Coca-Cola FEMSA S.A.B de C.V. Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Coca-Cola FEMSA, (KOF)

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

Q1 2014 Earnings Call

April 30, 2014 12:00 pm ET

Executives

Héctor Treviño Gutiérrez - Chief Financial Officer and Chief Administrative Officer

Analysts

Lauren Torres - HSBC, Research Division

Lore Serra - Morgan Stanley, Research Division

Karla Miranda

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

José J. Yordán - Deutsche Bank AG, Research Division

Alexander Robarts - Citigroup Inc, Research Division

Operator

Good morning, everyone, and welcome to the Coca-Cola FEMSA's First Quarter 2014 Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions]

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

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

Héctor Treviño Gutiérrez

Good morning, everyone, and thank you for joining us today, as always.

During the quarter, our balanced geographic franchise profile, the strength of our beverage portfolio and the brand equity of Brand Coca-Cola, combined with our revenue management initiatives, enabled us to deliver organic currency-neutral revenue growth of 20% for the quarter. Our company delivered these results in the face of structural changes and a difficult consumer environment, mainly in Mexico and Brazil, coupled with currency volatility across our markets.

Our organic gross profit margin expanded 130 basis points during the first quarter. Lower sweetener and PET prices in most of our territories were partially offset by the negative effect of the currency devaluation in our South America division and Mexico, as applied to our U.S. dollar-denominated input costs. Our organic EBITDA margin expanded 120 basis points, despite continued higher labor and freight cost, especially across our South American division.

Despite this challenging environment, as we have done throughout the years, we continue investing in the marketplace, reinforcing our returnable packaging base and improving our pricing of textures [ph] to connect with consumers every day across our territories.

Of particular note, as of the first quarter of 2014, we decided to use the SICAD exchange rate in Venezuela to convert these operational results into Mexican pesos. This exchange rate was VEB 10.70 per U.S. dollars as of the end of March, and it will adjust according to the exchange rate resulting from each weekly auction.

Now let's discuss our operations. In Mexico, we have experienced a slowdown in GDP growth, reflecting a continued weak consumer environment, driven by lower disposable income levels. Higher taxes and price increases across consumer staples have affected consumer spending practices, especially in the lower socioeconomic levels. Our organic volume in Mexico contracted more than 12% for the quarter, resulting from the effect of the price increases implemented to pass along the excise tax at the beginning of the year, as well as the ongoing weak consumer dynamics. Despite these price increases, our average price per unit case in Mexico, which is presented net of taxes, did not cover inflation for the quarter, and as such, we have implemented an additional increase as of the end of March.

Despite our declining volume for the quarter, we are seeing positive trends in certain categories. Organically, while regular sparkling beverage declined 6%, low-calorie sparkling beverage increased more than 8%. Especially, we saw 14% growth of Coca-Cola Zero. As this brand was not affected by the adverse excise tax, its growth reaffirms that some consumers are looking for more affordable alternatives and our company has the right portfolio to satisfy these consumers' preference.

Notably, on an organic basis, our returnable packaging portfolio gained more than 340 basis points of our sparkling beverage mix, underscoring consumer preference for our brand's more affordable packages.

Additionally, our 500-milliliter returnable glass presentation, which is sold at the attractive price of MXN 5, grew more than 45% during the quarter, enabled us to shift volume to single-serve presentations.

Organically, the personal water category grew 3%, driven by the Ciel brand. The noncarbonated beverage category contracted 3%. However, within this category, we saw consumers moving to more affordable products such as Valle Frut orangeade, which grew 3%.

To navigate this soft environment, our Mexican operation continues to emphasize returnable, low-calorie and single-serve sparkling beverages as compelling alternatives to connect more closely with our consumers' needs.

Despite the pricing initiatives that we have implemented and the increasing competitive landscape in Mexico, our share of sparkling beverage market remained stable across our territories compared with the previous year, reflecting the industry's contraction during this period. To compensate for the effects of the excise tax, we have proactively implemented portfolio and revenue management initiatives that have enabled us to maintain our top line in this difficult scenario.

Additionally, to contain costs and expenses, we have implemented transformational initiatives in our Mexican operations. During the quarter, we downsized our headcount in Mexico, including shutting down 1 production facility and 3 additional production lines in the country. Moreover, as anticipated, we have also reduced investment in new coolers by more than 50% and brought [ph] back entirely on purchases of distribution trucks. Our company has acted swiftly to protect the profitability and cash-flow generation of our Mexican business. We will continue to focus on controlling expenses, and we are prepared to adjust our operating structure even further, if necessary, through the year to meet our goals.

Moving on to Central America. During the quarter, we achieved 2% volume growth, thanks to our positive performance in Guatemala and Nicaragua. Growth in the region was mainly driven by 2% growth of brand Coca-Cola, coupled with the sustained growth of Fuze Tea and the continued strong performance of Powerade and Alpina water.

