Coca-Cola Femsa SAB de CV

NYSE:KOF

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, everyone, and welcome to the Coca-Cola FEMSA's Third Quarter 2018 Conference Call. As a reminder, today's conference is been recorded [Operator Instructions]. During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA's future performance, and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.

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

[Héctor Treviño Gutiérrez, executive]

Good morning, everyone, and thank you for joining us to discuss our third quarter 2018 results. Let me begin by saying that we are enthusiastic about the integration of our recently acquired territories in Guatemala and Uruguay. Our company's incremental volume growth driven by these new territories is 2.4% on an annual basis. Before going into our operating and financial highlights, it is important to note that several factors affected the comparability of our year-over-year results for the third quarter. First, as previously announced, due to a change in the reporting method, the results of Coca-Cola FEMSA Venezuela are no longer included in our consolidated financial statements as of January 1, 2018. Second, volumes and financial results of our recently acquired territories in Guatemala and Uruguay were consolidated as of May 1 and July 1, respectively. Third, on August 16, we announced the exercise of the put option to sell our 51% stake in Coca-Cola FEMSA Philippines to the Coca-Cola Company. Therefore, according to IFRS 5, the Philippines operation is presented as a discontinued operations as of January 1, 2018. And the consolidated financial statements was represented, as the Philippines had been discontinued since from beginning of 2017. Consequently, comparative figures are not the same using the financial statements published in 2017. As of July 1, 2018, our Argentina operation was reported as hyperinflationary subsidiary. This means we have to reexpress the results of any given month in real terms to the annual -- the reporting period. In this quarter, July and August, where we expressed in real terms as of September 30. Also, we have to use the end of period exchange rate to translate to Mexican pesos. To better describe our business performance for certain information, we present comparable figures, excluding the effects of values on acquisitions, triangulation effects resulting from exchange rate movements, Argentina, because this operation has become a hyperinflationary subsidiary and the results of Venezuela in 2017 as it has been deconsolidated. With this in mind, our operating and financial results this quarter reflect an inflection point in many of our markets. Volumes increased in Mexico, Central America, Brazil and Colombia. We continued pricing in line with or ahead of inflation in Mexico, Argentina and Central America, and we are consolidating the results of our recent new acquisitions of Guatemala and Uruguay.

Our operations continue to face challenging external factors, such as volatility in currencies, like the impact the translation effect in Brazil and Argentina, and affected our U.S. dollar denominated costs. For instance, the Brazilian real depreciated 25%, and the Argentine peso, 100%, compared to the U.S. dollars. Also, higher PET prices among our operations and an incremental concentrate price increase in Mexico were partially offset by lower sweetener prices in other territories and a favorable currency hedging position in South America. Importantly, our operators' strong capabilities and market-based execution, combined with the positive results of our business digital transformation, mitigating these factors, resulted in the reported high single digit increase in our profitability.

Moving on to our consolidated results for the third quarter. Our reported revenues declined slightly by 0.7%, while our comparable revenue grew 6.5%, our fourth consecutive quarter of delivering mid- to high-single-digit comparable revenue growth. This growth reflects the achievements of our KDP commercial digital platform, targeted analytics digital initiatives at each of our point of sales, positively impacting our top line growth by offering better pricing and promotions for our clients and faster responding to the market with our customized initiatives. Moreover, our successful deployment of affordability initiatives and relentless focus on point-of-sale execution will enable us to continue gaining market share in gradually recovering consumer environments, such as our South American markets. Colombia is gaining traction, Brazil continues to deliver top and bottom line growth and Argentina is better than ever prepared to face the current challenging macroeconomic environment, driven by a digital and affordability initiatives.

Our reported gross profit grew 0.6%, while our comparable gross profit grew 5.8%. Our reported operating income increased 8.2%, while our comparable operating income increased 5.5% for the quarter. Specifically, lower sweetener costs, a favorable hedging position in South America and operating efficiencies partially offset higher PET prices in most of our countries and higher concentrate prices in Mexico.

Our reported operating cash flow declined 1.2%, while on a comparable basis, our operating cash flow increased 6.2%. In addition, our reported majority earnings per share increased 3.6%, reaching MXN 1.55 per share, resulting from our previously described operating performance and the effect of a noncash gain on monetary position in inflationary subsidiaries generated by Venezuela for the third quarter of last year. On a comparable basis, earnings per share, we have increased 21%. Additionally we reported earnings per share of MXN 1.36 versus -- growth for the -- from the continued operations this quarter, as we consider the results of the Philippines business as a discontinued operation.

