for that amount of money as a waiver when you mentioned the performance of the businesses and the performance of the executives. I think that that's very key in the way of having the bench strength to be able to go to different markets and without distracting the management of the present operations, without putting risk -- the present operations for us to be able to go into other new territories and new geographies. In terms of the geographic scope, when you look at -- when you do your normal planning process every year and you find that in some territories like Mexico, you have high per capita consumptions of some of your sparkling products, you have high market share, you can argue that -- and then you go to other categories. And that's the case of why we decided to go to Jugos del Valle or Davis [ph]. If you -- unless you go to us [ph], your growth potential is very limited. You got potential to grow maybe the per capitas, maybe improve the mix of the products that the population gets a little bit more resources or have had a higher per capita income. They spend a little bit more on single-serve presentations, something like that. So in our planning processes, in order to continue growing at a flat base, either you go to other categories that are growing faster than sparkling or in other territories like Colombia, where you have a low per capitas, you try to invest behind growing the per capita for the sparkling drinks. And also when you look at the map in Latin America, you have basically 3 large bottlers. It's [indiscernible] and the opportunity -- the territories are available in addition to those 3 are, to be honest, quite limited. Like I have said in the past, there's no other Panamco story in Latin America unless you do a transaction either with Arca or with Andina. We already represent close to 40% or a bit more than 40% of the volume on Latin America. So when you do that analysis in your planning sessions, the direction of the planning goes to start doing some investment in new categories. As I mentioned, that's why Jugos del Valle, that's why Matte Leao in Brazil, that's why the reason for Estrella Azul and Santa Clara, or you go to other geographies. In the case of the Philippines, we were also again benefiting from this alignment with the Coca-Cola Company, our partner, in the sense that we think the same [indiscernible] that we have the capabilities to tackle up a market like that, we are very fragmented with the system with the way the population is, the per capita income, the love for the Coca-Cola brand, et cetera. So we think that we have a business for that. So what is in the future for us in the M&A front? I think that if we are successful in the Philippines, we have opportunities in Asia and that -- this is like our big chance going to that territory. And certainly, we will continue to look for opportunities in Latin America because within that, those are very easy to tackle and to integrate and to start getting efficiencies and bring to the profitability levels that we have in our operations. And that will continue to be very important in our focus, to continue growing in Latin America. And again, just to reinforce, very importantly, we have been investing important resources over the last 5 years so that our senior management is not distracted from their responsibilities in the present operations.

Next question is coming from the line of José Yordán, Deutsche Bank. José Yordán: My question is specifically about the fourth quarter, where you see gross margins in the fourth quarter. But if you could first clarify your earlier comment about flat margins in 2013. Is that your expectation for EBITDA margin for the entire year versus 2012? Héctor Treviño Gutiérrez: Yes, José. I think that my comment was basically flat to slightly positive margins for next year on a consolidated basis. It will vary by market. I've mentioned second quarter, and I reinforce during this conference call we are planning, especially for the Colombian market, we invest importantly behind our brands to try to foster consumption per capita. We're seeing that -- I mean, we have in this conference call for many years. And you know that Columbia has been an area where we see a lot of opportunities and we haven't had the opportunity or the capacity to really transform that market into a high-growth market in terms of volumes. The per capitas in Colombia are basically comparable to those in Nicaragua, which are the lowest that we -- per capita that we have in our 9 countries. So last year, Colombia, as I mentioned in the second quarter, we invest a lot on marketing expenses. So Colombia will pull down on a consolidated basis in some of the margins. Colombia will suffer on the margins next year because we are again spending -- we will be spending a lot of marketing resources. We have a plan, together with the Coca-Cola company, as they will invest similar amounts than us with idea of starting to push volumes and per capita consumption in Colombia to a next level. In the other countries, I'll see better margins than what we have during this year. It would depend a lot, again, on the -- as you know, we have a very important price gap versus our competitors in terms of the prices in the marketplace. That's why we have been a little bit more active on trying to extract volatility from raw materials and FX when we see those opportunities by shaking that. And -- but in general, I do see a positive trend for Mexico, a positive trend for Brazil and obviously, Argentina and Venezuela will depend a lot of the macroeconomic environment. And as I mentioned, Colombia will suffer for a year. But we think that if we are successful with that, we will have a better future in Colombia. José Yordán: Got it. And then, I mean, specifically about -- if I could ask you about Mexico, specifically, right. Because last year's fourth quarter is a nonmeaningful comparison, et cetera. So how should we think about a gross margin for that division in the fourth quarter this year? Should it be the same as third quarter, sort of sequential flat? Or are there any reasons, mix-wise, that would lead you to a higher or lower gross margin in the fourth quarter of the year, of 2012? Héctor Treviño Gutiérrez: Yes, specifically in Mexico, José, I think that we will have a better -- organically, we'll have a better fourth quarter than the third quarter. And in the new territories, we are also improving little by little the profitability of this at this moment as we start to capture some of the synergies. As I mentioned in one of the earlier questions, we would still have some restructuring charges, but these are little compared to what we have in the first and second quarters of the year. And rather than focusing on the [indiscernible] chart, I think that the fact that we have been doing such a level of restructuring in the organization without any problem with unions and newspapers and everything is very important. We have closed, if I remember correctly, 7 or 8 warehouses already from these territories. We restructured some of the manufacturing capacities. We haven't closed plants. But one specific plant that was important in the Tampico territory, we basically have restructured that to maintain a very small operation for water because it's important because of the logistics locally that you keep the water operation there. But most of the products on line for soft drinks had been transported to other parts of the -- of our operations, including moving some of those to Queretano, for example, which was also an acquisition. So I think that the whole logistics of our operations is improving, and we'll start benefiting from that in the fourth quarter and onwards.

