Coca Cola FEMSA SA de CV CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.24.12 | About: Coca-Cola FEMSA, (KOF)

Coca Cola FEMSA SA de CV (NYSE:KOF)

Q3 2012 Earnings Call

October 24, 2012, 12:00 p.m. ET

Executives

Héctor Treviño Gutierrez - Chief Financial and Administrative Officer

Analysts

Lauren Torres – HSBC

Antonio Gonzalez – Credit Suisse

Alan Alanis – JP Morgan

Lorre Serra - Morgan Stanley

Jose Yordan – Deutsche Bank

Alex Robarts – Citi

Operator

Good morning everyone and welcome to Coca Cola FEMSA's third quarter earnings event conference call. (Operator Instructions)

At the request of the company, we'll open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning Coca Cola FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations 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 proceed.

Héctor Treviño Gutierrez

Good morning everyone and thank you for joining us today.

In line with our expectations for the second conference 2012, our company delivered solely double digit top and bottom line growth and margin expansion in both divisions for the thrid quarter. During the third quarter of 2012, we continued to integrate the results of Grupo Tampico, Grupo CIMSA and Grupo Fomento Queretano in our Mexican operations. Their performance contributed positively to our Mexican Central America division and our company's better results.

Organically, our company's performance continued to be supportive by our operator's ability to leverage on our new commercial models. And to capture the industry's valuable opportunities to point of sale execution, selective price increases, and the strength of our [inaudible] beverage portfolio, which once again is led by innovation in our still beverage [inaudible] and the many alternatives that we present to our consumers in our sparkling beverage portfolio.

During this quarter, our reported consolidated revenues reached more than 36 billion Mexican pesos, up 20% from last year. Organically, excluding the newly merged territories in Mexico, our consolidated total revenues grew 10% for the quarter underscoring our geographically balanced franchise portfolio.

This increase was driven by average price per unit [inaudible] growth in [inaudible] operations and [inaudible] growth mainly in Mexico, Venezuela, Brazil, and Central America.

Our consolidated sales volume grew 18%. Organically, it's driven the recently integrated territories in Mexico, our volume grew 1%. As in previous quarter, innovation in the steel barriers contribute to the 15% volume growth in this category. Specifically, the fresh brand R&J in Venezuela, the [inaudible] line of business in Mexico and Brazil, and the recent launch of Fuze Tea and Powerade drove this growth.

The strength of brand Coca Cola especially in turnover package and single service water support the growth in our sparking various portfolios.

In addition, our single serve water portfolio grew in almost every country. [Inaudible] in our [inaudible] water portfolio in Mexico.

In the third quarter, lower PT prices and fewer costs in most of our [inaudible] more than offset the average depreciation of our main operations local authorities as supplied to our U.S. dollars [inaudible] tier costs. Consequently, our consolatory growth margins expanded 60 basis points to 46.9% in the third quarter.

Our consolidated operating income grew 27% to 5.5 billion Mexican pesos. Organically, our operating income grew 18%. We continue to experience higher labor costs in Venezuela combined with increased labor and freight costs in Argentina and Brazil. In previous quarters, we continued to register expenses related to the development of information systems and commercial capabilities in connection with the implementation of our commercial models. And we continue to invest in the development of new lines of business and [inaudible]. Building on our profit expansion, our operating income margin expanded 80 basis points. And more notably on an organic basis, our operating income margin expanded 110 basis points. For the quarter, our consolidated net volume grew 54%, which is 3.5 billion Mexican pesos.

Now I will elaborate on the performance of each division. In the third quarter, as reported, our Mexican and Central American division grew 30% reaching 478 unit cases. As reported, our Mexican operations volume grew 30% including 106 billion unit cases from our recently merged territories. Organically, our volume in Mexico grew 1.4% successfully building on 5% volume growth in the third quarter of last year.

Our increased volume was led by a close to 2% growth of brand Coca Cola. Consistent with our strategy to foster consumption and return of single serve representations. We recently reinforced our 500 millimeter glass offering reflecting our strategy to foster our presence in the flavor of sparking beverage territory. Our volumes grew 3% laid by the [inaudible] of this brand and the rest of our core flavored sparkling beverages.

The still beverage integrity grew 11% mainly driven by the continued success of [inaudible] fruit [inaudible], which now serves more than 40 million unit cases [inaudible] consolidated its position as this [inaudible] leader.

Also contributing to our growth in the still beverages our launch of complimentary packaging alternatives supported by the support of Fuze tea by presenting a wider array of options to our consumers. And building on the positive growth we mentioned on this brand.

Additionally, Powerade continues to deliver very positive results growing more than 40% and gaining an important share of its various [inaudible].

Our water portfolio excluding bottled water grew 5%. This increase is compensated for a 4.5% boiling decline in our bottled water portfolio as we continue to work to achieve higher efficiencies and profitability in the jar water business.

