Good morning, everyone, and welcome to Coca-Cola FEMSA Second Quarter 2019 Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions].At the request of the company, we will open the conference up for questions and answers after the presentation. During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations that are based on -- upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance. And now at this time, I'd like to turn the conference over to Mr. John Santa Maria, Coca-Cola FEMSA's, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us to discuss our second quarter results. Constantino Spas, our CFO; and Maria Dyla Castro, our Investor Relations Director, are also with us today. I am pleased to report solid second quarter results, showing our continuous progress and positive momentum. In Mexico and Central America, we generated strong top and bottom line growth, driven by our steady, balanced revenue growth, a more stable raw material environment and cost and expense efficiencies. Despite currency headwinds, our South America division achieved positive top line performance driven by strong volume growth in Brazil and healthy pricing across the division. With better-than-expected buying in Colombia and early signs of macroeconomic stabilization in Argentina, we are encouraged as we enter the second half of the year.For the quarter, we delivered solid consolidated top line growth of close to 8%, while our comparable revenues grew double digits, 11.6%. This growth was driven mainly by volume growth in Brazil, Colombia and Central America, pricing above inflation and positive mix trends across many of our operations.Importantly, we delivered these strong results despite unfavorable translation effects from all of our operating currencies into Mexican pesos. Our operating income increased 6.5%, while our comparable operating income rose 13.8%. This growth was driven by healthy top line results, expense efficiencies in Mexico and Brazil and more stable sweetener PET cost environment overall. These effects were partially offset by higher a concentrate cost in Mexico, the reduction of tax credits on concentrates purchase from Manaus Free Trade Zone in Brazil, the depreciation of all of our operating currencies as applied to our U.S. dollar-denominated raw material costs, and restructuring severances of MXN 512 million during the quarter. These restructuring severances are related to the implementation of an efficiency program that I will…

Thank you, John, and thank you all for your interest in our earnings call. Our commitment to disclosure and transparency and continuous improvement led us to redesign our earnings release as of the first quarter of 2019. Additionally, on our website, you can find an excel version of the financial information included in our quarterly earnings releases since the first quarter of 2018.I will now briefly summarize the four main factors that affect the comparability of our financial and operating results for the second quarter of 2019 as compared to the same period of 2018. First, volumes and financial results of our recently acquired territories in Guatemala and Uruguay were consolidated as of May 1 and July 1, 2018, respectively.With our sale of Philippines operations on December 13, 2018, according to IFRS 5, our consolidated financial statements were represented to exclude the Philippines figures. Consequently, the company's consolidated financial results are not comparable to the consolidated financial statements published in the second quarter of 2018. Third, as of July 1, 2018, our Argentina operation is reported as a hyperinflationary subsidiary. And fourth, starting January 1, 2019, we adopted the new standard of IFRS 16 leases, which introduces a unique accounting lease model for tenants. To better describe our business performance, for certain information, we present comparable figures, excluding the effects of: first, mergers and acquisitions; second, translation tax resulting from exchange rate movements; and third, the results of Argentina because this operation has become hyperinflationary subsidiary. For the first half of 2019, more than 50% of the negative effect on our reported results resulted from currency translation effects.Moving on to our consolidated second quarter results. Our sales volume increased 2.2% to more than 840 million unit cases with our transactions growing even more at 2.7%. Our comparable sales volume grew…

We are encouraged by our progress during the first half of the year, and more importantly, the abundant opportunities we see across our markets. We are on track to deliver on our strategy from our continued portfolio innovation, affordability and category expansion through our ongoing development of our superior capabilities. Our culture is strong, igniting and enabling our organizational transformation. Moving forward, we remain committed to delivering superior economic, social and environmental value for our -- all our stakeholders. We are confident that our ongoing initiatives will allow us to unlock additional value, increase our operating efficiency. And free up resources to reinvest in our markets. Thank you for your continued trust and support. Operator, I would like to open the call for questions.

[Operator Instructions]. We'll take our first question from Álvaro García with BTG. Álvaro García: My question is on your top line in Mexico. We saw very strong pricing in the quarter, similar to last quarter. As we think about pricing into the second half of this year and into next year, how defensive do you want to position your portfolio? How are you thinking about affordability? And if you could make a quick comment on performance in the south and southeast of the country, that would be great.

