Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q3 2014 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Coca-Cola FEMSA's Third Quarter 2014 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 Chief Financial Officer. Please, go ahead, Mr. Treviño. Héctor Treviño Gutiérrez: Good morning. Thank you for joining us this morning to discuss our third quarter results. In the quarter, despite the continued soft consumer environment, we delivered our 11% revenue growth based on the resilience of our portfolio in Mexico and Argentina, ongoing growth in Columbia and Central America and revenue management initiatives across our territories. Excluding the recently integrated territories in Brazil, total revenues grew 3%. Our wide array of turnover participations, our ability to offer packages as attractive and affordable prices points for our consumers and the experience of brand Coca-Cola continued to generate increased transactions across our territories, as has been the case this year. Lower PET and sweetener prices in most of our territories were partially offset by the average depreciation of the currencies in most of our operations. Consequently, our organic growth margin expanded 90 basis points. Despite higher labor and trade costs, especially across the South America division, operating expenses remained under control across our operations and have decreased as a percentage of revenues in most of them. For the quarter, our organic EBITDA margin expanded 150 basis points, highlighting our company's ability to deliver profitable results in the challenging conditions. As a reminder, since the beginning of 2014, we have used the SICAD exchange rate to convert our Venezuelan operation's results into Mexican pesos. This exchange rate was 12 bolivars per U.S. dollar as of the end of September. Now let's discuss our operations. In Mexico, this year, consumers had to adjust their budgets in the face of tough environment, characterized by increased taxes and higher prices at growth categories. Despite this complicated consumption scenario, our operators have successfully created relevant portfolio alternatives to increase transactions in Mexico by close to 2%, despite our volume remaining flat. This positive gain highlights our consumers continued collection with our portfolio. Importantly, our return on portfolio delivered positive volume performance by growing more than 6%, gaining 230 basis points in our mix to reach more than 38% of our sparkling beverage. As has been the case recently, our 500-milliliter returnable glass presentation grew 31%. Our 1.25-liter returnable glass presentation grew 24%, and our 3-liter returnable PET presentation almost doubled its volume. Playing a strong defensive role by serving consumers who were focused first to adjust their budgets this year. This performance continues to underscore the current reality of consumers looking for increased value in every transaction. The strong brand equity of Coca-Cola was once again evidenced by the success of the Share a Coke campaign. Since launch in July, we have been able to grow volume of our cans and 600-milliliter presentations, which together grew more than 2%, generating more than 23 million transactions. Consumer engagement had been so positive that we have decided to expand this promotion into October, adding new personalized names to all these [indiscernible]. Since the beginning, for those who were not able to find their names in one of our presentations, we installed more than 180 personalization centers in our territories, enabled us to engage more than 0.5 million additional consumers since the launch of this successful campaign. Additionally, at the beginning of September, we launched Coca-Cola Life, a naturally sweetening mid-calorie version of the world's most beloved brand. Available in 5 different presentations, from 8-ounce one-way glass to our new 310-milliliter can for more than [indiscernible] to a 1-liter one-way PET. This brand allows to refresh the Coke category in Mexico even more, providing consumers an additional opportunity to interact with their favorite brand. Our low-calorie sparkling beverage portfolio grew more than 1%, driven mainly by Sprite Zero and Sidral Mundet Light, along with Coca-Cola Zero which grew 4%, reaffirming its position as an affordable low-calorie value proposition for the consumer. Our personal water portfolio grew 5%, while bottled water grew 1%. Our non-carbonated beverage category contracted 7% during the quarter. Despite this contraction, it is worth highlighting that Powerade continued its growth in August, which is the leading position in this category with more than 49% share. Our Mexican operations continues to focus on intensifying connection with our consumers through a wide array of portfolio alternatives, while successfully containing operating expenses. In Central America, our acceleration plan based on the can execution level, increased cooler coverage and the introduction of Magic Price Points, continued to yield positive results. During the third quarter, our volume grew more than 9% in the region. In terms of transactions, our volume grew to 12% this quarter. Growth was mainly driven by a 10% increase of brand Coca-Cola, coupled with 7% growth in flavored sparkling beverages and 21% growth in bottled water. Our non-carbonated beverage portfolio remains flat this quarter. On a per-country basis, Costa Rica grew more than 3%, Panama more than 5%, and both Nicaragua and Guatemala saw a large volume increase of more than 14%. For the quarter, revenues in the Mexico and Central America division grew 4%. Our division's gross margin expanded 80 basis points on the back of lower sweetener and PET prices, which were partially offset by the depreciation of most of our operations' currencies, as applied to our U.S. dollar denominated raw material costs. Our division's organic operating cash flow margin expanded 60 basis points for the quarter. Looking at the close of the year, we will continue to enforce the initiatives that had given us a strong defensive position in Mexico and growth in Central America, reinforcing our returnable presentation base, building on the success of the Share a Coke campaign and the strong brand equity of Coca-Cola and ensuring the continued performance of Coca-Cola Life. In South America, our operation's organic volume increased 1% in the quarter, supported by the continued positive performance of Columbia and sustained growth in Venezuela, which compensated for a flat in Argentina and a volume decline in Brazil, excluding acquisitions. Including the recently integrated transactions in Brazil, the division volume grew close to 20%. In Columbia, we continued posting strong volume and transaction growth as a result of these operations portfolio and pricing architecture reconfiguration. In the quarter, Colombia's volume grew 11%, substantially building on a 7% growth in 2013 and extending this operation's positive performance to 8 consecutive quarters of growth above 6%. In terms of transactions, this quarter, our Columbia franchise grew 