In Central America, our bottled grew 3% building on 10% growth during the third quarter of last year. This increase was driven mainly by 15% bottling growth in the still beverage category. Supported by the proud portfolio and the continued success of Fuze Tea and Powerade. 14% growth of our water portfolio and 1% growth in our sparkling beverage category.

Our divisions reported total revenues grew 35% to 17 billion Mexican pesos. Organically, the division's total revenues grew 9%.

On the same basis, our average price per unit case increased 7% during the quarter underscoring our operator's ability to capture the [inaudible] potential by leveraging our new commercial model.

With regard to our profitability, lower sugar and PET prices offset a slightly higher fructose prices as the evaluation of the average exchange rate of the Mexican peso. As a result, our reported gross margin remains almost flat at 47.7% for the third quarter of 2012. Organically, our gross margin expanded 50 basis points.

Our operating income increased 44% to $2.7 billion Mexican pesos. We continue to move certain restructuring charges related to the integration plan for the new territories in Mexico. Organically, our operating expenses increased due to the investments related to the development information systems and commercial capabilities in connection with the implementation of our commercial models and to investments related to the relevance of new lines of business and [inaudible]. Nevertheless, our reported operating margin expanded 100 basis points. And our organic operating margin expanded 210 basis points.

Our Mexican and Central America division delivered strong results this quarter. [Inaudible] the commodity cost environment, we continue our disciplined marketplace execution implementing our bench commercial model fostering single third consumption. And reinforcing our turnover base in the sparkling base category. And focusing on innovation to compliment our wide portfolio of beverages.

Now I will briefly expand on the newly merged territories in Mexico. We have [inaudible] to enhance the operation and the structure of these territories. We have swiftly and smoothly integrated all of them. As planned, we have also continued with the restructuring of the manufacturing in the [inaudible]. The generation of operational efficiencies and the implementation of the IT platform to support our commercial models. As with every integration that we have undertaken, we know that the migration of talent and the cross-fertilization of best practices are key ingredients to success. These have been no different with these territories. As many of the talented executives of the Grupo Tampico [inaudible] occupy different positions in order to U.S. territories. And actually, the family owned owners have come to identify a unique benefit of the [inaudible]. [Inaudible] delay making any investments or encourage any expenses near to capture these synergies that we have previously identified. Indeed, we are pleased to announce that we have synergy target from 800 million pesos to 900 million pesos to fully capture at the [inaudible] cash flow levels as of 2014. Beyond this timeframe, we will continue working to capture additional opportunities to increase the productivity of these new territories.

This quarter sets a positive tone for a more robust second half as we have anticipated the last time we talked. We have taken advantage of some additional pricing opportunities in certain packages. And we have logged in the prices for Fuze Tea, fructose, and sugar in our Mexican operations. And secured the foreign exchange rate needed to purchase our [inaudible] for the remainder of 2012. Our operators will work diligently to meet the business plan that we have established for our company for the remaining of the year.

Now let's talk about our South American division. Our South American divisions total sales volume grew 1% in the third quarter. Reaching more than 280 million unit cases. This increase was driven by volume growth in Venezuela and Brazil with Columbia and Argentina remain flat for the quarter.

In our Columbian franchise territory, volume was flat compared with 9% growth during the third quarter of last year. In Argentina on top of a 13% volume growth in the third quarter of 2011, we experienced tough weather conditions in August and September of this year. [Inaudible] as I said remain flat.

In Venezuela, we continue to grow as it's simplified by a 2% increase in volume for the quarter. Our still beverage category was the main driver of volume growth, which more than doubled thanks to the success of our fresh oranges.

Brand Coca Cola continued to generate positive results as well growing more than 3% supported by the launch of two new packages and consumer preference for this brand.

Consistent with our commitment to invest in the business, we started to roll out our new commercial model in this country reinforcing our marketplace execution and especially our cooler colors.

In Brazil, despite tough weather conditions in September, our volume grew 1% as compared to 2011. Our water portfolio volume grew 22% driven by the performance of the Crystal brand. In the still beverage category, our volume grew 9% driven by the sucrose and [inaudible] line of business. Our flavors sparkling beverages volume grew 4% supported mainly by the Fanta brand.

In the third quarter, our South American division reported total revenues grew 10% to 19 billion Mexican pesos. This increase resulted from double digit revenue growth in Venezuela, Argentina, and Columbia. Despite a negative translation effect due to the evaluation of the Brazilian real.

On the [inaudible] neutral basis, our division's total revenues grew 17%. Mainly supported by selective price increases implemented over the past several months across all our franchise territories.

Lower sugar and PET costs across the division upset the average devaluation of the Brazilian real and the Argentine pesos as [inaudible] U.S. dollars [inaudible] costs. These resulted in a 120 basis point expansion of our gross margin, which is 46.3% for the third quarter.