I'll take that one. I mean as we mentioned, overall, we see very -- a steady and resilient Mexico business, despite the uncertainties that we're facing in an overall slowing growth rates. And as you mentioned, we're seeing -- we saw in the second quarter, actually, a sequential improvement in the volume performance. What we've done is, as you mentioned, drive our affordability through a lot of revenue management and a focus on execution, particularly behind our single-serve portfolio. I mean we are definitely focusing a lot on our single-serve strategy. And with that, allowing the consumer to have favorable and affordable price points today.And going forward, as John mentioned in the call, we have recently launched, based on the learnings that we gathered from our Philippines previous experience, a 235 ml returnable glass bottle at a majic price point of MXN 5, which has been gaining tremendous traction in a very short period of time, giving us good signs that this is the right strategy to go forward. And at the same time, supporting that with the infrastructure necessary for the consumers to have the availability -- and cold availability of those products. I mean we're installing 35,000 single-serve coolers to boost our mix. So that is one front that we're attacking. And with our analytics capabilities, we continue to look at optimizing our price architecture going forward and being able to surpass the margin pressures that we have. And the -- as I said, slowdown of the economy with intelligent pricing going forward, which we will continue to do.At the same time, the price increases are not only headline pricing to the consumer, but also leveraging our analytics capabilities on reducing discounts. And at the same time, being much more efficient in the trade promotion strategies that we…

I think that we will continue to, as I said, we will optimize our architecture. I think that you could expect a -- more impact on the mix trying to compensate for headline pricing, working on our mix, focusing reserve. And as you mentioned, we're trying to minimize the headline pricing during the softer economic environment. So that is something that we work on every day. I'm going to hand it over to John, also he wants to comment on that particularly.

Thanks for the question. I think the way I would think about is, we are giving returnability, both at single-serve and multi-serve levels, a very, very important role even in a more enhanced role than what we have today. That 235 that we just rolled out or we're rolling out has -- is backed up by tremendous execution and our [indiscernible] feels that it becomes incremental. And It does not become cannibalized. And I think that's a unique proposition that we have as a company that other people don't have because of their ability to control execution at the point of sale. I think the other thing to think about going forward is that we are looking for more transaction growth than volume growth. And therefore, what we're looking for is a mix rate, if -- that is positive, and that's how we're pricing the portfolio today as well. So we're going to favor returnables, and single serves in terms of lower pricing. Probably take some low rate on higher-priced multi serves, and allowing competitive space between both these segments to allow for more transaction growth.

We will now take our next question Luca Cipiccia with Goldman Sachs.

I wanted to follow up actually on Mexico. I think the previous question about the south region, I think also -- I would assume comes from some comments that some of the companies have made in the second quarter of -- so the lower performance there. And similarly, there were other comments that highlighted the relative underperformance or relative weakness in the traditional channel compared to the convenience channel as well. So maybe to start, if you could even give us your feedback on that front just in terms of comparability from what we heard from other peers in this space?

Luca, no, as I mentioned before, I mean, we have not seen any significant difference in behavior, in traditional trade in the southeast region versus the rest of our Mexican territory. I guess every category behaves differently in the different companies. But in our case, we have not seen, as I said, any abnormal behavior in the southeast region so far. I mean there is definitely in our category, whether it has relevant affect that might be different in other categories. And back in a particular month in a particular quarter, as you probably -- definitely know, might have a positive or negative impact. But in our case, we have not seen any material differences in the different regions in Mexico so far.

Perfect. Very clear. And so I think that's...

Nothing different to what we see at swings that we see -- sorry?

No, no, I missed it. Sorry, if I missed it. I didn't catch your comment about the channel. So that's clear now specifically.

Luca, I think what you're saying is our difference is not only territorially but by channels, right? The trends are the same as prior years and there is this year. So we don't see necessarily a channel mix differential or a shift in behavior amongst the channels that has been extraordinary and that hasn't been on trend already.

Okay. Very clear. Understood. And if I may, maybe just a follow-up on Brazil, which now -- there's been quite a few quarters as you've returned to positive volume growth quite consistently. So maybe as you look ahead, what -- can you separate maybe underlying consumer environment that seems to -- appears to be getting better, including Investor Day posted pretty good results in soft drinks and in beer in general. And combined with the investments that you made in the market over the last two years, affordability, price package architecture. So if you could spend maybe a couple of more on what is sort of self-help as compared to a general sort of consumer demand environment and maybe you're getting better, hopefully?

