Coca-Cola Femsa SAB de CV

NYSE:KOF

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, everyone, and welcome to the Coca-Cola FEMSA Fourth Quarter and Full Year 2017 Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] During this conference call, management may discuss certain forward-looking statements concerning Coca-Cola FEMSA 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 -- 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 would now like to turn the conference over to Mr. Hctor Trevio, Coca-Cola FEMSA Chief Financial Officer. Please go ahead, Mr. Trevio.

[Héctor Treviño Gutiérrez, executive]

Good morning, everyone, and thank you for joining us to discuss our fourth quarter 2017 results. Let me start by saying that 2017 was a very challenging year. However, our positive results clearly underscore our ability to adapt to complex environments, characterized by raw material cost pressures, especially sugar prices in Mexico, macroeconomic issues in many countries where consumers continue to suffer from currency volatility and higher inflation, such as in Mexico and Argentina, and a complicated consumer environment where limited disposable income leads them to shy away from our categories, such as in Colombia and Brazil.

Nevertheless, we continue to successfully navigate these adverse environments to maintain market share, reflecting our capacity to satisfy consumers' diverse lifestyles with a variety of better choices through our winning multi-category portfolio. Our strategic affordability initiatives, building on our robust platform of returnable presentations and [indiscernible] of Magic Prices and our excellent point-of-sale execution.

All of these capabilities, coupled with our financial discipline to ensure a more lean cost structure, enabled us to protect our company's profitability for our shareholders, while we continue to work to strengthen our capital structure and financial liquidity.

Our Mexico and Central America division reported a quarterly volume contraction of 1.4%. For the fourth quarter, our Mexico operations volume contracted 2%, while our Central America operations achieved 6% volume growth. In South America, we reported volume growth of 8.7%, including the results of our acquired Vonpar franchise in Southern Brazil. For these divisions, Argentina's volume remain flat. Brazil reported 7% organic volumes growth, and Colombia and Venezuela reported volume contractions of 6.8% and 17.2%, respectively, as we continue to experience a difficult consumer environment.

In the Philippines, we achieved volume growth of 12.6%, building on our 2.8% growth in the fourth quarter of 2016. For the fourth quarter, our consolidated reported revenues increased by more than 11%, this was in line with a 12% increase in gross profit, a margin that we successfully protected, even with cost pressures in some countries.

Our operating income increased by 6 -- 5.8%, due to higher freight cost and higher fuel price across our territories and the negative effect of Venezuela for the quarter.

Our operating cash flow grew 4.6% for this quarter. These reported figures include our results from Venezuela, the Philippines and our acquired Vonpar franchise territories in Brazil.

As we announced, as of December 31, 2017, the company changed the method for reporting Coca-Cola FEMSA de Venezuela to fair value, in light of the economic environment prevailing in that country. Until that date, we have been recording a foreign currency translation charge in equity, which has been reclassified as a noncash, one-time item to all nonoperating expenses in our income statement, in accordance with IFRS. These resulted in a majority net loss of approximately MXN 24 billion and a loss per share of MXN 11.50 for the quarter. On a comparable basis, earnings per share were MXN 1.85 versus MXN 1.39 in the same period of the previous year. It is important to highlight that Coca-Cola FEMSA de Venezuela will continue operating in Venezuela, and its fair value will be reported in the investment in shares line of our balance sheet going forward.

In an effort to explain the organic performance of the business, we exclude the negative impact of Venezuela, the positive results of Vonpar that are already reflected starting December 2016, pro-forming the results of the Philippines and on a currency neutral basis. Our consolidated comparable revenues rose 5.7%, driven mainly by average price increases in Mexico and Argentina, and coupled with volume growth in Central America, Brazil, Argentina and the Philippines, while our comparable gross profit grew 9.2%.

Moreover, our consolidated comparable operating income increased 13.3%, and our comparable operating cash flow rose 12.5% compared with the fourth quarter of last year. Notably, our comparable net income attributable to equity holders of the company was MXN 3,895,000,000, and earnings per share were MXN 1.85, an increase of 32.7% compared with the fourth quarter of 2016.

I will briefly discuss the highlights of the quarter for each of our operations.

In Mexico, we delivered 5.1% revenue growth, resulting from pricing ahead of inflation that was partially offset by a low single-digit volume decline as a result of extraordinary weather in the quarter. In November, we increased prices ahead of inflation to compensate for our regional cost and expenses.

We saw a slight shift from single-serve to multi-serve presentations in our sparkling beverage mix compared to 2016, while our non-returnable to returnable packaging mix remained the same. Coca-Cola Sin Azúcar or no sugar continued its positive performance, outpacing the volume of Coca-Cola Light. With this in mind, we continue to increase the mix of non-caloric beverages in our cola portfolio.

As part of our broad portfolio and aligned with our value versus volume strategy, we increased our transactions ahead of volumes, with our 354 milliliter and 235 milliliter cans now available for both colas and flavors. Fostering innovation in our flavored sparkling beverages, we launched [indiscernible] in December, a new flavor within our [indiscernible] segment that is now available in 600 milliliter and 2-liter presentations. As part of our strategy to become a multi-category beverage leader, we enter a new beverage segment with our successful integration of the AdeS portfolio in our point-of-sale in Mexico, offering our consumer an array of plant-based beverage choices. For the quarter, our Mexico operations top line growth enabled us to protect our operating income, even with higher cost and expenses, resulting mainly from unfavorable foreign currency hedge, higher sugar prices, which increased 12% to 16% compared with the same period of 2016, and higher concentrate prices and incremental diesel and gasoline prices.

