Hector Trevino - CFO.

Lauren Torres - UBS Antonio Gonzalez - Credit Suisse Alex Robarts - Citi Benjamin Theurer - Barclays Andrea Teixeira - JPMorgan Isabella Simonato - Bank of America Merrill Lynch Luca Cipiccia - Goldman Sachs Jeronimo de Guzman - Morgan Stanley.

Please standby, we're about to begin. Good morning, everyone, and welcome to Coca Cola FEMSA's First Quarter 2016 conference call. As a reminder, today's conference is being recorded, and all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

During this conference call, management may discuss certain forward-looking statements concerning Coca Cola FEMSA's future performance, and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based on 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. Hector Trevino, Coca Cola FEMSA's Chief Financial Officer. Please go ahead, Mr. Trevino..

Good morning everyone, and thank you for joining us to discuss our first quarter 2016 results. Our company started the year on a solid note, despite ongoing currency volatility, we generated robust top line results in local currencies across the world and strong defensive bottom line results in almost every operations.

While transactions outperformed volumes in key markets such as Mexico, Colombia, Argentina, and Brazil, we continue to exercise our pricing power and flexibility in every country to build on the strength on the Mexican consumer environment and to address [ph] prevailing consumer weakness in Brazil, continuing operating economic complexity in Venezuela, and inflationary pressures for our consumers in Argentina.

Our operating discipline, our proactive hedging strategy and favorable PET prices has enabled us to deliver strong defensive margins so far this year.

For the question, our consolidated comparable revenues rose 9%, and our comparable operating income grew 10%, while we increased our comparable EBITDA by more than 8% and our comparable net income by 11%.

This quarter, positive transaction growth was driven by our operations' continued emphasis on strengthening our point-of-sale executions, our focus on amplifying our beverage portfolio to provide consumers with the right beverage alternative, whether it's sparkling or still, and our push for relevant innovative packaging to satisfy our consumers' need for affordability.

As a result, this quarter we generated more than 6.7 billion total transactions across our 10 markets. Notably, we achieved solid growth in our core sparkling beverage transactions, highlighted by a 9% gain in Colombia, a 6% and 5% increase in Mexico and Central America respectively, and 17% growth in the Philippines.

Moreover, we continue to strengthen our market position across the still beverage category and maintain or gain market share in the sparkling beverages category across most of our markets, highlighted by Mexico, Brazil, and Argentina.

Powerade continued to expand its leading position in Mexico and Costa Rica, while extending its track record of gains in Argentina to reach more than 30% of market share today. Each operation delivered a solid set of operating results for the quarter.

In Mexico, we continue to enjoy a positive consumer environment, supported by strong remittances in U.S. dollar terms, low levels of inflation, and improved employment data.

Our revenues grew 11% on the back of a strong 6% increase in our average price per case and solid volumes, which expanded by more than 4%, highlighted by 14% growth in the Northeast and a 6% gain in the Bajio region. By category, our sparkling beverages volume grew by close to 6%, and our non-carbonated beverages volume increased by more than 15%.

Within the sparkling beverages category, Brand Coca-Cola grew more than 4%, and Coca-Cola Zero grew 11%. Flavored sparkling beverages grew 12% mainly driven by Sidral Mundet, and our recently-launched sparkling orangeade and lemonade Naranja & Nada and Limon & Nada.

For the quarter, these new beverages accounted for more than 60% of incremental volumes in flavored sparkling beverages. More importantly, these have already captured close to 40% of their category. In the water category, as we continue to improve growth profitability, we saw volume declines in both personal and bulk water.

In the non-carbonated beverages category, Vallefrut, Orangeade, Jugos Del Valle, and Santa Clara all delivered double-digit volume growth. Once again, as we continue to expand our point-of-sale coverage in the traditional sales channel we more than doubled the volume from our dairy business, selling more than 5 million liters this quarter.

Additionally, Powerade continued to expand its leading position in the sports drink category across our territories.

Our solid top line performance, combined with our currency hedging strategy and our operating discipline enabled our Mexican operation to maintain almost flat EBITDA margins in the face of currency volatility, and a spike in local sugar prices.

In Central America, we grew our volume by 7%, successfully building on 6% volume growth for the first quarter of last year. By country, Panama grew 5%, and Costa Rica increased close to 10%. Not only Nicaragua delivered more than 13% growth, extending its track record of growth to nine consecutive quarters.

This increase is compensated for a decline in Guatemala. Our volume growth together with our local revenue management initiatives and operating discipline enable the reason to deliver a 40 basis point EBITDA margin expansion for the quarter.

Despite Brazil's challenging economic and consumer environment, our operation continued to outperform the industry in terms of volume, implement price increases and revenue management initiatives, and maintain our franchise profitability.

Year-to-date, we have gained market share in both colas and flavored sparkling beverages, reaching now the 23rd consecutive month of gains. Furthermore, we have delivered important market share gains in tea, water, and juices.

Our ongoing focus on affordability for our consumers, underscored by the expansion of our one-liter and two-liter returnable presentations enable the volume of our multi-serve returnable presentations to grow 10%, helping our returnable packaging to gain 140 basis points in the sparkling beverages category.

Our Guarana strategy continue to deliver positive results this quarter. Our Kuat [ph] brand grew significantly across our Brazilian franchise, almost fully compensating for declines in the rest of our flavored sparkling beverages portfolio, while continuing to gain market share.