15%. Brand Coca-Cola's volume grew 7%, supported by our market price point strategy, which continues to be very well received by the conscious consumer. Year-to-date, we have been able to gain almost 4 percentage points of market share in the Cola segment. Our flavored sparkling beverages grew, again, this quarter, increasing more than 23%, supported by Quatro, Sprite and Kola Román. Our non-carbonated beverages grew 33%, mainly driven by growth of del Valle fresh, Fuze Tea and Powerade. Since 2012, we have worked together with our partners, the Coca-Cola Company, on our strategies to spur per capital consumption of our beverages. We have installed more than 100,000 additional coolers in our Columbian operations to capture the identified market opportunities. These investments, along with a new plant that will start operations in 2015, underscore the long-term opportunity that we envisioned to develop our brands in Columbia. Moving on to Venezuela. Despite a tough economic environment, our volume was up 3%, successfully building on 16% growth in the third quarter of last year. Moreover, our operation was able to grow transactions by more than 5%. Volume of brand Coca-Cola grew 18%, compensating for a decline in flavored sparkling beverages, as we continued to favor production of the fastest moving SKUs. Our non-carbonated beverage category grew 3%, mainly driven by the success of Powerade, which continues to grow significantly and gain market share. Our team continues to successfully improve productivity and increase volumes and market share, despite this country's constant challenges. We continued to improve service levels and execution and reinforce the brand equity of our portfolio. Our actions have enabled us to reach record market share for Coke and the sparkling beverages in Venezuela. In Argentina, where high inflation rates continues to affect our consumers' disposable income, our volume remained flat for the third quarter. Notably, Argentina delivered growth in transactions of about 1%. Driven by Aquarius flavored water and Bonaqua, volume of our bottled water category grew 25% in the quarter. Non-carbonated beverages grew 5%, mainly supported by the growth of Powerade, which is rapidly gaining share from the competition. These increases compensated for a 2% decline in our sparkling beverage category. Despite this decline, it is important to highlight that we continue to outperform the industry, gaining market share across all categories. We will continue to focus on revenue management initiatives and cost discipline going forward. Our team has the capabilities to reconfigure our portfolio's offering in order to increase the connection with our consumers going forward. In our Brazilian operation, on the back of selected price increases in our portfolio and a continued weak consumer environment, our organic volume declined 6% but our transactions decreased only 3% for the quarter. Despite of this performance, our Brazilian operation's local currency revenue increased 3% during the quarter, enabled us to significantly improve profitability in this operation. Our operators continued to foster the availability of one -- of our 2-liter returnable presentation and our one, two and three one-way single-serve entry packages to generate incremental transactions in the current environment. Our 2-liter returnable presentation for brand Coca-Cola grew 13% in the quarter, improving our mix of returnable presentations by 80 basis points to more than 17%. As we roll out this presentation to the rest of the country, we continue to grab the opportunity to increase transactions with cost-conscious consumers. The performance of our affordable portfolio allows to mitigate a decline in the sparkling beverage category. Our bottled water volume grew 4% during the quarter, driven by Crystal. Looking at the final stretch of the year in Brazil, we will face a relatively low year-over-year comparison, as volume in the fourth quarter of 2013 contracted more than 11%. We enter the highest season of demand for the year, aware of the challenging consumer environment, but we have a better price portfolio that should enable us to continue improving the profitability of our expanded Brazilian operation. During the quarter, our South American division organic revenue grew 2%, on the back of revenue management initiatives in Venezuela, Argentina and Brazil and volume growth in Columbia and Venezuela. Organically, lower sweetener and PET prices in most of the divisions were all partially offset by the devaluation of certain currencies in the division as applied to our U.S. dollar denominated input cost. Consequently, our organic gross margin expanded close to 100 basis points. Despite ongoing labor and freight cost pressures in Venezuela, Argentina and Brazil, our organic operating cash flow margin expanded to 130 basis points during the quarter. In our Philippines operation, volume grew almost 3% in the third quarter of 2014. Sparkling beverages, supported by the introduction of our single-serve one-way presentations, grew 7% despite a decline in local brands such as Pop Cola. Notably, Coke grew 7%, while Royal, the equivalent of Fanta, in this country and Sprite grew 22% and 19%, respectively. The new route-to-market model continues to grow across the country. And we now have the privilege of serving close to 0.5 million clients through more than 2,103 centers, allowing us to better serve the operational channel in this promising market. Now I will disclose our consolidated financial position. As of September 30, 2014, we had a cash balance of MXN 21.6 billion, and our total debt was MXN 61.6 billion. Our net debt-to-EBITDA ratio is currently at 1.26x, underscoring the strength and flexibility of our balance sheet and our commitment to deleverage [indiscernible] the company. Our comprehensive financial results for the quarter was impacted by the acquisition and financing of Spaipa and Fluminense, which was swapped into Brazilian reais, a foreign exchange loss related to our U.S. dollar denominated net debt position and a loss on the monetary position of Venezuela, resulting from the effect of high inflation on a larger monetary position. This quarter, we registered a one-time effect of the settlement of certain contingent tax liabilities at our Brazilian operations under the tax amnesty program offered by this country's tax authorities. This benefit was recorded in the nonoperative expenses and income tax. With this benefit, we expect the effective tax rate for the full year to be around 29%. During the quarter, our net income grew 13%, reaching MXN 3.3 billion, resulting in earnings per share of MXN 1.61. Despite the many challenges that we have experienced this year across our operations, our organizational flexibility, our operating capabilities and our committed team have enabled us to deliver solid profitable results. Coca-Cola FEMSA have the right SKUs to deliver growth in the challenging environment and create sustainable value for our shareholders. Operator, I would like to open up the call for questions at this moment.