In Central America, our volumes grew close to 6%, building a positive volume for the year. For the quarter, our 4 operations in the region reported volume growth. Notably, we achieved double-digit growth in Guatemala, coming from the implementation of our presale model. Driven by our affordable strategies in Central America, our price mix had an impact on our revenues as compared to last year, also affected by the translation effect of the depreciation of the currencies as compared to the Mexican peso. During the quarter, our sparkling beverage growth was mainly driven by brand Coca-Cola and its extensions, highlighted by our recent launch of Coca-Cola Sin Azúcar in Costa Rica, Panama and Guatemala.

The integration of monster into our portfolio generated incremental volume in the still beverage category. During the year, we launched Monster in Nicaragua, available in a 473 milliliter can. In our water portfolio, we reported high single-digit volume growth, coming from the positive performance of our 1 liter PET presentation.

In Central America, better volume and a benign raw material environment were offset by a change in price mix driven by our affordability initiatives and our go-to-market implementation that increased our cost of sale.

Our South America division continued to show positive signs of recovery in Brazil and Argentina, while Colombia and Valenzuela continued to experience a complex consumer environment. In Brazil, our fourth quarter results show a positive trend compared with the previous 2 quarters with 7.4% organic volume growth. Including our Vonpar franchise to return, our volume grew close to 21% for the quarter. Indeed, we closed the year with 4 straight months of positive organic volume growth, with transactions outpacing volumes and positive performance across all of our beverage category.

Our revenues in Brazil grew 14.3% as our average price per unit case in local currency was lower compared with the year earlier period due to promotions and discounts for the peak season.

Our launch of Fanta Guaraná has been a success. This major launch, our operation's largest in many years, now represents more than 7% of our flavored sparkling beverage portfolio.

In Brazil, Monster is outperforming expectations. After beginning from a very low brand base, we significantly increased coverage across our channels, closing the year with encouraging volume growth in December 2017.

We successfully integrated AdeS into our Brazil operations portfolio. AdeS offers an array of nutritious choices for our consumer to enjoy, including soy juices, soymilk and kids products.

Together with our positive volume performance, benign raw material and currency cost, and cost and expenses reductions, we achieved positive profitability in Brazil, significantly expanding our operating income and EBITDA margins.

A year after integrating Vonpar, our plan continues on track and we expect to deliver more than our targeted synergies. We rapidly improved our point-of-sale execution, whilst successfully expanding our portfolio of returnable PET presentation with significant volume and coverage gains throughout the territory.

In Argentina, we reported flat volumes for the quarter. Our strong volume growth in October and November was offset by a volume contraction in December.

Through our focus on more interactions with our consumers through affordable entry packs, our transactions rose ahead of volume, and our single-serve presentations continued to grow in our mix. During the quarter, volume of brand Coca-Cola was positive, thanks to the performance of Coca-Cola Zero and Coca-Cola original.

While satisfying our consumers' diverse lifestyles with a wider array of choices, Fanta Zero and Sprite Zero continue to deliver strong results in the flavored sparkling beverage category. Our still beverage category continued to deliver strong results, thanks to the integration of AdeS portfolio, the recent launch of Cepita syrup and the positive performance of Hi-C juice brand. In the water category, we recently launched a new 500 milliliter PET presentation for our Kirin brand. With the reformulation of our brands, our Zero and low calorie portfolio reached 30% of our sparkling beverage volume mix in Argentina.

Our revenues grew close to 4% as we maintained pricing in line with inflation. Top line growth and cost and expenses efficiencies enabled us to increase our operating income and achieve EBIT and EBITDA margin expansion.

In Colombia, which is offering the lowest GDP growth since 2009, a prolonged negative consumer confidence is affecting our industry, resulting in a 6.8% volume contraction. On the bright side, our economics and our market share in the sparkling beverage category peaked at historical levels in December.

Our affordable strategy through returnable PET presentations is now available in all of our Colombia's major cities, enable us to more than double our volume in this package. Additionally, we have increased our mix of non-caloric options, such as Coca-Cola Sin Azúcar, which is growing, achieving double-digit volume growth throughout the year.

In addition, better sugar prices, combined with a stable Colombian peso and an aggressive reduction in our cost and expenses, positively contribute to our operating income.

In light of Venezuela prevailing economic environment, we recorded a volume contraction of 17% for the quarter. Our local team continues to embody our values, passionately serving our consumers and working every day to strengthen the branches of the -- our portfolio in the market.

In our Asia division, for comparable purposes, we are describing the performance of our Philippines operations as if it were consolidated last year, considering the full 3 months year-over-year.

For the quarter, our volume grew 12.6%, with October and November showing strong performance, and December generating double-digit growth as our consumers prepare ahead of the tax reform that started in January 2018.