Now I will briefly discuss each of our operations highlights for the quarter. During the quarter, our Mexico operations revenues grew close to 8%. This solid top line growth was driven by close to 3% volume growth and prices in average on line with inflation, impacted by a mix effect. Excluding jug water, our Mexico operations volume grew 3.7% for the quarter. Although we experienced less pressure on sugar prices compared with last year, our top line results were affected by higher PET prices and the depreciation of the Mexican peso as applied to our on-hedge U.S. dollar-denominated raw material cost. Starting July 1, the price of concentrate increased another 1 percentage point of revenues for the next 12 months.

With regard to pricing, we increased prices in September, which affected our volumes for the month, but proactively prepared us for the end of the year. Also, our portfolio mix impacted our average price for the quarter, as multi-serve and returnable presentations increased the share of our portfolio mix. Finally, all of our various categories' volume, except jug water increased during the quarter, with brand Coca-Cola growing low single digits and still beverage growing close to 12%.

In Central America, we reported organic volume growth of 2.7%. Included our recent acquisition in Guatemala, we reported 35% volume growth for the region. Guatemala continues to perform positively, with double-digit organic volume growth thanks to the implementation of our presale operation model. In our new franchises, we are capturing synergies through portfolio alignment, mainly in the still beverage category, as we started our affordable portfolio by launching our 2-liter, multi-serve ret-PET presentation.

Our Costa Rica operation continued to report positive volume, while our Panama and Nicaragua operations volumes contracted. Despite softening consumer dynamics resulting from a disruptive sociopolitical environment, our Nicaraguan operators have been able to contain the volume contraction. The pricing environment in these countries remains challenging because of spot market competition affecting our price mix for the region. For the quarter, lower sweetener prices were offset by higher PET prices and the depreciation of the area's exchange rate, for the Guatemalan quetzal and the Nicaraguan córdoba as applied to our U.S. dollar-denominated raw material cost.

Moving on to our South America region. In Brazil, we continue our positive volume trend, marked by our fourth consecutive quarter of volume growth, reporting a 1.6% volume increase for the second quarter of 2018. In terms of pricing, our average prices have remained the same as last year, driven by a negative price mix effect and we started increasing prices this October. In Mexican pesos, our revenues were affected by a negative currency translation, as our sparkling beverage portfolio continued its growth, driven mainly by mid-single-digit growth in brand Coca-Cola. Importantly, water results of Chile, single-digit growth. Our continuous focus on point-of-sale execution, our affordable portfolio and our target -- powerful digital platform, enabled our transactions to grow ahead of volumes. Our Brazilian operation expanded its operating income and operating cash flow margins, evident in the division's profitability. During the quarter, favorable sweetener and aluminum prices, coupled with positive currency hedging were partially offset by higher PET prices and the depreciation of the Brazilian real as applied to our own hedged U.S. dollar denominated raw material cost.

Moving on to Colombia, we reported volume growth of 2.3%. We continued to gain market share despite still beverage categories, with the ongoing growth of our colas portfolio. We are leveraging our affordability strategy. In the still beverage category, Monster outperformed and we continue increasing our colas across the collection. Lower sugar prices and affordable currency hedging position and the appreciation of the Colombian peso offset higher PET prices for the quarter. Moreover, our continuous cost and expense efficiencies helped protect our margins.

In Argentina, as we have discussed on our last 2 calls, our consumers still face a high inflation environment, with a currency devaluation of close to 140% over the last 12 months. Even so, our volume contracted 11% and we have been able to increase our prices ahead of inflation. Net to translation effect, our reported revenues declined 41%, while they increased by 33% on a local currency basis. Our revenue management, combined with lower sweetener prices and our affordable foreign exchange hedge were partially offset by higher PET prices and the depreciation of the Argentine peso as applied to our own hedged U.S. dollar-denominated raw materials cost. Also, our improved selling and administrative expenses enable us to contain our operating -- operational margin contraction.

With respect to Uruguay, our integration process is proceeding according to plan. We are ready to reconfigure our supply chain to integrate our technological platforms, among other plans, that will enable long-term structural efficiencies. In the third quarter, we reported 9.4 million unit cases. Similar to Argentina, this operation portfolio enjoys a higher mix of low and non-caloric beverages, which is 32% of the mix this quarter. In this operation, inflation is increasing and the currency devaluation are impacting our cost and expenses as well as the cost of our U.S. dollar-denominated raw materials.