Our South American divisions operating income grew 13% to 2.8 billion Mexican pesos. Operating expenses were affected by higher labor costs in Venezuela and higher labor and freight costs in Argentina and Brazil. Despite this incremental cost pressures, our South America divisions operating margins expanded 50 basis points reaching 14.5%.

In the face of bad weather conditions in some of our franchise territories, our South America division delivered solely top line results in the third quarter on the back of selected price adjustments to offset local inflation pressures and increased taxes.

As part of our business plan, we continue to focus on internal presentations as a key driver of our sparking beverage growth. We are also actively fostering single serve consumption in this category. Our still beverage category will continue to yield positive results supported by [inaudible] platform and our continued innovation. We are confident that the full implementation of our new commercial model in Argentina and Venezuela will provide us with a clear picture to better capture the industry's value potential.

As we face the final part of the year, we see international sugar prices remaining flat sequentially. Our Brazilian and Columbian operations have [inaudible] the majority of their sugar consumption needs for the fourth quarter. In addition, PET prices should also remain stable for the rest of the year.

With respect to currently volatility, which has upset the benefits of longer U.S. dollars along with Euro costs especially in Brazil, we have [inaudible] the majority of our foreign exchange need for the remaining of 2012.

With regard to the potential Philippine transaction, we expect to reach a decision as to whether we should move forward with this undertaking and communicate it to you before year-end.

Looking forward of 2013, we see a benign commodity environment with sugar and PET prices remaining stable sequentially in U.S. dollar terms.

For fructose, we see a slight open pressures in dollar terms. In light of this outlook, we have hedged an important part of our sugar needs in Brazil and Columbia to prevent volatility in our input cost. With regard to foreign exchange, we have already started to hedge our foreign exchange needs for the first half of 2013 in our Mexican operations.

Our business plan for 2013 continues to build on our long-term [inaudible] framework for growth to achieve the full operating potential of our 16 operations. We remain focused on enhancing our competitive position by proactively implementing our commercial model and by fostering return and single serve presentations across our markets and categories.

There is still great work growth potential for us to capture both by increasing per capita consumption in every territory. And by achieving a larger share of the non-carbonated beverage business. Our strong pipeline of innovation is an integral part of our company. Accordingly, we have been working not only to compliment our winning brand portfolio with new packages and non-carbonated beverage alternatives. But also to develop efficient and effective business models to seize the opportunities in the vending matching channels and in our coffee platform.

Capitalizing on our presence in Latin America's largest cities, we have the capacity and the potential to grow these lines of business rapidly and profitably.

We remain a discipline and flexible approach to growth to mergers and acquisitions. Over the years, we have developed a very capable prepared and talented pool of executives and operators who we can rotate into any new territory without affecting the performance of our existing franchises. As we take steps to build a long-term emerging market platform, we continue to focus on the opportunities presented by the Latin American beverage system. We have come to represent a valuable alternative for bottlers in Latin America with a balance and reach geographic footprint. [Inaudible] growth opportunities in the [inaudible] and thus transpiring [inaudible] led by strong management with a proven track record of value creation.

Thank you as always for your continued trust and support. And now I would like to open the call for any questions that you may have.

Question-and-Answer Session

Operator

(Operator instructions).

Our first question is coming from the line of Lauren Torres – HSBC.

Lauren Torres – HSBC

Hi Hector, I’m not sure how much more collar you could give us with respect to the Philippines, but it seems like earlier this year you were targeting a September/October close, now it’s maybe moving to year-end or closer to year-end. I don’t know if there’s anything, as I said, you could share on the learning process of what may be taking time. If you’re thinking about it any differently as far as adding to your portfolio, the potential of that market. Like I said, any commentary would be great, thanks.

Hector Trevino Gutierrez – Chief Financial and Administrative Officer

Good morning Lauren. I think that what I can say right now is that we have three more finalize analysis opportunity. We think that because very good potential. Because again we are speaking of very large population, close to 100 million people. Very important base of the pyramid, a very young population, a very [inaudible] I think that there are a lot of challenges because the operation has been struggling in the past in terms of profitability. But we think that there are many opportunities. We are basically in the process of finalizing the negotiations with the Coca Cola Company, which they are the initial [inaudible] that you know, and basically we feel very confident now that in these 2 ½ months that we have before year-end that we’ll be able to finalize that negotiation process. As you can imagine they say in baseball, “It’s not over until it’s over” and sometimes the detail of the negotiations and the contracts go for a lot of – for some time delay. We are pretty much on target of what we announced at the beginning of the year. I mean we’re still in the ballpark. To be very honest with you, we are at the very end of [inaudible] But I’m very certain that before year-end we’ll be able to announce if we go or not go. And if we go, what are the terms and conditions for that.

So, it’s more [inaudible] the normal delayed process of the negotiations and documentation of this process.

Lauren Torres – HSBC

Okay, that’s fine, thanks.