During the quarter, we achieved double-digit volume growth in the sparkling beverage category, driven mainly by double-digit growth in brand Coca-Cola and flavors. Our entry packs of 200 milliliter and 300 milliliter single-serve PET presentations continue to deliver strong results, increasing our number of transactions, while improving our mix of single-serve presentations to almost 40% of our sparkling beverage mix.

Our water portfolio, which represents 11% of our still beverage category, generated double-digit volume growth, thanks to our Wilkins Distilled, Wilkins Pure, and our recently launched Wilkins Delight brand of flavored water.

Our still beverage portfolio, excluding powders, grew more than 30%, driven mainly by Minute Maid Fresh.

Even with our improving mix of single-serve presentations, our revenue grew less than our volumes as our prices remained relatively flat in nominal terms compared with the fourth quarter of 2016.

Our positive top line performance, together with flavored sweetener and PET prices and cost and expenses efficiencies enabled us to improve our operating income and EBITDA and expand our margins.

As many of you know, as of January 1, 2018, the government started the implementation of a comprehensive tax reform in the Philippines. Within this fiscal practice, a tax on sugar and sweetened beverage was enforced. PHP 6 per liter for drinks using sugar and artificial sweeteners, PHP 12 per liter for drinks using high fructose corn syrup, as such, since January 1, 2018, we have passed this excise tax onto the end consumer to an average price increase of more than 20%.

Now regarding our financial results. Below the operating line, our comprehensive financial results decreased 10.5%. This decrease resulted from our strategy of reducing our exposure to net U.S. dollar-denominated debt by swapping it for Mexican pesos and Brazilian reals, mitigating the effect of foreign exchange volatility on our income statement. As we change the accounting method for our Venezuela operation, in future financial statements, we will not have an impact on the line of monetary position in inflationary sub-tiers. Our net leverage ratio ended the year at 1.74x, and we reduced our net debt during 2017.

On February 21, yesterday, our Board of Directors agreed to propose for approval at the Annual Shareholders Meeting held -- to be held on March 9, an ordinary dividend of MXN 3.35 per share to be paid in 2 installments in May and November 2018. As we continue our journey of transformation to create value across our entire value chain, our centers of excellence continue to deploy initiatives ahead of plan. In all the 18 months, we implemented our commercial digital platform across 6 countries and more than 7,000 routes.

We plan to roll out this platform to the rest of our countries in 2018. We are enthusiastic about the preliminary results from our tailored, consumer-oriented initiatives, our agile opportunity detections and our better resource allocation.

Moreover, we deploy our distribution and logistic platforms in Mexico and Brazil, and we are testing these platforms in Argentina and Panama to reduce our cost and enhance our value chain flexibility.

Now let me close with some key remarks on our results for the year. As I said, 2017 was a very challenging year. Nevertheless, our positive solid results clearly underscore our ability to adapt to complex environments.

Our organic results improved compared with 2016, with slightly lower volumes but better gross profits in most of our operations. Mexico's volume remained flat, with a positive first half offset by a [indiscernible] second half of 2017. However, excluding the Philippines from our results for 2016, our operating income remained flat, despite the effects of foreign exchange fluctuation and increased sugar concentrate and fuel costs.

As expected, Brazil performed positively in the second half of 2017, with strong growth in profitability offsetting other countries' results in our South America division. We are encouraged by these results looking ahead into 2018.

In Argentina, our volumes remain flat compared with 2016, marked by an improving trend in the second half of 2017 compared with the first half of the year and a positive outlook going forward.

In Colombia, despite our volume contraction, we continue to gain market share with the growth of brand Coca-Cola, supported by our returnable strategy and to contain costs to improve our margins.

Our Philippines operation outperformed in 2017, after [indiscernible] year in 2016, achieving 3.8% comparable volume growth and operating income and EBITDA margin expansions of more than 200 basis points.

It is still too early to assess the impact of this tax reform on our business as there are other components of this reform that impact our consumers in a positive way.

Furthermore, we saw continuous progress on all of our strategic and operational fronts. We'll reset our competitive edge in Central America, including our introduction of presale in Guatemala. We increased our point-of-sale execution and drove affordability towards all of our territories, focusing on returnable presentations. We grew our non-caloric mix and we continuously progress with our digital transformation.

Guided by our strategic framework, we are committed to reinforce our leading market position as a global beverage company through our diversified portfolio, to transforming our operating model through our centers of excellence and to driving our cultural evolution that will enable us to continue capturing both organic and inorganic growth and creating sustainable value for our shareholders now and into the future. Thank you for your continued trust and support. And operator, I would like to open the call for questions.

[Operator]

[Operator Instructions] And first, we'll hear from Lauren Torres with UBS.

[Lauren Torres, analyst]

Hctor, if you could talk a little bit more about performance in Mexico. I think, you noted that volumes for brand Coke were down 2.5% in the fourth quarter, and we also saw a modest decline in still. So can you just talk about the trends you're seeing in Mexico? And as we think about 2018, if things should look a bit weaker off of a couple strong years? And also, continuing on Mexico, we had pressures on the cost side and on the expense side last year, should we think about some of those persisting or things should get a bit better and thinking about a recovery of lost margins this year versus last, in light of maybe some of these factors getting a bit better?

