Coca-Cola FEMSA S.A.B de C.V. Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Coca-Cola FEMSA, (KOF)

Coca-Cola FEMSA S.A.B de C.V. (NYSE:KOF)

Q4 2013 Earnings Call

February 26, 2014 11:00 am ET

Executives

Héctor Treviño Gutiérrez - Chief Administrative Officer and Chief Financial Officer

Analysts

Alan Alanis - JP Morgan Chase & Co, Research Division

Lauren Torres - HSBC, Research Division

Antonio Gonzalez - Crédit Suisse AG, Research Division

Lore Serra - Morgan Stanley, Research Division

Karla Miranda

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

Marisol Huerta Mondragon - Ixe Casa de Bolsa, S.A. de C.V., Research Division

Fernando Ferreira - BofA Merrill Lynch, Research Division

Marco Montanez - Vector Casa de Bolsa SA, Research Division

Operator

Good morning, everyone, and welcome to Coca-Cola FEMSA's Fourth Quarter 2013 Conference Call. As a reminder, today's conference is being recorded [Operator Instructions].

During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance that should be considered as good-faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.

At this time, I will now turn the conference over to Mr. Héctor Treviño, Coca-Cola FEMSA's Chief Financial Officer. Please go ahead, Mr. Treviño.

Héctor Treviño Gutiérrez

Good morning, everyone, and thank you for joining us today. As many of you are aware, during the fourth quarter of 2013, we continue to face a difficult consumer environment, mainly in Mexico and Brazil and currency volatility across our Latin American market. Nevertheless, our balanced geographic portfolio and our revenue management initiatives enabled us to deliver organic currency neutral revenue growth of 12% for the quarter. Our reported consolidated total revenues reached close to MXN 43 billion in the fourth quarter, including the noncomparable effects of the results from Grupo Yoli in Mexico and the operations of Fluminense and Spaipa, which were integrated into our Brazilian franchise in September and November of 2013 respectively.

Our consolidated gross profit margin was negatively affected by the devaluation of the currencies in our South American division and Mexico has applied to our U.S. dollar denominated input costs, which offset lower sugar and relatively flat PET prices in most of our franchise territories. With regard to our consolidated expenses, we continue to see higher labor and freight costs, especially across our South American division and more recently, freight costs pressures in our Mexican operations as well. As we have done throughout the year, we continue to reinforce our marketplace execution, enhance our returnable packaging base and foster our magic price points strategy to intensify our opportunities to connect with the consumers across our territories.

During the quarter, our net income reached MXN 3.1 billion. A larger debt balance resulting from our recent acquisitions led to higher interest expense. Moreover, the effect of the quarterly depreciation of the Mexican peso on our dollar-denominated net debt position, gave rise to a foreign exchange loss.

Now let's discuss our operations. In Mexico, an economic slowdown resulted in the deteriorating of the consumer environment through 2013. More recently, we experienced lower average temperatures, an increased rainfall over the last 4 months of the year. Our reported volume growth in Mexico for the quarter was 5%, including the non-comparable results of Grupo Yoli. Adjusting for these results, our volumes declined close to 1%, reflecting ongoing consumer dynamics and bad weather conditions. Organically, the personal water category grew 8%, driven by the Ciel brand and the non-carbonated beverage category remained flat. Moderately, [ph] Powerade grew 23% during the quarter and continued to gain share across sales channels. Our Mexican operation has focused on affordability through returnability to connect more closely with our consumers. Our returnable packaging portfolio grew 5%, gaining 180 basis points in our mix of a sparkling beverages. This increase was supported by 32% growth of our 500 milliliter returnable glass presentation. The recent introduction of our 3 liter returnable PET presentations for both brand Coca-Cola and del Valle of Mexico, and a 12% growth of our 1.25-liter returnable glass presentation. All of these presentations were complemented by a performance of our 2.5-liter returnable package for Sidral Mundet and del Valle of Mexico.

In Central America, we achieved 4% volume growth during the quarter. We delivered positive volumes in every country, especially our Guatemalan operation, which volume grew almost 8%. Growth in the region was mainly driven by 4% growth of brand Coca-Cola, coupled with a sustained momentum from the Jugos del Valle line of business and the 20% growth of Fuze Tea and the continued strong performance of Powerade.

For the fourth quarter, our reported Mexico and Central American division, total revenues grew 7% on an organic currency neutral basis, the division revenues grew 1%, reflecting lower volumes and an average price per unit case increase below the rate of inflation, which mainly resulted from a shift in our packaging mix to both returnable and multi-serve presentations.

Organically, lower sugar prices were partially offset by the depreciation of the Mexican pesos, as applied to our U.S. dollar-denominated raw material costs, resulting in a gross margin expansion of 40 basis points in the division. Overall, our division's organic operative cash flow margin expanded 30 basis points for the quarter, despite ongoing marketing investments and freight costs pressures, resulting from lower volumes and higher fuel prices. For the full year of 2013, our Mexico and Central America division delivered an operative cash flow margin expansion of 110 basis points. As many of you may know, as of January 1, 2014, the new excise tax on sugary beverages went into effect. These requires various companies to pay a MXN 1 per liter tax on any beverage that contains added sugar or fructose. As anticipated since January 1, 2014, we passed this excise tax on to the end consumer to an average price increase of 16%. In anticipation of an environment where many companies, in addition to those in the beverage industry, had to raise prices on account of increased taxes, we reinforced both our returnable portfolio and our one-way PET single-serve platform through 2030. Consequently, today, we offer our consumers a more robust and affordable portfolio to enjoy the most beloved soft drink brand in the world. We are confident that our amplified portfolio of returnable presentations, our magic price points strategy and our relentless focus on the point-of-sale execution will enable us to win in the marketplace.

In January, despite the pricing initiatives implemented and an aggressive competitive landscape, our market share of sparkling beverages remained stable across our territories when compared to the previous year. More importantly, in del Valle of Mexico, both brand Coca-Cola and our flavored sparkling beverage portfolio gained more than 1 percentage point of market share. Looking forward to the rest of 2014, our operator's consistent execution of our strategy positioned us well to capture marketplace opportunities and remain the preferred choice of our consumers.