In the still beverage category, we continue to focus on increased client covers together with packaging and brand innovation for our water, tea, and juice brands. Not only we achieve double-digit volume growth in the tea category, led by Leao Fuze helping us gain more than 12 percentage point of share in this category.

During 2015, we reinforced our juice portfolio to offer our consumer more affordable price points. This quarter we started seeing the result of this initiative as we delivered 3% growth in the juice category, coupled with market share gains.

Most important, in a very complex economic and consumer environment, excessive [indiscernible] close to 40% devaluation of the currency, our pricing initiatives, our currency hedging strategy, and our focus on cost control enabled our Brazilian operation to maintain EBITDA margins for the quarter.

In Columbia, we matched the '14 quarter of volume and transaction growth. Our sparkling beverages growth was driven by a 7% increase in Brand Coca-Cola, a double-digit gain in Coca-Cola Zero, and the continued strong performance of our flavored sparkling beverages brands.

In the still beverages category we achieved 17% volume growth, driven by, again, by Del Valle Fresh orangeade, and Fuze tea. Our personal water category continued to perform strongly, growing 27% thanks to the innovative one-way PET packaging for our Brisa brand.

We continued to navigate a tough volatile currency environment and increasing inflation rates. To compensate for these pressures, we are proactively implementing pricing adjustments that coupled with our currency hedging strategy which will enable us to defend our Colombian operation margins this year.

In Argentina, consumers are experiencing pressure on their disposable income, resulting from the usual effect of the beginning of year's salary revisions, lagging regular price increases in the market as well as the removal of government subsidies. For the quarter volume was down 5% while transactions remain almost flat.

Water continues to perform strongly growing more than 30% reported by our Aquarius flavored water brand and BonAqua brand. Non-carbonated beverages grew 11% driven by Hi-C orangeade and Fuze tea. These increases partially compensated for the decline in the sparkling beverages.

Our robust portfolio our operating and financial discipline and our infrastructural investments continue to deal positive market share gains across every category, highlighted by gains of more than two percentage points in both colas and flavors 4 percentage points in water and continued gains in isotonics, where Powerade has now reached more than 30% of the market.

Our revenue management capabilities, our currency hedging strategy and our operating discipline continue to deliver solid improvement, in our gross profit and EBIDTA margins, which expanded by close to basis points for the quarter.

In Venezuela, tough operating and economic environment, we continue to experience raw material shortages leading to volume declines of almost 80% for the quarter.

In the face of high cost and expense inflation, we continued to protect the profitability of our Venezuela franchise through our focused revenue management initiatives, efficiency gains and production of the most profitable and faster rotating SKUs. Our Philippines operation has started the year with solid 17% volume growth.

This performance was driven by the growth of brand Coca-Cola and our core our core flavored sparkling beverages coupled with the more balanced mix of one-way and returnable presentation at the competitive prices for our consumers.

More importantly, thanks to our ongoing strategy transformation, our business in the Philippines is delivering positive operation and financial results this quarter. We are encouraged by this profitable improvement as we continue the evolution of our business in the Philippines.

Moving on to our financial performance; as of the end of the first quarter, our net debt to EBITDA ratio including cross currency rate swaps was 1.57 times remaining flat compared to – compared with 1.56 times at the end of 2015. For the quarter, our comparable net income grew 11% to 1.13 pesos per share.

Our foreign exchange loss resulting from the devaluation of the Mexican peso as applied to our U.S.

dollar denominated debt, net debt procedure was offset by a gain in our financial instrument position and the lower tax rate resulting from the recurring of certain tax efficiencies across our operations and lower effective tax rate in Colombia as a consequence of moving part of our local production to our new clients in that tax-free zone and ongoing efforts to reduce non-deductible items across our operation.

Going forward, we expect these initiatives will continue to have a positive effect on our consolidated tax rate. We continue to relentlessly enforce our point of sale execution, our supply chain and our diversified portfolio products and package to meet our consumers ever changing needs across our operations.

Our company focuses on operating and financial discipline enable us to successfully navigate and evolving challenging market environment, with extreme currency volatility.

To this end, we maintained a disciplined approach to capital allocation, as we continue to focus on maximizing returns on invested capital by optimizing our maintenance growth and in strategic capital expenditures to deliver sustainable profit growth for our shareholders.

We started 2016 on the right foot to continue delivering comparable top and bottom line growth for our shareholders. Transactions continued to outperform volumes in key markets such as Mexico, Brazil, Columbia, and Argentina.

We successfully increased averages prices per unit case aligned with or above inflation in almost every market, while maintaining or improving our market share across all of our countries and most of our categories.

Driven by our positive top line growth, and supported by our active hedging and procurement strategy we defend EBITDA margins across the board, highlighted by expanding margins in Argentina, Central America, and flat margins in Mexico and Brazil.

Our Philippines operation performance remains encouraging as we generate solid transaction and volume growth in our core beverages portfolio, continue to deal important cost and expense savings to our improved logistics and manufacturing capacity, and ultimately delivered consistently profitable results.

These results also enabled us to drive accelerated net income growth. Innovation remains a key driver of our portfolio positive performance.