Operator

Your next question is coming from the line of Antonio Gonzalez – Credit Suisse.

Antonio Gonzalez – Credit Suisse

Good morning Hector. I just have two quick questions.

First, I want to ask on Brazil, I guess you’ve been following different strategies especially in terms of pricing from what other Coca Cola bottlers appear to be doing. You guys have been moving ahead, in empty space in the [inaudible] that have been announced and some other bottlers are not doing that same thing. So, I was wondering if you could give us some more collar on, how do you feel with respect to your market share in your particular franchise territory. And how different do you think you are from the rest of the Coca Cola system in Brazil that you can have these stronger pricing recently? And that will be my first question.

Hector Trevino Gutierrez – Chief Financial and Administrative Officer

Yes Antonio, with respect to Brazil I think that – let me make first a comment on the specific question. I think that in general from what I understand from others we have seen and information with share with other bottlers, we have very good market shares and we have increased basically in every country we have increased our market share versus [inaudible] The only exception that we have is United Energy Drinks and a little bit of this, that is an area for [inaudible] because obviously we celebrate important [inaudible] after the acquisition of [inaudible] But in the other categories we have continued to increase market shares. If we don’t have the largest market share of any bottler in the system we are very close or maybe tied on the top with other bottlers. I haven’t seen this information recently but, it’s that kind of market shares is at the top of the Brazilian participants.

And different than other bottlers, we have also been active at the pricing front. We have seen other bottlers that have stayed with prices and have benefited from larger bottling growth. In our case, as I mentioned our Brazil sales have continued to increase even though we have been active in the pricing front. Because we discussed over the last two quarter conference calls the pressure on raw materials [inaudible] and what’s important for us to [inaudible] We basically started with this pricing activity end of last year, and we have got some – we have been touching the prices of our products in March and July et cetera. When you compare our prices versus some of the other prices in similar practices for our peers in the system, usually you will find that our prices are on the high side. The important element of this is that we have continued to improve our [inaudible] participation in [inaudible]

I think in the Brazilian market you will find different levels of activities geographically. The economy is softening a little bit in terms of growth. We are not seeing the same growth in our territories that we were seeing in economic terms. [inaudible] economic activity. We have had some changes in the tax laws that like for us to also take some pricing. We are basically passing those movements in taxes to the consumer. We have suffered early from the so called [inaudible] transportation regulation that have increased the cost of our logistics and freight within our territories. And we have basically also tried to pass those original cost to our consumers with price increase.

And I think those comments I give you I think are a very good flavor of what is happening in Brazil, [inaudible].

Antonio Gonzalez – Credit Suisse

Yes, this is supper helpful Hector. If I may just ask a quick second question. Could you share with us what best guess I think at this point of the FX rates for Argentina and Venezuela if you’re incorporating in your worst case scenario they will leave [inaudible] currency for 2013, and how would those impact the – I guess the outlook of the outlook that you just described for raw materials and the Mexican peso appreciating in terms of margins for next year?

Hector Trevino Gutierrez – Chief Financial and Administrative Officer

Yes. In Argentina it’s very difficult to predict, but we believe that the currency will continue to devalue a little bit in some our scenarios for next year we are assuming as much as 20% devaluation of the currency. Obviously we do [inaudible] scenarios in our planning processes, but that’s something that we think it’s feasible that might happen. And obviously we’re always very alert at the implications of [inaudible] in our operations.

For Venezuela what I can say is that – to what I mentioned in the first two quarters that we have a very plentiful access to dollars to buy raw materials. During the third quarter, that’s not the case. We have been strongly hit with request for foreign exchange to buy raw materials on the [inaudible] . We expect that this will speed up in the fourth quarter. I don’t know exactly what will happen – in terms of what process – but in general we are seeing that what you call scarcity of foreign exchange to buy raw materials especially in the third quarter.

Again one of our scenarios is that we could hear a movement in the foreign exchange in Venezuela for next year, and I think that [inaudible] interview many economies. Everyone is expecting sort of [inaudible] of movement. It could be probably as much at 30 or 40%. What implication does that have for our margins and raw materials? In those countries on top of this, let me say microeconomic environment that I just described with respect to currencies, does two countries have high [inaudible] compared to some the other seven countries. Or the other seven countries that we – where we operate. And in those territories, when you have [inaudible] you always have also the opportunity to capture, or to try to maintain prices at least with inflation, and sometimes they can [inaudible]

That has been the passkey to Venezuela and Argentine. So when you look at the average price for unit case, we have seen good pricing. Again, in general to recapture inflation, but some positive movements in the [inaudible]

So, in general I think Antonio the name of the game here is to be very careful and attentive towards how you see the movements on [inaudible] and what it’s like with raw materials, and again try to sometimes when you have the opportunity try to pass that to the consumer because for us to maintain our margins.

