Coca-Cola FEMSA, S.A.B. de C.V. (KOF) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, please standby. Good morning, everyone, and welcome to the Coca-Cola FEMSA Third Quarter 2017 Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions]. During the conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as a good faith estimate made by the company. These forward-looking statements reflect management's expectations and are based upon current available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. At this time, I'd now like to turn the conference over to Mr. Héctor Treviño, Coca-Cola FEMSA's Chief Financial Officer. Please go ahead, Mr. Treviño. Héctor Gutiérrez: Good morning, everyone, and thank you for joining us to discuss our third quarter 2017 results. We continue to successfully navigate challenging consumer environment and cost pressures in some of our territories to deliver solid top line results for the third quarter of 2017. Our positive results were driven by our portfolio and pricing initiatives, point-of-sale execution, rollout of affordable presentations and financial discipline across our territories. As we previously announced, commencing February 1 of this year, we've started consolidating our Philippines results in our financial statements. Due to this consolidation, our results for the third quarter reflected a reduction in our share of profit of associates and joint ventures accounted for using the equity method, particularly in our Mexico and Central America division. We are encouraged by signs of consumer recovery in Brazil and Argentina and better-than-expected results in the Philippines for the quarter. In Mexico, we faced a complex operating landscape in September, resulting from the unprecedent earthquakes and hurricanes that softened the consumer environment. As part of our initiatives to drive transactions, such as volumes by fostering single-serve consumption, we highlight our transaction growth in Brazil, Argentina and the Philippines, which demonstrate this value equation across our core carbonated soft drinks and noncarbonated beverage brands. Our Mexico and Central America division reported a contractual of 3% in volume. It is Mexico contracted 3.2% while Central America recorded a slight volume contraction of 0.9%. In South America, we reported volume growth of 4.2%, including the results of our latest acquired territory in Brazil. In this division, Argentina reported 4.6% volume growth; Brazil reported a decline of 1.4% on an organic basis; Colombia, a 10.4% decline; and Venezuela, minus 47%. In the Philippines, we achieved volume growth of 7%, building on a strong 7.3% volume growth for the third quarter of last year. For this quarter, our consolidated reported revenues increased by more than 16%. This was in line with our 16.6% increase in gross profit, a margin that we successfully perfected even with cost pressures in some countries. Our operating income decreased by 2.8%, due to higher expenses across our territories and negative effect of Venezuela for the quarter. Our operating cash flow grew 13.7% for the quarter. These figures include our results from the Philippines and the acquired Vonpar-franchised territory in Brazil. During the quarter, our consolidated comparable revenues rose 3.9%, driven mainly by other price increases in Mexico, Brazil, Colombia and Argentina while our comparable gross profit grew 6.6%. On a comparable basis, our operating income increased 3.3%, excluding the results of Venezuela and Vonpar and the effects of currency translations and assuming the usual results in the Philippines also in 2016. Similarly, on a comparable basis, our consolidated operating cash flow increased 5.2% compared with the third quarter of last year. We began the integration of Others in our noncarbonated portfolio in Mexico, Brazil, Argentina and Colombia. We'll focus on increasing progress in countries' point-of-sale execution and expanding in operational sales channel. Our operational transformation, driven by initiatives from our Center of Excellence is progressing according to plan. We continue to implement our commercial digital platform across our territories. As of September, we have been deploying these platforms in 6 countries. We are enthusiastic about the preliminary results on tailored consumer-oriented initiatives, the agile opportunity detection and better results allocation. Moreover, we started to deploy our distribution and logistics platform in Mexico and Brazil to reduce our cost and enhance our value chain flexibility. I will briefly discuss the highlights of each of our operations. In Mexico, we delivered 5% revenue growth, resulting from pricing ahead of inflation, which was partially offset by a low single-digit volume decline, mainly in July and September. We increased prices in June to compensate for the increased price of concentrate that began to apply in July and was reflected in softing - softening consumption. As a result of the [indiscernible] September earthquakes in the State of Mexico, Chiapas and Oaxaca, and 2 hurricanes in our territories, we experienced a lower consumer environment that affected our volumes. Together with the Coca-Cola Company, Coke FEMSA launched 2 million special edition 12-ounce cans of Coca-Cola with the #Fuerza México slogan on the profits from which will be donated to the earthquake relief efforts. It is important to note that even in this softer environment, we have - we are seeing a significant shift between single-serve and multi-service carbonated soft drinks not achieve from nonreturnable to returnable packages. Coca-Cola Sin Azúcar [indiscernible] continues positive performance and is outpacing the volume of Coca-Cola Light. With this in mind, we continue to increase the mix of noncaloric beverage in our Coca-Cola portfolio. The performance of our still beverage portfolio was in line with same period last year, including double-digit growth of Santa Clara dairy products. For the quarter, our Mexico operations' top line growth enable us to partially contain higher costs and expenses, resulting mainly from a favorable foreign currency hedges, highest sugar prices that increase growth to 20% compared with the same period of last year and higher concentrate prices, incremental diesel and gasoline prices. These variables led to a mid-single-digit contraction in operating income. In Central America, our volume declined 0.9%, following low single-digit growth last year. For the quarter, Guatemala and Nicaragua reported volume growth while Costa Rica and Panama experienced a low to mid-single-digit decline in volumes. In particular, Costa Rica's consumer environment was affected by Hurricane Maria. As compared with the same period of last year, our unit case in local currency remained flat. However, the effect of currency translation impacted the division's top line results. Brand Coca-Cola and its noncaloric options stand at low single-digit volume contraction in this region. Coca-Cola Sin Azúcar is outpacing the volume of Coca-Cola Life during the quarter. In our water portfolio, we reported a high single-digit volume growth. Additionally, we benefited from year-over-year resin and sugar prices, which improved our gross margin. As we previously note, this has been implemented throughout the market initiatives in the region. As part of these initiatives, the implementation of our presell platform in Guatemala boost our Other's daily sales by 14%, increased our market share and grew our point-of-sale execution and captured efficiencies in our distribution network. In the short term, this strategy increases our cost of service and partly our operating income. However, it will enable us to capture top line opportunities. Our South America division continued to show positive signs of recovery in Brazil and Argentina while Colombia continued to experience a complex consumer environment. In Brazil, our third quarter results show a positive trend compared with the second quarter. Indeed, September marked the second month of organic positive volumes this year followed by June, partially driven by our affordable strategy, including our 2-liter returnable presentation, which was close to 6%. On an organic basis, our Brazilian operations volume contracted 1.4%, including this Vonpar-franchised territory, volumes grew plus to 24%. Additionally, our average price per unit