[Héctor Treviño Gutiérrez, executive]

Good question. Mexico, let me try to reflect on what we are expecting for Mexico. In 2018, the first half of the year will have a very tough comparison because last year performance of Mexico, volume-wise and price-wise, was very good. If you notice, on a quarter-by-quarter basis, it was basically the third and the fourth quarter that were impacted in our Mexico operations. There is a mixed bag of reasons from that. Obviously, we have the very difficult situation with 2 earthquakes in September and a couple of hurricanes that hit the country with a lot of rain. Importantly, when you segment the different areas of Mexico, you see a very clear underperformance on the states that are near to all this -- all related industries, especially Tabasco and Veracruz, and even in Oaxaca, so no surprise in the states that have the lower performance in terms of GDP growth are having the lowest performance in our mix of the states. You have to isolate the north part of our territory, which is the center of Mexico, is having very strong performance. It's one of the top performance areas of the country for the Coca-Cola PET. And obviously, Mexico City is the area where you have all -- the confluence of all competitors' very aggressive marketing initiatives, et cetera. So having said that, Lauren, what we are seeing this very tough comparison in the first quarter, a little bit in the second quarter. And then, easier comparison this year versus 2017 on the third and fourth quarter. When we compare with other CPG companies and some of the retailers, the numbers that we delivered in the fourth quarter are similar to what other companies are doing, it's our consumers that was hurt by very high inflation that was totally out of control. Remember back when Mexico is shooting for a 3% inflation rate and we hit 6.7%, that was the consumer that was affected by oil prices and gasoline prices. And we have started to see in some of the retail information we have, a better performance on -- towards -- in this year. Specifically in our operations, volumes for January and February are soft compared to last year, but again, we are comparing versus a very difficult margin trends that we saw last year. On the margin side, the big impact that we have in Mexico -- or let me put it this way, Mexico was, of the 10 countries, the one that was -- that has the most flexibility on passing prices to the consumer, and that's where you saw much better pricing improvement versus to -- versus the year ago. But at the same time, we have the extra cost of gasoline, or the diesel price increases and a very tough sugar or sweetener environment. 2017 versus 2016, sugar prices increased between 16% to 17%. And if we compare versus 2015, sugar prices have increased to close to 40%, or even in excess of 40%. So one of the potential benefits that we see for this year 2018 is that we are starting to see declining sugar prices because Mexico sugar prices have been totally out of synchronization with the international markets. We are starting to see these prices starting to decline. And that's one of the positive inflection point that we could see here in 2018. We have to remember that we have, in Mexico, our second increase on concentrate cost starting July, and that will certainly have an impact on our cost structure. And we need to continue analyzing how to improve our margins, despite that incident increase. And so having said all that, Lauren, I think that the summary for the expectation for 2019 is a very difficult first half in terms of comparing volumes. I think that we will have a more benign raw material environment, especially sweeteners. We have the additional concentrate cost. And with all of that, I think that we will be able to maintain our margins during 2018 to those that we have in 2017. I hope that I answered your question with these comments.

[Lauren Torres, analyst]

Yes, very clear, Hctor. Just one other part to that question was the brand Coke volumes. Was there anything specific to that number or it's just inclusive of your other comment?

[Héctor Treviño Gutiérrez, executive]

No, I think that, in general, the trends that we are seeing, that's basically the same in all the territories. It's sparkling volumes being flat or slightly negative and some growth in the water category and in the stills category. Sometimes, in some of the countries, important growth. In Mexico, we are seeing important growth with stills and important growth in water. And as you said, sparkling suffered a little bit in -- during this quarter. I don't think that there is nothing to worry. We have -- we build a statistics of preference of the consumer for our brand, and they are good. They are as healthy as they were a few years ago in terms of what we call the brand loves for and the consumption trends. We are -- as you know, in every country, we have this trend of -- and it's no different in Mexico, we have this initiative of bringing an affordable product to our consumers, and therefore, the big push for returnability that we are pushing in every country, including Mexico. So I don't think that brand Coca-Cola is necessarily softening in any specific. I think that we have to do more with weather-related and this situation at the end of the quarter that we have more colder weather than what we have. And in our budget, we are not seeing anything specific with brand Coca-Cola and specific for us to worry about that with that plan.

[Operator]

And next, we'll hear from Martha Shelton with BBVA.

[Martha Shelton, analyst]

I was wondering if you could comment on the level of profitability that you think you need to achieve in the Philippines in order to continue to maintain operations. Just trying to get a sense for, given that the put option expires in January 2019, what you're thinking about in terms of what you need to achieve in that market in order to exercise the call or exercise the put option?

[Héctor Treviño Gutiérrez, executive]