For the first quarter, our reported Mexico and Central American division total revenue grew 4%. On an organic basis, the division's revenues contracted 2%, reflecting lower volumes resulting from the price increases implemented to pass along the excise tax in Mexico.

Organically, lower sweetener and PET prices were partially offset by the depreciation of the Mexican peso, as applied to our U.S. dollar-denominated raw material costs. Consequently, our division organic gross margin expanded 150 basis points in the quarter. Overall, our division's organic operative cash flow margin expanded 110 basis points for the quarter, despite the previously mentioned restructuring expenses in Mexico. Today, our company offers one of the most robust beverage portfolios in the industry. We will work diligently to ensure that our consumers have many attractive alternatives to continue enjoying the most beloved soft drink brand in the world.

Whether their preference is brand Coca-Cola, Coca-Cola Light, or Coca-Cola Zero, in our returnable or one-way presentations, we are confident that we offer the most compelling choices for consumers, who are increasingly looking for the right value in every transaction.

Moving on to our South American division. Our operation's organic volume increased 6% during the quarter. This increase resulted from a recovery in volumes in Brazil, along with continued growth in Colombia and Venezuela. Including the performance of Fluminense and Spaipa in Brazil, volumes in the division grew more than 28%. As we entered the year in Brazil, our business was positively influenced by hot and dry weather conditions in January and February, and the performance of our new portfolio in the country. Consequently, our organic volume in Brazil improved 5% for the first quarter.

We successfully intensified our connection with consumers through our magic price points for single-serve consumption occasion as well as our affordable returnable 2-liter presentation. Importantly, our 200-milliliter, one-way PET presentations for brand Coca-Cola at BRL 1 and our 300-milliliter, one-way PET presentations at BRL 2 achieved price compliance indicators of roughly 70% among our favorites [ph], ensuring the successful implementation of our strategy in the marketplace and reflecting wide consumer appeal.

Additionally, our 2-liter returnable presentation for brand Coca-Cola grew 27%, supported by consumers' preference for this package. As a result, we increased the mix of returnable presentations in our portfolio by 280 basis points to reach more than 70% for this quarter.

In light of these packages' positive result and the ongoing difficult consumer environment, we will continue to increase the point-of-sale coverage of these affordable presentations to intensify the connection with our consumers throughout the year.

In a couple of months, the FIFA World Cup and the promotional peak [ph] around this event, combined with increased brand awareness of Coca-Cola, should continue to drive positive momentum and increased sales of our beverage for the second quarter.

For the rest of the year, our team will continue to reinforce our marketplace execution, improve our standard operations' top line performance, optimize our operating structure through the integration of new franchise territories, capture the expected synergies and extend the profitable results that we achieved in the first quarter.

Moving on to Venezuela. Consumers continued to face higher levels of inflation and scarcity of many basic items, including water. Our operators worked hard every day to ensure our presence at the point of sale and serve as much consumer demand as possible.

Our Venezuela operations' volume was up almost 11% in the quarter, successfully building on 11% growth in the first quarter of 2013. Brand Coca-Cola surged 18%, more than offsetting the decline in flavored sparkling beverages, as we continued to focus production on the fastest-moving SKUs in our portfolio in order to navigate the country's challenging operating conditions.

The noncarbonated beverage category grew 28%, mainly driven by del Valle Fresh orangeade, which grew 30%. Our bottled water portfolio grew 33%, supported by the performance of the Nevada flavored water brand.

Despite the challenges faced by these operations, our team continues to focus on better executing our picture of success at the point of sale and maintaining the flexibility required to meet our consumers' and clients' demands.

In Colombia, our strategy to foster per capita consumption continues to yield positive results. During the quarter, our volume increased 8%, successfully building on the 6% growth in the first quarter of 2013. Brand Coca-Cola grew 9%, driven mainly by the successful launch of our 1.4-liter one-way PET presentation, capturing transactions at the magic price point of COP 2,000.

In the noncarbonated beverage category, del Valle Fresh grew almost 50%, while Fuze Tea grew almost 70% and Powerade doubled its volume during the quarter.

We will continue capitalizing on our strategy in Colombia to foster per capita consumption through better execution at the point of sale, increased cooler coverage, and a more affordable portfolio to maximize the connection with our consumers.

Moving on to Argentina. During the quarter, we experienced bad weather conditions in February on top of a weaker consumer environment fueled by the devaluation of the country's currency and increased real inflation rate, which directly affected our consumers' disposable income. For the quarter, volume was down 1%. Flavored sparkling beverage were up 12%, partially compensated for a decline in brand Coca-Cola. Despite this dynamic, our market share continues to improve significantly year-over-year.

The noncarbonated beverage category grew 12%, driven by the Cepita juice brand and the continued success of Fuze Tea, which has enabled us to capture share of the flavored water category. Additionally, our Bonaqua water brand continues to grow, now reaching close to 1.4 million unit cases.

During 2014, our operators will continue to focus on cost discipline and efficiency optimization, as well as revenue management initiatives designed to capitalize on an improved operational structure, and a strong portfolio approach and practices to serve a more difficult consumer environment.