case in local currency increased in line with inflation. In Brazil, we achieved encouraging profitability through an operating margin expansion resulting from better portfolio segmentation and point-of-sale execution, plus price compliance and cost and expense efficiencies. Additionally, we continue to maintain positive market share in the carbonated soft drink category, marked by a positive trend. In addition, we achieved a positive momentum driven by the appreciation of the Brazilian real as well as better aluminum and PET prices. The launch of Fanta Guaraná has been a success. It now represents close to 10% of our flavored portfolios as an option with lower sugar for our consumers. Our integration of Vonpar continues on track. We rapidly improved our point-of-sale execution. We are successfully expanding our portfolio of returnable PET presentations with significant volume and colors throughout the territory, and we are capturing pricing opportunities across all of our beverage categories. In Colombia, a sharper than anticipated deterioration in the labor market, prolonged negative consumer confidence and delay investment and household spending has negatively impacted our consumer environment as we reported a 10.4% volume contraction. However, we continue to improve our portfolio of affordable and returnable packages, increasing our mix of returnable presentations by 4.3 percentage points compared with last year. Our market share increased year-to-date, 1 full percentage point with the growth of brand Coca-Cola. Additionally, we have been increasing our mix of noncaloric options such as Coca-Cola Light and Coca-Cola Zero, which have achieved double-digit growth throughout the year. Our improved pricing aligned with inflation together with an improved execution of the point-of-sale focused on increasing share of visible inventory and product coverage, enable us to partially mitigate the effect of contracting volumes for the quarter, while allowing us to improve our margins quarter-over-quarter. In addition, better sugar and PET prices, combined with a stable Colombian peso and an aggressive reduction of our costs and expenses, contribute positively to our margin expansion. In Argentina, we reported 4.6% volume growth for the quarter with transactions rising ahead of volumes as we diversify our single-serve portfolio such as the entry pack of 250-milliliter can at ARS 10. Our sparkling beverage portfolio volume grew 1.5% compared with last year with mid-single-digit growth in flavors, thanks to the performance of brand Crush and our noncaloric options such as Sprite and Fanta Zero. Our still beverage category achieved double-digit volume growth, driven mainly by our Cepita and Hi-C brand juices. Fostering price innovation and offering diverse option to our consumers, we launched noncaloric options such as Aquarius Zero and Cepita Orange with 0% added sugar. Consequently, our noncaloric portfolio represents 29% of the mix at 2 percentage point increase. And our Argentine operation was impacted by a national truck driver's strike, which stopped our operations for 3 days. Our top line growth in local currency in line with inflation and better PET and sugar prices enabled us to increase our gross profit. As we previously explained, in the third and second quarters, we have larger labor-related expenses and costs since salaries are referenced to the previous year's rate of inflation, which negatively impacted our operating margin. In the phase of an exceptionally complex environment in Venezuela, we have recorded sequential volume growth throughout the quarter. We continue to focus on local currency cash flow generation in order to mitigate increased operating expenses. Considering the existing inflation in this country, we remain committed to satisfy our Venezuelan consumers' diversities. Moving on to our Philippines operation. For comparable purposes, we are describing the performance of this operation as if it were consolidated last year, considering the full 3 months year-over-year. For the quarter, our volume grew 7%, building on high single-digit volume growth during the third quarter of 2016. As part of our commercial strategy to develop key carbonated soft drink packages and to win first the attractiveness of our portfolio, our single-serve presentations of colors and flavors achieved double-digit volume growth in the quarter. Even with our improving mix of single-serve presentations, our revenues grew less than our volumes as our prices remain relatively flat in nominal terms compared with the third quarter of last year. Additionally, our water portfolio achieved accelerated growth of 20% with personal water improving more than 50% compared with last year. Moreover, our noncarbonated beverage category led by juices under the Minute Maid Fresh brand grew close to 28%, which was offset by a decline in our private brands. Better sweetener and PET prices were partially offset by a devaluation of the Philippine peso as applied to our dollar-denominated raw material prices. Our Philippines operations operating income also increased, driven by our cost efficiencies and reduced operating expenses. Now regarding our financial results. In the third quarter, considering net income attributable to equity holders of the company, earnings per share were MXN 1.5, an increase of 37% compared with the third quarter of last year. And we announced in August, we'll use the proceeds of the Mexican bond issued in late June to partially refinance the U.S. dollar-denominated notes due 2018. Below the operating income line, our comprehensive financial results decreased significantly. This decrease resulted from our strategy of swapping out net dollar debt exposure to Mexican pesos and Brazilian meals. Consequently, although we have higher interest rates in these countries, we will not file the effect of foreign exchange volatility in our income statement. We would like to remind our shareholders that as of November, we will pay the second installment of the dividends approved by our shareholders in the amount of MXN 1.67 per share. Now let me close with some key remarks. Our company started an encouraging second half of 2017 with significant progress on nonstrategic fronts. Our organic results include compared with last year, with a slightly lower volumes, but better gross profit in most of our operations. Mexico experienced a low single-digit low volume contraction. However, excluding the Philippines from last year's result, our operating income remained flat despite the effects of foreign exchange fluctuation and increased sugar cost, concentrate and fuel cost. Brazil shows strong growth in profitability, offsetting other countries results in our South American division. For Brazil, September marked our second month of positive volumes for the year, along with prices aligned with inflation and an expansion of our operating income margin. In Argentina, our volume increased by close to 5%, an improving trend compared with the first half of the year and a positive [indiscernible] going forward. In Colombia, despite our volume transaction, we continue to gain market share with the growth of brand Coca-Cola, supported by our returnable strategy and with cost containment improved our margins. The Philippines operation shows positive volumes and improving profitability. However, we expect pressure on sweeteners going forward, which will lead to mid-single-digit operating income for 2017. Furthermore, we saw continuous progress on nonstrategic and operational fronts, resetting our competitive edge in Central America, including our introduction of presell in Guatemala, increasing our point-of-sale execution and value affordability throughout all of our territories, focusing on internal presentation, joining our noncaloric mix and continuously progressing with our digital transformation. Guided by our strategic framework, we are committed to reinforcing our leading market position as a global beverage company through our diversified portfolio, to transforming our operating model through our Centers of Excellence and to driving a cultural evolution that will enable us to continue capturing both organic and inorganic growth and creating sustainable value for our shareholders now and into the future. Thank you for your continued trust and support. Operator, I would like to open the call for questions.