[Operator Instructions] And we'll take our first caller, Antonio Gonzalez from Crédit Suisse. Antonio Gonzalez - Crédit Suisse AG, Research Division: Two quick questions. First on Mexico. Obviously, with volumes being very close to flat or flat by the third quarter, I guess, a sequential improvement relative to the beginning of the year has been above our expectations, and I would presume yours as well. So I just wanted to ask, looking into 2015, you've made comments in previous conference calls regarding how you would not expect the full impact of the excise tax in 2014 to be recovered in 2015. Would these results change your view regarding those previous comments? That's my first question. And then secondly, very quickly on Brazil. My understanding is that, in 2013, you lost a huge portion of the profitability there. And obviously, we are seeing in South America, already this quarter, huge market expansion. So I just wanted to ask whether you can give us a little bit more color on what are the initiatives, specifically, in Brazil that are driving these margin improvements? And if you can help us maybe quantify a little bit how much of the profitability that was lost in 2013, might be recovered in the next 12 or 18 months? Héctor Treviño Gutiérrez: Starting with Mexico. I think that one important element to consider here, especially, during this quarter, with respect to the volume performance, is the fact that in September of last year 2013, we were hit by 2 hurricanes in the area [Indiscernible]. That significantly impacted that specific territories close to bad weather conditions that we have because of the rain in most of the country. So when you look at the volumes for Mexico, even though we are kind of flat versus last year, it's important to take into consideration that we are still struggling with the price increases because of the tax. So my expectation, if you remember, when we were speaking at the end of 2012, the beginning of 2013, of a 5% to 7% reduction in volume, my perception for the full year would be more in the range of 4% reduction, which is basically where we are now on a cumulative basis as of September. So we'd-- I'd like first to see how we -- the performance of the last quarter before completely saying that we have totally recovered the effect of the tax impact. We have adjusted the operations in Mexico. Very importantly, we have maintained -- we have reduced our headcount by at least 1,300 people. We have closed production lines. We have reduced the number of distribution [indiscernible] because with a very large volume, based on we have in Mexico, every single point of volume that we lost represents millions of cases. So I think that the company has adjusted through this environment in Mexico, with much higher prices of -- as you know, increased prices around 16%. And therefore, we have continued to work very diligently in adapting our organization and our cost structure to this new reality. 2015, I will expect to see some growth in volume. But I don't know, we've got change so much in the organization that is difficult to quantify we would fully recover the impact of the tax increase. If we move to Brazil and South America, I think that the main thing that you have there and let me go on country-by-country. I think that Columbia, we have done a very good job, a tremendous job I'd say in earnings, capital and growing volume. This is a program that has been there what we call the Plant Columbia and we discussed already a couple of years ago that we will be suffering a little bit on the profitability in Columbia, with the objective of gaining contraction with the volume and gaining more capital consumption, I think that we are there. The challenge for Columbia is to start improving the profitability because a lot of the volume that was there in Colombia has to do with reducing prices to Magic Price Points in some of our presentations. And despite a very good volume growth what we have in Columbia, the profitability at this point -- is not growing at the same level as the volume. So we -- the challenge for next year is, how we will recover that profitability going forward. In Venezuela, it's always a challenge. I think that's very important to point out that compared to last year, when you look at the numbers in local currency, everything is increasing on very large numbers, I mean, [indiscernible] 80%. But now, we are converting up to 12 bolivars per the dollar exchange rate denominated for this quarter versus 6.3 that we have last year. So in Mexican pesos terms, Venezuela is not creating that much of a distortion this time around. Argentina, we are softening a little bit on the volume, but our operators have really done a very good job in trying to maintain prices, meaning increased prices with inflation, which is high in Argentina and trying to capture that opportunity and maintain the [indiscernible]. Again, I think that Argentina is one of these cases where you would see a reduction in volumes, but profitability increased. And Brazil, your correcting point [indiscernible] last year, we suffered a lot because of the -- especially because of the new tax situation that cost importantly in the raw materials that we were sourcing from Minas, in the restrictions for traffic that significantly impacted the growth of our freight dispense. And I think that the change that we are seeing during this quarter is, I'll say it 1 or 2 parts. One is, the [indiscernible] we are getting to reintegrate these new territories now that we are increasing in a very important manner [indiscernible] growth in the Brazil [indiscernible] we have 50% more cases that certainly brings a colossus scale. Second, it's also a lot of focus on controlling cost. And very importantly for us, I think that we are having a much better control on the price point to the consumer and the discounts that we give to the retailers. There was strong [indiscernible] with big retailers in -- for Cola [indiscernible] in Brazil, where in some cases, they were buying thousands of cases and then selling these to small mom-and-pops. We are having better control on that. And because -- in my opinion, because of that fact, we are seeing this effect where you have a better revenue per case without affecting the price to the consumer because we are basically taking away part of the margin from the retail. And I think that's a good explanation of what's happened, basically, in South America during this quarter end.