At the South American division level, the revenue management initiatives that we implemented in Venezuela, Argentina and Brazil, coupled with our positive volume performance in Brazil, Venezuela and Colombia, resulted in 40% organic currency-neutral revenue growth for the division during the quarter. Organically, lower sweetener and PET prices were partially offset by the devaluation of the Colombian peso, the Argentine peso and the Brazil real, as applied to our U.S. dollar-denominated input costs in the division. Consequently, our organic gross profit margin is under 120 basis points in the quarter. Despite ongoing labor and freight cost pressures, our organic operative cash flow margin expanded 130 basis points during the first quarter of 2014.

With regards to our Philippines operation, volumes remained flat in the first quarter of 2014. In particular, I would like to highlight the positive performance of Mismo, our 300-milliliter one-way presentation for brand Coca-Cola, which continues -- which contributed significantly to 11% growth of Coke in the country.

Despite its relative recent launch in December, Minute Maid Fresh orangeade has been very well received by the Filipino consumer. Based on our strategic framework, we are working to capitalize on the opportunities that we see in the Philippine market, expanding the initiatives that have been successful in Greater Manila to the rest of the country. We are planning to strengthen our supply chain capabilities to have the capacity to support the growth of the business.

Finally, in the route-to-market. We have completed the rollout of our new commercial model in the Greater Manila area. Building on this achievement, we are working to expand our route-to-market model for the rest of the Philippines. We will continue to build, step by step, the foundation to ensure our ability to capture the growth potential that the Philippine market offers.

Now allow me to expand on our consolidated financial position. As of March 31st of 2014, we have a cash balance of MXN 19.1 billion, and our total debt was MXN 60.6 billion.

During the first quarter, we leveraged our financial flexibility and capability to issue debt in the international capital markets at very attractive rates by reopening the senior notes that we placed in November of last year. We will use the proceeds from these offerings to repay debt in Mexican pesos.

Our net debt to EBITDA ratio is currently 1.42x, a sequential improvement compared with the fourth quarter of 2013, highlighting the strength of our balance sheet and our commitment to delever the company.

During the quarter, our net income reached MXN 2.3 billion, reflecting our top line and operating income growth, driven by organic growth, mainly in South America, and also the acquisitions. This growth was offset by higher interest expenses due to a larger debt balance resulting from the financing for the recent acquisitions of last year, higher interest rates on our Brazilian real-denominated debt, and higher interest rates in connection with extending our debt maturity profile from 4 to 8 years. Net income declined 5%, mainly due to higher interest expenses as compared with last year and the foreign exchange gain that benefited last year net income in the first quarter.

During March, our shareholders approved the payment of a dividend in the amount of MXN 2.9 per share to be paid in 2 equal installments in May and November of this year. This dividend, which remain in line with the previous year, is consistent with our commitment to return capital to shareholders while deleveraging the company, capitalizing on our financial flexibility and continuing to invest in the future of our company.

For the year, we will continue to work to achieve the synergies that we have identified in our recently merged and acquired [indiscernible] territories in Mexico and Brazil. We will take advantage of our teams' capabilities and our portfolio's brand equity to capture opportunities across markets, regardless of the specific state of the consumer in our territories.

Now before I open the call for questions, as we recently announced, as part of the consumer management development agenda that we pursue in Coca-Cola FEMSA, José Castro, who has worked as [indiscernible] Director of Investor Relations since 2010, was invited by our Mexico and Central American division to continue his career as Director of Operations, Planning and Purchase. José worked relentlessly to position Coca-Cola FEMSA's story as a benchmark in the global beverage industry.

Alfredo Fernandez, who many of you already know, and who is overseeing Financial Planning, will now take over our Investor Relations efforts, in conjunction with his current role as the company's financial planner. Welcome back, Alfredo.

Operator, now I would like to open up the call for taking questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Lauren Torres with HSBC.

Lauren Torres - HSBC, Research Division

Just wanted to ask a bit about the impact and the effects that you've seen based on the pricing actions you've taken to cover the excise tax. I guess, in some respects, the behavior of the consumer is maybe a bit better than you expected going into the year with respect to the volume decline. Just curious to get your impression on that. And seeing that we're going to see some increased pricing come through from -- at least on the first quarter, I was just wondering if you think there'll be additional consumer reaction or it's generally been accepted. And I guess, if I can just make that question broader on Brazil, because I guess today we're hearing more about excise tax and taxes being increased in Brazil on beverages, so just curious to get your general sense on the ability to take pricing in a soft consumer market. And how do you deal with that if the consumer still is soft and maybe your pricing actions remain limited going forward?