[Operator Instructions]. Our first question comes from Antonio Gonzalez from Crédit Suisse.

I wanted to talk about Brazil. We've heard that in light of the illegal process between the Coca-Cola Bottlers and Heineken in Brazil, the distribution agreement, which on paper was supposed to be terminated by the end of this month, might actually extend a bit further. So I wanted to ask if you can give us any update on whether this is the case from the perspective of Coca-Cola FEMSA. And what are your thoughts on how quickly - irrespective of what the exact commodity in which the agreement gets terminated, what are your updated thoughts on how quickly can the Coca-Cola system find an alternative to this bigger volume that will be lost sooner or later and whether this can interrupt the pace of recovery and profitability that we're seeing in the country. Héctor Gutiérrez: In respect to Heineken, our position is that the contract is effective until 2022. And as you correctly pointed out, Heineken announced that they wanted to terminate the agreement basically next week. The agreement that we have provides for mechanism to resolve differences, and we are currently in that process, which have an obligation to keep confidential what has been discussed during the past. In the event that we are authorized by Heineken, or by Brazilian authorities or we will be able to disclose another details. And basically, Antonio, we are 1 week away from the time frame that Heineken provided last in the - for the - with the idea of this confidentiality towards this - the following week. And therefore, we will be willing to disclose so. But right now, we have this obligation of confidentiality, okay?