Now in regard to our financial results. During the quarter, our total debt increased by MXN 6.6 billion compared with year-end 2017, due mainly to the financing of our acquisitions of new territories in Guatemala and Uruguay in the second quarter of 2018. Additionally, our weighted average cost of debt for the quarter was 7.7%, including the effect of debt swap to Brazilian reais and Mexican pesos. Importantly, as we report, the Philippines has discontinued operations. Our net-debt leverage ratio, not including cash and EBITDA with the Philippines, ended the second quarter at 1.96x. Our comprehensive financial results recorded an expense of MXN 1.3 billion Mexican pesos, resulting from lower interest expense, net of interest decline in Brazil, a translation currency effect of the Brazilian real compared to the Mexican peso and debt reduction in South America. These factors were partially offset by the interest expense derived from new financings related to our positions and interest rate increase in Mexico.

Starting this quarter, we are reporting our Argentine operations as hyperinflationary. This means we have to express the results of July and August in real terms as of September, and we use the end of period exchange rate to translate to Mexican pesos. Accordingly, we recorded a monetary position gain in the inflationary subsidiaries of MXN 170 million. As compared to last year, we earned in the quarter a profit of MXN 1.3 billion, driven by our Venezuela operation.

Finally, during the quarter, we reported income tax as a percentage of income before tax of 31.4% compared with 25% last year. This result was mainly driven by the increase in the relative weight of Brazil's profit in our consolidated results, which has a higher rate, coupled with the consolidation of Venezuela, which had deferred taxes in the third quarter of 2017.

As we approach the end of the year, we are encouraged by the integration of our new territories, the positive performance of our Brazilian operations, the resiliency of our Mexican operation, the turnaround of our Central American region and the ability of our Argentine operations -- operators to navigate this challenging environment.

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

[Operator]

[Operator Instructions] Our first question is from Benjamin Theurer from Barclays.

[Benjamin Theurer, analyst]

Actually first of all, thank you very much for trying to keep it as simple as possible, although the, obviously, reporting with all the issues Argentina has isn't that easy. Now, looking a little bit into 2019, and especially on Mexico, I wanted to focus at. So you've mentioned there's going to be an increase on the concentrate price, and obviously, we're getting into a new year with an upcoming presidency. So what's your take about the consumer environment? And clearly we've seen a little bit of an improvement here in Mexico, what you've mentioned volume transactions and pricing potential. But what's your strategy into next year in terms of pricing? What do you expect in terms of profitability? And how do you feel about all the cost pressure we've been seeing for a lot of the consumer companies, including, in your case, around energy, fuel, and so on? That would be my first question, and I have a quick follow-up on Brazil.

[Héctor Treviño Gutiérrez, executive]

Mexico, I think that, although there are uncertainties, as you say, with a new government kicking off on December 1, we feel encouraged what we have been seeing in terms of performance of our operations. We believe that it has to do a lot with the better, let me say, understanding, so the use of analytics of our shopper, and to a certain extent, of our consumer. That has placed us in a way, as we have expressed other quarters, in a way where we can pinpoint with much efficiently the commercial discounts and trade activity. And that certainly help us both in volume performance and in price. And I think that the results of this quarter shows a little bit that. The worrisome part with the consumer in Mexico is that, in our industry, and this is very, very clear in our territories, remember that the south of Mexico has a much lower disposable income -- disposable per capita income, per consumer, but the consumer is clearly preferring returnable multi-serve packages. So a one time, you have a much better understanding and not much better analysis of the shopper and the consumer, and therefore, better pricing on each individual package. But the mix of our products continues to shift towards new presentations. That's clearly one of the strategies that we have and we have made a lot of emphasis that affordability in our territories is very important. So if I'm trying to answer your question about the consumer, those are the parts. We are able to have a better pricing on each of the individual SKUs that we sell, but the consumer is moving little by little towards multi-serve returnable presentations. So at the end of the day, the price that we see when you divide revenues by cases is -- has the effect of the price activity that we have plus the mix shifts that we see. With respect to other categories, I think that -- on in general to the categories that we serve, I think that's very positive that we are seeing growth in brand Coca-Cola, still, despite all the creative brands that you see around the world, brand Coca-Cola continues to grow. Flavors in Mexico continues to grow. I do see a better growth trend in water and in NCBs, that are growing at a faster pace. So for us, I think in general, that the -- we are seeing good trends in the consumer. Second, very careful the consumer in terms of using better -- these affordability packages that we have in the market. And third, there's these uncertainties of the macroeconomic environment for next year, given the new government. And those are more the trends that we see here, no?

[Benjamin Theurer, analyst]

And then just quickly on Brazil. So I mean clearly, most likely you don't have much of an update on the situation with Heineken and the fact that you still report almost MXN 3 billion in beer revenues tells me that you still ship the beer. But that put aside, we've seen, and obviously, one of your big competitors in Brazil is having kind of a meltdown today on the back of significant weakness in volume in the beer category but also in the nonalcoholic beverage category. So if you could shed a little bit of light in terms of the competitive dynamics, what you've been seeing market share? And if you have some commentary on beer, how that has been behaving, because, at least in your case, it looks decent on a year-over-year basis. So any commentary you have on that? I know you can't talk on the deal, but about market share and so on would be much appreciated.