It's a tough question. Let me give you some of the facts. Fact number 1, as you said, we have a good option over all 2018. So in any period during 2018, we can exercise the put. Fact number 2, we have a call option that ends in 2020. We could have -- we could exercise that option. Very important for us at this moment in time is, fact number 3, the performance of the Philippines is the better the system have had in the last 15 years. So both the Coca-Cola Company and Coca-Cola FEMSA up to December of last year were very happy with the way the business was going. Fact number 4 is that everything is changing starting January 1, and it's too early to really be able to value what is the fair market -- the fair value of the Philippines under these circumstances because as I said in the opening remarks, we have some positive trends in the tax packets and what's passed in the Philippines. Basically, more jobs because a lot of infrastructure being built during the coming years. Tax breaks for the lower parts of the poorest people in the Philippines. But on the other hand, we have this very high tax on soft drinks. Very high tax on oil and gasoline and taxes on tobacco and alcohol. So it's too early to understand what the full impact of this new tax bill will have on our industry. The dialogue that we have started, and it's too early, with the Coca-Cola Company is that, given these difficulties, that we should explore different possibilities, including, and I want to remark that we are just starting to have this conversation with the Coca-Cola Company, including the possibility of extending the periods for this option that we have, both the put and the call. I think that, in my opinion, and obviously, we need to negotiate this with the Coca-Cola Company, the best outcome for the system is not to be pressured by this specific situation that started in January 1, and have a little bit more time to digest and to understand the implications for the Filipino market -- or for the Filipino industry, soft drink industry. I think that's where we are right now. It's a -- we have this option that you clearly described, it expires in January 2019, basically, to put back the -- at the same price that we paid 5 years ago in dollar terms, the Filipino asset -- the Philippines asset. We have the option to acquire the rest of the Philippines. We -- and again, as I said, 2017 was a very good year in terms of improvement and really getting this feeling that we are understanding better and better how to operate in this region. So we will keep you informed on how this dialogue with the Coca-Cola Company evolves. And certainly, by next quarter conference call, we'll have some news on that for you.

[Operator]

And we'll next hear from Isabella Simonato with Bank of America Merrill Lynch.

[Isabella Simonato, analyst]

If we can move a little bit to South America, Hctor, if you could comment on the volume performance in Brazil, how much was organic this quarter, and how you're looking for performance throughout 2018? If you could discuss your view for consumption in general of soft drinks? And I'm not sure if you can give any update on Heineken as well?

[Héctor Treviño Gutiérrez, executive]

Let me start with [indiscernible] we're going to Heineken. In Brazil, we saw what I think is a very good performance and pretty much in line to what we were expecting at the beginning of 2017. Remember, we said, we're starting -- we think that we hit the bottom was what we were saying at the first quarter last year, and that we're expecting a better trend in the second half. And that's really what's happened. If you look at organic volumes in Brazil, we were growing around 7% year-over-year. When you include the volume of Vonpar, that was not included in our 2016 numbers, the reported volume growth in Brazil is very large, it's 21%. So -- but organic, again, we need to be careful with that when do all this analysis of the comparable figures to isolate this one-time event. So the organic number is 7%. For next year -- and this -- let me just again comment on this 2017. And this 7% volume was achieved through a combination of maintaining market prices, introducing return on PETs, that has brought our average price per case a little bit down. So when you look on a reported basis, volumes increased 21%, as I said, revenues increased [ 7.40% ], that give you an idea that our average price per unit case is lower in Brazil. But that's where we wanted to be as we consciously are taking the decision to improve the affordability of our portfolio through returnable packages and the introduction of small packages for the, what we call, the entry packages, no? Having said that, we continue to see good performance going forward in Brazil. Volumes in January have been strong. Somewhere around low single-digit numbers volume growth for Brazil is a good number for our budget. We think that we will maintain prices at above levels with inflation. We'll just take to the Heineken situation. There's really not much we can discuss at this time. We still have an obligation to give the confidentiality on the process. As we said in the last conference call, the agreement that we have with Heineken provides for mechanism to resolve the differences. And what I can say at this moment is that we continue to sell Heineken beers as of February. We need to wait for this mechanism that are embedded in our contracts to resolve the situation, no? And that's basically what I can say right now.

[Operator]

And next, we'll hear from Rafael Shin with Morgan Stanley.

[Dong Uk Shin, analyst]

I just have a quick question on Brazil beer. I see that -- I mean, you had a -- you guys had still a very strong fourth quarter with revenues growing almost 30%. So I was just wondering if you can provide us some color on, I mean, which brands are having a lot of momentum? Is that coming mostly from pricing and FX or volume? Any color on, I guess, Brazil beer growth could be -- would be really helpful.

[Héctor Treviño Gutiérrez, executive]

Sorry, I had the phone on mute and I did not -- Brazil beer, we continue to have very strong performance of all the brands, but mainly, it's Heineken and Amstel brands. What has happened is that there's this trend with the consumer where, I don't know it's the right word, is the reformulation of our competitor beer. I don't know if the right word is reformulation. But the fact that they use different grades is apparently -- well, so far, the information we have from the market is basically that the consumer is not necessarily liking those new formulas. And Amstel beer is growing very importantly from a very low base. And Heineken beer continues -- Heineken brand continues to perform very well. But in general, all brands are doing fine. But it's part of the, I guess, the volatility and dynamics that you see in the marketplace normally.

[Dong Uk Shin, analyst]

Okay. And any specific channel where you're growing more?

[Héctor Treviño Gutiérrez, executive]

No. No channels. Remember that the [indiscernible] in Brazil, which is a very important on-premise market, and bars, we are growing with soft drinks and with beers, importantly, in that segment, in [indiscernible]

[Operator]

And next, we'll move on to Alex Robarts with Citi.