Our next question comes from Lauren Torres of UBS.

I was hoping you could give a bit more perspective on your views on Mexico. As volumes were impacted, as you mentioned, as a result of the earthquakes and hurricanes in this quarter, but we've all been curious to see or hear if you are experiencing any pushback at the consumer level of slowdown. There's concern going into next year with the elections and we're hearing a lot about these NAFTA negotiations that the market could soften. And also the margin pressure that you're seeing on these sweetener and concentrate costs, and you're protecting that with pricing. But maybe a little bit more looking into next year, how do you feel about that? Do you think you could continue or get back some of those lost volume and grow volumes again and protect or grow your margins in light of the cost environment? Héctor Gutiérrez: Yes, let me speak a little bit about Mexico. It's still kind of - even though October is almost finish, let me give you some perspective on the consumer. July was certainly affected in - with respect to volumes. Volumes were affected by the fact that we increased prices in June, and that's what we were expecting during that month. August is at a positive volume trend, low single-digit volume growth. And then September was very complex for all our region. And since we have a lot of rain due to these hurricanes, lower temperatures led to these storms. And then we were hit by 2 earthquakes that affected especially the South of the country. October continues to be kind of soft with low single-digit reductions in volume. And what I was saying at the beginning, I'm still not sure if part of that has got - have to do with the areas that were mostly affected by these earthquakes would have to do with our Southeast region. If we divide the territories in our modern territories, including the old Tampico territories, we saw basically [indiscernible] 1.5% to 2% volume reduction. While in the South of Mexico, we were seeing close to 5% volume reduction. So that clearly signals that there was some many elements in the South of Mexico that were affecting our consumer. And we believe that it has to do mostly with the climate that was affected by these hurricanes, but somehow also affected by these hurricanes. We continue to see a consumer that is kind of shy for our plays and not growing as we were expecting in our budgets. Difficult to predict what is going to happen next year with what we are describing on the - there's noise that NAFTA negotiations are creating in the economy and also the election that is going to start, and the process for that will start around January. So we believe that with the cost pressures that we have, as I describing in the call, with sugar prices increasing close to 20%, the increase in concentrate that's raising [indiscernible] increase that we have, as I mentioned as well in this prepared remarks. It will start to this increase in July. The main objective of the company, our operations in Mexico to maintain profitability. And that's why we have seen price increases that are important for a low-inflationary environment, although inflations have been high because of the gas prices. And we are hearing in excess of 6% increases, we are - speaking about 8% to 9% increases in our average price per unit case in Mexico, again, with the objective of maintaining the profitability in this operation. Otherwise, that all. I mean, that's the description I wanted to tell you, Lauren.