[Héctor Treviño Gutiérrez, executive]

Yes. The fuel -- I understand what you're saying about beer. Beer continues to grow and we continue to distribute that. We are in the midst of this process, the arbitration process. It will still take around several quarters to be resolved. Sometimes these things don't move that fast and...

[Benjamin Theurer, analyst]

Does it take -- as long as the agreement's going to last, or how long is it going to take?

[Héctor Treviño Gutiérrez, executive]

Maybe not, because -- we do not know. But when we look at the trends, beer is growing double-digits, close to 20% or something like that, for the quarter. For us. Mainly in Heineken and Amstel beers. With respect to sports drinks, it's a curious mix because in colas, we are growing very well, and in flavors, we are softening a little bit because of our, in my opinion, a self-inflicted wound in the sense that we went ahead with this -- similar to this general strategy of affordability that I've mentioned for Mexico, we also have a very important strategy of reducing the sugar content on some of our drinks and the formulations. In Brazil, we moved aggressively with Sprite and Sprite dropped very -- importantly in the last 2 quarters. This is starting to gain traction, but because we are now giving the option of the full sugar Sprite and Zero Sprite, and market share numbers are looking well. But in flavors, we are still little bit negative when we compare to last year because of what we saw the first and the second quarter of this year. Third quarter, we see a recovery, but in total, market share numbers for Brazil are pretty flattish, all's growing in colas and all's -- soft drink and in flavors because of what we are describe. Water is growing very well, and we have growth -- back to share numbers there, and we are growing in sports drinks. Some of the juices and teas we are softening a little bit. So Brazil is kind of a mixed bag of results. But in general, when you look at total nonalcoholic ready-to-drink category, we are basically flat, slightly above, but basically the same number that we see last year. That is on Brazil still.

[Operator]

Our next question is from Leandro Fontanesi from Bradesco.

[Leandro Fontanesi, analyst]

Just on sale of beer, again, if I'm not mistaken, you mentioned you grow double-digit, or something around 20%, but if we look into your revenue growth, it was 6%. So I'm just wondering, what explains this difference between the volume growth and the revenue growth -- to some degree in terms of pricing, or something like that? And the second point, just if you could talk a little bit about the measures that you have been taking such as the mini cans, so reducing the size of the cans in some of the countries in South America. If you have a lot of more room to continue doing that, in order to improve the revenue in this region.

[Héctor Treviño Gutiérrez, executive]

I think that I recall it correctly, the number for Brazil in the volume is a little bit in excess of 20%. And I don't recall any special price activity supporting what you're seeing there and overall the financial experience is more of an effect of the translation into Mexican pesos, because of the very strong devaluation of the Brazilian real versus the Mexican peso this quarter versus last year. There is no specific pricing initiative that already -- worked on pricing activity on beer. And as I said, we continue growing double-digit in both of them. With respect to the small presentations, it's also -- I describe this general strategy in affordability in most of the countries, and that has 2 angles: one is returnable presentations; and the other is what we call also recruitment, which is making very affordable single entry package that can compete with a fleet or a convenience store and that's where small mini cans or small PET bottles play a role. It's an important element because we think that we need also to start these campaigns of recruitment with the consumer and that's important. The second strategy was the mini can, and the mini PET bottles also help with that, we'd like to continue fostering single-serve presentations because as I described, when you go to difficult economic situations in different countries, returnable bottles and multi-serve packages grow, because they offer a more affordable product to the consumer. Normally, the rule of thumb is that these packages are less profitable than the single-serve presentations. So for us it's important also to continue fostering the growth of single-serve packages as a way of perfecting the size of the single-serve mix that we have. And that's why, for example, in Mexico, we have changed from 600-milliliter PET to 500-milliliter PET because of price adjustment we were moving away from matching prices. So all those are strategies to make one-way packages, and there's normal sizes and at better price points is an important strategy for the whole company, basically in every country.

[Operator]

Luis Miranda from Santander has our next question.

[Luis Miranda, analyst]

My question is with regards to Brazil. I wonder if you can give us some color on the level of price increase you've been implementing October. And if you are aiming to be -- this is more like a one-timer in the short term, or should we see more moderate and more practical price increases going forward, especially considering the changes in the IPI taxes next year? And if -- I have a follow-up question in Mexico.