Next, we'll take our question from Pedro Leduc from JPMorgan. Pedro Leduc - JP Morgan Chase & Co, Research Division: [indiscernible] from JPMorgan. It would be also regarding to Mexico and specifically, Mexico and Central America. We saw SG&A percentage of sales falling slightly of 40 basis points year-over-year this quarter after having risen substantially in the first semester of this year. So this was a source of margin gains now for first this year. And so, we are wondering what drove this higher efficiency. We already mentioned some headcounts reduction in the call, but if there's more to come, and we expect this to be a source of margin improvement also in the fourth and then in 2015, please? Héctor Treviño Gutiérrez: Generally, just working, I mean, we have been discussing probably for 2 or 3 years now that a lot of the focus [indiscernible] was in better controlling SG&A. I think that's [indiscernible] reduction. There is a little bit of effect of the noncomparability of [indiscernible] at the beginning of the year, but this quarter is fully comparable. So at the end of the day, it's just getting a better grasp on the SG&A cost. We have changed the organization even with -- our sales organization, we did configure from 4 -- from 5 different sales zones to 3, so we're reducing the headcount also in some of the -- of their sales organization without, obviously, losing the contact with the consumer. And I think that all those efforts are now paying off now, and that's basically the explanation for the better performance of SG&A. Pedro Leduc - JP Morgan Chase & Co, Research Division: Okay, okay. So [indiscernible] to have it continuing at growing below sales in the near future then. Héctor Treviño Gutiérrez: That would be our expectation, yes. Pedro Leduc - JP Morgan Chase & Co, Research Division: Okay. And then just a last quick one. In Brazil, if you could remind us when the new plant in Minas comes live? And we understand it's a lot of returnables, so what you expect differently there, and maybe you have an inflection in the sharp volume drops that we are seeing this quarter? That will be all. Héctor Treviño Gutiérrez: We are basically in the last stages of the plan. In theory we will be starting to plan, basically, less than a month from now, by at least, mid-November. We would have returnable capacity there which will help us a lot [indiscernible] area. So we should be seeing some savings on freight. And we are very hopeful that this new plan that has been -- did work for almost 2 years, it's going to bring some additional efficiencies to the Brazilian operations. One of the learnings is that as we try to -- and it's the same for Columbia where we're building also a new plant that we will start during the first quarter. But one of the learnings is that every time we go into a huge project like these 2 plants, the amount of authorizations and permits that you need to get always delay the original plans, but now we are very close to that. We are in the final touches there. We are testing some of the lines and we should be ready to go by mid-November with [indiscernible] Which is in Brazil and our plant in Columbia by the first quarter of next year.