Our next question comes from Pedro Leduc of JPMorgan.

Clearly on the Philippines, you've seen good few quarters now of margins perhaps above levels that we initially thought. Just looking to hear your thoughts on what's been driving it, even though performance are flattish there and mix that you just mentioned as well as an update on the perhaps tax discussions there, that would be useful. Héctor Gutiérrez: In the Philippines, if you recall some of my remarks in previous calls, we are seeing a substantial increase in the profitability in the Philippines. Still in the low-margin seasonality. Every year, first and second quarter have a better margin because of volumes than the third and the fourth quarter. And if you remember, during the beginning of the year, I spoke about 5% to 6% operating profit margin. So what we are seeing there in the Philippines is that we have this quarter somewhere around 3% operating income. It's still low compared to the level that we would like to see. And EBITDA margins, given all the investments we have done there is a double-digit margin number, which is good. The risks in the Philippines are potential restrictions on importing high fructose from Asia, especially from China, because of pressures from the local sugar cane producers. That could potentially affect our cost structure as local cost of sugar is higher than what we are importing from China. We do not have a definition on that, but that's the potential risk. And clearly, as you are saying, there is this potential tax on soft drinks that is being discussed in the Lower House and the Senate. Our understanding right now is that Congress is in a recess - [indiscernible] they are in a recess right now, and they will start discussing this towards the second half of November and first half of December. So our estimate is that if we were to have this tax, it will be more towards the beginning of next year. Difficult to know if this tax will go or not and what the level of this will be. And clearly, we will have to evaluate how to compensate potentially - in case this tax is passed, how to potentially compensate for those taxes and for an increase in sugar cost. A lot of the strategies in the Philippines right now is basically to continue growing volumes and increasing the profitability of the business as we dilute better our fixed cost structure through volume generation. And for that, as you have seen during the last year basically, we have been with prices in nominal terms more or less similar. So in real terms, we are with prices below inflation. That might need to change in case sugar prices or the tax, the potential tax is implemented. And we need to adjust our cost structure and efforts in the Philippines.

Our next question comes from Isabella Simonato from Bank of America Merrill Lynch.

I have two questions. First of all, in Brazil, if you could share a little bit in more details what your expectation is of volume recovery next year, and if you could try to break down between CSDs and still beverages. And also in Mexico, if you could assess the outlook for raw materials next year as well as your FX hedges, those will be my questions. Héctor Gutiérrez: With respect to Brazil volumes, we assume - what's happening in Brazil in general terms, we have a very positive news in terms of the integration of Vonpar, so we have an important growth in volume terms. On a comparable basis, we are still - we have a small decline in the quarter, although as I mentioned September was a positive month. We are trying to maintain prices in local currencies in nominal terms. With small increases, it's hard to compensate for some of the cost increases that we have, and that has translated into very good profitability numbers for us in Brazil, obviously, after suffering a little bit more than 3 years of contracting volumes and contracting margins. So we are - it looks like, as I mentioned in the previous conference call, that the second half of the year is going to be much better in Brazil than the first half. So Brazil, we feel very confident that the volume trends, prices, margins are going in the right direction. With respect to raw materials - and we are clearly - our expectation for next year is we're expecting low to mid-single-digit volume growth both in CSDs and on stills, we are looking especially with substantial increase in all the categories. With respect to raw materials, we are seeing prices - our expectation is that prices for PET and sugar will be similar to what we have during 2017, so we are not seeing especially increases in this front. The only exception is that because of the one of the suppliers basically going out of business in Mexico, one of the suppliers for PET, we are starting to see a little bit of pressure on PET cost. Our expectation is that the market for PET will have an adjustment and some of the rest of the suppliers will adjust to supply the lack of this raw material created by this plant that went out of business in Mexico. So we could expect some, I guess, especially for November and December and probably January, a low to mid-single-digit increase in dollar terms in the cost of PET. Sugar in Mexico continues to be kind of a tricky question because while some of the international sugar prices are coming down, importantly, in Mexico, prices continue to retract. So our expectation is for prices to stay where they are in Mexico, not to continue increasing, but also we will see necessarily a reduction to international levels in the - for 2018. With respect to our hedges, we have basically covered with the risk management practice that we have internally that has worked very well for us, especially to provide stability to our operators in terms of some of the cost of raw materials. We have basically hedges for the full quarter at around MXN 19.70 per dollar. And in reais, we have around BRL 3.25 to BRL 3.28, more or less, that's the range. For the second part of - excuse me, for the first half of next year, we have some Mexican peso hedges around the MXN 20 per dollar, and in reais, we have some hedges around BRL 3.23, basically that's the check prices, the average check prices that we have. So what we are looking with this strategy is basically to give our operators the opportunity to have certainty in some of the cost of the raw materials, especially those that are dollar-denominated, so that they can better plan their prices to the consumer or to our clients and the margins that they will deliver as a result of all these strategies. Thank you.