In the rest of the countries we see more stable effects environment. We have seen volatility in Brazil this year for example, basically if we compare versus last year, we have seen close to 20 or a little bit more than 20% devaluation of the currency. I think in general our operators in terms of raw materials and trying to at least maintain flat margins under operations, we’re attentive to look at opportunities to why some of the raw materials – or to take some of these raw materials, remember not all of them come [inaudible] In some cases for example we enter into agreements with the suppliers to pre-purchase part with the future needs at a certain price and so it’s [inaudible] as opposed to doing a financial hit.

So, in general, my sense Antonio, is that if we continue with some of these pricing activity that we have seen reflect in our numbers. We could see flat to slightly positive margins for next year. That’s like my story after all this explanation of the different [inaudible].

Antonio Gonzalez – Credit Suisse

Thank you so much Hector.

Operator

Operator

Your next question is coming from the line of Allen Robarts JP Morgan.

Allen Robarts – JP Morgan

Thank you so much. Congratulations Hector on the result. My question has to do more – you can check if I heard something correctly. You said regarding the increase of Powerade, you said 40% , that’s 4-0, did I listen correctly or was it 1-4 in Mexico.

Hector Trevino Gutierrez – Chief Financial and Administrative Officer

It’s 4-0.

Allen Robarts – JP Morgan

4-0 okay.

Operator

Your next question is coming from the line of Alan Alanis with JP Morgan.

Alan Alanis – JP Morgan

Thank you so much, congratulations Victor on the results. My question is what [inaudible] take if I heard something correctly, you said, we’ve [inaudible] increase of PowerAide, you said 40% of 4-0, did I listen correctly, or was it 1-4 in Mexico?

Male

Yes, it’s 4-0.

Alan Alanis – JP Morgan

4-0, okay.

Male

Magical – I think that this – one of this success stories is [inaudible], if I’m not mistaken, we now are close, or slightly above 25% in [inaudible].

Alan Alanis – JP Morgan

Okay.

Male

A few years ago we were basically non-existent, but the job that have been done by our world [inaudible] in the market place is tremendous. Obviously, in many cases, at the beginning you suffer with the price, and you have to do the best in marketing, and then you have to work up, and so at the beginning you suffer under productivity, but once you start getting a little bit of skill, and once you start taking this road to financial agenda, [inaudible] then you start making this profit.

Alan Alanis – JP Morgan

Correct, now, in that same line of thought, I did hear what you said regarding about your [inaudible] and the 40 million unit cases, and that you’ve reached also basically from zero a few years ago – could you speak, going forward – I mean, what are the next categories that you can talk of that you see this kind of potential, or what is the status of where we are – I mean, specifically, you mentioned also coffee, I mean, that would be interesting to hear a little on that, and other than [inaudible], the daily part, and if there is any other one that we should be aware of that you’re seeing that kind of potential in Mexico, and other parts I would be very interested to hear your thoughts. That is my question, congratulations again.

Male

Yes, as you [inaudible], you have some social success, and clearly in that case, by the [inaudible], the last time of going into [inaudible] that was [inaudible] but not very important in the market place and the [inaudible], and if we leave to [inaudible] very important and successful. We have some of [inaudible] results, we have [inaudible] that we’ve thought about very possibly with them, and then after a few months in the market place, we feel that they are not getting the attraction, no. I feel that the area of focus for next year for our organization is this, the coffee [inaudible] that I’m not sure if everyone is familiar, but it’s basically some equipment and some stores, some [inaudible] stores, to deliver – I mean, to sell coffee. The story there is that we have been getting some boarder attraction, but still not very profitable, and we are teaching [inaudible] the cost structure for that because we started with equipment that was very expensive as we have worked with a supplier to redo it even into a smaller and a cheaper equipment, we would basically might be better [inaudible] on that segment, but it’s like [inaudible] that we know its there, and we know we have the potential to capture because we’ve reached so many different lives with our work trucks every week, that if we conserve that [inaudible] properly, we [inaudible]. Nearly Santa Clara, we would like to work with it, and [inaudible] finalize [inaudible] that is new for us. Santa Clara is very small [inaudible] now you have machinery that would cost very 1 to 1.5% market share. Given that our hypothesis is that [inaudible] there would be, why do other dairy [inaudible], like [inaudible] would something like that – not so much on the [inaudible] milk. And there you also have the potential to have a very successful starting run, where we are just starting with that one. Certainly in Panama our experience with the [inaudible] has been difficult, we have been operating that for a year-and-a-half basically, and we are struggling with the part to [inaudible] that would [inaudible] before, but it has to do with reconnection of milk from the farms and working under with the quality and understanding that process that is behind – everything that is behind putting the product in the bottle, the bottling process that we know very well. We are learning a lot on the [inaudible] and how to logistics on the transportation of this [inaudible] are more sensitive, but I figure the only [inaudible] of good experience that [inaudible] have had [inaudible] country in going into Santa Clara and Mexico.