[Héctor Treviño Gutiérrez, executive]

Luis, it's a good point that, in Brazil, we've moved prices at the beginning of the year and now October. Brazil, as you see it in the numbers, we have been increasing volume but we have stayed with prices with inflation or slightly below inflation, so in real terms we have reduced prices, but because we have not moved the prices of the new growth figures and also because all of this makes sense, that I just described. So the strategy in Brazil is very clear, it's a lot of execution, maintaining some of these price points and, as you correctly pointed out, let's you see how the IPI tax evolves in the future. More or less 80% of the competitors in the soft drink industry have operations in Manaus. So our expectation is that in this low price environment, everyone -- all of -- these 80% -- sorry, as the volumes -- if the volumes are not affected, we'll start increasing prices next year with the new tax situation. But Brazil, specifically for this year, it was similar to Central America. It was a case when we were campaigning price increases to start reaching a larger number of consumers, and certainly is a reflection of the very difficult macroeconomic environment, and the recession that the country was going through over the last 2 years.

So clearly, Brazil's having the strategy of campaigning prices with inflation or slightly below inflation and capturing additional [ volume ] and that's why we basically have these 2 price increases in Brazil. A very different story for Mexico that I described where we have, on the intelligence, tried to capture these opportunities. In Brazil, we have KDP commercial platform also there. But our cross-sell of PETs, et cetera, calls for us to be careful with the prices, and the volume times price formula is in the small in favor of decreasing volumes because of the competition and the crossing of [ those ] material.

[Luis Miranda, analyst]

If I may follow up, I guess in Mexico, I don't know if you can give us some color on the evolution of the presentation that you have just pointed the market with a lower sugar content? And if that is in line with your expectations or are you seeing any positive or negative trends over there?

[Héctor Treviño Gutiérrez, executive]

No. At least that continues to lead according to plan. We have that in multi-serve packages, and we have been doing some testing in some cans, in the 12-ounce can. The Coca-Cola Company is defining that strategy, and so far, we haven't any complaint by the consumer with respect to the taste or the formula. So difficult still to predict where this formula will end up a few years from now, but so far so good in terms of the acceptance of the consumer of a lower calorie content product Coca-Cola.

[Operator]

And we'll go next to Lucas Ferreira from JPMorgan.

[Lucas Ferreira, analyst]

If you can elaborate a little bit on your costs into the fourth quarter, how do you see the trends there, the positives and also the negative directions? If you can comment on the new lines, including energy transportation and the main commodities, that would be awesome, and so we have a sense of where the margins could go. And also my second question regarding the proceeds from the Philippines of sales, if you can comment on when they're going to come and if you guys have already discussed the potential destination for that cash, if they're going to probably become some extraordinary dividends or if maybe you'll pay down some debt, maybe something related to Vonpar, if you can elaborate a little bit on that bit as well?

[Héctor Treviño Gutiérrez, executive]

With respect to commodity prices, energy transportation play a role, but it's not that important in our P&L, but that has been increasing, we know all about, especially in Mexico. For oil prices, albeit the effect of the hurricane effects, [ to do with energy in other countries ]. And then because of the oil prices, we are seeing also still some volatility in PET prices, and similar levels to what we had in the third quarter, but there is higher than what we had last year. With respect to sugar, we are seeing some increases in sugar prices from a very, very low international prices of -- that is on sugar in most of -- I mean, in our countries because of these international prices, so we took advantage to pre-buy some of the sugars at these low levels. So I would say that we will have similar traits to what you saw during this third quarter. So PET prices are higher than last year and sugar prices are lower than last year, although, as I said, sugar is increasing versus the third quarter. Energy transportation for tariff is increasing, but it's not that meaningful in our case. We have the [ marked ] increase in Mexico, which is -- will affect products in the fourth quarter and will be similar to what we have this third quarter. We've got another percentage point increase in July of 2019, and that one is the, I'd say, the environment I'm seeing with respect to raw material prices for the fourth quarter. We have been active in hedging some of the exposure to dollar-denominated raw materials, though I don't see any specific changes in what we have in the third quarter. With respect to the Philippines food option, I'd say that we are very close to '19 to close with this. Basically this process calls for a pause to give the advice, but what we've given back in August. Then the difficult part, [indiscernible] ways just to confirm some of the EBITDA figures that I've used for the multiples and the cash flow, I'd have to leave with the cash flow of the last month when we close the transaction. So my expectation is that would be in the fourth quarter. If we use fourth quarter, we should be receiving the close of this put option and receiving the proceeds. Next week, we will have a meeting with the finance committee to analyze how to use these cash balances, and as we have described, the options that we're analyzing basically, we pay down debt, potentially [ $1 billion ], call it, or some trends in the dividends going forward, which will increase that, or even looking at a potential share repurchase. We have this meeting on Tuesday, next week, and we will find and get board approval for whatever we're having. So far, given the maturities that we have next year and at the beginning of 2020, management recommendation especially will start focusing more in debt repayment. But we need to run these options. The mandate we have is to analyze these options and present this to the finance committee and then to the board on the next Tuesday. But what I can tell you is that basically, we have close to -- when you look at the maturities recovery in 2019, and out to further 2020, where we have another bond that matures on February 2020, we have close to $1 billion in maturities that we would need to cover. So I think that's going to be healthy to at least use part -- a portion of these proceeds to reduce our debt. If we were to use the full amount of the proceeds for the full option to repay debt, the number that I gave you during the introductory remarks, both our debt-to-EBITDA of 1.96, which is how we close this third quarter, you can use the full amount of the proceeds to repay debt. We will know where our debt-to-EBITDA close to 1.6x, which is, in our opinion, very healthy. And to maintain also a good way to make the very clean, balance sheet in case we have the opportunity and another opportunity in the future. So that's -- I wanted to share this with you as a way of sharing where our thoughts are. But we are still analyzing basically 3 options, a deal make, debt reduction or share repurchase, okay?