On top of the initiatives we have implemented for our regular sparkling beverage portfolio and in the spirit of getting closer to our consumers, we are working to increase the point-of-sale coverage and packaging alternatives for our low calories sparkling beverage portfolio. It was unaffected by the excise tax and provides an additional alternative for our consumers.

Aside from our top line initiatives, we have been working to optimize our fixed cost structure in the beginning of the year. We will continue these efforts to protect the profitability and cash flow generation of our Mexican business.

Moving on to our South American division. Our operations' organic volume declined 2% during the quarter. This decrease resulted from our continuous soft consumer and macroeconomic environment in Brazil and certain operational disruptions in Venezuela. In Brazil, as of September, we are including the results from Compania Fluminense, and as of November, we are including the results of Spaipa, as well. As we entered the summer season in Brazil, our organic performance continued to reflect a soft consumer environment and heavy rain falls in our Minas Gerais franchise, coupled with lower temperatures of across our territories. Consequently, our organic volume in Brazil declined 11% for the fourth quarter.

During the quarter, we completed our portfolio strategy to intensify our connection with our consumers through magic price points for single-serve consumption and our affordable returnable 2-liter presentations. We launched a 200-milliliter one-way PET presentation for brand Coca-Cola at BRL 1, replacing our 250-milliliter presentation in the traditional sales channel. We reinforce the on-premise channel through our 300-milliliter one-way PET presentation at BRL 2. Additionally, our popular 12 ounce can will allow us to play an important role at the BRL 3 price points and finally, we are offering our 600-milliliter one-way PET presentations at BRL 4. Taking into account the recent launch of our 200-milliliter presentations, we are encouraged by the point-of-sale coverage and price compliance that our operators have achieved thus far. More importantly, our 2-liter returnable presentation for brand Coca-Cola grew 14%, supported by our team's efforts to increase the package of inflation [ph] and acceptance.

As a result, we increased the mix of returnable presentations in our portfolio to 15.5%, an increase of 160 basis points versus last year. In light to their positive results, we will continue to work to increase the point-of-sale coverage of these presentations to provide our consumers with a wide array of attractive alternatives to quench their thirst. As we have often noted, our organic infrastructure and marketplace investments, along with the integration of Fluminense and Spaipa, are testaments of our company's positive long-term view on Brazil. In the short term, a much anticipated sport event will allow us to generate momentum in 2014. The FIFA World Cup play -- to be played in June and July will not only drive incremental sales of our beverage during the event, but also more importantly, will provide the Coca-Cola system with a perfect opportunity to increase connection with our consumers in every event and promotions leading up to the World Cup. Thus far, our Minas Gerais [indiscernible] promotion has proved immensely popular with consumers and among many other promotions and events. We look forward to hosting the trophy tour in our territories during April.

Operationally, the start of 2014 is already encouraging. Our portfolio initiatives are making the right connection with consumers and coupled with favorable work condition, our organic volumes are up by high-single digits so far this year. Through the integration of the Spaipa and Fluminense, we have enjoyed the opportunity to enrich our management bench with a talented executive from these franchises.

For the rest of 2014, we are confident that our expanded operation in Brazil, bolstered by our another integral team of professionals will continue to work constantly to reinforce our marketplace execution and improve our operations top-line performance, supported by a more robust portfolio of offerings for our consumers, a simplified picture of success to our clients and selective price increases across our territories. We will continue to optimize our operating structure in the country, encouraged by the fact that we have already started to capture the benefits of our identified synergies from the integrated territories as of 2014.

Moving on to Argentina. During the quarter, we achieved more than 8% volume growth. This increase was mainly driven by the remarkable 30% growth of our flavor sparkling beverage portfolio, as our local operators prepare in advance to meet peak season demand, reducing out-of-stock indicators and improving delivery efficiency rates. Additionally, brand Coca-Cola grew 3%, supported by the recent launch of Coca-Cola Life and the performance of Coca-Cola Light and Coca-Cola Zero. Furthermore, our Bonaqua water brand continues to continue significantly to these operation's growth, successfully building on its launch in the fourth quarter and last year with solid growth performance. The non-carbonated beverage category grew 8%, driven by the successful launch of Fuze Tea and the Cepita juice brand. During 2014, we are confident that our Argentine operators will continue to perform well through the current consumer environment. Capitalizing on an improved operational structure and a strong portfolio of products and packages, while relentlessly focusing on cost discipline and efficiency optimization.

Moving onto Venezuela. During the quarter, we faced a considerable slowdown in our Maracaibo plant and distribution center due to our labor contract negotiation.

Consequently, these operation's volume was down almost 6% in the quarter. The non-carbonated beverage category grew 24%, driven by del Valle Fresh, which grew move 31% and Kapo, which grew 41%. Our bottled water portfolio grew 28%, supported by the performance of the Nevada flavored water portfolio, which was -- which has enjoyed great acceptance on more consumers locally. These increases were offset by a decline in the sparkling beverages. Year-to-date, we continue to see strong consumers' spending levels that are reflected in the positive volumes for this operation.

In the first 2 months of the year, our operation's volume has grown mid-single digits, successfully building on 2 years of important growth. Despite this soft macroeconomic and operating environment, we are confident that our Venezuelan team has the right tools and skills to better execute our picture of success at the point-of-sale, increase cooler coverage and maintain the flexibility to launch products and packages that will meet our consumers' demand.

In Colombia, our strategy continues to yield positive results. Despite a soft consumer and competitive environment, during the quarter, our volume increased 9%, successfully building on a 10% increase during the fourth quarter of 2012. Brand Coca-Cola grew 10%, driven mainly by the continued success of our 1.25-liter returnable glass presentation and the launch of additional multi-serve one-way presentations to cover magic price points for the consumer, and our affordable entry pack strategy. Del Valle Fresh and Fuze Tea continued to perform exceptionally well, growing 50% and 62%, respectively, during the quarter.

