Please stand by, we are about to begin. Good day, everyone, and welcome to Coca-Cola FEMSA’s Third Quarter 2016 Conference Call. As a reminder, today’s conference is being recorded, and all participants are in a listen-only mode. At the request of the company, we will open the conference for questions and answers after the presentation. During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA’s future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management’s expectations and are based on currently available data. Actual results are subjective 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: Good afternoon, everyone. And thank you for joining us to discuss our third quarter 2016 results. This quarter our company continued to deliver solid top line results. This performance was driven by our focus on transactions and pricing, supported by our strong point of sale execution and market share gains across most categories and territories. Our transactions continue to outperform our volumes in key markets such as Mexico, Brazil, Colombia and Argentina. As we leverage our operating focus on pricing flexibility, our average prices per unit case grew ahead of inflation in most of our markets. Our top-line performance coupled with our financial discipline enables us to better weather a general volatile currency and raw material environment, especially higher sugar prices and mitigate margin pressures. For the quarter, our consolidated comparable revenues rose 6% and our comparable operating income grew 7%, while our comparable EBITDA decreased slightly as a result of certain one-time non-cash expenses recorded in 2015. I will briefly discuss…

Thank you. [Operator Instructions] And we’ll take our first question today from Lauren Torres with UBS.

Yes, hi, Héctor. I guess, I’d like to just address South American, and I guess to be more specific, Brazil. We are seeing some still notable volume declines and I think in the past you’ve addressed the fact that there are price package opportunities, ways to protect margin, there is an improved margins. How do you see this market either - just thinking about the rest of this year and more importantly going into next year, that the trend seem tougher, can you protect margins in light of what’s going on? And then, I guess, second part is just on Brazil. Vonpar seems like a bottler that you’ve always had interest in, if you could give us any sense of what the addition of this bottler could mean for you, synergy, impact things like that would be helpful? Thanks. Héctor Treviño: Good afternoon, Lauren. The way we are looking at Brazil, and we had it in our budget, we knew that we were going to have a tough third quarter. It’s been a little tougher and in terms of the consumer sentiment and that volumes that we are seeing. We believe that fourth quarter will be a little bit better, in terms of comparison versus last year. But really to start changing the trend that we see in Brazil, our expectation is that we will see that in the second part of 2017. So third quarter and fourth quarter, our hypothesis is that we will see a return in the growth that we are expecting in Brazil. I think that the acquisition of Vonpar will bring around $65 million in synergies. As usual, it will take probably around two years to do that. I think that the number is very achievable. I think it basically has to do with cost…

Yes. That’s very helpful. Thank you. Héctor Treviño: Thank you, Lauren.

And we’ll take our next question from Isabella Simonato with Bank of America Merrill Lynch.

Thank you. Good afternoon, Héctor. Good afternoon, everyone. I have two questions. First in Mexico and Central America, Héctor, if you could discuss the outlook for raw materials going forward, and regarding both currencies and sugar prices and what we expect in terms of margin performance in Mexico in the coming quarters. And the second question, in South America, I appreciate your comments on the outlook for Brazil. But if you could also discuss the expectation for Colombia and Argentina, mainly in terms of volume performance going forward that would be great. Thank you. Héctor Treviño: A: In Colombia, we have increases and we mentioned that last quarter of around 25%, 27% on the prices of sugar. In Mexico, we are at levels around close to 20% increases on sugar prices. The outlook that we see for next year is an outlook where sugar prices will have committed to high-single-digit increase in prices in local currency. With respect to high fructose, we have already arranged with some of the suppliers of pre-bought if you will some of the contracts or pre-agreed with the suppliers prices that are low-single-digit increase versus what we have. That’s basically for Mexico. And with respect to PET prices, which is another element we are seeing also low- to mid-single-digit increases. Obviously, it will depend on oil prices and everyone we will have a different opinion where oil prices will be. But our expectation is that oil prices will increase a little bit for next year. All of our operations are cognizant of these trends and are working actively together with The Coca-Cola Company to find ways of using our pricing levers and start moving prices on those packages where we see opportunities to levers and where we feel that the competitor has - our competitors…

Great, thank you very much.

And we’ll take our next question from Jeronimo De Guzman with Morgan Stanley.