And up next, we have Luca Cipiccia from Goldman Sachs.

I have 2 quick follow-ups. One on Mexico on the still beverage category performance. We've seen the decline continuing throughout the year. And I was curious to understand now, after 9 months since the price increases from the highest taxes, how do you see that category develop going forward? And is it really a function of affordability or is this something else that we should consider? And what do you think how it would play out for next year? And secondly, going back to LatAm, Brazil and Colombia, where on the one end, we understand there have been price increases in Brazil, there is a strong focus in improving affordability in Columbia, I wanted to understand if you could comment on how the market share dynamic have also been affected by these 2 strategies for their respective markets. Héctor Treviño Gutiérrez: Let me start with Mexico on the stills. First of all, the stills, even though are -- some of them are juices, we are affected by the excise tax. Remember that as long as you have just 1 gram of sugar -- added sugar in the Coke, then you have to face the impact that was introduced in Mexico at the end of the year. So -- and usually, most of the users are, let's say, 100% users in Mexico and other countries, they need to balance the formulas. We need to add some sugar, very little sometimes, but there is -- the 5% make a distinction of the amount of sugar. It's just, if you add sugar, you have to pay the MXN 1 per liter. In Mexico, we have been struggling a little bit with our competitors because, especially cool mix in the case of personal-sized juices, the dealer increased the price to the consumers. They didn't pass along the tax increase. That's [indiscernible] and we don't know exactly how they are absorbing that, so Jugos del Valle our brand is now competing with Homex, where especially in the personal size presentation, with this disadvantage that we have a higher price than our competitors. For now, our opinion is that that's the main cause for SKUs underperforming, especially juices in Mexico. In the dairy category, we are doing very well because we have rolled out the Santa Clara brand to orders [indiscernible] presently for, so we basically doubling the size of the business in Santa Clara, still from a very, very small base. Very importantly, in order to better compete with what I was saying about Homex and the prices, we need to work in reformulating the product, so that -- to see we can get a product that we would not have to pay the tax or a formula that would have a lower cost for us so that we have a better margin. But in general, this has been kind of disappointing the performance that we have had especially in juices and mix. With Powerade, as the price point we continue to increase volumes there. And as I mentioned in our opening remarks, it's the first time that we achieved leadership in that category, surpassing Gatorade for the first time, which is, if you will remember, 3 or 4 years ago, we are speaking about having 10% and 15% market share. Now, for the first time, we are seeing 49%, which is a very important mark for us. So this category, my expectation is that next year, we'll see a better performance. Let's remind that juices now are more expensive than soft drinks. And so the whole consumer environment with more taxes and that is on some of the fruit mix and drink, have created some consumers that does not have the same amount of resources and that's certainly impeded the performance of juices and mix. But I expect a better performance next year. Now, with respect to Columbia and Brazil. Brazil, as I mentioned, we increased, what you are seeing is a reflection of a better price per unit case, not so much because we have passed increases to the consumer, but because we have reduced a little bit the margin of the retailer. And that translates into a better pricing for us. In general, in Brazil, we have, and I don't mention this last quarter, we have the highest market share in brand Coca-Cola than we have in the competition in Brazil. And one of the lowest that we have in flavors is also in Brazil. Brazil and Colombia is also the same. So what has happened in Brazil is that the flavored category has grown a little bit in importance within the industry, and that has caused us to lose a few basis points on share. We are gaining market share in Colas, we are losing a little bit in flavors, and flavors is growing in importance. But even if we maintain the same market share in flavors because of the part of flavors growing within the pipe, that will create a smaller erosion in the market share in Brazil. In Columbia, it's very much the same because we have had very good performance volume wise, as I mentioned during the comments, we maybe we start seeing a better performance on the financial indicators, better pricing and better margins. But in general, we are increasing share in Colas and we are losing some share in flavors -- to Brazil. So for the total country, we are basically staying flat. We are increasing 0.3 percentage points, which will be basically flat for us. So very stable market shares both in Brazil and Columbia with this performance.

And up next, our question will be from Lore Serra from Morgan Stanley.

I guess, I just wanted to ask very quickly on Philippines. The loss seemed to have widened there, but you seem to be making progress in a number of initiatives to improve the franchise. If you could just give us a sense of what's driving those operating losses, that would be really helpful, please. Héctor Treviño Gutiérrez: Let me go into the Philippines. I think that good news in the Philippines is that for several quarters in the past, part of the explanation for the good performance had to do with volume and pricing coming back. We had this effect of brand Coca-Cola growing, but Pop Cola is reducing significantly in size. It was part of the strategy that to focus in just 1 Cola, which should be brand Coca-Cola. So Pop Cola will stay with very little volumes in areas where there's a lot of competition or maybe at some point in the future, we'll just discontinue the brand. But for many quarters, the story was volume and price declines. This quarter, volume and prices, price and mix is performing well. The issue, which is, and I see that's good news, and then we go a little bit into those 2 areas. One, I think that the fact that we have more than 2,000 resellers now attending the operational channel in the Greater Manila Area, we've seen a lot of progress in terms of market share, in terms of growth of brand Coca-Cola, in terms of growth of all the categories because we have a better service and better coverage of the operational channel. During the last 2 or 3 quarters, we were facing with these roadblock of prices from our competitors. We also rolled down some of the prices. We have gone away from that now, we have increased the prices again of some of the returnable presentations. And importantly, some of the these PET presentations that we introduced in some areas where we have a very strong competition, we are maintaining the same price points with 250-milliliter as opposed to 350-milliliter presentations, so we are reducing the size while containing price point and in areas where we don't have such strong competition, the 300-millimeter that we're selling at PHP 10, now we moved up that to PHP 12. So those are very important price increases that are helping the top line of the [indiscernible]. The difficult part right now, that is reflected in this, in the P&L for this quarter has to do with one issue that is a onetime event that has to do with the Typhoon Glenda. We lost around $8 million to $9 million in raw material that were lost because of the floods and the POP [ph] material in finished product that was lost in some of the redistribution centers, some of the metal shielding of some of the production plants and distribution center was blown away. So we have -- the maintenance spend was also increased. So Typhoon Glenda had an impact of around $8 million, $8 million to $9 million. Most of that was not covered by the insurance policies because [indiscernible] and Philippines is really in a Typhoon area. So very difficult to get -- it's impossible to get an insurance coverage that would cover everything and they have to pay a very large amount for insurance. So we have a policy that we think is adequate for [indiscernible], but in this case, the effect that we have in the redistribution center and plant were the small sort we don't have [indiscernible] insurance policy. We have some additional labor cost that has to do with the distribution centers and new [indiscernible] market, which is we have the positive side on the volume and pricing, but we also have some additional cost on that. And importantly also is the fact that there is [indiscernible] we have been confronted with a new situation in Philippines that has to do with the so-called truck ban. So during the day, trucks are not allowed to run in the Great Manila Area, which is a very important market for us, and freight cost kept increasing, so we have $7 million to $8 million also that is impacting this quarter versus last year in additional freight cost or transportation cost for us. So we have to adapt our organization to that, Lore. So I'll say the good news is that top line is no longer the problem, it's increasing. We have this additional cost and the effect of the typhoon. At least the transportation cost should be more in our control. We have a new team of people that are the internal experts for logistics, now contracted in the Philippines for a few months to work around that and help us organize that and hopefully, next year we would have a better performance in that market. I hope this is a good explanation of Philippines.