In Mexico, our sparkling orangeade and lemonade, our new Ciel Exprim flavored water and Ciel Mineralizada continue to give strong results, while we look to launch even more packaging alternatives so that our consumers can enjoy a wider variety of sparkling beverage choices.

In Brazil, returnable presentations drove incremental transactions and volumes, despite the tough consumer environment. In dairy, we more than doubled the volume from our Santa Clara portfolio through our expanded client coverage in the tradition trade channel, and our home delivery platform.

Finally, supported by our commercial manufacturing and distribution and logistics centers of excellence we continue to transform our management and operating models to deliver solid, improving top and bottom line results for our shareholders. As always, thank you for your continued trust and support in Coca-Cola FEMSA.

And, operator, I would like to open the call for any questions at this moment..

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

Yes, hi, good morning, Hector and Roland. If I could ask two questions, the first, Hector, you talk a lot about protecting and defending margins.

And in light of the macros and currency volatility that we're seeing, just curious to get your perspective, if you feel as things get tougher in some of your markets, so which markets do you think are most at risk where you won't be able to protect margin there, or we should see some pressure, just trying to get a better sense of that? And the second question is more general, just an update on consolidation in the U.S.

process. We heard more from Coke last week on signing agreements potential interests from bottlers. So if there's any further detail you could provide on that that would be great. Thank you..

Good morning, Lauren.

I think that with respect to the first question, protecting and defending margins, I think that as we are facing, as I mentioned, currency volatility in all of the territories basically, we have been, as you see from the numbers, very active in trying to increase prices to the consumer either through new launches, meaning new packaging sizes, a smaller size with a higher price.

And in some cases, launching returnable presentations like in Brazil because of the very tough environment we feel that with the success that we have with returnable PET in two liters, it's the strategy that help us in the possibility to increase prices in other transaction, in other packages.

And the strategy in general is, try to continue with these price increases in every market. I think that we are facing a favorable market with respect to PET prices. Going forward we will certainly have some pressures with sugar in most of the territories, we are feeling that.

We have in the case of Brazil that is where we can actively do some hedges with sugar, some good hedges that would protect some of the profitability in Brazil going forward. It's not the case in Mexico, because the price in Mexico is very different from the international prices, and it's not possible to hedge.

We do some pre-buys with some agreements with the supplier. So I think that we have good pricing in Mexico also, but we will suffer a bit more from the volatility of sugar prices. So, all in all, with all of these, what I'm saying, I think that we will focus a lot on increasing prices in every territory when possible.

I think that Argentina and Brazil are tougher in that sense. In the sense of increasing prices because of the macroeconomic environment we are seeing a consumer in Brazil that is not that well. In Argentina we have a consumer that is hurt at the beginning of the year.

That's normal when you have prices for services like water, transportation, and electricity increasing sometimes in excess of 300%. So the consumer is a little bit away from all consumer products in Argentina.

But in Argentina the good news is that we were anticipating the movements in the currency since last year, and most of our raw material needs, in dollars, are already covered since prior to the devaluation. So we have very good cost structure in Argentina. So Argentina it's very possible that we can maintain our profitability.

I think that the rest of the countries, including Venezuela, we have a lot of flexibility to move prices according to what we see fit and obviously trying to balance market share and competitive pressure. With respect to the USA, we heard the news about the U.S. entering into some agreements we franchise some of our territories.

You now basically have California, parts of Nevada, Texas, and New York, things like that. I think that's also important territories in terms of volumes still. There is nothing new to comment at this point. We have continued to have not that formal conversation with the Coca-Cola Company of our interest in volume.

We have continued to express our interest to the Coca-Cola Company and going to the U.S., but we have not engaged in any formal negotiations at this point..

Great. Thank you..

Thank you..

And we'll go next to Antonio Gonzalez with Credit Suisse..

Hi, good morning Hector and Roland. Thanks for taking my question. Just two quick ones, the first one, you mentioned, Hector, during your prepared remarks that the northeast of Mexico was doing really well, and the Bajio region to a lower extent was also quite healthy.

Are there any comments you can share on the Southeast? And are you seeing any implications from all of the weakness in the supply chain of them, et cetera? Is that translating into a considerably weaker consumer environment? That's number one. And number two, very quickly, also you mentioned a large increase in the milk segment in Santa Clara.

And your peer bottler in Mexico, Arca [ph] made similar comments.

So I just wanted to ask if you can give us any additional color in terms of whether you think this is a coordinated improvement, you think obviously in the context of the JV with the Coca-Cola Company, do you think that the whole JV is working better? Or is it more bottler-specific initiatives that are driving this improvement? And where are you, you think, in terms of this improvement, 50% through, is there more to come or you have captured most of it? Thanks..

Good morning Antonio. I think that in the opening comments I wanted to highlight this comment about the northeast, because I think it's important. I think that the north of Mexico, and you know that we are position of the former Tampico franchise; we cover up a big portion of Tamaulipas, and also the north of Veracruz.

We are seeing a much better performance. I think that has to do with macro activity in that region.

And probably -- and we think that is related close to the Pemex activity in the southeast, and also some of the regions like in Guerrero to the insecurity and some of the stores not been opened full hours, and things like that, especially Guerrero and Michoacan.

However -- and also I think that the north of Mexico has helped also by very good weather conditions. So when we segment the different regions in Mexico we see the southeast, especially Tabasco and Central Veracruz somewhere around the 5%, Chiapas, around 7% with good growth. But the states as I mentioned, Oaxaca and Guerrero are somewhere around 2%.