Hi, good afternoon. First, I want to just ask a follow up question on the FX impact. Do you have any FX hedging already in place for moving forward for 2017 in Colombia, Brazil or Mexico, and then more or less at what levels? Héctor Treviño: Yes, Jeronimo. Good afternoon. We do have some of these hedges in place. More or less I will say we have around for the full year around 25% of our dollar needs in Mexico, at levels around MXN18.6, something like that. It’s more or less the hedges that we have. In Brazil, we have similar amounts, but the numbers are a little bit out of the money, around 380 more or less - 370 more or less is the average. And we’ll have somewhere around 20% already covered. As I mentioned, during the board meeting today, we discussed that and we are probably going to stay with that level. Of course without increasing the exposure in that in Brazil just because of the carrying cost until we see some reduction on the carrying cost. And Colombia, we have a lower amount, probably closer to 16%, 17% for the year, at around COB3,150 more or less. The way we look at this, Jeronimo, has always been similar. We look at the market; we see what the previous year FX was. We see what the budget for the year is, and we see opportunities to start fixing some of these cost in local currency, I mean, in raw material cost that will help us postpone price increases, then we move together with in a decision that is taken together with this Chief Operating Officer of each country to try to fix that, because why it’s important, because in every country we have a price gap versus our competitors that we want to protect as opposed to - protect meaning that we should not - we want to avoid increasing the price gap that we have versus our competitors. And we can fix some of the raw material cost at similar levels that we have in our quarters of the previous years, then we can assure that that price gap differential to be maintained. And that’s basically the philosophy we have here. As some of the currencies have appreciated, the effectiveness of these hedges have diminished versus what we have in 2015.

So, I guess the way you think about Brazil margins for next year on average maybe the FX is more of a tailwind but the sugar becomes a headwind for next year and then - because of the hedges that were favorable this year, and then in the end you think you can still protect margins or could you have some difficulties there given the sugar increases? Héctor Treviño: Yes, Jeronimo. The budget that we are working with our guys in Brazil calls for increasing margins on 2017 and that would have to be done through price increases and the change in the mix towards a single-serve presentations that will help us improve on that. It’s always a very difficult balance. The turnovers help us a lot, because we can maintain the affordability with our margins and that will give us a space to improve pricing on some of the more on-demand consumption, which is also very profitable for us. But certainly the idea is to increase margins in Brazil on 2017 and despite these increases in sugar and all of that, yes.

Okay, thanks. And then, also just in Brazil, on the Vonpar transaction. I just was wondering if you do see the transaction as maybe a catalyst to open up new consolidation opportunities in the country, do you think it could accelerate some of the talks with other bottlers in the country? Héctor Treviño: Yes, Jeronimo. We think that the answer is yes, because of two reasons, because again it restarted after three years of no activity in Brazil at the start of the operations. And I think very importantly is that the owners of Vonpar that will receive shares of Coca-Cola FEMSA are very important members of the Coca-Cola community in Brazil. As you know, Ricardo Vontobel was the head of the Coca-Cola Bottlers Association in Brazil for many years. And it has a lot of, I guess, prestige among the bottlers. So I think that that he is a shareholder with Coke FEMSA will help also in that process.

Okay, great. Yes, interesting, thanks. And just a final question on the Philippines, so just wanted to confirm, you will start consolidating that next year as I understand. And I just wanted to get a sense of, I mean, talked about the top line trends. And it seems like they have been very positive, but just wanted to get an update on how the margin - how the margin trends are looking, how the pricing trends are also looking and kind of what’s your outlook for where margins could be this year and then into next year? Héctor Treviño: Yes, starting 2017 we will consolidate the Philippines operation. We will report that separately so you will have a lot of visibility on those numbers. So far, I will say that we will have to prepare pro forma financial statements for 2016, so that the numbers are comparable. And I’ll say that the Philippines - the whole history of the Philippines is a story of volumes that have been increasing, brand Coca-Cola that is growing in importance and then getting the other, I want to call it de-ramp of the private brands that were owned by the Coca-Cola company diminishing in importance in the mix. We are a little bit behind volumes of what we were anticipating during the acquisition, and we are a little bit behind on pricing according also to our original estimates. And the important element here is that it’s an operation that is growing volumes more importantly now. Without moving necessarily the prices that much, I think that is important that we get the scale with volume. And then start moving prices a little bit more aggressively in the following picture. It’s not doing 2016, and maybe not during 2017. And with that at the end of the day the profitability that we have is lower than what we have in Latin America. But it’s improving little by little. You are speaking about an operation that we will have mid-single-digits EBIT figures and low-double-digits, and by that I mean 10%, 12% EBITDA margin in the Philippines. So our expectation is to - but we are coming from basically zero or negative numbers. So I think that we are moving in the right direction. It will take some time, but it’s again moving in the right direction and you will see that starting next year on our numbers.