And our next question will come from Jim Watson with HSBC.

I wanted to talk about the shift to returnables a little bit. As you touched on before, you mentioned the opening plants in Brazil and Columbia that will specialize or allow you to do more returnables, and we've seen a big uptick in Mexico. My questions are we've always seen returnables relevant during a downturn. Is this equally as relevant during a recovery and has there been a shift in your kind of internal strategy with respect to the importance of returnables in your portfolio? Héctor Treviño Gutiérrez: I think that returnables have always played a role in difficult environments and my own view is that we are going through a difficult environment, especially in Argentina. We have a consumer in Brazil, we have the impact in Mexico, so we basically used the returnable process a way of presenting to our consumers and as an affordable loss and tried to have the same profitability on the presentations that are one-way presentation and I think that we are very good at that. We have seen times, for example in Argentina, that where right now it's around 19% is the importance that [indiscernible] in Argentina. But the use of [indiscernible] going through very difficult times, it was as high as [indiscernible] 33%, 34%. In Mexico now, we are around 38%, which is very high to what we have seen in the past. But given the circumstances of the new tax, we think that has been a tremendous force behind the -- that we are seeing in our products, especially for example in Mexico, the 500-milliliter returnable glass presentation has grown very important. It's a presentation that is for in-house consumption. So we are, in a way, providing the consumer with this alternative that they have many years ago of going to the small mom-and-pop to buy the product for their meals. In general, what I can say is returnables is very important for the organization and you will see the importance of returnable within the mix going up or down depending on the disposable income of the consumer and the preference of the consumer. But from our perspective, we need to watch very carefully these trends and provide the consumer with the opportunity. They want an affordable growth to have that accessible or if they want, they have the disposable income to pay for a one-way product to have that also available. And I hope that brings some light on that. For example, in Brazil, right now, it's around 16%, 17%. My feeling is that with the new plants that we will open next month, that number will go up a little bit especially in the development of the center in Minas Gerais. But again, it's basically we need to be ready to serve the consumer preference for either one-way packaging or returnable package. But this time, in 2014, we have been growing -- in every market it has been very difficult environment, and that's why the returnables have been growing basically in every country.

And just to clarify, so the change in returnables is a lot more to do with the consumer. Is there anything on the back end as you are introducing a new plant that is changing the economics, especially on the production side of returnables for you? Héctor Treviño Gutiérrez: It's totally consumer-driven. Returnables, as you can imagine, are more complex in their handling because we need to bring back the bottles to the plant. The transportation cost is also a little bit larger for this. It is a way of providing the affordability for the consumer. If the consumer is heard, then returnables you will see, I mean, for us the alternative will be to lower the prices of PET to be close to our competitors. So as always, you will find a side job that is important and the same presentation with our competitors, but we have a returnable presentation that is similar in price to our competitors that will help us compete better. It's totally consumer-driven, not much of our strategy and production line.

And our next question will come from Alexander Robarts from Citi.