And then the Center of Mexico growing somewhere around 3%, that's basically what I can tell you. A very tough environment, more with respect to the competitive environment in some regions of the Valley of Mexico where we are seeing, basically, volumes growing slightly below 2%, which it's very different from what we are seeing in the northeast.

So I think both weather issues and economic activity play a role in these different performances in different regions. With respect to milk, I think that this is more the effect of the fact that we are growing, basically doubling the size versus prior year, still over a very small base on the dairy business.

It's more the effect of our very well-coordinated JV effort together with the Coca-Cola Company and the rest of the bottlers. We are facing some capacity constraints in our production plans in Pachuca.

We are building a new facility in the Jalisco area, Lagos de Moreno, which is a very [indiscernible] area which is -- that's why we are building this new facility there. But at the end of the day, Antonio, this is the result of the strong and very profound capillarity that we have with the distribution network that all the bottlers have.

So, before, when we acquire these it was basically sold in the Santa Clara stores and supermarkets. Now, when you reach thousands and thousands mom-and-pop with a coordinated effort, then you start seeing this good performance in terms of volume..

And would you be able to share, Hector, what's the coverage that you have in the traditional channel? Are you 50% of where you'd like to be or even less than that? Are you able to share any order of magnitude there?.

No, I think to don't have a specific number. Antonio, let me get back to you on that. But we still have a long way to go. And as I mentioned, the issue right now is production capacity.

So we have to be careful with that, and because it's not good to overextend your reach and then not being able to supply because of production capacity, so we are moving slow in that front. But I'll get back to all of you with the coverage number in the next call..

That's perfect. Thank you so much, Hector..

Thank you..

And we'll go next to Alex Robarts with Citi..

Thanks, and hi, everybody. Yes, I want to go back to your comments around, first of all, Venezuela. And it's one of these markets that, at least I feel, the visibility is still quite low. And yet you managed to get very good pricing, good margins despite these scarcity issues and volume declines.

I mean can you tell us a little bit about or help us, looking out in the next couple of quarters in Venezuela, what are the further downside risks or even upside risks to that market? I seem to have the impression or seeing in various local commentary in the country that March saw a further ratcheting down of conditions and availability for raw materials and supplies.

And so, just it would be great to get your view on the short-term in Venezuela. That's the first question. Thanks..

Good morning, Alex. Venezuela is, as we have mentioned, is a very tough country to operate. Basically what you have there is very strong inflation, and especially with respect to the cost of our raw materials, because everyone that is producing locally is increasing prices importantly.

So it's an environment where you have, officially, numbers around 200 or 200-plus inflation. But when you look at the price points that we have in some products, we have increased prices, like 400%, obviously as a way of, as you mentioned, as a way of protecting the profitability in local currencies in the country.

The strategy that we have there, it's very simple. We know that we have scarcity of raw materials. We focus basically in Brand Coca-Cola. That is our fastest rotating SKU, and the most profitable SKU. So we will sacrifice other flavors in order for us to produce Coca-Cola when we don't have raw materials for every -- to produce 100% of our needs.

Second is to continue to increase prices ahead of our cost inflation so that we continue to protect this profitability. And third, is trying to move as much as possible to local suppliers.

And for that we have to have a very coordinated effort that has been here for many years with the Coca-Cola Company in terms of finding quality suppliers for, for example, caps, plastic caps for our PET bottles, starting this month has been produced locally.

Before, we were struggling, and having a very difficult time with the central bank to get in dollars in order for us to pay for imported caps. The same I can say for labels and plastic crates, trucks. Everything we are trying to localize suppliers as much as possible. I think that we have advanced a lot in that front.

The issues, presently, have to do with the scarcity of sweeteners, basically sugar, because it is not so much because local production is not there is the spare parts for the mills are late, and sometimes the mills have to stop production. And electricity is starting to be an issue also.

So sometimes we don't have electricity in our plants or in our distribution centers. And, obviously, that causes disruption in our operations. But again, I think that what is remarkable from our team over there is that in spite of 17%-18% margin decline, we continue to maintain profitability in local currencies.

We are translating, as you know, everything now at the so-called DCAM [ph] exchange rate. We used to [indiscernible], so that number is increasing today at 366.

So next quarter we will report numbers with the higher number in terms of translation and that way we are presenting this comparable uses in Venezuela because of the potential noise that Venezuela could present in our financial number.

Going forward in the future I think that the potential downside has to do mainly with these two issues, electricity and sugar scarcity. I think that we're very well-placed, in terms of the rest of the raw materials and our assets for production.

I think that at the end of the day, Venezuela is a large country with good value for our [technical difficulty] in the future potentially could be positive for Coke franchise. So I see a lot of options value on this operation in the future, okay.

Yes. Thanks very much; very clear, comprehensive. I want to just shift gears a little bit to the kind of M&A big picture issues.

We've talked about certain regions that are of interest in focus for you with varying degrees, most recently though, I feel that with this change of control potentially happening or pending in the African continent with the Coke operations there, as they relate to the SABMiller acquisition, could you share like a little bit about your thinking with that region, I mean on the plus side, there's obviously some interesting go-to market and market structure similarities with Latin America and Southeast Asia and in Africa, but at the same time, it seems that there are some owners or partners that might be interested as well in kind of being on the shortlist.