Héctor Treviño Gutiérrez

Lauren, let me start with Mexico. As you pointed out, the -- in general, the 4.4% reduction in volumes that we have for the company in Mexico is a little bit below the estimate that we have and that we shared with you at the end of last year when we said we were expecting 6% to 7% declines in volumes. The first quarter in that sense has been a bit better. It's important to highlight that when you look at the SKUs that were affected with the tax, so those were affected in a larger percent of reduction, closer to 6%. And as I've mentioned during this introduction, [indiscernible] presentations like Coca-Cola Zero growing 14%, still from a very low base. In general, the total mix of our portfolio -- of the total mix of our portfolio diet products represent less than 12%, but still is very significant that Coke Zero is growing at that pace. Juices and nectars are also suffering within the piece. On the other hand, other products like Powerade continue to surprise with very positive performance, grow [ph] also around 11% [indiscernible]. So in general, we have to be careful in the sense of the volumes for the first quarter might be a little bit affected positively at the end of March because of the inventory buildup in anticipation of the price increases that we have implemented at the very end of March. So April, we should see slightly lower volumes or a larger drop in volumes. It is not that significant. So my expectation for the second quarter is -- in general, my expectation is that we will see similar numbers to what we see here in the first quarter. Although April, as I've mentioned, because of the inventory effect, is slightly below that number for the first quarter. Have we recovered [ph] -- have we worked [ph] around that? As we mentioned, our consumers are being exposed to a general increase in taxes and prices for most of the consumer staples. So the consumer does not have the same disposable income, which is a fact in Mexico. We feel that the consumer is changing his consumer habit and in a certain way is prioritizing soft drinks. In our opinion, they are not spending as much in other things like toilet paper and on other consumer staples. We see that also with snacks that are suffering a little bit more than soft drinks. And the company, as I mentioned, has to do a very important effort in restructuring our operations. So I think that our guys that are managing the Mexico operation are doing a very important job in reorganizing our operations in this country, substantially reducing the number of headcount and working very closely with working capital and CapEx so that we continue to generate important expansions, in my opinion, on the operating margins that we see. My expectation is that this consumer -- that these price increases that we are doing in March are necessary to fully compensate for the tax increase and the inflation that we are expecting for the year. I would expect that these are the last price increases that we see in the year and that this will be enough to have basically a fewer price increase in real terms. And obviously, that includes compensating for the taxes, as I explained. And so far, our competitors have also increased prices, importantly, in similar levels as we have seen. We have seen some of the low-brand -- low-price brands increasing prices that they haven't moved for many years. We have seen the Pepsi operation also increasing prices. So we are basically maintaining the price gap that we have before. And in that sense, I think that what we are seeing in this first quarter is a good reflection of what we can expect for the rest of the year in terms of volume performance, because the whole industry is moving prices in a similar fashion. And I think that our industry is doing a little bit better than other the consumer staple products in the country. If you move to Brazil, the authorities announced this morning a new tax -- or an adjustment to the -- it's not -- excuse me, let me correct this. It's not a new tax, an adjustment to the tax, the way it's computed. This adjustment normally happens every 1 or 2 years. With some minor adjustments, sometimes twice a year. In general, we have -- and just that everyone has the same information. In general, we have a tax that is established in the law, and then there is this, so-called, the reference price and the multiplier, which I have provided [ph] also that they adjust periodically. And that is something that the government can move without changing the law. We were anticipating -- or our expectation was that this reference price was going to be changed in July or August, so it's a little bit behind schedule or behind our quarter. We still did not have computed the full effect of this, but the preliminary back-of-the-envelope analysis for this is that we will have to increase prices between 1% or 2% in Brazil to compensate for this increase in the tax in Brazil. Our idea is to -- only to increase the prices. We think that the competitors will do the same. And as you've correctly pointed out, the consumer is -- continue to be in a soft environment. There is restricted liquidity on the part of the consumer. So we think -- and the consumer is very price sensitive. So in general, the way to tackle this soft environment both in Mexico and Brazil is, as I mentioned, to continue focusing on the returnable presentations that have been very successful in difficult times in the past. I think that returnable presentations have helped a lot during this period of uncertainty in Mexico and Brazil. And also having this affordable magic price point of MXN 5 in Mexico, which is less than $0.5 or BRL 1 in Brazil, which is approaching at least $0.5 for specific packages, which is very powerful when you have the brand preference of -- in Coca-Cola. So in general, I think that, that's a good description of the consumer environment that we are seeing, and our possibility to increase prices in these 2 markets that are important for us. I thought that I -- it's a long answer to try to answer a difficult question, Lauren.

Lauren Torres - HSBC, Research Division

Sure. And just quickly, did you mention what the size of the tax increase that you took at the end of March was?

Héctor Treviño Gutiérrez

Oh, the tax increase in March? It's around 3% to 4% in Mexico. It's -- the algorithm was on the whole portfolio.