The other area which is highly different than a new contemporary [inaudible], like [inaudible] is what that within that bending by chance in our territories in Mexico, and so there Latin American countries, we are very under the bed. We have older peers that have much higher penetration [inaudible] for – in terms of if we mix for 1,000 [inaudible] or something like that, and I think that you will see a big push on vending for partly in Mexico to see to do vending process there, and that we find success will try to copy that to other territories. Just to give you some [inaudible] right now, we have around 10,000 within Mexico, and we feel that very easily the target for next year should be around 40,000.

Alan Alanis – JP Morgan

[inaudible] expansion, no?

Male

Yes, it’s a ruler for expansion for [inaudible] – if we are successful with that, at the start seeing that is profitable for us, we will copy part of that to [inaudible] and [inaudible] and Buenos Ares, and I think that this is [inaudible] of potential growth for our company.

Alan Alanis – JP Morgan

That is very useful Hector, and again congratulations, and thank you so much.

Male

Thank you.

Operator

Your next question is coming from the line of Lorre Serra with Morgan Stanley.

Lorre Serra – Morgan Stanley

Good morning, and thanks Hector. Just a couple of specific questions, and then one more general one. The specific questions, can you tell us how much restructuring charges were in the third quarter from the three acquisitions and confirm that this is the last time that we will see restructuring costs?

Male

Good morning Lorre, if I remember correctly, it was around 80, 85 million pesos and right now what I can tell you is that after September, we have around 650 or 650 versus the head count reduction, and we have continued to balancing October, we will see some in the [inaudible] charges in the fourth quarter. If I am not mistaken, the number right now should be around a little bit more than 1,000 persons or a 1,000 people already – the structure, I guess is what – production head count, no. So, we might see a little bit more room during the fourth quarter, but it’s not as large as we have during the first and second quarter of this year.

Lorre Serra – Morgan Stanley

Great, and then there was a swing this quarter in other operating expenses from where you where in the last quarter, was there any account that was responsible for that, its one about 100 basis points from expense to income.

Male

The other – if you rephrase to other expense line.

Lorre Serra – Morgan Stanley

Yes.

Male

The main [inaudible] that we have there Lorre, has to do with the fact that on the inventories on [inaudible] material, as you consume that it was to [inaudible] request a good [inaudible], but then you have a piece of that that is reflective in that line because when you have an accounts payable that’s dollars are [inaudible], and you have an extra positive effect, it is reflective in that line. This quarter, as we close the quarter, we got [inaudible], that is basically a reflection of [inaudible] is should we reflect in the – and be willing to cost a good [inaudible] of this quarter, but most of that is a reflection of an adjustment in the [inaudible] of the inventory for the formal end quarter are as we would consume in the future. So, in other words, when you buy from a supplier, you will receive an account payable that is dollar denominated, you register that at the exchange rate of the date that it’s registered, and then at the end of the quarter, you’ve got the exchange rate that [inaudible], you’ve got a [inaudible] that is reflected in that light.

Lorre Serra – Morgan Stanley

Okay, that’s helpful, and then a more general question, you talked about closing the Philippines by the end of the year, and you also talked about how you’ve proven and these deals that you’re a good partner for a lot of the [inaudible]. So, as we think about the expansion opportunities kind of into ’13 and ’14, do you see more opportunities to expand into Latin America, and can you do that concurrently with the Philippines? Is that what you are kind of transmitting with that comment, or should we really think about the Philippines as being the major kind of initiative on the non-organic side for [inaudible] over the next year?