I mean can you comment on how and if Africa may figure into the Coca-Cola FEMSA scheme or outlook on consolidation? That's my last one, thanks..

That's a tough question because first of all, a lot of things have to happen within the Coca-Cola Company in Atlanta and in the relationship with SABMiller for us to start material – potentially materialize in the future.

When we do some of our planning sessions, we carve a very, very clear understanding that we have contiguous territories that are very profitable to take an opportunity from the speaking up from M&A point of view, basically meaning Latin America, we have this opportunity in Asia and I think that the fact we are improving substantially the performance market wise and financial wise in the Philippines is also helping us position ourselves also to be a player in other countries in Asia and acquiring the other 49% of the Philippines that we owe now.

The U.S. market is an attractive market, as we have mentioned because we believe that very good opportunities to do a better market activities and better market performance in that territory and clearly Africa is there and is attractive in the sense again the low per capita, the similarities that you described with Latin America, certain issues.

The fragmentation of the retail system, but that would be more towards the end of all this, that I described in other regions of the world, I think we have many, many opportunities in the – that are strategically better for Coca-Cola FEMSA and including also continue to grow in other categories in the markets where we are.

Before we move into really analyzing, I think that the first element is already for the Cola-Cola company to define what the future of this company with the partners they have right now and then if something evolves, where we would certainly look at it but I think that many, many other geographic areas that are closer for Coca-Cola FEMSA, okay..

Okay fair enough. Thank you..

We will go next to Benjamin Theurer with Barclays..

Hi, good morning, Hector. Good morning Ronald. Just one question to your comments you made on this volume growth on brand Coca-Cola and Coke Zero, et cetera. So it's kind of interesting that low teens growth here on the Zero category.

Can you give a little more detail where it's coming from, do you think it's shift in consumer habit or is this really something which is more due to seasonality or whatever, and basically what does this category now represent within the Coca-Cola segments, the lights and the zeros, in the lives of the world, I know they are very small, but what's roughly this year now and the growth, how has that evolved over time, so that would be my first question..

Good morning, Ben, I think that we have not seen the growth of the low calorie products as one might expect that is clearly above the calorie content of brand Coca-Cola.

We have moved to have very clear clearly very clear labeling of the calorie content of our products, and strategically in most of the territories, we decided to and especially let me speak for example, the example of Mexico, [technical difficulty] after the tax was implemented a couple of years ago, we decided to increase to the consumer in all of the products including Coca-Cola light that didn't have the tax.

So Coca-Cola Light because of the premium attached to that brand. We also maintained the small price premium of [indiscernible] with brand Coca-Cola was depending on the partition in the region.

The Coke Zero we did increase the price, so right now the increase in Coke Zero and most of the zero brands that we have, in fact we have Fanta Zero and the Sprite Zero also in some other markets, we are using that as a way of having an affordable low calorie product and also to try to foster the growth of the low-calorie product.

And that's what is happening two years after we have this strategy, it's we are seeing a better growth of the price; still very, very low penetration of this brand in most of the markets. Mexico for example lights and zeros account for less than 3% of the total brand Coca-Cola. Coke Zero is 0.6% or something like that of the mix.

You have markets like Argentina where the consumer and granted that we basically serve, the greater Buenos Aires area, where we have large disposal with the income of the consumer compared to the country. So in Argentina, lights and some low calorie are closer to 89% Brazil is somewhere around 5%, still very, very low compared to the U.S.

or other countries, but basically what the messages that we want to say, the zero strategy is to maintain prices below brand Coca-Cola or below Fanta, regular Fanta and that's why we are seeing the smaller factor growth than the rest of the brands.

Okay?.

Okay, perfect, and very clear. And then just more technical question, so first of all, your tax rate in the first quarter was pretty low in comparison to what we're used to see in the past, it usually was around about really that 30%, 30.5% then, clearly went down here in the first quarter.

Was that because of any special taxes carry for whatever you may had or anything related to Venezuela if you could explain a little bit what happened to you on the tax rate..

I think that this is basically a reflection of two important elements. One is that Venezuela represents around 2% of our net income, consolidated net income. Before it was representing a larger portion and Venezuela is the one that has the higher effective tax rate closer to 40%.

The second point is that, as we have the new production plant in Colombia we have also, like a tax free, where some of the value added factors are zero or very small. But also we have a lower income tax number for that – the company around that production plant and we are shifting more volume to that plant.

Our total Colombia effective tax rate is also coming down and the rest is basically looking for efficiencies in every country and trying to be as efficient as possible as always complying with lower -- with the tax lowering in every country now, but the two main impact, the fact that Venezuela is now a smaller portion of our consolidated number and the fact that, this production plant in Colombia special treatment with respect to income tax.

Going forward I think we should see, going forward just for everyone to be clear, before we were saying that somewhere around 30% was a good effective rate, I would say somewhere around 28, 29 would be my new expectation going forward..

Okay, very clear on that, and if we're talking about expectations on guidance a little bit on just very quickly on CapEx which was well down by about 25% compared to what you spent in the first quarter of 2015.

There as well for full-year, if you could give a little bit of an idea what you are planning to spend in terms of investments, PP&E, et cetera so that we get a better sense on CapEx here as well just by having seen that 25% drop on a year-over-year basis so that would be great..