Two questions from our side. First on sweeteners and second on share. On sweeteners, I mean, the operating leverage at Mexico particularly has reflected this very good level that you fixed in this year for your fructose and sugar. Prior calls suggest that you've got 8% to 10% lower average sweetener cost this year versus 2013 in Mexico. When we look out towards next year, I understand that right now is where you're looking and kind of negotiating with your suppliers for -- to set the prices for next year. How are you looking at the potential for sweetener cost relief next year versus this year? And is it safe to assume that you could perhaps bump up the percentage in high fructose? It seems that there is perhaps some supply issues in sugar when we think about next year that could make the price relatively more interesting for the high fructose component of your sweetener. And kind of a tag on here, just congratulations on the Coca-Cola Life rollout and you talked about Stevia. Where does Stevia fit just from your cost standpoint versus high fructose and sugar? So that's the first question. Héctor Treviño Gutiérrez: I think that, in general, or what I can say with sweeteners. We use either a high fructose or sugar and there are limitations to the amount of high fructose that we can use because of formulation or because of the capacities that we have in some of the production facilities. But in general, those are the sweeteners that we use and then, you have all these sweeteners for the diet -- the light colas and zero colas which are artificial sweeteners. We have lower cost of sweeteners this year. There, you are correct. It's currently 7% to 8% on that level, what we are reflecting in Mexico especially. We try to negotiate with a lot of our suppliers to double the prices in advance. In the case of Brazil and Colombia, we do some cases because the local prices are similar to international prices, and those are markets where we can kind of do a hedge. In the case of Mexico, we have another catch because the price, the local prices so different from the international prices that even though our accountants will account for that more as the financial transaction and not so much as a hedging of our raw material. So far, we have started to negotiate some of the prices in Mexico for high fructose for next year. There is also this issue and this debate of this arbitrage within the U.S. and Mexico because of the so-called dumping of sugar in the U.S. that might be with some restrictions on high fructose coming into Mexico, so there is still a lot of uncertainty about the market of high fructose that we will use in next year. We try to cover, in the case of high fructose, we try to advance and to hedge the foreign exchange because high fructose is purchased in dollar terms. So normally, we go on and hedge part of that as to have a more stable cost for next year. And usually our strategy is to try to go either below the price that we have last year or at the same price of last year. It's just the strategic intention that we were able to have the same cost for sweeteners that we have in previous years. We will not have the pressure of raw materials in our for us to pass to the consumer in the price increase. In other words, with the price that we have, we are assuring certain margin and that's why we told you try to do these hedges as I mentioned, sugar and Brazil and Columbia, to buy in advance from high fructose in Mexico and some other countries, and to try to cover the effects, especially for high fructose. In general, what I can say is we have seen prices stable at these levels for 2015. We have not seen a continued decline on those or an increase, but these are markets that are -- that have their own volatility and there might be some movement there in the price point issue. Sorry, sorry, I need to answer the question about Stevia. Stevia is very little, still in the formula [indiscernible] in Coca-Cola Life. We think that is a good product in the sense that it covers -- it partially covers the concern with calories, because it's a mid-calorie product, just to give you the right information, a regular Coca-Cola, 12-ounce can, a 12-ounce product of Red Coca-Cola will have 149 calories; Coca-Cola Light will have around 60, so it's a very large reduction in the calorie content. But the other part of the equation is that a 100% natural sweeteners is cane sugar plus Stevia, which is also a natural sweetener. And that's what we are trying to -- we are focusing this for the young adults that we figure are concerned with calories and also with the naturality of the sweeteners, and I think that since more segment right now that hopefully, we will compliment very well brand Coca-Cola, so we'll have now [indiscernible], but for Stevia, right now, it sells more because we have Coca-Cola Life basically in Argentina and Mexico now.

Right. Okay, now listen, that's very helpful. The question on Stevia, so I was just on a per unit basis, is it typically -- like how does it compare to the other 2 sweetener cost on per unit basis? Héctor Treviño Gutiérrez: On a per unit basis, it's similar to sugar. And in that case, Coca-Cola has all the formulation, and we are sourcing so far because it's very small in volumes. We are sourcing that from the Coca-Cola Company and similar to the sweetener cost that we have in the regular Coca-Cola.

Okay, got it. Very helpful. And the second and last question had to do with share in the sense, the Coke results from yesterday remind us that kind of we think about your top markets, Mexico and Brazil, we should also be thinking about your share in terms of the nonalcoholic, ready-to-drink market as a whole. And as we think about your 2 big markets, Brazil and Mexico, how do you see the CSD share of nonalcoholic evolving over the next couple of years? And any color about the challenges and opportunities that this could bring us? So kind of more of a big picture question on beverage industry. That would be great. Héctor Treviño Gutiérrez: Okay, Alex. That's a good question. In general, what we are seeing on the trends we are seeing, you see usually [indiscernible], you see growth in CSDs, you see growth in water. [indiscernible] business and carbonated nonalcoholic beverage segment. And normally, you see growth in juices and some other food products also at a faster pace than CSD. So in general, you will see a small erosion on CSD's market share if you look at the total nonalcoholic ready-to-drink folks. There are so much actions, for example in Mexico this quarter, we saw kind of flattish volumes in Mexico for CSDs, with a very strong effort and we're trying to compensate for tax impact and we saw a reduction in juices and nectars, which is not normal, but juices and nectars were also affected by that, so other time, we saw important growth in Powerade. Teas, are also being affected in Mexico. In other countries like Argentina and Brazil are growing very importantly. These are also impacted by the tax in Mexico and I think it might have been [indiscernible] similar to juices and nectars at a price point that is not that competitive with CSDs and that's why the consumer is also moving a little closely. It's difficult to give a general answer, it would change country by country but in general knowledge, the trend is that CSDs will grow, will continue to grow and we will see other categories growing a little bit faster than CSDs.