Operator

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

Lore Serra - Morgan Stanley, Research Division

Great. Well, let me ask 2 questions. Let me just ask sort of a follow-up to the question that you just addressed. I mean, it seems like, at least, initially, the volume as we've talked about hasn't been quite as bad in Mexico as maybe as feared, and you seem confident in Brazil. And I understand some of that is because of what you're doing in terms of the returnability and the affordable magic price points. But I guess if we contrast that with Colombia, your volumes are growing but maybe not as proportional to the pricing that you've taken. I don't know if you'd agree with that statement. So I guess, are the different experiences you're having in Mexico, Brazil and Colombia making you think that the elasticity of the category is less than you thought maybe on the upside and on the downside? And then the second question I wanted to ask was just an update on Venezuela. I appreciate that you're now using the CCAD 1 rate and that it will move. I know there's a lot of uncertainty what -- where that rate goes. But I wondered if you could talk about kind of how confident you are. I mean, in the last quarter, you mentioned that you're still getting the access to the raw materials at the fixed rate, whether that's still the case, whether you see that rate going to another rate and how you kind of see that playing out over the course of the year. Those 2 questions would be really helpful, please.

Héctor Treviño Gutiérrez

I think that, in general, I think that our elasticity is low, I mean, and I expressed that when we were discussing the -- Spaipa and the potential tax in Mexico last year. And if you remember, I mentioned that some people in the industry were expecting a larger reaction. My experience after many years in this industry is that in some markets with certain brands, if you work with some affordable [indiscernible], like returnable [indiscernible], you can contain a lot the effect of these -- of changes in prices. I think that the effect in Colombia that you're referring, it's a little bit similar in the sense that we lowered the prices, as we explained, when we described it like Colombia for only 1.5 years ago with the ideal increase in the consumption per capita in [indiscernible]. Then at the beginning, the volume didn't react that well. However, we are seeing volume that have continued to grow importantly compared to the other countries. But as you said, it's probably somewhat to have expected a larger reaction of the volume given the price reduction that we have taken. So we are happy with Plan Colombia. Plan Colombia, you have to understand that in that country is difficult. We have a very large market share in cola brand, and have very low market share in flavors, and we have a very strong flavor, a local flavor producer. And the competition dynamics have changed importantly, so we lowered the price. Our competitors also lowered the price, and in a sense, we feel that the industry is growing because returnables are selling more cases. But we haven't changed dramatically the market share or the dynamic of the competition because the 2 competitors, and including the cola [ph], have adjusted -- the 2 competitors have adjusted the prices to the downside. So in general, Lore, I think that what you're saying, it could be -- I think it's correct in the sense that even we have very important price increases because of taxes or otherwise, you would not see a substantial reduction or a [indiscernible] reduction in volumes, and the same happens when you reduce prices. Always having in mind important factors like brand preference, affordability, returnability and the effects of the movement that the competitor does in the specific markets. In the case of Venezuela, we received very important approvals for raw material purchases in February. We have received fewer dollars at a fixed rate, a fixed earning [ph] recently, but there hasn't been any change in our perception. We believe that given the fact that we are -- consider that we are part of the food industry that we continue to have access the official exchange rate. I don't know if the official exchange rate will be 6.30 or will adjust to the upside in the future. There was an important meeting with Brazil [ph] [indiscernible] and the industrials a couple of weeks ago. And he recognized it publicly, and it was in the TV that the bureaucracy was affecting the competitiveness in Venezuela, that he was going to fight that, and he even basically say that 30% of the accounts that were pending to the [ph] dollars to pay suppliers, that they would sell [ph] those 30% in a very -- in a month. We haven't seen that, but we are expecting for the next 2 or 3 weeks if there is a potential that we'll receive a more important amount of dollars to pay some of the debt that we have with suppliers. So right now, as I mentioned, we change all of our translation of the -- of our Venezuela P&L at 10 70, which is the [indiscernible] rate. There is a third rate, which is the [indiscernible]. That is trading around VEB 50 per $1. But the authorities have been very clear that they would not allow the purchase at that -- of dollars at that rate to pay dividends. And that's why has the discussion with auditors -- and seems like it's more like a consensus among the companies that have operations in Venezuela is that 10 70 is the right exchange rate for translating in [ph] our P&L numbers.

Operator

We'll take our next question from Karla Miranda with GBM.

Karla Miranda

Héctor, I was wondering if you can give us more color about working capital going forward. It seems that you made a great job during the quarter regarding the declines in receivables and inventory. But I was wondering if this is sustainable going forward or which one is the level at which -- in which should we expect the working capital going forward?

Héctor Treviño Gutiérrez

Yes, I think that, in general, we have been -- the same way that I've been stressing during this conference call that we are focusing a lot on controlling expenses and SG&A. We have an effort for the last 2 years or this 1.5 years of monitoring and trying to control working capital in an appropriate manner. It's not that it was out of control, but I think that it's important that as we grow to additional operations, especially in these mergers and acquisitions that we were doing in the previous years, that we have -- that we establish the best practices with respect to inventories, account receivables, the way we collect and return our dollars, et cetera. And then it is the same is true for CapEx. We believe that we have a very important discipline that we monitor centrally, and that we monitor every month, and the operator of every country has to review all his working capital needs, his CapEx needs and everything that has to do with cost and expenses with corporate offices. I think that what you are seeing is basically the result of the last 1.5 years or the last 2 years working very close with the operators on that front, Karla. And what you see now is fairly a good level of working capital going forward. The only caveat that I have for this is in the numbers for South America, Venezuela, even the fact that we did not receive a lot of -- at the pace we like the authorization to pay raw materials, our account payables in Venezuela [indiscernible] an outlier down there. But that's the only caveat that I will have for this comment on the working capital. But in general, I think that the discipline that we have implemented over the last 2 years is bringing fruits now for our organization.