In the water category, Brisa and Manantial continue to deliver positive results, supporting 10% growth in this portfolio. We began 2014 on the right foot in Colombia, growing volumes at mid- to high-single digits, successfully building on a 6% growth in the first quarter of 2013. We will continue capitalizing on our Colombia strategy, fostering per capita consumption to better execution of the point-of-sale, increase cooler [indiscernible] and a more affordable portfolio.

At the South American division level, the local currency revenue management initiatives that we implemented in Venezuela, Argentina and Brazil, coupled with our positive volume performance in Colombia and Argentina, resulted in 21% currency neutral revenue growth for the division during the year -- during the quarter. The devaluation of each country's currency, as applied to our U.S. dollar-denominated input costs more than offset lower sweetener prices in the division and lower PET prices in Brazil, resulting in a gross margin contraction.

Operating expenses in the division continued to reflect labor and freight cost pressure in Venezuela and Argentina, changes to the transportation law in Brazil and increased marketing investments across the division.

With regard to our Philippines operation, volumes were down only slightly in the quarter, despite the typhoon that struck the Visayas region and our ongoing portfolio reconfiguration initiatives across the country. During December, we launched Minute Maid fresh orangeade, a new low-juice content beverage tailored to the taste of the Filipino consumer. Initially, we launched a 250-milliliter one-way PET presentation with great success and consumer acceptance. More recently, in 2014, we complemented this brand offering with a 800-milliliter presentation. Consistent with our strategy, we continue to reinforce our one-way PET offerings in the marketplace. During 2013, we completed the rollout of our go-to-market approach in the greater Manila Metropolitan area with encouraging results. In 2014, we will expand our route-to-market model to cover as much as 70% of the country's volume.

Now allow me to expand on our consolidated financial position. As of December 31st of last year, we had a cash balance of MXN 15.3 billion and our total debt was MXN 60.5 billion. Our net debt to EBITDA ratio was 1.58x and our EBITDA to net interest ratio was 10.6x, highlighting the strength of our balance sheet. Over the course of the year, we took proactive steps to further strengthen our capital structure, as well as to fund our investments and acquisitions. During the past 12 months, we have leveraged our flexibility and capability to issue approximately $3.1 billion in 3 separate transactions in

Mexico and international markets, at very attractive rates. Through this issuance, we performed the ability management strategies that enable us to expand our investor base and improve our debt maturity profile, lengthening the average life of our debt from 4 to 8 years.

Moving ahead, we will capitalize our proven ability to reduce debt, as we did subsequent to the -- our acquisition of Panamco 10 years ago to the levers of our company over the next few years.

Yesterday, our Board of Directors agreed to propose a dividend of approximately MXN 6 billion to our shareholders. This proposal now represents a dividend of MXN 2.90 per share, and we will paid in 2 installments during May and November of this year. As we shared with you recently, we continued to see the benign raw material environment for 2014, with PET prices remaining stable sequentially in U.S. dollar terms and sweetener prices below 2013 levels.

For the remainder of 2014, we will work diligently to achieve the synergies that we felt identified in our recently merged and acquired franchise territories. Despite the structural changes particularly in Mexico, to the excise tax on sugary beverages and Brazil, due to the new transportation law, we'll take advantage of our team's capability to adapt our operations to the new market dynamics, while remaining focused on the prospects presented by our markets. This strength of our operating team has led forward most category beverage portfolio and the robust profile of our geographically diversified footprint will enable us to embrace the recovery that we ambitioned in the upcoming future.

Thank you for your trust and support. And operator, I would like to open up the call for the questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Alan Alanis with JPMorgan.

Alan Alanis - JP Morgan Chase & Co, Research Division

The first question I have regarding working capital in 2013. I think -- I mean, you had a consumption of almost MXN 900 million during the year. How do you see this going forward for 2014, Hector?

Héctor Treviño Gutiérrez

Yes, indeed, as always, we have paid a very strong attention to working capital. I don't think that there is anything to worry in these numbers. Basically, this is our reflection of 2 main issues. One, and most importantly, is the Venezuelan situation, where our inventories are increased because of the scarcity that we find in that environment. So if we were to have normal inventory levels out of that MXN 900 million that you had mentioned, I'd say between MXN 500 million to MXN 600 million have to go that situation in Venezuela, prior inventories of raw materials and the spare parts, because again, since there is scarcity in the marketplace, every opportunity we have to buy these products to basically have stability in our operations in terms of the ongoing operations and continuing operations. We have been taking those steps. The second element, Alan, is that we are incorporating the Spaipa [indiscernible], so that in September and November. So we have the working capital needs of those businesses and still on the revenue side, on the profitability side, they're still just starting to reincorporate -- the inventories and the accounts receivables and everything it's a one step change that you see. So I do not put a lot of attention to those issues and then I don't think that there is any strange other than the Venezuela situation that I just explained because of the scarcity that we are seeing in the marketplace for some of these spare parts and raw materials that we need to build higher inventories to ensure the continuity of our business.

Alan Alanis - JP Morgan Chase & Co, Research Division

Yes, that's very clear now. A couple of very unrelated follow-ups coming on 2 different -- 2 totally different topics. One of them is you raise prices by 16% year-to-date in Mexico, could you comment on the volume trends that you are seeing year-to-date also in Mexico in any kind of expectation that you may have for the year? And then, last, very unrelated question as well, any comment that you might have on the U.S. refranchising, this announcement that the Coca-Cola company made last week, whereby the directory of Chicago and Tampa were given to this beer distributor and this other entrepreneur. How do you envision the role, if any, if in Coca-Cola FEMSA, if their refranchising continues and what should we read that in this process, none of the Latin American bottlers, you being the largest one, did not participated?