[Operator]

Moving on, we have a question from Juan Guzman from Scotiabank.

[Juan José Guzmán Calderón, analyst]

Let me start with one on Mexico. It looks like the stills category grew revenues by 8%, with a 12% growth in volume, which is certainly a very nice pace. Can you talk about this category and whether there have been trajections or special pricing actions or other particular forces behind this improvement? And then I'll -- follow up with another question.

[Héctor Treviño Gutiérrez, executive]

Stills, in general, I'd say, we have very healthy growth, especially with brand Monster and brand Santa Clara, even with Powerade double-digit growth, and all that has to do with juice [ products ] but mainly with the value brand growing, we have single-digit numbers. So we are seeing very, very good growth in terms of volume. There is no specific price activity that I could remember from this quarter and on these categories. We're still trying to grow the profitability of these categories, they did strongly as we have discussed in our quarters. When you look at the different categories, [ we at least, ] because of the size and scale of this most profitable time, berry and juices, and also because of the raw materials that are involved in the non-carbonated drinks and stills. But in general, we are seeing very healthy trends on these categories in Mexico and the consumers coming back. There was a period where Peace were suspended at [ factory ] in Mexico. My feeling was that when we have the tax on sugary drinks, I think that there was a lot of consumers that were surprised by the price increases and that they started to read the labels with more care and they realize that these also have sugar and kind of the -- there was kind of a setback especially for Peace after 2014. But now warnings are coming back again and it's important. But those are the main things that I see in stills. Very healthy growth, no price activity, it's just preference of the consumer, in some cases, winning market share, and in some cases, our very low-scale, like in Santa Clara, where we have very miniscule market share but it's growing fast. And some more categories like Monster that we have by gaining market versus in [ indiscernible. ]

[Juan José Guzmán Calderón, analyst]

That's very clear. And moving on to South America, can you please expand on what we are seeing also in the stills and flavors category? Not only in Brazil, where you have - which you heard from a bit -- a little -- 2 minutes ago, but also in Colombia where we've seen that volumes are suffering and we're going to be [indiscernible] from colas, and which are growing at a very healthy manner. And you already mentioned that reformulation was partially a driver, and you were dialing back on some reformulations, but I would appreciate if you can give us an update on the problems of the category or the competitive dynamics on the stills and flavors in these 2 countries?

[Héctor Treviño Gutiérrez, executive]

Let me start with Brazil. The stills, we are changing a little bit of our strategy on changing the SKUs because, at the very beginning, we have -- with the acquisition of [indiscernible], we had a production center in the tax-free zone, that was [ helping ] our operation with respect to taxes, but it was very bad with respect to transportation costs. So we're in the midst of changing from one production center that were serving the whole country to a more local production by the bottlers. And because of that, I feel that it will be much better compared to have a good cost with some of its very competitive packages, especially with [ 1-liter ]. So because of this change, for me, it's still difficult to fully understand what -- if this change is -- it was these trends in materials is affecting the results and performance in these categories, and it's affected by these changes that we are enacting. But in general, Brazil's stills volumes are [ trending ] 4% down. Monster decreasing because the variable is growing very fast because it was [ not there negative ] so we were growing very, very well. But the rest of the categories in still, suffering a little bit.