Operator

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

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

I have 2, one about Mexico and the second one on Brazil. On Mexico, assuming that the volume performance has in fact been better than what feared in the first quarter, maybe I was hoping you could share some color on what has surprised you the most in terms of what you expected earlier in terms of reaction, consumer reaction or whether it's channel, whether it's [indiscernible] packaging or has that really been across the board that the performance was somewhat better than what you anticipated even though it's still declining. And secondly, on Brazil, maybe if you can give us an update on the synergies after Spaipa [indiscernible] last year. Just to understand if it's realistic to assume that with the volume recovery that we've seen so far with the World Cup around the corner, these past few months haven't necessarily been the most appropriate to try to look or extract additional synergies or that maybe we will see a stronger focus on that in the later part of the year. That would be my second question.

Héctor Treviño Gutiérrez

Yes, I think that -- I think that, in general, I can say in Mexico that -- as you say, we are probably doing a little bit better than what was here [ph]. My concern, again, is that given that we have a price increase at the end of March that the first quarter was a little bit positively influenced by various rate [ph] of some inventory buildup. But in general, I think that the positive surprise is that the consumer loves our brand, so Brand Coca-Cola is doing very well. We are not doing as well as some other flavors. I was surprised at the effect of returnables, especially the 500-milliliter, which is at a market price point of 5, and it's growing importantly. It's an important consumer occasion. I was positively surprised by Powerade. That is growing still double digit, and gaining importantly in market share in Mexico where we are now a close second place as opposed to being very far in the competition front. I was a little negatively surprised with juices and nectars that are down double digit, but those juices and nectars were also impacted by the tax, and you can argue that the consumer is preferring some of the soft drinks because of the [indiscernible] price than -- in comparative terms. And I think that in preparation for all of that, what is important to highlight is that the very important effort in organizing our operations to be able to tackle this reduction in volume. When you think about a 4.4 reduction in volumes, you are speaking about hundreds of thousands of millions of unit cases if you go to a yearly basis. And that's why we were able to close down 1 facility. That facility had 3 production lines. We will need to close down 3 other production lines. In total, we have closed 6 production lines now in Mexico. And as we announced at the end of last year, we were going to be very cautious in some of the CapEx and investments, and knowing that we would have some distribution trucks idle. We are not buying trucks for this year, and I think that the discipline of the organization has shown it's an important element to highlight. In Brazil, I think that we are pretty much in line with the synergies that we're expecting. We basically mentioned somewhere around $50 million in a 24-month period at the EBITDA level, and we are in line with that. The performance of [indiscernible] and Spaipa have been very good in volume. They are growing a little bit more than São Paulo [ph]. So that's good news. We have held some strategic [ph] [indiscernible], mostly related to our ability to supply some of the product, and you know that we are building a very important facility that if the technical guys comply with their promises, should be up and running in September with productions ready to sell. So I think that in that [indiscernible] some of these surpluses that we have had would be sold once we have this production plan. And as I mentioned, I think that the World Cup is bringing a lot of activity and attention to Brazil, and a lot of promotional activities around that, and I think that the next 2 or 3 months will be good for the Brazilian operations. It's important to remind, and that's why we highlighted this, even though we are growing 5% volumes in Brazil. It's important to highlight and to remember that last year, we have a very bad quarter. That's why we mentioned that we basically recuperated the volumes in Brazil, but it's important as a change in the trend that we're seeing in that market. I think that, that trend [indiscernible] with the effort that we put in place last year of 2 liter returnable, and the small packages in one-way presentation in BRL 1, BRL 2 and BRL 3 that are now presenting the results in my opinion during this year. Okay?

Luca Cipiccia - Goldman Sachs Group Inc., Research Division

And if I can just quickly follow up, just want to understand, is there any initiative that, for instance, given the World Cup, given the emphasis on volume in the first part of the year, was July put on hold until later on after this initial period or of this more volume recovery period is over? I think that's what I was trying to understand on the synergies on the integration, something that from a cost maybe perspective will accelerate after the World Cup simply because now top line is probably better, a more important priority?