Héctor Treviño Gutiérrez

Alan, let me start first with the volume trends. As you said, we increased prices around 16%. Say that the impact of the excise tax, we call for an increase between 13% and 14%. So we have 2 or 3 extra points. Basically, as an effect of rounding off to the prices to convenient price points, rather than having a traction of peso amount. And also to recapture some of the inflation that we have in the year. I think that the important trends here and that was reflected in the softness that we saw during December in Mexico. During the fourth quarter, we have a good October and good September, and December we saw some pressure on the volumes, mainly as a result around of the fact that we did some price increases towards the end of November, beginning of December, in anticipation of these excise tax. Most of our competitors started to adjust prices during January. We did a subsequent price increase in January and we think we have do some other price increases probably by mid year. That's basically to cover -- to fully cover excise taxes. And as I've mentioned, getting to the convenient price points or what we call the magic price points. The good news is that most of our competitors have increased prices now to more reasonable levels. So whatever price gap that we have in the past, we are basically seeing those price gaps maintained. You might find some changes by package, specific packages were either Pepsi or RC Cola or [indiscernible] have some presentations at certain prices and maybe in that presentation, we are offering a price gap, but in others, we are reducing pricing gaps, important -- for example, Pepsi the 2-liter presentation that they have we're importantly reducing the price gap in that size. So I think that the message is beginning of this year, we are more or less on the level field with some variations in price gaps in the specific packages, but in general I say that we are in the level field. The volume trends are pretty margined in the level that I mentioned in the last conference call of our expectation for the year, 5% to 7% reduction in volumes, that's more or less where we are. I think that in general, as we mentioned, we are seeing [indiscernible] of market shares, we are seeing some improvements for our brands because of the strength of the brands. So that calls for the industry, and also to see in reductions basically on those amounts. With respect to the U.S. refranchising, I think, we saw the news. We have [indiscernible] in the past, we need to understand what will be the relationship vis-a-vis the Coca-Cola Company in this process going forward. When these franchises happens -- from what we are reading from the press release because you probably have more information than us and this is a more recent contract.

Alan Alanis - JP Morgan Chase & Co, Research Division

Yes, they are.

Héctor Treviño Gutiérrez

Company will supply the finish product. So it's a different arrangement of what we are used to in Latin America. And as always, we will have our, all of our screens and radar targeted to understand what is happening in this market and see how that is evolving. I think that is too early to really conclude what the strategy of the Coca-Cola Company will for the U.S. and this is just market of Chicago and Tampa, it's strengthened in the sense that vis-a-vis in the distributor and the entrepreneur. We have seen in the past of movements, where they are -- have assigned some of these territories in similar conditions to other U.S. bottlers, and I do believe that at the end of the day, once the strategy is announced and the process starts, I do believe that some Latin American bottlers will be also invited to take a look at this. But as I said, we need to understand the conditions of this -- the commercial conditions vis-a-vis the Coca-Cola Company in this process going forward. We will continue to focus in Latin America as you can imagine and to turn around the Philippines, and then look for opportunities in the Philippines. And I think that's what I have to say in the M&A front. And I don't know if...

Operator

We'll take our next question from Lauren Torres with HSBC.

Lauren Torres - HSBC, Research Division

Just a follow-up on Mexico. Obviously, you're coming off at top of your last year, to explain that the price increase is based on the excise tax on beverages. Just curious, Hector, about -- how you think about full year? Is that 5% to 7% achievable for the year? And then I guess, thinking about it a little further, you talked about some initiatives. I wondered if that's enough to kind of keep margins stable for the year or how are you thinking about the environment in 2014? Do you have enough offsets to kind of get through it or is the consumer still tough right here and there's not a lot of opportunity to grow in the market, particularly from a profitability standpoint?

Héctor Treviño Gutiérrez

Yes, I think that in general, I mean, as you can imagine, basically at the end of February, it's still kind of early to fully understand the impact of this tax initiative in Mexico. Our operators and our plan and our budget basically is work with this idea that the 5% to 7% reduction in volume is going to happen. As I mentioned in the last conference call, that calls for very strict costs control. We're estimating -- and I did mention this last time that we at this conference call. We are estimating that with 5% to 7% volume reduction, we'll have extra capacity in production plans and in distribution centers, and in all this supply-chain basically, some troughs. So we are adjusting a lot of our CapEx for this year. We are looking at the reduction in headcount. And as I mentioned during the last conference call, potentially closing down some production facilities also. And with those efforts, we believe that a reduction in that volumes of 5% to 7%, we will be able to maintain the profit margins. Obviously, it's 5% to 7%, obviously, the last unit cases that you sell are the most profitable. Those are the golden cases. So we need to do [indiscernible] cost control and cost reduction, be able to maintain margins. As our plans for the year is to do all the effort to even in spite of this volume reduction, we have maintained margins or probably, we will slightly [ph] margins.

Lauren Torres - HSBC, Research Division

And can I extend that question to Brazil? Obviously, you had a really tough fourth quarter, but you said year-to-date, things are looking better and I know weather has been a benefit. But for that market, do you think you are seeing some improving trends? Is it just more a result of the weather? Or do you think you're actually seeing some improvements in consumer levels?

Héctor Treviño Gutiérrez

In general, what we're seeing in Brazil is very encouraging in the first 2 months, that -- during this mutual remarks up to [ph] weather. Like to think that a lot of [indiscernible] capabilities and all of the end of that year are adjusting our portfolio to the market in [indiscernible] coming back to the category in general. This is also a market share as last quarter. We are starting to see [indiscernible] of January, with some improvements in market share again. And in January and February, we are seeing 5 single-digit of volume growth, which is difficult to predict if that will stay for the rest of the year. We're seeing very, very encouraging result. Again, with margins and volumes at level, high-single digits the same that I mentioned to Mexico, but the reverse. This is golden cases that bring bunch of profitability in operations in Brazil and we are seeing that going forth in the expansions of margins, so far in January and February. [indiscernible] annually big months and then we have carnival. At World Cup there will also be an opportunity to collide with the consumer importantly. And one important trend, I like to mention here in Brazil. The market share that we lost during last year have a more to do with the fact that, generally, in the industry sparkling today where things growing importance or we have a lower market share in that. So when you look at category by category, we look [indiscernible] basically we are flat and in the sparkling, we're basically flat to slightly negative. But the total mix, they have also started to grow importance with more the industry, total [indiscernible] solution for that equation is that this year, our market share reduction in our company, because we are much more important for us, but in category by category, market share numbers are very stable. So in general, Lauren, I'd say that very high costs for Brazil and a very tough comparisons versus [indiscernible]. Our easy comparison versus 2013 because we have a very tough year in 2013. But in general, we are seeing as I mentioned, volumes grow in January and February highs, low-medium to high-single digits for the year, as we call for [indiscernible] as well as in Mexico, we're working very closely with our operators at very efficient supply chain, although we are seeing production plant in all territorial Brazil, and will call for additional efficiencies -- financial efficiencies dilute of closing distribution centers and maybe even a production plant of the new territories. And we'll -- we're working very closely to see that we would achieve targeted synergies. We mentioned that in a few months to achieve the somewhere around $50 million synergies. Working on that front, positive news also in Brazil is that the team of professionals that we found in Spaipa and Fluminense are [indiscernible] very good. Most of them are staying with us and taking new positions within our operators -- our operations. And I think that current having a talented team of Brazilian professionals in [indiscernible] potentially is a very positive news for Brazil.