Male

Yes, Lorre, I think that measure that we want to send here basically is that potential to capacity with the Philippines. For the last, I would say, four or five years, and this year – and guess it would present our quest for our world directors. We can’t be spending around $10 million every year in terms of preparing people, and talent, and getting new people in the [inaudible], and that goes from staying for example with very good [inaudible] from a group of [inaudible] and character that if you read my note [inaudible], if you look at the present operations, we basically ask for $10 million per year. We got that in the last five years for that amount of money as a weaver for the – as a weaver, would you mention the performance of the businesses, and the performance of the [inaudible]. I think that that is very key in the way of [inaudible] the benches strength to be able to go to different markets and without distracting the management of the present operations without [inaudible] with the present operations, or else be able to worry to our [inaudible] . [inaudible] scope, when you look at your normal planning process every year, and you find that in some territories like Mexico, you have high [inaudible] the consumption of some of your sparkling [inaudible], you pride market shares, you can argue that one day you will go to other [inaudible] and that’s the case why we decided to look [inaudible], if you are eligible to work, you grow potential as a great leader. If you’ve got potential to grow a little [inaudible] culture, maybe improve the mix of the [inaudible] population gets a little bit more resources, or [inaudible]. So, they spend a little bit more on [inaudible] and things like that – now our planning process is – in order to continue growing at a half base either you go to [inaudible] factors and sparkling, or you note that there’s like Columbia, where you have [inaudible] you try to invest the kind of [inaudible] sparkling drinks, and also, when you look at the map of Latin America, you have basically three large [inaudible], it’s [inaudible], and the opportunity – the [inaudible] they’re available in [inaudible] to those three are [inaudible]. There’s no other [inaudible] story in Latin America unless you do [inaudible] either with Latin America or [inaudible]. We are ready to send close to 40% or even more than 40% of the [inaudible] to Latin America. So, we do that – would you do that in your planning stations, that there our ratio of our plan goes to start doing some embezzling in [inaudible], that is why [inaudible], that way [inaudible], or you go to your indication of the Philippines where also they benefited from this aligning with [inaudible] company and we’re partner in the same [inaudible] that they think the same [inaudible] that we have believe is to [inaudible] a lot a market like that. We are familiar with their system, the weight of population is very [inaudible] income, the love for the Coca Cola brand, we feel that we have given [inaudible]. So, when it is usual for us in the [inaudible], I think that we are successful in the Philippines, we have opportunities in nation, and this is like our big chest [inaudible], but certainly we will continue to look for opportunities in Latin America, because we think that those are very easy to keep track of and to integrate, and to start getting efficiencies and bring to [inaudible] different layer than we have in our operations, and that would continue to be very important in our work focus, to continue growing in Latin America. And again, just to [inaudible] very importantly, we [inaudible] investing important resources over the last five years so that our [inaudible] management is not distracted from their responsibilities in the present operations.

Lorre Serra – Morgan Stanley

Thanks very much, I appreciate it.

Male

Thank you.

Operator

Your next question is coming from the line of Jose Yordan – Deutsche Bank.

Jose Yordan – Deutsche Bank

Hi, good morning, everyone. My question is specifically about the fourth quarter, where you see gross margins in the fourth quarter, but if you could first clarify your earlier comment about flat margins in 2013, is that your expectation for EBITDA margins for the entire year versus 2012?

Hector

Yes, Jose. I think that my comment was flat to slightly positive margins for next year on a consecutive basis, either [inaudible] by market. I’d mentioned second quarter and I reinforced through this conference call, we are planning, especially for the Columbia market, to invest importantly [inaudible] to try to force their [inaudible] per capita. We have been in this country for many years and you know that Columbia has been an area where we see a lot of opportunities and we haven’t had the opportunity or the capacity to really transform that market into a high-growth market in terms of importance. [Inaudible] in Columbia versus basically comparable to those in Nigeria, which are the lowest that we [inaudible].

So last year, Columbia, as I mentioned, will invest a lot of marketing expense so Columbia will pull down. Columbia would suffer from the margins next year because we are, again, spending – spending a lot of resources. We have a plan to [inaudible] where they would invest similar amounts and [inaudible] starting to push volumes and production in Columbia to the next level.

The other countries have obviously better margins than what we have in this year. It would depend a lot, again, on the, as you know, [inaudible] we have a very [inaudible] versus our competitors in terms of in the marketplace. That’s why we have been a little bit more anxious on trying to start [inaudible] and affects when we see the support in the communities changing that. But in general, I do see a specific trend for Mexico and obviously Argentina, will depend on this bad economic environment. And as I mentioned, Columbia will suffer for a year but we think that if we are successful with that we’d have a better future in Columbia.

Jose Yordan – Deutsche Bank

Got it. And then speak particularly about – can I ask you about Mexico specifically, right, because last year’s fourth quarter is a not-meaningful comparison et cetera, so how should we think about a gross margin for that division in the fourth quarter this year? Should it be the same as third quarter, so a sequential flat, or are there any reasons mix wise that would lead you to a higher or lower gross margin in the fourth quarter of this year, of 2012?

Hector

Yes, specifically Mexico, I think that you have a better – or [inaudible] would have a better third quarter than what – than the third quarter and we are also improving little by little and by a small amount we start to capture some of the [inaudible]. As I mentioned, in one of the earlier questions, we will still have some restructuring charges but it’s very little compared to what we have in the first and second quarters of the year. And rather than focusing on the restructuring charge, I think that the fact that we have been doing a certain level of restructuring in the organization without any problem with unions and newspapers and everything, it’s very important. We’ve closed 7 or 8 warehouses already from these territories. We restructured some of the manufacturing capacities. We haven’t closed plants, but one specific plant that was important in the [inaudible] territory, we basically have restructured that to a very small operation for water because it’s important to the logistics locally, the water operation there. But most of the lines have been transported to other parts of the – of our operations including moving some of those to [inaudible] for example, which was an acquisition.

So I believe that the whole logistics of our operations are improving and we’ll start benefiting from that before [inaudible].

Jose Yordan – Deutsche Bank

All right. Thanks a lot.