Your next question is coming from the line of Alex Robarts, Citi.

I guess I wanted to focus on volume. And 1.2% organic volume growth on a consolidated basis for the quarter was a little bit lighter than what we were looking for. And I kind of just noticed Brazil. Looking at the carbonated soft drinks in Brazil, the volume was down in the quarter. I guess first 9 months, you're also down as well. And kind of -- I guess, the specific question comes on -- if you could kind of give us a sense over the coming quarters whether we could get into or kind of achieve some volume growth there? And I guess, clearly passing on delayed -- of Maurice's [ph] cost, the increase in the tax, and I appreciate you happen to go aggressive on price increases, should we expect this kind of dynamic to continue in the coming quarters? Is demand perhaps softening a little bit more? I know you alluded to that earlier. And I appreciate you talking about market share trends earlier in the call. But it would be great if you could give us a sense of that core carbonated soft drink volume in Brazil, which again, Brazil is 20% -- or that piece is 20% almost of your total volume. I mean how do you see that volume growth in CSTs over the coming quarters? Héctor Treviño Gutiérrez: Yes, Alex. I think that this quarter, this specific quarter, in Brazil, we suffered basically on the brand Coca-Cola front. If you look at some of the numbers that I shared during the -- during my initial speech, almost every category in Brazil grew except brand Coca-Cola. Brand Coca-Cola for the quarter was, if I'm not mistaken, around 2% reduction versus last year. But the important element here is that in market share terms, when you look at colas, we are basically above 90% market share. And we were flat versus the same quarter last year, even though we suffered in both. So as I mentioned, in terms of sales, we are not having any problem. And in my opinion, it's more related to the fact that after many years of very important roles in Brazil, we are seeing a slowdown, in our opinion, in the general economy. And as we have been very active on the pricing front, as you've expressed in your question directly, I think that we are basically sacrificing with the volume to maintain the profitability of our -- of that specific category in Brazil. We are focusing a lot on returnables, returnable growth and single-serve, but the main focus of the management on dairy. The other very important element is how to strike additional profitability from the cost structure. And for that, there is a big effort of restructuring operations in Brazil in terms of logistics and manufacturing. We have mentioned before that we are building a new plant in the state of Minas Gerais. We are having a tremendous -- it's a plant senior to what we have in Toluca. For those of you that have had the opportunity to visit, that is state-of-the-art. That obviously requires some additional CapEx. But I think that we'll start to see improvements in some of the efficiency measures in production and logistics that had been lagging some of the other operations in the 9 countries. So returnables, single serve, in terms of portfolio and a strong focus on the extracting value from the cost structure both in logistics and manufacturing in Brazil are the main focus for the management there for next year. What is the outlook for volumes over Brazil? I think that we'll have positive impact because of the Olympics and then the World Cup in a couple of years after that. And we are hoping to see that this increases in taxes and increases in some of the transit regulation has to bog [ph] that away and start constructing from this new base of our businesses.