Operator

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

Antonio Gonzalez - Crédit Suisse AG, Research Division

Actually, I just have 2 questions. First one was on Venezuela. I saw in the recent development section of your press release that you talked about different exchange rates. I just wanted to make sure I got it completely right. Could you let us know what's the percentage of your raw material that you are importing at the official, and how much is the parallel exchange rate in Venezuela? And to the extent that it's possible, whether you have any comment on what would be the percentage going forward. And then I have a quick follow-up question.

Héctor Treviño Gutiérrez

Sure. In Venezuela, we continue to face and that's related to the inventory question that we mentioned at the beginning with the working capital and the type of inventories in Venezuela. In Venezuela, we continue to export -- excuse me, to import 100% of our raw materials at the official exchange rate. It's taking very long for us to pay and a lot of patience for our suppliers because they can -- we have been expanding some of those payments for them because we entered all the process. We get authorization to import the raw materials, and then payment is sometimes delayed for -- well behind the official of the agreed payment dates. So far, the suppliers have been working well with The Coca-Cola Company, and we have been working obviously very closely with them for them to show support in these difficult times. They know that we are getting -- at some point in time, we are getting the dollars out of the Central Bank at the official exchange rate. And we -- we are basically asking for their patience to wait for us. But 100% of the raw material that we are buying, it's in all at the official exchange rate. Very minimal things that have been done outside of the Central Bank, mainly -- well, we don't get authorization for the importation.

The first process in getting that authorization is that you need to ask and demonstrate to the authorities that the product is not available as well. So we have been moving to Venezuelan suppliers in some cases. And remember that in our case have not been the owner of the brand calls for a lot of authorization process with the Coca-Cola company, but also has been helping us in this process. So we have been changing some suppliers to local suppliers. But I'll say that 99.9% of our imports are at the official exchange rate.

Antonio Gonzalez - Crédit Suisse AG, Research Division

Secondly, if you don't mind, I wanted to ask a more strategic question regarding capital allocation. And basically, the question is whether you have been considering buying back your shares? And coming from the angle of at the end of the day, when we see the M&A activity that took place in the last 2 or 3 years, which obviously while transformational in many dimensions, yet it took place at a multiple that is probably higher than what the multiple is for the publicly traded bottlers today. We saw transactions as high as, I don't know, maybe 16x in Brazil. Obviously, that is impacted by goodwill amortization and some other considerations. But when you look at the correction in not just Coke FEMSA shares, but across the industry, when you think of the optimal capital allocation, I guess there's some additional elements like CapEx probably not increasing this year because of the adjustments that you mentioned earlier, regarding the excise tax implementation in Mexico. Both more really coming from the angle of [ph]Coke FEMSA is thinking of allocating cash efficiently. Is there a reason why it wouldn't be attractive to buy Coke FEMSA at a much cheaper valuation under the transactions that took place in the industry over the last, I don't know, 2 or 3 years?

Héctor Treviño Gutiérrez

Okay. Let me go into this. Obviously, that kind of analysis will always be to look at those opportunities, and we do analyze that in our planning process and with our finance committee. Let me mention 2 or 3 issues that are, at this moment, against doing a share buyback, important share buyback. One is that -- and probably the most important way now is with the acquisition we did last year, the amount of debt that we have in our balance sheet has grown importantly. And so we still have a very healthy margins in terms of levers and interest covers. But similar to what we did 10 years ago when we did the acquisition of Panamco, the signal that we have of the structure that we have from our finance committee is start the levers in the company importantly, so that we don't have any, let's say, financial risk on top of the operational risk that is embedded in the integration of new territories.

So first of all, at this specific moment in time in 2014, we do want to reduce debt importantly. One of the rating agencies, I don't remember if it's Moody's or S&P, had us with a negative rates because they want to see gross debt to EBITDA around the 1.5 level. We are slightly above that level. And when you look at net debt to EBITDA, we are well within that number. But I think it's important that we take care of the rating agencies, and we are doing everything in our -- that is in our power to maintain those ratings that we have. I think that having those ratings has allowed us to look for credit very swiftly and efficiently in the marketplace and therefore there is this consideration of maintaining the rating metrics.

Another element here is that this year -- or the second element would be that during this year, we are in the final process of final -- final process of terminating the investments of the new 2 plants, one in Brazil and one in Colombia. That calls for an extraordinary CapEx this year on top of the ordinary CapEx of around $200 million. So even though we are reducing our CapEx needs in most of our markets, especially in Mexico with the reduction we are anticipating in volume, we will still have somewhere around $600 million to $700 million CapEx number for this year, including these 2 operations.