Yes I think the in the CapEx front, it's important for everyone to have a very clear. We have like three or four years where we will building a new plant in Brazil and a new plant in Colombia and specially the last three years, we were closer to 800, 850 million CapEx. This year I am expecting somewhere around 650.

Again we have this big two plants that are now, would not require us to do a lot of investment in production, we will continue to invest in coolers, trucks, bottles, and cases and things that are more -- that more every year, but given the large increases that we have capacity in Brazil and in Colombia, we will have a few years of lower production CapEx.

I think that our center of excellence for supply chain is doing very good job in finding efficiencies and we are very strict in making sure efficiencies in every plant and at the end of the day, we can improve the production efficiency by one percentage point, CapEx for two or three years, CapEx meaning we don't need a lot of production line because you have extra capacity improve efficiency.

So somewhere around 600 to 650 is safe to be a good number for the following two or three years we expect to come, okay?.

Okay, perfect. Thank you very much..

We will go next to Andrea Teixeira with JPMorgan..

Hi. Thanks, Hector for taking the call. I just wanted to ask a question regarding margins and costs, and I understand you explain about the sweeteners still wondering how you're seeing that for the rest of 2016. And also regarding in some of the explanation you gave to previous questions about in the name.

So obviously we've seen you being very active in the past in Latin America and now you de-leverage the -- assuming that you leveraged to the level that you wanted, I was just wondering if you're still looking into doing and to be more aggressive into the rest of specifically in the Andean region, it seems the missing pieces for you and if you were to reign understand obviously that turns to the top of the in other list for you in terms of M&A.

And if and how, but you might end up with Asia depending on another franchise in Asia depending on how the arise or would you be able to negotiate with coal to wait on that in order for you to be able to participate in and more interesting or more synergic oppositions or even in the U.S? Thanks..

Good morning, Andrea. I think the rest of the years -- for 2016, I think that margins -- what we saw in the first quarter is a good reflection for the rest of the year. I think that as I say we will continue to monitor the internal cost that we have because of the volatility of the currencies.

Reminding everyone that we have an active hedging team, so we do have some protection in that sense going forward, and we had been very active in the pricing front, and I'm sure when you compare with all of these in the industry, we will see that our pricing activity and flexibility has been there.

So, imagine that we have improvement in margin, we have I think are here to stay for the rest of the year. In the cost front, I'm worried a little bit about sugar prices, and as I mentioned, I'm seeing a benign environment in PET prices in dollar term.

And again, we will try to continue to be proactive -- we would continue to be proactive in the hedging front. With respect to M&A, I think that there are still some pieces of territories in Mexico, Brazil, and in South America. I think that those are potentially very attractive for us, because of the synergies and the knowledge of the market.

I think that in fact that we're having a good performance in the Philippines, it's giving our Board of Directors more confidence into continue investing in Asia, meaning when the time comes, executing the other 49%, the option that we have -- provide 49% of liquidity, and certainly to look at adjacent territories.

But more importantly I think that Coca-Cola Company is also convinced that we are doing a very good job in the Philippines. Remember that we have a tough start of operations there as we were changing go-to-market and portfolio on pricing and different SKUs. And we started our -- our start in the Philippines was really some ups and down.

Now everyone -- my feeling is that everyone in Atlanta is convinced that we're doing a good job in the Philippines, and that also pose well for potential opportunities in other adjacent territories in Asia.

And finally the U.S., we have mentioned this is an attractive market and we would like to be a player there, and we have communicated to the Coca-Cola Company very clearly..

But how can you prioritize those? I mean if you were to prioritize many of those what would be your wish list? And just a follow-up on the hedges, if you can, remind us how the hedges are for the second quarter and ahead?.

Yes, prioritizing this is kind of difficult, because we also needed [indiscernible]. I think that the U.S. is very clear that Coca-Cola Company wants to finalize this first, 2017.

So I think that that's -- there is no question when that happens -- let me rephrase that, there is no question that the Coca-Cola Company want to move ahead in re-franchise, and there is no question that we have expressed we like to be there and take a look at the values and the operating model and all of that.

The rest of the Latin America, I think that whatever we can do there is very, very easily adjustable by our operations. We have evolved a lot our management capability, our processes to be able to take on the regional franchise and just compare everything to our KOS way of doing things.

So when I say that, I'm speaking about supply chain, commercial initiatives, administration, treasury, everything is so well prepared that it will be very easy to do it in Latin America. We know most of the markets in Mexico and Brazil.

So if someone -- we know that someone who is willing to sell at reasonable prices, in Mexico, Brazil, it's going to be very easy and we have the debt capacity and we have been losing shares also in Mexico in the past. So I don't see very strategic problem to moving that direction.

I think that we have a management-based strength also to deploy some of our knowledge to these areas in Latin America. Asia is a little bit further down the road mainly because the option that we have for the other 49% is based around 2020.

And from the financial point of view, just from the pure financial point of view, we'll makes sense to work till the end, because these are very low cost call that we have on that.

In the meantime if some of the adjacent territories were to be for sale, we certainly will take a look and see if it make sense to move in that direction before the 100% liquidities, but in terms of the timing, if you will -- the timing that I see for these transactions, the U.S.

the Coca-Cola Company is dictating the pace, because they say that in 2017 they want to finish. Latin America, with this volatility that we see, and normally we also see the owners of these franchises are a bit more nervous about this is the right time to move up, and this works both way.