Sure. I think one of the things to think about is that we've over the last two years, we've redefined our portfolio in a lot of different ways. And the most significant one is probably the last year's noncarbonated beverage portfolio redesign, which -- we redesigned everything. And I think we're starting to look at all the benefits of that. But I think more telling than not, we've been seeding and really looking at affordability in a major way in Brazil through small packs, single serves through rough cut in a lot of ways. And one of the things that is happening right now, we're detecting is the low socioeconomic levels in Brazil are returning to the category, okay? And that -- when you start looking at the e-consumers in the past four or five years, they left the category because of economics. And now they're returning to that -- to our categories in a big way. And so that's part of what's driving our volume as the -- and I think that's going to continue as Brazil continues to have itself in a more macro stabilized manner, okay? And the outlook becomes better, and the outlook for personal income becomes -- it's slightly more marginal. So it's encouraging to see that the consumer footprint in Brazil, the components of which are starting to come back for all consumers.

And just to complement on what john was saying. I mean on your question on, well, is this riding the improved consumer trend in Brazil? Or this is internally driven? Definitely, it's a combination of both. But I think that the fact that in this particular quarter, for example, we have grown market share in every single relevant category that we compete in, gives you an idea of the impact of our strategic thinking, and that translated into our initiatives in the market driving significant growth for all of our categories. So I think that is very telling of what we're doing in the market. And we're also understanding the market better to continue to tailor our strategies for that. So when you see us -- the impressive growth that we've had with Coca-Cola Sin Azúcar in Brazil. Through a purchase structure consumer understanding, we're seeing that the growth is bringing on new consumption occasions to the category without cannibalizing significantly the rest of the quota portfolio, 70%, 7-0 percent of that volume comes from other beverages, and mostly powdered beverages, juices the nectars. So we're tailoring our initiatives with deep consumer understanding to be able to drive better growth and a standard portfolio impact across Brazil. Any of the combination of those facts tell you that we're doing a lot in the market in a continuous way, a very focused way. And at the same time, we're definitely benefiting from a more favorable consumer environment overall in Brazil.

I have something just to add, too.

We get very excited about this. John why don't you...

To add, I think if you look at where we were in Brazil four, five years ago and we look at the portfolio is one thing. When you look at how our execution has improved in Brazil is another thing. And the other thing -- part, Luca, I would say, is also look at the capability of getting cold drink equipment in Brazil. Over the last five years, we've done a much better job, okay, at consistently addressing the needs of refrigeration for our customers.

And if mention the advantages too...

Well, you add those altogether and it becomes very powerful.

It sounds like -- when you say, as the consumers are coming back to the category, you're a much better offer and price package architecture and portfolio and setup. But if I may say, what would you see as the big next step in Brazil looking ahead if this continues?

Well, what I see is a big next step. But there is -- I think there is opportunities to continue to consolidate that market. There is some scalable plays in Brazil. And I think once we get a couple of resolutions out there as to certain adjacent categories, I think we need to move forward and be aggressive on that.

We'll take our next question from Antonio Gonzalez with Credit Suisse.

I just wanted to ask about these new efficiency initiatives that you described at the beginning of the conference call, John. Obviously, you've been talking about digital enablers for quite a few quarters now, how you've been able to optimize discounts, extract a better revenue per unit case, et cetera. But it seems that the tone at least in your prepared remarks this quarter, it seems like your taking this even a step further, right? And you called out new ways of working, changes at the corporate structure, et cetera. So I wanted to get a little bit -- if I take a step back, I guess, I wanted to get a little bit of context on, a, is this a fair assumption? Do you think you are taking it further? And what is the trigger for that? Is it the macro weakness that apparently is starting to emerge in Mexico? Some of the margin headwinds in Brazil, given the elimination of tax credits, a combination of all of these? And where are the buckets where you see the most upside? Because obviously, again, you've been working on this for quite some time already. Is it more on the corporate side? Are there still sizable opportunities on the commercial side? Any incremental color that you can add, John, would be very helpful.