Our next question comes from Martha Shelton of BBVA.

I was just looking at volumes in Colombia, and it looks like we're coming up on several quarters now of negative - a negative volume decline. And I know that's affecting other consumer companies in - that are operating in Colombia. So just wanted to get some insight into what you're thinking about in so far as how to approach Colombia, what to do to improve volumes and your thoughts on whether or not this is a result of really competitive pricing actions on the part of your competitor there or if this is really just a macro-oriented issue? Héctor Gutiérrez: Colombia is kind of, I guess, a question mark with respect to today's volume performance. The answer is, what we are seeing is a macro environment that is not good for our use. With this, volumes in Colombia declined 10% during the quarter compared to last year. And - but at the end of the day, we continue to gain market share because volumes for flavored drinks have decreased more than volumes for cola, so we have a much better position in cola. So our - the readings that we have from Nielsen and the likes is that we are to continue to increase market share. And therefore, it's not competitive pressures. It's the consumer that is not there. Very importantly, as we see with the Colombian consumer, the flavor that has been there for a couple of years is this strategy that we have deployed of going to returnable PET packages that was not present in Colombia before and that is helping our consumers to have a more affordable price. When you look at returnable glass, we have increases in volumes in those packages. So I think that the strategy is well designed. We are doing the right things for the market. But what we like to see is for the consumer to come back to that category and start to have a positive trend in volumes that will benefit a lot the profitability of our operation in Colombia. Because we have been decreasing volumes more and more, those are the golden cases that bring a lot of the profitability for our operation in Colombia. Okay? Thank you, Martha.

Our next question comes from Alex Robarts of Citi.