[Alexander Robarts, analyst]

Just one on Brazil and the other on sweetener. So if we think about the soft drink industry recovering in Brazil this year, how are you thinking about the pace of operating leverage recovery? In another words, after this multiyear contraction in the industry, where are you in terms of capacity utilization? And I guess, there aren't a lot of prior examples of coming off of such a deep recession in Brazil. But I mean, how do you gauge and think about the pace of getting back to more normalized utilization rate? Is it a multiyear process? It'd be really interesting to hear your thoughts on this. Where are you now? In other words, in terms of capacity utilization, where do you think you could be by the end of the year? And how long does it take to get to a more normalized level? So that's the first question. The second is on sweetener. You talked about the sugar trend in Mexico with some helpful color. When we think about high fructose, you dollar cost for high fructose this year, if you could tell us what that is shaping up to be in Mexico versus last year? And then, just kind of your sugar outlook in trends for South America this year would be very helpful.

[Héctor Treviño Gutiérrez, executive]

Alex, in terms of the capacity utilization, you are reading very well the situation in Brazil. Brazil went through a 3-year recession in our -- or reduction in the size of our industry and our company in terms of volume. And remember that we built a state-of-the-art plant in the State of Minas Gerais 2 or 3 years ago. So Brazil is one of the country where we have the lowest utilization of our production capacity. On the other hand, we have done some investments to get rid of bottlenecks that we have in distribution centers. We have acquired some distribution centers so that we avoid renting a space. And in general, especially in cities like São Paulo, are complex in terms of space. So we do have some limitation in -- with respect to workout. But right now, we are [ pay ] after some of the investments that we did. But that just is workout space, et cetera, we do not have the same spares capacity as we have in production capacity. So going forward, basically, it's very good for us because if we increase volumes, we will just start filling out some of this extra capacity that we have and, conceptually, those cases will be golden cases in the sense that the cost structure of the infrastructure is basically the same that we do not need to have major capital expenditures going forward because of lack of capacity in Brazil. With respect to your second question with respect to sweeteners, especially in Mexico. When I said that, in some of these remarks, that sugar prices have increased in excess of 40% over 2 years, and around 16% last year, I'm referring to basically cane sugar. High fructose have continued to have very stable prices. I'll say that it increased 1% or 2% last year in dollar terms. Obviously, we have to -- the volatility of the currency on those prices. And as you know, we have a strategy to continue rolling lower partially, so all the exposure we have to the raw materials in terms of entering into hedging some of this dollar exposure in every country but also in Mexico. So the equation for sweeteners in Mexico was a very large increase in cane sugar prices over the last 2 years and kind of stable high fructose prices in dollar terms, with a volatility that is embedded because of the FX. Going forward, what we are starting to see is that because of this disconnect that the sugar price has from the international prices, we are starting to see little by little lower prices on Mexico on cane sugar. We -- in high fructose, we are seeing a very stable, again, prices for 2018. We have been in conversation with our suppliers and prices are stable in dollar terms. Some of the other countries, Alex, for example, Colombia, we have seen an important reduction in cane sugar prices after a couple of years where sugar prices were, again, very high compared to international standards. And Brazil prices are pretty much in line with international prices. So we are seeing a good environment in Brazil for prices. And in Brazil, similar to what we do with respect to currencies in Mexico and Colombia, in Brazil, we are able to hedge sugar prices. So we do have some hedges for 2018 that are at reasonable levels according to -- the mark-to-market that we have on those is positive. So I think that, that describes very well the sweetener environment for the countries. The extra element that I want to add is that it's probably more medium and longer term. The Coca-Cola system and, I'd say, the whole industry is looking at ways of reducing the calorie content of the beverages that we serve to our consumers. The consumers are evolving. It looks like there are a bunch of consumers that like the full flavor of original flavors, but there are consumers that prefer a reduced calorie content on their drinks. So in general, I'll say that more, again, medium and longer term, you will see a reduction in the amount of sugar that we need to buy because we expect that the nil cal and 0 cal will be growing in our portfolio mix.

Thank you, Alex.

[Operator]

And next, we move to Antonio Gonzalez with Crédit Suisse.

[Antonio Gonzalez, analyst]

I just have 2 quick ones. First, a follow-up on the Philippines. I presume that part of the strong volume performance that we saw in the fourth quarter was just some of your clients building up inventory ahead of the tax increase. So I wanted to ask if you'd be able to comment what you've seen so far in 2018? I mean, are you seeing a decline in volumes worse than what you should expect for the rest of the year as this inventory buildup gets depleted? Or do you think that the rate of decline has normalized already? And would you have any guestimate, I guess, at this point that you could share in terms of what sort of elasticity you would be expecting? Or it's too early to share any of these points?