If we go to Colombia. Colombia has to do mainly to -- or with respect to reformulations, similar to one we did that I described in Sprite in Brazil. In Colombia, we make more sparkling favors and stills to basically zero content -- zero-sugar content, and the consumer is not liking that. And we have cases like, as I mentioned, Fuze Tea that is declining very much, close to 30%, 35%. The [ Italia ] brand declining mid-single digits, and we have cases like Powerade growing double digits and Monster growing a lot more than 40%. So all in all, it's a mixed bag of performance, but Colombia, it's pretty modulated to reformulation and obviously, the learning that we need to adapt to that. In total, we would look at the total stills category where volumes decline close to 20% with these differing brands and categories within stills, as I've described, okay?

[Operator]

[Operator Instructions] We'll move on to Antonio Gonzalez from Crédit Suisse.

[Antonio Gonzalez, analyst]

Héctor, I just wanted to make a couple of quick follow-ups first. On Brazil, 2 things. Is it possible to quantify for us at this stage if you have not increase prices further, how much would margins compress given the partial elimination of tax credits scheduled for next year? So that's number one. Number two, in the discussion that you just had on the proceeds from the divestment of the Philippines, and the fact that you are likely paying for the minority stake that you do not yet have in Vonpar at the end of next year, does that change at all the way you think about the potential proceeds from the Philippines? And just third and final, Argentina, are there any, I guess, more qualitative comments maybe that you can share at this stage on how do you think you can try to minimize the volume decline, what sort of market strategies you are implementing, and I guess, any parallels with previous volatile episodes in Argentina that you think can be helpful to bear in mind at the moment?

[Héctor Treviño Gutiérrez, executive]

Let me start with Brazil. For 2019, if we just don't do anything, I'll just say, if we don't increase prices, and as I said, 80% of the volume is affected by this new tax inflation. Assuming that nothing moves and you just take the hit on that, I'd say it's something around BRL 400 million to BRL 500 million, the impact that we have -- that we would have. If you extrapolate that to the total profitability of Coca-Cola FEMSA, we would be somewhere around 1.5%, 2% volume contraction, assuming that you don't do anything at all, which is very difficult [indiscernible] for us to have. Sorry, I'm being corrected here, the number I gave you is expressed in Mexican pesos, not reals, I'm sorry.

[Antonio Gonzalez, analyst]

Not reals. That makes sense.

[Héctor Treviño Gutiérrez, executive]

MXN 400 million to MXN 500 million. Sorry about that confusion. With respect to the Philippines. The number that I -- the Philippines have -- the number I gave that we had was $1 billion of the amortization. We have considered our $200 million that we added to the Vonpar acquisition. The way it works is, we have these competitive bonds that the trigger price is, right, is out of the month. So our assumption is that the shareholders will prefer the cash and that's around $200 million. That is included in the $1 billion already spent in the maturity that we have that we were hint at compromise the bond maturity that we have for 2019. On Argentina, what I said is, very importantly, the turnovers, affordability is there, and that's why I ventured to say that we are better prepared than ever to confront this environment. And we have our commercial platform and analytics in place. So we believe that we have the tools to try to better sort this crisis. So volumes are basically declining 10%, and that's where we have very good cost control, prices are being met ahead of inflation, finding opportunity, et cetera, so it's basically a volume top line effect that was here in Argentina. We are moving very fast because the consumer in Buenos Aires, the pricing is soft and low sugar or no sugar produce also, very important and that scales also in the margins for us, because, as you say, when the cost of goods sold, basically, that is when prices are the same or in some cases even higher. So I think that Argentina is basically how to continuously secure our affordability strategy and how to use our digital platform to better understand the strength and tariff act in prices very fast that we have been doing it.

[Operator]

We have a question from Alan Alanis from UBS.

[Alan Alanis, analyst]

Héctor, tell me maybe if I'm correct, this is probably your 100th conference call as CFO of Coca-Cola FEMSA, so congratulations is what came to mind. My question is, how much of the gross margin contraction that we saw in Mexico has to do with the incidence cost increase? And could you remind us how much more you will get next year, and if there's any renegotiation in terms of the incidence cost in any of the other territories in the coming years, or specifically next year?

[Héctor Treviño Gutiérrez, executive]

25 years, that's right, thank you. Alan, let me try to describe -- probably the best way to describe the incidence increase is similar to what I was answering about the [indiscernible]. Assuming that we don't do anything with the prices or cost control or whatever, the sole impact of every point increase this year is affecting more or less MXN 60 million per month. So it's around MXN 700 million a year. That's the impact of the [ interiors ], our present mix and volume that we have, and honestly, we are trying to catch up with prices and reducing cost, et cetera. Now assuming the we don't do anything, the [ foreign country ] must apply a way of presenting this. As far as negotiation, I don't see a specific movement right now, and it's very clear what we have to do. It's another point next year. What we have been seeing is the Coca-Cola Company is, their revenues, it's presumed it's a little bit more active in participating in marketing campaigns, in recruiter interaction, et cetera, so they are anticipating a little bit more on these activities. So in a way, it's not correct to state that our accounts of the incidents increased, but in a way, they are sharing part of their -- those proceeds and participating more in live activities.