Okay. Sounds good. Thank you very much.

And we’ll go next to Benjamin Theurer with Barclays.

Hey, good afternoon, Héctor. Thank you very much for the call. And I have question on outlook for Mexico, so what you are expecting now with - well, you mentioned already there was a deceleration in volume, clearly because of the tough comparison to the second-half of last year. But just to get a little bit of the sense what you are seeing in terms of volumes and transactions in Mexico going forward and looking into 2017. So did you expect that the rate of growth for volume should be somewhere similar to what we see now in the third quarter or do you expect the a further deceleration? What’s your take on what’s currently like a natural growth rate for volume in your view in Mexico? And then I have different question, but leave it with that one first. Héctor Treviño: Good afternoon, Benjamin. In Mexico, I think that, first of all, we are seeing a deceleration in the volume. But as we compare that to the first-half, the volumes continue to grow versus last year, but at a smaller pace. So I’ll say that a good bet for Mexico is low-single-digit volume growth with a strong pricing. That’s the formula that we are looking for. And as we mentioned in other conference calls also, we think that we are in agreement with The Coca-Cola Company in that respect, that is very important for us to focus in revenues and profits as opposed to just volume numbers. Transactions continued to outpace volume, which is an important element. And all our operations in Mexico are clearly - they clearly got that mandate of starting to look for opportunities for pricing. A lot of what we are doing with the digital - what we call the digital transformation or the - in our companies starting in Mexico; right now, we have around 60% to 70% of our routes already with a state-of-the-art handheld device that is providing substantially a larger amount of information that will give us opportunity to do a lot of analytical analysis on the operators. And that has clearly helped us on the process of improving the way we manage discounts into different accounts. We believe that that will give us a much better granularity on our clients and understanding the dynamics of the market as we have a much better and much larger information from the consumer - from our clients which are the stores. So all in all, what I want to say is, volume low-single-digits, but with strong pricing, that’s what we are looking for in Mexico.

Okay, perfect. And then one other question I have on a completely different topic. Could you share a couple of thoughts, and a little bit of highlights, how the Monster distribution is going in the different markets, because that’s still a very young business, just to get a little bit of a sense of how you’re doing there on the energy drinks sector? Héctor Treviño: Benjamin, it’s too early to know. It is doing well. We just started in Mexico, I don’t know, that’s probably a month ago or something like that. So it’s too early to start seeing trends. But we are encouraged by the - we think that our hypothesis is that Monster will be a very nice addition to our portfolio in all these countries. We launched that in Mexico. We are in the process of launching this in Brazil. Central America, we already did it similar to Mexico. Argentina, still pending and we’ll go - we have good comps for - because it’s a very profitable product that that we could sell in all of our distribution fronts.

Okay, perfect. Thank you.

[Operator Instructions] We will take our next question from Alex Robarts with Citigroup.

Hi, everybody, and good afternoon, thanks. So I guess my one question would really go back to Mexico. And I’m just trying to get a sense more of what’s going on in the short-term. I mean, I can’t remember the last time we saw 160 basis points contraction in your Mexico, Central American margin, in that EBITDA margin. And I guess when you look at it compared to the first-half, right, I mean, is that a notable step down in that level of profitability. And I appreciate the top line is decelerating. But I am still trying to get my head around, this very sharp step-down in that margin. And I’m thinking to what extent can you help us break this down between this seemingly kind of recent spike in the sugar price versus what seems to be incremental pressure at the gross margin level from the currency hedge. And I’m wondering if you could just help us break it down in those two buckets, I mean, operating deleverage is clearly an issue. And as we think about in the fourth quarter, should we be thinking about a recovery from these current margin levels of 22.5% or do we kind of stay down in this zone, and think about what can happen again to the currency and the sugar, so just getting a sense of really this short-term margin trend, what was going on this quarter and then how you’re thinking about next quarter? And kind of the last bit of this, what hedge - what dollar hedge price were you at on average and how much coverage were you in Mexico in the third quarter and where are you in the fourth quarter? Thanks very much. Héctor Treviño: Good afternoon, Alex. I think that in general for - when…

Now, I mean that’s clear and I get it that it’s the FX and sugar. Just thinking then about fourth quarter, would it be safe to assume that you perhaps trend sequentially stable in the margin or do you feel that there could be some improvement sequentially? I guess, that’s the last bit. Héctor Treviño: Now, I think that fourth quarter we have the potential to improve a little bit our margins. We are looking to increase prices in November. So November, it’s kind of the middle of the quarter and we’ll see what the impact is for the end of the year. But certainly will help that price increase, will help us to start the year on the right foot with respect to the pricing of our products, okay.