[Héctor Treviño Gutiérrez, executive]

Yes, as I point out in the remarks, clearly, the double-digit performance in December, in my opinion, was also influenced by the fact that the tax every one -- the retailers knew that the tax was coming starting January 1. So having said that, January was a month where we saw declines of around 17% to 18%. Having -- also having increased prices in excess of 25% increased prices to the consumer just because of the tax impact. So in general, we were expecting a little bit higher decline because we think that elasticities in a country like the Philippines that has very low per capita income or lower per capita income than some of the Latin American countries, and lower consumption per capita, in other words, the use of soft drinks in the normal type is high compared to Asia, but is low compared to Latin America. So we're expecting elasticities -- higher elasticities. So at the end of the day, Tonio, what I would say is, too early to know. There were some inventory buildup. We were surprised a little bit that volumes in January only declined 17%, 18%. We were expecting a higher number given the price increase that we pass to the consumer. But the other fact is that some of the competitors have had some disarray with their pricing strategies. One of the consumers increased prices in excess of the tax and then reduced the price again by the end of January. So the industry is still again stabilizing and getting into, again, in an equilibrium. What has happened right now is that we have passed almost all of the tax impact to the consumer because of maintaining some price points, we are a little bit short of passing the full effect of the tax. And because of that, now, we have in the marketplace, something that we haven't had for many years, which is parity prices with Pepsi-Cola and RC Cola in some of the packages. Over the last 5 years, we have our closest price a little bit ahead of our competitors. And in this price adjustment and this, let me use the word disarray that was created during January with everyone wanting to move the price list and all of that, that is what is created at this moment in time. The conclusion for me, Tonio, it's still too early to fully get an understanding of what the impact of this will be, okay?

[Antonio Gonzalez, analyst]

That's very clear. And if I may just very quickly, a follow-up on Venezuela as well. Beyond the rates that you used to translate results and the method that you use to consolidate, can you give us a quick update, please, on what's the status of your lines and warehouses and production facilities? Are you permanently shutting down any lines at the moment or that's not the case?

[Héctor Treviño Gutiérrez, executive]

The short answer is we are having a lot of problems finding spare parts, but all the production lines, all the distribution centers continue to work with very low capacity utilization. Remember that in Venezuela, it's very difficult to adjust headcount, as you can imagine. So we have our 4 production plants, all of them running. In theory, we were using close to 20 million unit cases per month. And now, we are selling 5 million or 6 million. In theory, we could have shut down some of the facilities, we are not doing that because we need to understand what the future of Venezuela is. All production plants are working, we are maintaining workforce. We are using all levers to pay for salaries, we are using all levers to buy raw materials. And I think that this issue that is Board of Directors following the recommendation of management of basically deconsolidating Venezuela. Our numbers is an accounting adjustment, but basically, what we want to do is to have a much more stable income statement going forward, as we will not be reporting or we will not be consolidating Venezuela in our P&L. So you would only see a line in our balance sheet saying investment in shares. That's the value we have. Right now, that's around MXN 1 billion pesos. Around $50 million. And the only impact that you will have going forward in our P&L is in case share value will call for an increase or a decrease in the value of those -- that investment in shares that we have in our balances. So I think that given the difficulties in operating in that environment, I feel that we've seen much more stability, I guess, to our P&L. I will not say transparency because we have always been very transparent in isolating the Venezuela as a single operation so that everyone understands what is happening there. And as we said in the remarks in our press release, it's just an accounting adjustment, that we will continue to operate in Venezuela as normal. Again, selling products, collecting revenues from our clients, using the lever we collect to pay salaries and to buy raw materials and let's see what the value of this operation might be in the future, no?

[Operator]

And next, we'll move to Luca Cipiccia with Goldman Sachs.

[Luca Cipiccia, analyst]

Just a quick one. I was hoping you could share some comments about the dairy segment. Not so much about the quarter, but how do you see that sort of cash redevelopment and the relevance within your portfolio, not only in Mexico but maybe also in Brazil that now is starting to get better. You made now an inroad in plants-based beverages. Dairy seems to be an area that is somewhat underrepresented in Brazil compared to other markets. And even looking some of your peers and some assets came up a few months ago, I guess you didn't participate in that opportunity. But I was curious to see how you see that category going forward, how important it will be? And whether it can also have some role to play in Brazil in dairy?

[Héctor Treviño Gutiérrez, executive]

Luca, good question. Dairies is a category that is very different from soft drinks, but very, I guess, compatible with our capacities, especially when you look at ambient products because you can use again the red crop and the capillarity we have and the number of business we do, the devices we have with our pre-sellers to manage an increased number of SKUs. So clearly, dairy is a very important category in the future of our company. Where are we? We have Estrella Azul in Panama that has not been performing that well financially. We are in a very important transformation phase. We have a new state-of-the-art plant that will be up and running, basically up to speed. By mid-year, we will finalize the closing of the old plant and starting the new one. So in Panama, we have this issue of having building a new plant and still operating in the old plant and starting to open some of the lines in the new plant and having double the number of people because of the 2 plants. We have Santa Clara in Mexico that is growing very well, is doing very well market share-wise. We're again very small base. But as we get -- as we have access to the number of stores with the products that we have, volumes is increasing double-digit importantly every month. In the Latin America system, we also have Tonicorp in Ecuador where are deriving some learnings. And we have Verde Campo in Brazil, which is a very important element in our design of the value-added dairy going forward. The innovation that we can derive from Verde Campo is very, very important. So the efforts that we are doing as a system is how do we better, let me use the word, integrate in the good sense, integrate, meaning derive good practices, products, examples of what every -- what people have done in Ecuador, or example, of the things that we're doing wrong in Panama, the things that we are doing well in Mexico. And as a Latin America system custom, we improve from there. Another thing also, to consider the fact that we have, with our part of the Coca-Cola Company, a tremendous array of formulas and brands that we can start deploying. And then, we give you an example in Mexico. We are using this flavored milk that normally was to attract kids and to use that in the so-called lonchera in Mexico, the bag that the kids will take to school. And we are presenting now a new formula in a plastic and a full body label of products which are flavored drinks for young adults and adults, which we are targeting with new formula. We are launching under the [ Varista ] brand, a way to bring coffee or cold coffee drink that we think would be successful and have a very good price point, a niche product that will have good profitability. So those are the kind of things that we're targeting to develop in the future. And certainly, Brazil is an important market for that. There's all this controversy of, should we -- should you be present with -- through with milk in order for you to be able to have value-added products in the marketplace or can you just use this -- can you just be present in the value-added drinks without to compete a little bit more -- on more, I guess, supermarket [indiscernible] milk product. So at the end of the day, this is more than what we are thinking. I think that, in general, we are very opportunistic of the future of dairies within our portfolio. And as I said, the file that the Coca-Cola Company has all over the world, all approach, including the [indiscernible] approach in the U.S. market where we have formulas, I think that will position us very well to better serve this opportunity or this category in the future.