Your next question is from the line of Alexandre Miguel, Itau.

Hector, so just a quick question on Mexico and the synergies. I just wanted to understand actually how much you have achieved to date and just to get a sense of how much is left for 2013 and 2014 out of the new guidance of the MXN 900 million. Héctor Treviño Gutiérrez: Alex, I think that the general -- I mean, the good news is that we'll continue to find some opportunities, as we've mentioned once we have the first 24-month period of the acquisition where we still -- where have basically a lot of restructuring charges and merging of the facilities and reduction in headcount. The number, as I mentioned, is around MXN 900 million. To say that -- for certainty next year, we'll start seeing a lot of those. I don't have any specific at the end of my mind, but I'll venture to say that probably 60%, 70% of those should be captured in 2013 as an approximate number. I'm very confident of that. For 2014, clearly, the $900 million should be around every -- excuse me, [indiscernible]. It's there coming every year after -- during 2014 and after.

Okay. But is there a starting point like to capture the 67% into next year? How much you have done in 2012 or before, just to get a sense of the addition on 1 month you probably will see in 2013? Héctor Treviño Gutiérrez: No, I think that -- we are already capturing some of that. I mean, for example, in raw materials, that was very fast. Headcount reduction is happening quarter-by-quarter, no? But when you look at the separation between organic and reported numbers, you see how the profitability of the new territories have been improving quarter-by-quarter. So I think that -- I mean, we are already capturing part of that. It's not -- it's just the fact -- and we are separating that, Alex, in the sense that during the first -- especially in the first year, some of this expenses also are recurring for the -- in the second year. We have some expenses related to closing the facilities, moving production lines from one plant to another, indemnifying employees. At the very beginning, we have some due diligence expenses related to lawyers and things like that are charged as part of that. So I mean, we already -- basically they're capturing a bunch of those synergies. As I said, raw materials, no question, that was -- they won [ph] with that, no? I'd say that for the full year, next year, we'll have somewhere around 60% to 70% of those $900 million. I'm very confident that we'll have them in a full year basis.

Okay, perfect. Then just a final question regarding Mexico as well. We have been -- we had heard from different sources of a possibility of a new -- eventual new excise tax for soft drink in Mexico maybe as part of a wider reform on taxation or any other reason, not [indiscernible] of any potential reason. But just wanted to get a sense for you guys if you are aware of this, if you have heard something related to that or if you guys are taking part of any discussions regarding a possibility of new taxation for soft drinks in Mexico? Héctor Treviño Gutiérrez: Basically, Alex, every year, we have -- at the end of the year, when they are preparing the new tax law or changes to the tax law, we are basically, every year, confronted to a situation similar to this in Mexico, no? It happens also in other countries. In Brazil, we just suffered some increases in the federal taxes. We know that the beer industry have been enable to postpone some of these increases in Brazil to the end of the first quarter of next year. And the industry in Brazil is also working to try to do something similar. And maybe we'll have some success and that will help our operations in Brazil because we have already tried to capture part of those increases in our price. Specifically, your question in Mexico. There's always, at this time of the year, a lot of, let me use the word noise of new taxes for different industries. Beer, tobacco and soft drinks are very easy to tax with a few participants and it's easy to tax those industries. We don't know if there's -- it's difficult to venture today if there's going to be a tax or not for this year. There's always that possibility. And I'll say that on a worldwide basis, this issue with obesity and some repercussions of other movements that you have seen around world always observed by different countries. And I think that the argument of obesity is also something that has created some negative potential trends in terms of taxation in the different countries. I think that our conversations as an industry are more in the sense of trying to work in living a more active life as opposed to trying to tax a very specific product that we think is discriminatory. If there is any tax in the horizon, in our opinion, it should be more the taxing of sweeteners, so that every product that has sweetener would suffer a little bit from that as opposed to taxing a specific product like a soft drink. Every congress in every country has a different trend, but certainly, this time of the year in Mexico, there's always this, I guess, news in the newspapers about the potential -- or the debate in congress to see if there should be taxes or not on soft drinks. That's always a cost in our industry in Mexico.

At this time, there are no further questions in the queue. I would like to turn the call back over to Mr. Héctor Treviño for any closing remarks. Héctor Treviño Gutiérrez: Well, thank you for your interest in our company. And as always, José, Roland and his team will be -- and their team will be available to answer any remaining questions that you might have. Thank you.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.