The number might be a little bit higher, but depending on how do we invest in coolers and bottles and cases, so remember that. As we are fostering or improving our lot of the efforts of returnability, we are investing -- I mean more important than previous years on returnable bottles and case. So my estimate is somewhere around $600 million, $700 million on sales. It could on be a little bit larger or a little bit smaller, depending on how we're doing during the year. So that's the second consideration for this year. And the third, Antonio, that I think that even though the liquidity of Coke FEMSA has increased importantly because we have invited new shareholders and we expanded the percentage of our float and the market capital of the company if we compare it to other years in the past has improved obviously last year. I've seen a reduction in the market cap. I think that the fact that we are part of the indexes has helped us a lot on the liquidity of our shares. It took us a lot of time to be part of the Mexican Bolsa Index, I feel we need to take care of that also going forward. And that's also a consideration when we look at share buybacks.

Operator

We'll take our next question from Lore Serra with Morgan Stanley.

Lore Serra - Morgan Stanley, Research Division

I actually wanted to ask 2 questions. I'm going to ask them one at a time. In Mexico, can you just confirm that, that 5% to 7% drop you're talking about for year-to-date, that's on an organic basis or does that include yearly in this period not in the year ago? And then just the question I really have is on the operating expenses. And I'm looking at the fourth quarter and the year numbers and the growth in operating expenses was really high, 18%. And I see the depreciation and amortization up a lot. I'm not sure why, and I don't know how much of that was the 18%. But I'm just trying to understand why the operating expenses went up so much last year. And then, as you look to this year, I would guess that you're going to see a pretty strong shift in the returnables, given that the pricing you've had to take. And that's higher cost to sort of to move around. So I'm wondering kind of how you're thinking about -- or where's the confidence coming from what in terms of the operating expense containment next year, given those 2 factors?

Héctor Treviño Gutiérrez

Well, the trend for the 5% to 7%, it's what I mentioned and it's organic. We started January a little bit with the effect of the inventory buildup that we saw at the end of December. So that calls for a very bad December because, as I mentioned, December was a negative. In Mexico, October and November were more or less flat numbers. And then December was a negative number in volume. Including the fact that there was some inventory buildup because of the new tally of what's going on in general. So at the beginning of January, volumes were substantially lower than that level, the 5% to 7%. We are seeing that number improve. We have seen some very encouraging dates when we compare on a daily basis, where the number is not that difficult from -- the difference coming from last year. But in general, 5% to 7% when I'm referring to that is in organic basis.

In terms of the OpEx, I think that it was more a reflection of some adjustments that we found during last year, meaning the fourth quarter of 2012, where even though we were making efforts to adjust our marketing expense so that we don't have variation on a month by month basis, the final number for the year was more than what we were anticipating in 2012. So we have an unusually low market in expense during the fourth quarter of last year. That's why when you look at the full year numbers, the comparison is not as dramatic.

And the other effect that you have there is that as we are investing heavily on returnability and in coolers, our depreciation expense is increased. I don't have a specific breakdown in mind by now to do [indiscernible] come March of this is because of one thing or the other. But I do see a more stable 2014 in that respect. I know that we have been saying this for many years, but believe me, the efforts are there in the company. We have been reducing headcount, especially on the sales and distribution area. I think that there's some work still to do going forward. And with respect to returnability, I think that you're right. I mean, part of the increasing freight expense has to do with the fuel cost, and returnables have to go back and forth to our production plants. So there is a little bit more expense in that, but the fact that you are re-using or re-utilizing the bottle also calls for reasonable margins in that presentation, seamless to what we have in one ways, including the additional expense that is regulated to that. Obviously, the difficult part, which is always a challenge and that we think that we are very good at is taking good care of your bottles and cases, because if they don't come back to your production plant, it's a very expensive proposition. That's why we believe that in some markets, our competitors are not necessarily on the same page in terms of this knowledge of how to manage returnables. I will not be scared of the returnability. I think that it's -- that we will be able to have very good margins with that and protect the price points that we want to protect with this returnable products. Like for example, this 500 milliliter returnable glass in Mexico at MXN 5 is very, very powerful. We have seen growth, that presentation grow, in excess of 30%, obviously, from a very small base. But I think that is very, very important in our strategy going forward.

Lore Serra - Morgan Stanley, Research Division

Okay, that's really helpful. And then just in Venezuela, I know the situation is very uncertain. If you could help us understand kind of -- with that extra inventory, how much days of supply do you think you have? And if you could also help us understand to how to think about this issue of the exchange rate. I mean, some of the companies are starting to translate at different rates, most of the [ph] are still at the 6.3 rate. I guess, your positioning is that as long as you can get it at 6.3, then you'll continue to translate at that rate. But at what point do you -- or what causes you to shift the assumptions -- not the assumptions, what you do for reporting purposes, because it seems like that that's going to happen at some point. I don't know. Is it just a matter of you stay at 6.3 until you can't get all the permits? Or how should we understand that issue?

Héctor Treviño Gutiérrez

You're raising a very good point, a very sensible -- Let me try to be helpful here as always. We have been discussing the issue of the convert --- of the exchange rate that we need to use for the conversion of the financial stakes. We're using the 6.3 rate. We've discussed very thoroughly that with our auditors. We know that some other companies are using a different rate. We believe that in those cases, what we have seen are cases of companies that are not necessarily related to the whole industry. It's more like the Procter & Gamble and the -- and some [indiscernible]. And in some cases, they don't necessarily have manufacturing facilities for those products in Venezuela, so they need to import finished products from the outside. And obviously they're probably not getting the official exchange rate for that. In our case, we disclosed in yesterday's board meeting and in the auditing committee, very thoroughly that we see it as recently as not this last Friday but the Friday before, we received $20 million of payments that were for our suppliers at 6 30. We even received out of this $23 million what we received, 2 of those were still at 4 30 and they gave us because these were invoices that were there in the Central Bank in [ph] for close to a year. So they respected the fact that we introduced this request for FX a year ago and they gave us the amount for this bottle caps at 4 30. So the argument for using the 6 30 is very strong. We know that there is a lot of pressure and there is this new change in the convertibility loss in Venezuela where -- I fear there will be some so called permutas or exchanges amongst particulars. We don't know exactly how that's going to work. In the moment, we have, and we have not had so far, access to foreign exchange for dividends. We need to use that exchange rate for dividends. The impact that we will have, on the translation effect, you noted the numbers from Venezuela because we need to report that on a yearly basis and on our 10 20 F. It's probably somewhere around MXN 1 billion. It would translate at 11 as opposed to 6 on the translation of P&L. That, potentially, could be the impact of -- on our P&L, of a change of that nature. But so far in very throrough discussion with our auditors, 6 -- there are a lot of reasons why 6 30 should be still applied in our P&L as I mentioned in our translation of the numbers. As I mentioned, close to 100% of our raw materials near are being supplied, at this exchange rate. Very recently, as I mentioned, 10 days ago, we received 20 more million dollars that cover basically 2 or 3 months of needs of our supply of raw materials. And we would need to value month by month when and if we supported to use a different exchange rate.