[Luca Cipiccia, analyst]

It's very clear. Just on this last point about value-add with milk, without milk, how can you separate or be successful in the value-add without the rest? The willingness to maybe sort of embrace the category more broadly in markets such as Latin America, that resistance, is it more from sort of a Coca-Cola global strategy standpoint? Or is it something that the bottlers you don't see as necessarily the successful way to do it? I think it's a fair question at some point, if you want to have scale, you can't not have one without the other. I guess, that would be an argument. But when is this due? I think, Toni in Ecuador, is it a little bit of both? It's got more balance. But when do you think this due is going to become more clear if you want to scale the dairy business?

[Héctor Treviño Gutiérrez, executive]

Luca, in general, what I can say is that we have worked together with The Coca-Cola Company and other bottlers to really understand better all that is important with theirs. As I said, we have not such good experiences with Panama. Very good experiences, like with Santa Clara, in Mexico. We are very clear that at some point in time, we'll have to scale this business. And broadly, that will imply M&A transactions. But that has not been fully defined. So some of the transactions that have happened recently probably were not at right time for us because we aren't presiding in that definition space.

[Operator]

And next, we'll hear from João Soares with Bradesco Bank.

[João Soares, analyst]

Hctor, I was wondering if you could go back a little bit back on Argentina and Brazil as well, you talked a little bit about prices. How do we -- how should we see the environment 2018? And do you guys expect to be a little more aggressive in terms of pricing. I mean, your competitors had a little bit more discount in order to resume growth. Can I think a little bit more that you're going to -- prices are being in line or above inflations? How should we see that for 2018? And my second question, I understand you can't speak much about the Heineken process, but if you could talk a little bit about your plan B. I mean, are you negotiating with other third-parties to provide distribution services? Can we think that you're going to compensate for those revenues? How should we see this?

[Héctor Treviño Gutiérrez, executive]

Well, the second question, I didn't follow. The first one is very clear, pricing. Let me answer the pricing and then you ask me again the second question. Pricing in Argentina and Brazil, going forward, the strategy for 2018 is to continue pricing individual packages with inflation or a little bit ahead of inflation. In Argentina, it's a little bit more difficult, given the level of inflation that we have. I mean, inflation is coming down importantly, but during 2017, we saw inflation hitting 25%. So that implies increasing prices at that level. So some months, you are little bit ahead of inflation. Some months, you are a bit below inflation. But in general, the strategy is to price with inflation. In Brazil, inflation has come down importantly, and the strategy is the same. However, in Brazil, we are pushing very importantly for returnable packages. That might bring the average price per unit case a little bit lower, just because of a mix effect. The Brazil strategy will be, again, to summarize, pricing individual packages according to inflation to maintain prices in real terms at the present levels. And then, we might see a little deterioration of the average price because of mix effect. And can you repeat the second question please, João?

[João Soares, analyst]

For the second question, basically, I just wanted to understand if you have a Plan B, a backup plan, for, I mean, if the Heineken process goes sour, are you considering going to other third-party industries? There other beer companies, or maybe even other categories that you're willing to provide distribution services in order to compensate for the beer revenues that you might lose in case the Heineken agreement is terminated?

[Héctor Treviño Gutiérrez, executive]

Yes, João. Right now, it's a difficult question because, obviously, a Plan B has crossed our minds and we need to be prepared for that. But right now, all the efforts are focused on finalizing this differential -- difference that we have with Heineken. As I said in other conference call, our bid of the agreement that we have with Heineken is that this agreement will terminate until October 22 -- excuse me, until 2022. So right now, about where we are, we cannot do anything regarding Plan Bs or whatever. Obviously, in a scenario where Heineken is independent from the Coke system, for us, beer is an important element because, as we said, most of the retail system in Brazil sells beer and soft drinks together. So there is an important element of maintaining a low cost per unit case in terms of the distribution effort.

[Operator]

And at this time, I would like to turn the call back over to Mr. Hctor Trevio for any additional or closing remarks.

[Héctor Treviño Gutiérrez, executive]

Thank you, everyone, for your interest in Coca-Cola FEMSA. And as always, we -- you have the doors and telephone lines open for any future questions. Thank you.

[Operator]

And that will conclude today's call. We thank you for your participation.