Okay. Fair enough. Thank you. Héctor Treviño: Thank you, Alex.

And we’ll take our next question from Pedro Leduc with J.P. Morgan Chase.

Hi, thank you very much for the question and would be more related to the U.S. territories if you can give us an update on how those ventures are looking. And on a broader perspective, [Ciel obviously has been same volume so far] [ph] across the region. How are the interactions have been happening with you during the strategic change that is been tailored? Then if you can elaborate bit on how we should see marketing expenses of all in light of these lower volumes? Thank you. Héctor Treviño: Good afternoon, Pedro. In the U.S. front there are no news - let me give you a little bit of the recent, I guess, developments. We are looking during this fourth quarter to have a conversation with The Coca-Cola Company to see if we agree to the basic principles of a potential acquisition in the U.S. As I have explained in the past, the first part of this process for us to understand the way the U.S. system works and the governance within the U.S. system. We are pretty much finished with that process. So assuming that we continue and the calendar of The Coca-Cola Company has established, we will basically - means that we might be reaching a non-binding agreement with them with respect to the next step, which is starting due diligence. We will probably finish this closer to November or maybe December. At that time we’ll probably have to announce something to the market saying, we agreed this agreement or we didn’t reach an agreement. At the end of the day, The Coca-Cola Company is looking to close - to potentially close a transaction over the third quarter of next year. Assuming that we’ll have for documentation and due diligence we have basically six to eight months on that process. I think that with respect to the region, I assume that you’re referring more to Latin America. And we are - volume prices in Latin America certainly there. I think that very important and I have stressed this in the last two or three calls, The Coca-Cola Company and ourselves are now pretty much in tune at looking revenues and profits, and not so much the volume figure per se. We both agree in improving coverage of our products, improving performance of our coolers and continue to invest in coolers. We both agree in providing affordability to the consumers through the returnability. And we need to look also at opportunities to capture a richer mix of products with single-serve presentations and to try to target certain consumption occasions. So I feel confident that we are in agreement. There is always a lot of back and forth in trying to agree to these strategies. But we feel that we are pretty much in the same page with The Coca-Cola Company in that respect.

Great, thank you very much.

And we will take our next question from Luis Miranda with Santander.

Hi, good afternoon, Héctor. And my question is on Mexico pricing. When we take a look at the strong pricing that you have been seeing especially in the third quarter, can you tell us some color on how much is mix, how much is direct price increase, and how do we see it going forward in the short-term? Thank you. Héctor Treviño: Good afternoon, Luis. I didn’t quite follow your second question, but let me answer the first question. In Mexico, we’re showing increases around 5% in prices, around 3% to 3.5% has to do with rate pricing impact. And the rest is basically mix, improving mix of products. We have been, as for example, in flavor, almost 100% of the growth that you are seeing has to do with Naranja & Nada and Limon & Nada, which have a very important component of single-serve one-way presentation. We are saving a little bit less water. We are improving colas. So I think that mix is moving in the right direction. And that accounts for basically 2 percentage points of this price increases as we saw during the quarter. And I didn’t quite follow the second question…

The second question - yes, the second question was if you think that this trend could continue, I mean, I guess that your direct price increases for the next year should be also in line with inflation and we could expect some improvement in the mix. Héctor Treviño: Yes. As we are seeing a new price increase in November, I think that that will help a lot in our pricing strategy especially for next year. As I mentioned, during the fourth quarter, we’ll have an impact on December which is a good month normally. But we will start with the right pricing for the beginning of next year, okay.

Okay. Thank you, Héctor.

And we’ll take our next question from Alvaro Garcia with BTG bank.