And our next question will come from Fernando Ferreira from Bank of America Merrill Lynch P10.

I have 2 questions. First one on Venezuela. Can you share with us what was the percentage of sales and EBITDA that it represented this quarter? And also, how do you feel about the need to eventually have to move to a weaker effects there going forward? That will be my first question. Héctor Treviño Gutiérrez: In Venezuela, similar to what we have on the previous quarter, Venezuela represents around 7% of our volume, total company. And it represents around 17% to 18% of our EBITDA for revenues. For this specific quarter, we are basically using a VEF 12 per dollar exchange rate versus the VEF 6.30 that we used last year. My opinion is that Venezuela didn't have the same impact that in some of the previous quarters where we are seeing a lot of growth in the profitability. So when you look at incremental profits from Venezuela this quarter, it's basically the same kind that we had before. Why? because we are increasing local currency close to 100% the numbers and we use basically an exchange rate that is also 100% higher. So In terms of growth for this quarter, not as much as what we saw in other previous quarter. That's the level where it was represented. It's 7% of the volume, around 17% to 18% of the profits on a consolidated basis.

Sure. And then my second question is regarding the plan that Coca-Cola announced yesterday that they want to accelerate the refranchising in the U.S. Is that a model that might interest you, the one that they have announced for the refranchising there? Héctor Treviño Gutiérrez: The U.S., I mean, what we have been commenting is still correct. I think the U.S. is a different markets from what we have in Latin America. If and when we are invited, we'll certainly take a look at that. We feel there are interesting points in the U.S. market. There are some difficulties in the U.S. market, that are very different from what we see in Latin America or Asia. And if that becomes available, we will certainly take a look at the opportunity in the U.S. and see what can we have in value versus the price that we will need to pay for those territories if they are available for us.

Sure. But my understanding is that the separation between the production and distribution is not something that would attract you. Is that correct? Héctor Treviño Gutiérrez: Yes, there has been a lot of, I guess, indications that production will be centralized. We do not fully understand to what extent is that going to be all over the U.S. and Canada or that that be some different territories. And as I said, we need to understand the whole picture of an opportunity in the U.S. market where [indiscernible] that presented to us. If you would like, in our opinion, it's much better if we have the production because we think that we are very good at organizing the whole value chain from suppliers all the way to getting the product to retailers. If at the end of the day, the proposal is different, and we will be buying finished product and delivering this. It's a different model that we need to analyze at that time.

And our next question will come from Berenice Muñoz from Barclays. Berenice Muñoz - Barclays Capital, Research Division: As you know, all my questions were already responded.

The next question will come from José Yordán, Deutsche Bank. José J. Yordán - Deutsche Bank AG, Research Division: My questions were mostly answered as well. I just want a clarification about your answer of flat sweetener cost for Mexico next year. Given the big decline in corn year-on-year, it would seem that, that would go in your favor. So the reason for you're saying that there's going to be flat cost, is it only the adverse move in the Mexican exchange rate? Or is it that you -- as you mentioned that you think there will not be -- you'll not be allowed to import anymore fructose to make a difference in your mix? And, I guess, I'd like to see your view on what the Mexican sugar price will do because that's the last of the factors at play here. Héctor Treviño Gutiérrez: No, my comment is in a way to be conservative in this sense. We are using more or less 60% high fructose in Mexico. High fructose is certainly, in our opinion, we have lower prices than what we have in 2014, and we have already locked in a portion of that at 3% to 5% below what we have in 2014. The big question is if we [indiscernible] cash, if we are not going to be able to bring this fructose into Mexico or not. And then there is the other -- even if we stay with 60% fructose, then there is the other 40% in sugar, which we don't know exactly what is going to happen with the price. We think that all in all, we'll have in a conservative way, flattish prices for sweeteners. There is a chance that we can import 60% of high fructose, we'll have lower prices than 2014. That's for sure, and you are correct in pointing out that the prices of corn, we have an opportunity for Mexico.

And it appears there are no further questions at this time, Mr. Treviño. I'd like to turn the conference back over to you for any additional remarks. Héctor Treviño Gutiérrez: Well, thank you for your interest in Coca-Cola FEMSA. And as always, Alfredo, Roland and the team will be available to answer any remaining questions that you may have. Thank you.

This does conclude today's conference. Thank you for your participation. competitors because, especially cool mix in the case of personal-sized juices, they didn't increased the price to the consumers.