In terms of the number of days, it varies by raw materials,Lore. Let me give you some ideas. In some cases, like in concentrate, we have many days of inventory because we have -- obviously the relationship with The Coca-Cola Company and the IPO of maintaining all the business continuity that we both want to maintain in Venezuela. In some, raw materials like caps, bottles, we are very short on inventories. We are closely basically suggesting that inventories archiving 6 to 10 days inventories. [indiscernible] is I'll say is somewhere around a month, and it's similar to sugar. But it varies month by month. As we have opportunity to buy some of these raw materials, we take the opportunity and build up inventories.

Operator

We'll go next to Karla Miranda with GBM.

Karla Miranda

Hector, I was wondering if you can comment a little bit about pricing in South America. So far in 2013, it seemed that -- well, it didn't seem. It was a fact that the price increase implemented for local currencies weren't enough to offset the FX effect. So we -- I was wondering if we should witness further price increases in order to offset this negative devaluation of local currencies in South America? And second of all, I was wondering if you can comment about the effective tax rate for 2014?

Héctor Treviño Gutiérrez

Yes, I think that in general, you will see in South America, other than Mexico, obviously because in Mexico we already spent and we increased. Prices are on 16%, which is much higher than inflation, but we have the tax -- the excise tax situation. We do believe that in South America, we need to increase prices with inflation. Sometimes the FX does not necessarily match the inflation numbers, and that's why -- when you see some distortions. But in general, our objective is to -- and we think that we have the flexibility to move price with inflation or none of our operations. And so I will not see -- I'm not seeing any pressure on it because of our competitors in the pricing front in Latin America. With respect to tax rate, we will see a slight increase in the effective tax rate. Somewhere close to 33% would be a good number. The slight increase is basically because of the tax reform in Mexico. There would be some expenses that are now not 100% tax deductible, and that will increase a little bit our tax rate. But remember, that in Brazil we have the probably the effect of this amortization of goodwill. And obviously, the effect of the new debt that we have now in the company reducing the tax burden for the company. But while you take into consideration all of these numbers, the effective tax rate will be somewhere around the 33%. Okay?

Operator

We'll take our next question from Luca Cipiccia from Goldman Sachs.

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

I also would like to go back a bit to Brazil. I think you made some comments before on the profitability you're expecting for 2014, but the line wasn't great. So maybe, if you can elaborate a bit more on that. And also on Brazil, as time has gone on, when would you think we may hear on incremental potential synergies on [ph]spy but the target initially was relatively low? So you've been a few months into the integration, into the conclusion of the transaction, so curious to know if there will be some news there? And lastly, given the volatility of the currency in Venezuela, in Argentina and the size of Brazil in the LatAm operation, is it plausible to think that you will maybe report the region separately at some point so that it's easier to track the progress on margin on top line and on the improvements as well with the integration. That would be my questions, please.

Héctor Treviño Gutiérrez

Yes. I think that in general Brazil, we are seeing high single-digit volume growth numbers so far in January, February. And we expect somewhere between mid single-digit to high-single digits for the rest of the year. I think that we will see improvements in the margins in Brazil definitely. I believe that the reduction that we saw last year, we saw an important reduction in the EBITDA margins and EBIT margin and EBITDA margins. I don't know if we are going to break 100% of the reduction in margin, but certainly, we'll make a good inroad in integrating part of that. We are seeing that trend in January and February, and I think that it's important that you have that. Synergy wise, we are working very well with Fluminense integration. We are well on track. We had that work integrated in September. Spaipa, we are well on track on that, but it's still too early because we basically finalized this integration in November, we are in the process of finalizing the organization. As I mentioned, we are staying with a very good talented group of professionals from Spaipa and [indiscernible], but it's too early for us to change our expectation on the synergies from Spaipa. So somewhere around, as I mentioned, the $19 million in [indiscernible], 33% in the Spaipa is still the target number that our executives have there. I'm certain that at some point in time, we'll be able to disclose these with [indiscernible] and probably change our expectation

on that as we find more opportunities. I agree with you that in paper, 33 million for Spaipa looks a little bit smaller, although it's an important element for the synergy going forward. And in terms of the volatility of -- that we are seeing in Venezuela and Argentina, especially on the currency, we don't see that in Brazil. Yet, Brazil is obviously now a very important element of our company because of -- we increased the size of our operation there basically by 40%, and it's very large now. Venezuela, we do have to report separately as a separate region on a quarterly basis on [indiscernible], with some indicators basically [indiscernible] because of the exchange control. I think that we are still far from that in Argentina, because inflation numbers, although being higher now, is still far from hyper-inflationary accounting, which is one of the elements why Venezuela has to be reported separately in our [indiscernible] FX control. But as always, look, we try to provide information in terms of the top line and volume and the consumer trends on a region-by-region basis. So far I don't think that we would necessarily open financial statements on those sectors going forward.

Marisol Huerta Mondragon - Ixe Casa de Bolsa, S.A. de C.V., Research Division

For Brazil, specifically, you don't think you will isolate the numbers just for Brazil in the future? For profitability, growth and -- like you do for the region of the world today?

Héctor Treviño Gutiérrez

No. We do not have plans to do that so far.

Operator

We'll go next to Fernando Ferreira with Bank of America Merrill Lynch.

Fernando Ferreira - BofA Merrill Lynch, Research Division

I had 2 questions, actually. First one, can you comment when you look in the volumes in different categories in Mexico so far this year, are you seeing some shifts or growth in categories Like Water or Coca-Cola Light and diet presentations? Or you're seeing declines across the board?