[Operator]

Our next question is from Alex Robarts from Citigroup.

[Alexander Robarts, analyst]

I guess, I had a clarification first and then a question. On the MXN 400 million to MXN 500 million standalone impact, right, from the Manaus tax credit change, is that based at the 10% rate, just to clarify that? And then the main question is really about your profitability trend in Mexico. We've seen over the last days, I guess, half a dozen branded consumer companies in Mexico report their earnings, and what's interesting, when you're looking at the Mexican piece of the businesses, sales kind of high single-digit for all of them. And yet when you look at profitability, there's 2 buckets, right, those that kind of have flattish to kind of slightly higher margins and then those that are showing margins falling. And I guess in your case, when we look at the Mexico margin drop this quarter, you've talked to some of these kind of pressures on margins. And there seem to be 4, right? The concentrate, there's the PET, there's diesel and energy costs and, I guess, general operating -- or not as much operating leverage. If you could -- just help us rank the relative importance of these factors, and how that might change kind of in the short-term. I guess you've said that the sweetener or sugar would kind of quarter-over-quarter be a little bit higher. And I guess, sorry, I would add another one, which is your FX cost hedge, right? So you have these buckets. I mean, do you think it's likely then, after giving the ranking, that we see these pressures change, and perhaps, we move toward -- or in your mind, perhaps, what would be the ones that are likely to change positively in the short term such that we get to at least kind of flattish margins?

[Héctor Treviño Gutiérrez, executive]

Yes. The first part of the question, the IPI, this MXN 400 million to MXN 500 million is assuming that we have 12% IPI tax on the first half of '19, and 8% in the second half, which in manners would take it to the 10% that you described. So that's basically -- you are correct on your commenting. And in Mexico, I think that when you look at some of the performance, we feel very well with the performance of our operators. When you look at volume, pricing activity, how market share is moving, et cetera, et cetera, cost containing, et cetera. But we have these place that are affecting, which include described very well. One that's very important is the concentrated price increases, which at the end of the day, it's if you look versus the beginning of 2017, we have an average 1.5% margin contraction, because we increased 1% this quarter, in July of 2017, and 1 percentage point in July of this year. You have this effect of PET. You have the -- already the sugar prices. So all in all, it seems like there are these headwinds that have -- limited our ability to increase our margins. On top of that, the volatility is, you're correct, I want to mention that, that you won't forget, the FX. FX plays a very important role also. And at the end already this quarter we have a Mexican peso devaluation of around 5%. That had [ already been ] reflected for Mexico, but I had the number because we have it for the bond meeting next Tuesday. On the total company, FX has an impact of around MXN 333 million that we have been able to cover with our hedges and reduce that. The positive effect of the hedges helps, maybe compensated a lot of that impact, so we have the impact around MXN 50 million. Also the raw materials that were not hedged, but that affects us this quarter. And in Mexico, because of the strength of the market in terms of the peso market, the depth of the market, it's very easy to do hedges. In other markets, it's not as easy to do. And then you have sometimes very high interest rate like in Argentina, so if you want to do hedges for the 10 months ahead, looks like very expensive, but we're still trying to manage all the loans. I think that the hedging process has been very good for Mexico in general for other countries. This time around, respective in Brazil, we hedged some of the sugar price, and that was a negative effect for us, because sugar prices were substantially low. But that's not the way this is providing certainty to our operators, for the cost base that they will have to operate. So it's not as a profit center, it's more a way of providing these certainty to operators. So when you look around these factors, Alex, you have, in my opinion, very good performance, the organic performance, whether it's is in the control of the operator, and then some headwinds like PET prices, energy prices that are related to the world or the whole volatility that you have around the world, FX, and certainly, the cost of call center that is increasing also, which is basically in our plans. We need to plan for that and have to continue making. So going forward, I think that when you look at the margins we have in countries like Mexico and Argentina, which are very good, I think that you can expect those margins to be maintained as a way of forecasting. And when we see opportunities, it's to continue improving the margins on Central America, Colombia and Brazil where we're on a comparable basis, our lower margins have turned the other [ points, ] okay?

[Operator]

And there are no further questions at this time. Mr. Treviño, I'll turn the conference back to you for additional or closing remarks.

[Héctor Treviño Gutiérrez, executive]

Thank you for interest in Coca-Cola FEMSA. And as always, we are open to any additional questions you might have. Thank you.

[Operator]

That does conclude our conference call today. Thank you for your participation. You may now disconnect.