Sometimes people say no, this is not the time to sell, and sometimes that I rather sell before these things get worse. And as I said, Asia broadly is a bit further down the road.

With respect to the hedges, we have -- with respect to currency hedges, normally you will find that for the second quarter of 2016 we have somewhere between 50% to 65%-70% of our mix [indiscernible]. And as you go further down the road for third and fourth quarter, it would be more around 30% to 45%. Those are the ranges that we use in this.

We are starting to lose something for the first quarter of 2017, but that's even -- it represents broadly around 10%..

Thanks, Hector, but that's only for the FX, right? It's not related to the price of sugar or the price of fructose?.

It's only for the FX, what I'm referring, in some cases we negotiate, for example, in Brazil we do enter into hedges because the so-called Contract 11 for sugar is a very good season for the prices in Brazil. So I will say that we have somewhere around 30% of our needs in -- for 2016, probably a little bit higher than that.

And again, next quarter probably closer to 60% of our mix, and it's going down all the way to the first quarter of 2017, somewhere around 15%-20% for the sugar geography. And then with suppliers in Mexico, fructose or sugar we try to pre-negotiate the following three or four months, and we agree on the pricing and delivery date.

We discuss basically part of the normal commercial practice that we have with suppliers in rest of the countries.

Okay?.

Very nice. Thank you so much, very useful. And congrats on the results..

We will go next to Isabella Simonato with Bank of America Merrill Lynch..

Hi, good afternoon everyone. Thanks Hector for the questions. First question is, back to Venezuela.

If you could if you have any visibility if you're raw material supply would, at some point, normalize and volumes start recovering or this is your view for the remainder of the year? And also given the ongoing volatility and lack of visibility in this business, it still makes sense for the company to continue to fully consolidate debt under results given the volatility of the numbers there.

That's the first question..

Good morning, Isabella. In Venezuela, I think that it's tough to predict what the volumes are going to be there. My feeling is that even viscosity with sugar, and potentially we're in the summer months, we will have some shortages and days that we would not be able to work a 100% of our [indiscernible].

So, somewhere around, I'd say, 15%-20% below volumes of what we have last year. That's basically my estimate for Venezuela. I think that -- as I've mentioned, we will continue to increase prices importantly to cover for the cost that we have, so that we maintain the profitability in local currencies.

We have reviewed the issues in Venezuela with our auditors, and even with some advisors that are experts in accounting, and because of the -- because we operate on the international financial rules of the U.S.

GAAP, the fact that you have a very complicated microeconomic environment and scarcity of currency is the reason good enough to de-consolidate the operations and that's why you have seen a number of companies, including, for example, PepsiCo, Kellogg and Unilever, and Delta, and some of those companies are consolidated in Venezuela.

There is not a single example of a company on the IFRS rules that have this consolidated because while we have this done, they say, you do it, I will give a qualified opinion, which you cannot [technical difficulty] we have purchased some dollars at the [indiscernible] rate and then at the parallel rates and then in transactions that are total opened, and we have used those to pay some spare parts and we paid some deviance of very small amounts.

So according to our auditors, there is no reason right now for us to reconsolidate the numbers of Venezuela.

So the best we can do in terms of explaining the performance of the companies to present numbers as reported and then numbers that are comparable, meaning excluding money transactions or excluding countries like Venezuela that can distort some of the consolidated numbers because of the volatility.

Okay?.

That's very clear. Thank you for your answer. And the second question is regarding the re-franchising the U.S., if you have any update since the Coke is accelerating the process.

If you have any updates on how you stand on that?.

Yes. As I mentioned, we have expressed very clearly our interest to the Coca-Cola Company to participate. If you look at the map, there is basically California, Texas, New York, and Nevada, and parts of Arizona.

In Mexico, we have not engaged in the formal process with the Coca-Cola Company other than having a continuous dialog of also expressing our interest, and they're saying that they want to move fast in new franchise.

Okay?.

Perfect, thank you..

Thank you..

We will go next to Luca Cipiccia with Goldman Sachs..

Hi, good morning. Thanks for taking my question. Hector, I'm sorry, I'm going to ask another one on consolidation and M&A, but actually wanted to drive kind of little differently and not so much and would you be interested in buying PET, rather what you may be interested in selling if the opportunity is right.

And I think is my question specifically refers to Argentina, it seems to me that there is a process also rationalizing the structure of the distribution across markets in countries and where possibly have as possible in one particular region, one particular market.

I think Argentina seems to be a little bit the odd one out with four different bottles there. So, should there be opportunity for you to say exit that market, say in exchange of maybe territories in Brazil.

How would you look at that opportunity, how strategic would you think Argentina is for you or rather is it that you have an ambition to expand, how attractive you consider Argentina for you as an M&A opportunity as a whole if not in its single parts, maybe swapping Argentina and Brazil specifically?.

Good morning, Luca. Where to start; Argentina, I think that Argentina as you say we have four bottlers there. It's changing territories. It's always a possibility, no question about it. It has not been done in the past other than very small things [technical difficulty] changing small pieces of territory that really make sense to changes in the past.

I think that's the possibility we haven't explored at this time. I think that one important element that we have is that we believe that owning a very large city is very important and strategic. So, you have a very, very profitable Mexico city.