Héctor Treviño Gutiérrez

Yes, no. We are seeing certain trends where you have some of the America products declining on a faster pace. We are too seeing some improvements in the mix of non-calorie products. Then we give you basically -- although it's very small compared to other countries, Mexico, non-caloric 5%, somewhere around 3% to 4%. Now we think that number and obviously [indiscernible] we're seeing an increase of non-calorie products on the volumes on non-caloric 5% during those 2 months versus our reduction in [indiscernible] of an a little bit more than 7% decline that I mentioned. In total, the company's is between the 5% to 7%, but we are seeing non-calorics growing, Water growing, and basically seeing these and juices and nectars mainly because of the price changes that we've seen. Remember, that one that one of the strategy that we have is that Coca-Cola Light price parity will brand Coca-Cola because it's [indiscernible]. Coke Zero is sustained below the price of Coca-Cola because since it's not affected with the tax, we are staying with that price point, which is a different strategy again that Coca-Cola Light is not being taxed but we are increasing the price because of the premium-ness of that brand. So we are seeing some shift in the drinks of the different categories within the soft drink category.

Fernando Ferreira - BofA Merrill Lynch, Research Division

And I have another question. I don't know if you already mentioned it. And I apologize if you did. But I want to understand also in Mexico, what's the strategy for branding, advertising this year? And also how do you think about SG&A. Do you see SG&A being sustained at the same levels we've seen for the last few years or will we have some extra support from the Coca-Cola Company in terms of advertising?

Héctor Treviño Gutiérrez

I think that in general, Fernando, I think that we will be very cautious with the market -- with the expenses on marketing expenses. But in general, whenever we have this kind of situations in countries like the new tax in Mexico or a currency movement in Argentina, normally you see a continuation of the marketing the strategies because we believe those are the opportunities when you capture important inroads in the market. So my answer will be we are going to make purchase, but you will see similar levels of marketing expenses throughout the year. The only caveat for that in Mexico is that as we see volumes declining, remember that part of the investment that we do in coolers goes to the marketing side, which is a marketing asset that we use, and it's reflected there. Coolers, we will continue to invest, probably not at the same pace because we will have some extra capacity in the cooler, though we have already. So we'll see a lot of activity of redeploying the assets that we have to points of sale that are performing better. And that will call for a slight reduction on the marketing expense in Mexico just because of a lower level of marketing assets in the market. It is important that we bear in mind that in every crisis that we have had in Latin America in the past, the company continues to invest on these marketing assets and [indiscernible] advertisement. And we have benefit from that in the past. [indiscernible] work off -- that normally calls for low marketing expenses. Around the world, this is an event that Europe and America and Africa and Asia basically behind that. And generally, I'll say that we will not see the kind of operating expense growth that we saw here in the fourth quarter. As I mentioned, it was a little bit basic results. [indiscernible] marketing expenses in 2012 and we'll see a more normalized OpEx going forward.

Operator

We'll take our final question from Marco Montanez with Vector.

Marco Montanez - Vector Casa de Bolsa SA, Research Division

Could you share with us the -- what are the exchange rates for 2014 from the currencies in Argentina, Brazil and Venezuela, please? I mean, in particular, in the case of Argentina and Venezuela, do you have any stress scenario for the expected rates? And the second one, if I may, regarding the freight cost in Mexico, could you give us more color about it? Is there any regulatory impact or increase in the fuel prices?

Héctor Treviño Gutiérrez

Let me go to the rate. They are basically -- budgeting process are exercises. These are exercises where we use some sensitivities and we do several analysis for the potential changes in that. And basically, we have, in our analysis, and we use ranges for that. We are assuming a 12.8 average exchange rate for Mexico that by now it's our economist estimation [ph] for the year. And of the real, we are somewhere around the level where it is right now, 2 35 to 2 40. And in the Venezuela exchange rate, we are using somewhere around the 9.8 exchange rate. But this is just again, just for budgeting purposes and in some scenario statistic. Very difficult to obviously predict what these numbers will be but more or less our estimate. But in Argentina, around 9 to 9.2 number that are now 9.7. Those are more like the averages that we have in the countries. I didn't follow on the second question. Were you referring to sugar? [indiscernible] If you can repeat second question.

Marco Montanez - Vector Casa de Bolsa SA, Research Division

Yes, of course. Regarding the freight cost in Mexico. I don't know if wanted to share it with us if there's any regulatory impact or increase in the fuel prices. I mean, at the end of the last year, there was some regulatory reforms in Mexico in order to have some changes in that activity. So well, I don't know if you can give us more color about it.

Héctor Treviño Gutiérrez

Yes, I'm sorry. Now I understood. In terms of freight, we are seeing some -- it's modest -- there's a slight pickup in freight expenses, and it has 2 main variables. One has to do with the increase in fuel prices, but in Mexico, it's adjusted every month and it has been increasing importantly. And the other element of those smaller, it's also important to take into consideration our mix on returnable continues to increase because we are going behind this strategy of carving affordable prices with returnable presentation. Returnable -- the D&A of the returnable calls for going back and forth to the marketplace and the plants. And that would also imply some extra freight expense. There is nothing special in the regulatory front. That has been talks of limiting the size of the trucks. Nothing definitely. But remember that most of the freight that potentially could be affected by that is done third parties. So we'll assume that we'll adjust to whatever regulation there is in that front. But what we have in our P&L reflected in 2014, is a slight increase in freight, mainly as a result of fuel prices. And a little bit because of the increase in returnable mix.

Operator

This concludes today's question-and-answer session. I'd like to turn the call back to Mr. Treviño for closing remarks.

Héctor Treviño Gutiérrez

Thank you for the interest in Coca-Cola FEMSA. And as always, Jose and Roland are available to answer any remaining question that you may have. And we look forward for another conference call in 1.5 months as this first quarter numbers are coming very soon. Thank you.

Operator

This does conclude today's conference. We thank you for your participation.

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