Sure. Listen, this is something I've we've been working on for at least four, five years, okay? And it started off with the establishment of centers of excellence, where we started to put forth the development of capabilities for Coca-Cola company, okay? It's not something that is overnight. It's not something that has happened spontaneously. And it's something that we've been driving through our culture as an organization. What we have found over the last two years is -- and through that development of the [indiscernible] as centers of excellence is that we had a move and we had a very large -- we have a good opportunity to go and streamline our organization and functionalize our company as a first step, okay? And by functionalizing the company, we will eliminate a lot of redundancies that are in place today, given the facts that our organizations are more territorial in nature.And when you make it a function, you're eliminating a layer of the same activities at the country level. So what you're really doing as the next step here is that the centers of excellence become the areas that have the processes with all the capabilities, have the processes, have a single work in single systems. And therefore, you are allowed to go out and digitize in a manner that it becomes efficient for the whole organization. So -- and when you start looking at that, it allows us to bring down the amount of people that we brought down as first step. And I think it becomes sustainable. I do -- it does become sustainable. But it allows us to go out there and also reinvest it and continue to digitize each one of our processes, okay? And as well as reinvesting it in the marketplace because we do have an apple portfolio that needs to be further fueled. So when you look at this, it's not only about organization. It's about finding different ways of working in that organization, how we become more collaborative, as there is much about organization as it is about culture, okay? and how we're going to interact with the countries and the center offices. So there's a lot of components of that. And it starts the organization and the culture starts meeting the operating models and the digitized strategies at this point. So it's all coming together in a sustainable manner. Does that help you?

This is very helpful. Yes. And just final, if I may, perhaps small detail on this conversation. Brazil is the only country where you didn't call out a severance cost strike? Do you think you can -- is it because the volume growth is just absorbing that much energy at the moment? And when do you think you can start these efforts in Brazil?

As you would note, this is a sequential event. We're starting off of Mexico and Colombia but typically in Latin America -- in Central America. And we will get to Brazil and Argentina by the second half of the year. Now I don't expect them there to be as much of a hit because Brazil has been through just a lot of pressure over the last four or five years. And by definition, has had to be a lot leaner. And what it is about Brazil or Argentina at this point is more about adapting to the model and making sure that we have the right model connections with our central offices or functions in our territories than it is about the cost savings there. And we should be done with that phase is -- and we should be done with that phase of the business by the end of the year

The end 2019. Yes.

And we'll now take our final question from Carlos Laboy with HSBC.

Can you please expand on how you adapt your digital platforms in Brazil differently than in Mexico? What do they do differently for you there? Or what are you going to get out in Brazil differently than you get out of Mexico?

So I think this is version 2.0 of what we have in Mexico, okay? And the power behind us is how we're getting -- if you want, let's talk about the traditional trade alone, okay? And there is two aspects of it, how we're enhancing our business-to-business capability and, going out there and offering different ways of becoming -- first, of connecting with the -- with our customer. And secondly, how we have that connection become omnichannel, so that the customer has a single view of his capability or his or her at any point of time. So there's a couple of things that we're doing there. First, we're using not only the mobile sales force, we're using all of the telesale. We're going with WhatsApp as a way of going out there and order entering as well as well as getting on the web.So there is seven or eight different ways of a route to market in Brazil for our customers that we're also replicating in Argentina. And we're testing in the beginning of September. And this is really powerful because at the end, what we're changing is the paradigm of the customer having to wait for us to order because of whenever we go there and call him or whatever to be able to connect to us whenever he wants. And how we connect that into our system for delivery is also a major, major transformation internally for us, and it requires a lot of the different systems platform. But secondly, when you start looking at the digitization at -- the Brazil team was bringing to the table. They know, as we know in Mexico, where each one of their trucks are. But they are not going out there and then giving the customer advance ship notice about…

And that does conclude our question-and-answer session. I'd like to turn the conference back over to management for any additional or closing remarks.

Well, thank you very much for your interest in Coca-Cola FEMSA. As always, our team is available to answer any of our -- your remaining questions through Maria Dyla and Jorge. But I think this has been a very, very satisfying quarter for us. And I think, as we go forward, we're encouraged to see that our efforts and strategies continue to build out appropriately in according to what we thought. Thank you very much.

Thank you.

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.