I did want to go back to the quarter and the results, specifically around South America, and what struck me was really the trend at the OpEx level. The quarter seemed to show that we had mid-teen, or actually 16%, increase in the South American operating expenses year-on-year, kind of twice the rate of growth of sales. And I'm wondering if this sharp increase relative to sales is in some way partly reflecting the salary increases that you talked about earlier in Argentina. Could it also be - wondering if it could reflect this - you talked about a new distribution platform in Brazil and might that involve some front-ended OpEx. And just kind of getting a sense, I mean, is mid-teen growth in OpEx something that we should be thinking about for next couple of quarters? So that's the main question. And the last thing is just a clarification. Did you - is it safe to assume that this discussion around high fructose imports in Philippines is, in fact, separate from the piece of legislation around fiscal reform? Or - I was under the impression that it was, but you seem to be saying that it's actually a separate line of potential change in the Philippines. Héctor Gutiérrez: With regard to the first point, OpEx in South America. We have some increases basically related to what you described - that I described during the opening remarks, which has to do with labor cost in Argentina increasing. Similar to inflation of last year, that was much higher than what we have now. So in real terms, when we look at these numbers, the contrast of what we share with you is a substantial increase in real terms mid-year. You can argue that last year, we had inflation, and salaries were below inflation last year because of the same reason. But this time around, we are seeing this increase. The other important element here that is important for you to remember is that we are including Vonpar, which is not present last year in the numbers. And just take a look at that because maybe that's one of the explanations there. We obviously have Venezuela embedded in the South America division. Remember that we have to use inflationary accounting rules in Venezuela, so we need to bring everything to the latest estimate in terms of inflation, which is very high in Venezuela. So I'll say, those are the 3 main impacts for the increase that you're seeing in OpEx. With respect to your second question, in the Philippines. I see those 2 issues separate. Prior to all the discussions for any potential tax, there were very tough discussions with cane sugar growers association in the Philippines and kind of a pressure in the government to put some tariffs on imported sweeteners. That was, in a way, negotiated back and forth with good results for the industry in general, for the Philippine consumer at the end of the day as imports remained open. And then this potential tax discussion came. In the draft that we have seen from the Lower House and the Senate, there is this mention that maybe there could be a potential tax differentiation between those products that use cane sugar, local cane sugar, versus those that use high fructose, imported high fructose. But again, this is just speculation with respect to the draft that's being circulated in the press in the Philippines. So I'll say that at the end of the day, they started as 2 separate issues. And I think that the potential tax legislation, it looks like, could be differentiated between the different sweeteners, and in a way, these 2 issues are merging in this potential tax regulation. Thanks, Alex.

Yes. I appreciate that, and that's helpful. Just a clarification though on the OpEx. I mean, I understand the Vonpar expenses weren't there in the prior year period, but neither were the sales. So it was really - what was interesting is OpEx growing twice the rate of sales. But I can follow-up offline. And just on the Brazilian distribution platform, I mean, just if you - that was kind of the other piece of that. Could you comment on how that's going and what your expected outlay for that and opportunity to save or to be more effective at go-to-market? That would be great. Héctor Gutiérrez: Yes, Alex. In the digital platform, we are deploying 2 basically main products. One has to do with all the digitalization. And basically our salespeople going to the market with basically a smartphone with very targeted initiatives. But our expectation is either to improve a bit the volume because you have more targeted initiatives, but certainly, improve the net price that we receive as we better design promotional activity and avoid discounts or promotional activities that are - that will not create an important traction on volume. The fact that - our expectation is that we will be able to better track and analyze the effectiveness of these promotional activities. On the other front, we are also moving into a more coordinated, better-designed logistics network that could bring about some additional savings in Brazil. That second part is more towards 2018. The first part in the description, the smartphone, is already working there. I think that we are seeing some of the effects of the commercial platform by looking at the execution in the point-of-sale and the scores that we are getting in that front. We were basically - the last of the - with respect to the different bottlers in Mexico in terms of the scores that they were getting. We are #1 now, and Vonpar is moving very rapidly also on the scale on this execution, of course, which clearly signals for us that this commercial platform is helping in that form, Alex. Thank you.

Our next question comes from Felipe Ucros from Scotiabank.

Maybe if could have a follow-up on Colombia volumes. One of the issues that we're having trouble understanding is that while we do understand there was clearly a macro shock from the tax reform at the end of last year and the consumer suffered quite a bit, we are kind of seeing a rebound in retail sales, and it seems like consumer confidence is also rebounding. And some of the other consumer companies we follow in the country, although they reported positive volumes in second Q and are expecting again positive volumes in 3Q, and in my mind, that's why I'm kind of missing something in the puzzle. I'm assuming that your volumes are still contracting in a very strong way, but I'm seeing other sectors in consumer recovering a lot more quickly. If you could comment a little bit on what you think is driving something different from you guys and from the rest of the industry, that'd be great. Héctor Gutiérrez: Yes, Felipe, it's a strange trend because we see the numbers that you are describing, and they are correct. Some of the retailers including [indiscernible] stores, however, are starting to perform better. The consumers in our industry is not reacting the same way. What strikes the most is that, as I mentioned, we continue to gain traction with returnable PET, which is a more affordable presentation, but returnable PET is growing. And we continue to gain share, and that clearly signals that it is more like an industry trend that is affecting the consumer. Per capita consumption of our industry in Colombia has been one of the lowest for many years in the 10 countries that we have. And our take of this is that the consumer has other options, including tap water and juices from fruits. So the fact that our share is stable or growing a little bit, it kind of indicates to all that we are moving with the right strategies in the marketplace. But it's a strange trend. We are following very closely other industries, other companies, consumer goods companies, as they report, and it's strange that our industry continues to have this kind of volume decline. Our expectation is that for next year, we'll see some pickup in volume in the mid-single digit, but that's basically our budget after having softer several years with volume declines in this country. Thank you.