Hi, Héctor, thanks for the call. My question is on Colombia. I was wondering if you could just repeat what you had said earlier in the call regarding the potential impacts on the tax reform there. And maybe talk a little bit about the price elasticity in Colombia vis-à-vis Mexico, and some of the initiatives you put into place going forward given the potential impact of this move by the Colombian authorities. Thank you. Héctor Treviño: Yes, good afternoon, Alvaro. In general, I think that the tax that was proposed to Congress was COB300 pesos per liter, which is basically equivalent to 24%, 25% of the average price that we have there. Our expectation is that given the per capita we have in Colombia that will have a tougher or a stronger elasticity as compared to Mexico. In Mexico - in Colombia, I guess, the consumer is not as used to drink our products or any sugary drink, because they have other substitutive products. And our expectation is that the elasticity will be higher than that what we experience in Mexico now. So certainly Colombia is something that we need to worry about. Okay.

That’s clear. That’s clear. And just repeating what you said earlier, the COB300 peso per liter will be roughly 25% of your average price. And then on top of that you said that VAT would increase from 16% to 18%, is that correct? Héctor Treviño: 16% to 19% is the proposal. They say that they will lower corporate taxes. That VAT increase will partially affect us directly, because if you remember that we have the new plant is in a free trade zone that has no value added tax there. So vis-à-vis the rest of the operation will have that benefit of this extra price if you will with this - or we could lower the price and still be with the same economics, because we will not be affected by this VAT. But our preoccupation is that the consumer will be incurred in their pockets with these increasing VAT, okay.

Of course, no, no, that’s very clear. Thank you.

And we’ll take our next question from Carlos Laboy with HSBC.

Good afternoon, everyone. Héctor, with consumer down trading across so many categories in Brazil, can you give us some additional insight into your market share gains? Héctor Treviño: Yes, Carlos. Good afternoon. Every category in Brazil has improved in market share and then let me give you some numbers. In colas, remember that’s one of the strongest market shares that we have on the 10 countries that we operate. We are slightly improving the market share around 10%, that’s 10 basis points. In this is a super-performance, growing closer to 14 percentage point improvement in market services last year. So when you take all - when you take everything into account, all see as this is basically increasing around 1 percentage point, a little bit less than that. That’s according to Nielsen and the information we share we share with The Coca-Cola Company. The only category that has a negative trend is Powerade and what the so called isotonic, the sports drinks, that we are losing a couple of percentage points in that market. So I think that with the returnable presentations that we have introduced in Brazil, the price points that we have in some of the single-serve presentations that - remember this strategy for MXN1.213 [ph], the much better execution that we have in the marketplace, it has helped us to - even though the consumer is not necessarily there for us to continue growing market share in the region - in that market.

That’s great. Thank you. Héctor Treviño: Thank you, Carlos.

And we will take our next question from Antonio González with Credit Suisse. Antonio González: Hi, good afternoon, Héctor. Thanks for taking my questions. Just a quick one, on Venezuela, if didn’t hear a lot of comments yet on the volume deterioration we’ve seen so far this year. And I just wanted to ask you if you can give us your, I guess, guesstimate of what’s going to happen in the next several quarters after these very large decline in volumes and whether obviously at 30%, 40% volume contraction leads you to reassess, whether your installed capacity in the country is the correct one or you are reassessing your scale, I guess. And then just secondly, if I may very rapidly, you made the comments about your expected elasticity for Colombia in a scenario for potential tax increase being higher than Mexico. Do you think the same thing would apply to the Philippines? And any preliminary comments that you can make on the, I guess, informal proposals that have been made at this stage with respect to increasing tax in the Philippines as well? Thank you. Héctor Treviño: Good afternoon, Antonio. Let me start with Venezuela. Venezuela was a country that was selling close to 240 million, 250 million unit cases. Now, we budget, we anticipated a strong reduction basically to 170 million unit case. I guess that the - and several factors are affecting this. One is the availability of sugar. There is no sugar available in Venezuela. And that has created a very interesting trend. We are moving - basically somewhere around 70% of our volume is non-caloric Coca-Cola. It’s not called Coca-Cola, still just the same label which says Coca-Cola without calories. Our analysis in some of the test that we’re doing in the market are on…

And, sir, with no further questions in the queue, I will turn the call back to you for any additional or closing remarks. Héctor Treviño: Thank you for your interest in Coco-Cola FEMSA. And as you saw in the press release, Roland is abandoning the ship and moving to Strategic Planning. While Roland [ph] is moving to Strategic Planning within the corporate area and Maria Dyla Castro will be joining us. And Roland and Maria Dyla will work together over a period of time just to get to know all of you personally and then pass the baton to the next step. Thank you.

Thank you. And that does conclude today’s conference. Thank you for your participation. You may now disconnect.