Héctor Treviño Gutiérrez

Yes, I think that -- I mean, in general, we have -- as I mentioned for Mexico, we have renewed again or we are trying to reorganize our operation in a more efficient manner. We have done -- we have put some restructurings, and we have some expenses related to the [indiscernible] payments. We are focusing, as you said, a lot on top line, no question about it, because we believe that the issue with Brazil is to grow volumes is the way to grow the business importantly. It's not by saving a few pennies in expenses that you're really going to turn around that to really grow that business more. It's really growing the top line. So there is focus on that. There is focus on the World Cup, and there are expenses related to all the execution of the marketing campaigns and promotional activities that we have around this period of time. So in general, you're right that the second part of the year should be good in terms of not having those additional expenses related to the FIFA World Cup. But in general, I said that we have very good expectations for this year for Brazil since our marketing process, and we are counting with our operation there to have a good performance this year.

Operator

And we'll take our next question from José Yordán with Deutsche Bank.

José J. Yordán - Deutsche Bank AG, Research Division

Just wanted to follow up on Lore's question on Venezuela. Looking at your recent annual report where you break this out, I was a bit shocked to see that margins are actually down over the last couple of years there. Slightly down, let's say to 11% EBIT margin. Because, I mean, if you're buying 1/3 of your COGS at a 0 inflation even in nominal terms and you're raising prices in line with inflation, give or take, one would expect a big increase in margins there, unless the other costs are significantly higher than local inflation. So I was just -- any color you can give us on how each of the different input costs and labor, et cetera, play into this and how you plan to manage the Venezuela P&L going forward, what can we expect in terms of margins? I realize that it gets increasingly difficult to do so, but any color you can give us on that would be great.

Héctor Treviño Gutiérrez

You bring a good point. In Venezuela, I think that we need to be very careful with Venezuela in the sense that it's a very, very difficult environment to work. And the pressure that we have, and that's why [indiscernible] reflection of this, what you say is expected improvements in margins has to do with the fact that even though we get dollars at the 6 30 exchange rate, prices for raw materials in dollars have increased importantly because the suppliers are very afraid of moving product into the country. And everything that has to do with local raw materials is crazy. That, I mean, the price movement that we see are very important. That's why our product is also increasingly important in pricing. I mean, when you have inflation of 50%, you have prices growing importantly more than that, but you have labor and raw materials also growing at a difficult -- at a very high pace. That's the main explanation that is behind these numbers. It's a very difficult environment. Last quarter, we discussed some of the inventory problems that we have in Venezuela, where we are almost every day trying to solve an issue of I don't have caps or I don't have labels or I don't have bottles or sugar is -- the shipment of sugar was stopped in the highway and things like that. Remember that the economy there is under very, very difficult circumstances. So even though, as you correctly pointed out, we are getting dollars at this exchange rate of 6 30, that does not necessarily reflect on lower raw material prices because of the scarcity that we have in that market, José.

José J. Yordán - Deutsche Bank AG, Research Division

Are you saying, for example, that your resin supplier in Venezuela charges significantly more in dollars per pound of resin than they would in Mexico and other places, assuming it's the same company? But I'm mean, there's really only a handful of suppliers of that stuff in the world, right? So are you saying they have differentiated pricing?

Héctor Treviño Gutiérrez

Yes, it's just -- it's a little bit of that. And maybe that is not the best example because it's not -- there are not [indiscernible] that number of suppliers. We have basically 2 in Venezuela that also can push [ph] in our market. But the prices that we have in dollars for the product in Venezuela is different than what we have in Mexico or Brazil, as I've described. The main problem is with the local raw materials, especially sugar.

José J. Yordán - Deutsche Bank AG, Research Division

And then -- and just to remind me, the Coca-Cola concentrate pricing in Venezuela is the same incidence pricing model as everywhere else? Or is it any different?

Héctor Treviño Gutiérrez

No, it's the same model. It's in model that [ph] the other countries.

Operator

We'll take our next question from Alexander Robarts with Citi.

Alexander Robarts - Citigroup Inc, Research Division

Let me turn to Mexico. Two things there, please. First is jug, and I know it's not the main category for you in Mexico. It's almost 20%, though, of volume. And a little surprised see that, I guess, it's down, given that it's not subject to taxes, I mean, down 2% volume in the quarter, and kind of went back and saw that, really, this is, I guess, the third quarter in a row that we've seen it down. And I recall you -- you talking about your efforts to optimize the routes with the new acquisitions in Mexico. And could it be that you're still involved in this process, and that's why we're seeing jug volumes down in this first quarter in Mexico? And when can we perhaps think about seeing growth and margin enhancements there, if you could talk about that as we look out for the rest of the year? That's the first question.