Our next question comes from Álvaro García from BTG. Álvaro García: I want to go back to organic volumes in Brazil. I mean, the organic decline was quite impressive especially in light of what the Coca-Cola Company mentioned of a high single-digit decline this morning for the country as a whole. I guess, my question is, diving a little deeper, what really is driving that? Is it an effect of a lower base? Is it digitization? What exactly is driving this outperformance vis-à-vis the rest of the country? Héctor Gutiérrez: We saw the Coca-Cola Company report, and we shared some of this information with the rest of the bottlers. And we are seeing that trend, which is very positive for us in the sense that we believe that because of the efforts with affordability with single-serve presentations that continue to be at Magic Prices with returnable PET and the very important improvement in execution in the point-of-sale, I believe that's what is explaining this differential in the performance during this quarter. And that's basically our belief. I don't remember exactly how we were comparing versus the other bottlers in previous years, but clearly, the efforts on those 2 fronts, on affordability and execution, we believe, are giving us this opportunity to improve much better than the rest of the fleet.

Our next question comes from Benjamin Theurer from Barclays.

I just wanted to go back to Mexico, and thank you very much for giving a little more detail on the volume outlook, how it behaved throughout the quarter and obviously there were certain one-timers. But I'd like to dig in to actually the performance on transactions. So we clearly have seen significant decline of almost about 4.5% in transactions in Mexico. So with the price increase in July, how did that translate on transactions? And then how did August perform? And then what ultimately happened in September? So that we get a little bit of a sense of how you've been doing on the transactions in Q3 considering that in Q2, we had actually a decline in transactions in Mexico, there just to get a little more clarity on the transaction picture. Héctor Gutiérrez: As you pointed out, we have been struggling a little bit in Mexico with this formula where we like to see transactions growing more than volume and revenues growing more than transactions. So that's the matching equation that we'd like to see there. In the case of Mexico, and probably because of this soft environment with the consumer that I described and certainly affected by the earthquakes and rain, hurricanes, but what we are seeing is the consumer moving strongly to multi-serve, returnable PET, especially the 2-liter presentation. And we are seeing a decline in some of the single-serve presentations, especially 600-milliliters. Several facts. Obviously, the price per ounce or the price per liter in the large packages is more affordable to the consumer, so that volume is growing. The 600-milliliter is now being priced basically around MXN 12, which is in a way moving away from the MXN 10 Magic Price Point. When you have inflation, it's difficult to maintain this Magic Price Points as the inflation in Mexico pickup. It's still at manageable levels, but - in the 6% to 7%. And the alternative is to start trying to maintain this Magic pricing with different presentations. And that's what we are doing, introducing 400-milliliters, 500-milliliters, et cetera, including some returnable glass presentations that continue to have attractive prices for the consumers. But in general, what we are seeing is this trend towards larger packages and the smaller packages or the single-serve packages softening a little bit more. I don't recall exactly, Benjamin, how that transaction behaves month by month, but we can follow up in a different question. But it's very similar to the volume. It's a negative July, slightly positive August, sort of flattish, and a negative September because of what we described in the Q as [indiscernible] we can share probably better numbers later on.

And ladies and gentlemen, that's all the time we have for questions today. Héctor Gutiérrez: Okay. Thank you so much for your interest in Coca-Cola FEMSA. And as always, we'll be available to answer any of your remaining questions. Thanks a lot.

Ladies and gentlemen, that does conclude our call. We do appreciate your participation, and please have a great day.