I don't have any doubt that Buenos Aires is the most profitable territory in Argentina, because of the concentration et cetera. The same is true for Bogota and Sao Paulo. That's why Belo Horizonte was very important for us. This is the third or fourth largest city in Brazil.

I want to mention that it's not only the size of the population or the number of locations you serve this, the profitability of the cases that you serve in a big city is important..

I guess Rio de Janeiro would be equally -- I guess Rio would be really attractive right? That makes sense..

Yes, certainly there is the potential, yes. So you have Andina, you have Arca, and you have a small independent bottler, which is David Lee, which is basically next Buenos Aires, and there is literally a street that differentiates one franchise from the other in Buenos Aires.

So doing something with Andina in exchange for territories in Brazil, either way could be a possibility. Yes, certainly there will be a possibility. It make sense strategically, yes, it only would make sense from a synergetic contribution.

So if you ask me, I don't know what Andina was asked to do, but if you ask me, I would say yes if the price is right, the conditions are right, there is a possibility. And then, if I understand correctly, you said, is Andina a potential target as if what I want to understand, I do see Andina, the large companies are trying to consolidate.

We have very good relationship with them, and I see Andina staying independent for many years as a specific contributor. It will be attractive. I think that it will be attractive for everyone..

Absolutely. I think it's very clear.

I think my question is precisely with the -- I mean you've been talking about the U.S., you've been talking about Asia, you've been talking about opportunities in Brazil in your existing territories and I was wondering how much really can you take on even in terms of real, how much you've been update there is to take on maybe regions if we move more fit, while you're not aware today even if the come up with opportunities when in fact, you still have Brazil to close and potentially the U.S.

and Asia longer term.

So I would assume maybe that's not the top of your priority list going back to that idea what comes first?.

I think you are right. I mean, at the end of the day we feel that what I describe as potential territories, I'm not seeing all of them having at the same thing. I think that we have been building a strong management team and we have very young talent that we have been fostering for many years in the organization.

I think that something in Latin America will be doable very easily because of knowledge of the markets, and again, the moving talent along will be much easier. In Asia, we have been out for three years.

I think that we're building a good Philippino talent and international talent in the Philippines of different nationality that [indiscernible] region, and the U.S., potentially be northeast, certainly. My feeling is that not all of these will happen at the same time..

Thank you, Hector. Thanks..

We will go next to Jeronimo de Guzman with Morgan Stanley..

Hi, Hector and Roland. I had a few follow-ups, maybe just starting with Venezuela, just a follow-up on the availability of the purchasing of raw materials.

I wanted to get a sense of how much of the raw materials you are still purchasing at the official rate or some of the controlled rates versus how much are you already purchasing locally here with the implied parallel rate?.

Good morning, Jeronimo. In Venezuela, I would say that most of the suppliers we are paying local currency. It's not necessarily at the official exchange rate. In other words, we might be buying some products that differ -- the equivalent and differ in exchange rate you were to buy these from the outside.

In other words if someone is worth, if a product, let's say plastic cups. If you were to buy a $100 worth of plastic cups, you will not be worth at 10 Bolivars locally, if they would charge you more, but [indiscernible] the local currency, so expensive raw material when you translate that at official rate.

Plus, the official rate is not available to buy these cups. So that's the point of the minor over there. So right now, most of the raw materials we're buying from local sources.

There is still few, very few amounts of imported raw materials that are coming from other parts of the world that we are still in the process of negotiating with the Central Bank to get the dollars, and obviously the payment period for that is much longer. The waiting time to get this out of the Central Bank is getting longer and longer now..

I see. So, at this point you see, I guess limited down side and we were to lose access to wherever remains that you're buying at the official FX rates and….

Yes. Basically what we are saying, what we are doing is participating in some of this buying dollars at the [indiscernible] 260 today. Sometimes we will buy dollars at that rate than we used to buy spare parts or some raw materials that we don't get authorization from the Central Bank.

For example, last year we ended up acquiring somewhere around $11 million to $12 million at that rate, and that's embedded in our cost structure in the P&L, because that's the official rate that we used to buy raw materials. So, little by little we have been shifting most of our raw materials to local sources. So right now I'm saying 95% is local.

Okay?.

Okay, very helpful.

And then just on the Philippines, you mentioned that the volumes and you also mentioned that the profitability is improving, which is encouraging, just wanted to understand what is driving that profitability improvement efficiency and are you seeing already maybe a better or more rational pricing environment from the competition?.

It's more of the first part of your question is more efficiencies, cost of structure, better supply chain, we're seeing rate of pricing environment from the competitors, but we launched new presentations and moving to the returnable presentation, the three quarters of a liter presentation, that's the one that we call Kasalo, that is having a lot of success.

We're reaching the competitive price point with a turnover approach and trying to have a good pricing on our one-way presentation. So it is balancing this -- having a good balance between returnables and one-way presentation. So, on the pricing front we still have some room to improve. It's more the latter that's having the efficiency, et cetera..

Okay, great. Thank you very much..

Okay..

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

Thank you everyone for your time and attention to this conference. And as always, Coca-Cola FEMSA and the team is available to answer any remaining questions you might have. Thank you for your support..

And that does conclude today's conference. We thank you for your participation. You may now disconnect..