Operator

Your next question is coming from the line ofAlex Robarts – Citi

Alex Robarts – Citi

Thanks. Hi, everybody. I guess – I wanted to focus on volume and you know, 1.2% organic volume growth on a consolidated basis for the quarter was a little bit lighter than what we were looking for and I kind of just noticed Brazil. You know, looking at the carbonated soft drinks in Brazil, you know, the volume was down in the quarter, I guess first nine months you’re also down as well. And kind of, I guess the specific question comes on – if you could kind of give us a sense over the coming quarter whether we could get into or kind of achieve some volume growth there. And I guess clearly, you know, passing on the late – the more recent costs, increase in the tax and I appreciate you having to go aggressive on the – on price increases. Should we expect this kind of dynamic to continue in the coming quarters? Is demand, perhaps, softening a little bit more? I know you alluded to that earlier and I appreciate you talking about market share trends early in the call, but it would be great if you could give us a sense of that core carbonated soft drink volume in Brazil which again, Brazil is 20% - or that piece is 20% almost of your total volume. How do you see that – that volume growth in CSDs or in the coming quarters?

Hector

Yes, Alex, I see that this quarter, this specific quarter in Brazil, we suffered basically on the brand Coca-Cola front. If you look at some of the numbers that I shared during the – during my initial speech, almost every category grew except brand Coca-Cola. Brand Coca-Cola for the quarter was very, no mistaken, around 2% reduction versus last year. But the important element here is that in market share terms, when you look at colas, we are basically above 90% market share and we were flat versus the same quarter last year even though we saw [inaudible].

So I think in market share sense, we are not having any problem and in my opinion, it’s more related to the fact that after many years of reporting growth in the field, we are seeing a slowdown in the general economy and as we have been very active in the pricing front, as you expressed in your question correctly, I think that we are basically sacrificing our volume to maintain the availability of our [inaudible].

The other very important element is how to strive original profitability from the cost structure. And for that there’s a big effort of destruction the operations in Brazil in terms of logistics and manufacturing. We have mentioned before that we are building a new plant in the state of [inaudible] . It’s going to be a tremendous plant here to what we have in Toluca for those of you who have the opportunity to visit, that is state of the art. That obviously required some [inaudible] But I think that we’ll start to see improvements in some of the efficiency measures in production and logistics that had been lagging some of the other operations in [inaudible]. So, returnable’s, single serve in terms of portfolio and a strong focus on the destructing value from the cost of structure both in logistics and manufacturing in Brazil are the main focus for the [inaudible] for next year.

What is the outlook for bargains order over Brazil I think that we’ll have positive impact because of the Olympics. Because of the Olympics and then the World Cup in a couple of years after that. And we are hoping to see that this increasing in taxes and increases in some of the [inaudible] regulations just to park that away and start constructing from this new base of our business.

Allen Robarts – JP Morgan

Okay thank you.

Operator

Your next question is from the line of Alexder[inaudible]

Alexander [inaudible]

Hello, good morning Hector. So just a quick question on Mexico and the synergies. Just wanted to understand actually how much you have achieved to date, and just to get a sense of how much is left for 2013 and 2014 out of the new guidance of the $900 million in Mexican pesos?

Hector Trevino Gutierrez – Chief Financial and Administrative Officer

Good morning Alex. I think that in general the good news is that we continue to find some opportunities as we mentioned once we pass this 24 month period of the acquisition where we have basically a lot of restructuring charges and closing of the facilities and reduction in sale count. The numbers I mentioned is around $900 million. I say that for certainty next year we’ll start seeing a lot of those. I don’t have any specific idea in mind, but I’ll venture to say that probably 60 to 70% of those should be [inaudible] in 2013 as approaching that number, I’m very confident of that.

For 2014, clearly the $900 million pesos, is there coming every year after –during 2014 and after.

Alexander [inaudible]

Okay, but is there a starting point like to capture the (67) into next year, how much you have done in 2012 or before just to get a sense of the additional amount you’ll probably will see in 2013?

Hector Trevino Gutierrez – Chief Financial and Administrative Officer

I think – I mean we already capturing some of that. I mean for example, raw materials that was very flat. [inaudible] production I see happening quarter by quarter no. But when you look at the separation between organic and reported numbers, you see how the profitability of the new territories have been improving quarter by quarter. So, I think that – I mean we are already capturing part of that, it’s justified and we are separating that [inaudible] during the first – particularly in the first year, but some of these expenses also are recurrent in the second year. We have some expenses related to closing the facilities, moving production lines from one plant to another and identifying employees. At the very beginning we had some due diligences expenses related to lawyers and things like that, that are charge as part of that. So, I mean we already basically [inaudible] as I said, raw materials [inaudible]

I’ll say that for the full year next year we’ll have somewhere around 60 to 70 of those $900 million, I’m very confident that we’ll have them on a full year basis.

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