Héctor Treviño Gutiérrez

Let me -- bottled water itself, is -- I guess it's important that we review this. Bottled water, you have seen for many quarters a reduction in the volumes as a way of optimizing the profitability of that business. And we have moved away from some of the practices of the past of moving bottled water for very long distance. So in way, bottled water has transformed to what is comparative to a very local business where you're not positioned in a specific city or a specific region. It's very difficult to send profitably water to a long distance. So we downsized it a little bit, the business for that, so we have been doing that for many, many quarters. The second stage of this is that we used the home delivery trucks of bottled water to reach directly to the consumer. We are starting to move -- we're targeting a very positive movement, which is taking all the products directly to the house. So in that sense, what you have seen in the last 2 quarters and would affect the bottled water is more the consumer buying the other products from our truck, other products meaning Coca-Cola and soft drinks and juices instead of water, and that's why the water volumes, we are seeing some reductions in the water volume. As you say, it had the important number in terms of unique cases is not that important in the profitability front. It's a business that is every day as we have downsized the size of -- downsized the business. It's a little bit more profitable at this stage, but it's not as profitable as soft drinks as you can imagine or juices or other products. So I think that the second part to the equation is positive in the sense that the company [indiscernible] is selling other products and selling probably a bit less bottled water.

Alexander Robarts - Citigroup Inc, Research Division

So as we think in the second half with the easier comps, given what you said, might that be then the time to think about growth? Or it's still too early to call, I mean, at this point?

Héctor Treviño Gutiérrez

I think it's too early to call at this point in the [indiscernible]. I think that now a level that we feel comfortable with the profitability of the bottled water, and different from what it was 1.5 years, 2 years ago, and it's important also to remind everyone that in that specific market, there is a lot of informal competition that has erupted in most of the comps, in most of the territories. So it's a market that we -- it's a category that we monitor very closely, and that obviously we're going to continue selling the amount of water that is necessary to maintain a profitable water business. If we need to downsize it a little bit more, we'll do it. But there is a lot of informal so-called [indiscernible] for the people that buy and informally fill out these jugs -- in little jugs [ph].

Alexander Robarts - Citigroup Inc, Research Division

Okay, very helpful. And just the second was more of a question/clarification on your comment about 2Q in Mexico, and definitely appreciate you being open and forthcoming with us on giving us kind of your feeling for the quarter and -- or how it would shape up in volumes in Mexico. And I understood you to say that you kind of thought or you're thinking now that the volume drops in Mexico in the 2Q could end up being similar to where we've seen it in the first quarter. And I guess it's -- I mean, I'm assuming that's what you were saying, and so when I thought about ...

[Technical Difficulty]

Operator

Pardon the interruption, please stand by.

Héctor Treviño Gutiérrez

Somehow we lost the connection. Sorry about that interruption. You were saying about the second quarter, and then we lost the connection.

Alexander Robarts - Citigroup Inc, Research Division

Sorry about that. Good. Yes, listen, just to finish the question. I appreciated your comments, and you seemed to characterize your feeling now about 2Q in terms of Mexican volumes being similar to what they were in the first quarter. And if I understood that right, I mean, I guess I would have thought that there would have been some marginal improvement in the sense that maybe volumes would not be as impacted in the second quarter than in the first quarter. And as I sensed during the first quarter, you had a little bit of a less of a drop in March than January. And obviously, there's elements around the timing of your pricing and you've mentioned an inventory effect, and I guess there is also an Easter effect. But is it -- I mean, are you being conservative when you suggest that, in fact, that the volumes might be similar to the first quarter? Or is it really just the fact that you're just not seeing the consumer adjusting to it, as you mentioned, kind of its reduced disposable income disposition and such?

Héctor Treviño Gutiérrez

Yes, Alex. I mean, it's obviously -- we don't have a crystal ball to predict exactly what's going to happen, but let me -- my personal feeling is that, as you said, and as -- we were guiding at the end of last year somewhere around 6% to 7% volume drop. The number for the first quarter is 4.4%. I think that it's important to highlight that the SKUs that were affected by the tax are being affected more and these were influenced [ph] more in the 16.5% [ph]. We have, as I mentioned, juices and nectars dropping double digit, and we have other products that are growing. So at the end of the day, it's going to be the preference of the consumer in certain brands. I think that is going to be the affordability that we present to the consumer, and we've returnable packages [indiscernible] are the 2 factors that will be very important for how we're going to view [ph] the rest of the year. What I was saying is also that the first quarter was also positively affected by the fact that we increased prices at the end of March, and that created some inventories. So there is a possibility that the second quarter will be a little bit worse than the first quarter. But no question that we are suffering with some of the products that we have -- where we have the tax. Coke Zero, we didn't move the price, and it's growing 14%. That's a clear signal that the consumer is looking for an affordable product, returnable packages at MXN 5.00 500 milliliters. We didn't move the price. It's [indiscernible], and the volume is reacting on that. What would be the effect of the rest of the year? We might end up in the 6%, 7% reduction that I was mentioning that I was guiding at the end of last year. So far, the fact is that the first quarter, we are doing slightly better because of the products like water and Coke Zero that were not affected by the tax, okay?

Operator

That concludes today's question-and-answer session. Mr. Treviño, at this time, I will turn the conference back to you for any additional or closing remarks.

Héctor Treviño Gutiérrez

Thank you for your interest in Coca-Cola FEMSA. And as always, Alfredo, Roland and the team will be available for any remaining questions that you may have. Thank you, all. Goodbye.

Operator

That concludes today's conference. We thank you for your participation.

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