Coca-Cola Femsa SAB de CV

NYSE:KOF

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, everyone, and welcome to Coca-Cola FEMSA's Fourth Quarter and Full Year 2018 Conference. As a reminder, today's conference is being recorded. [Operator Instructions]

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

And now at this time, I would like to turn the call over to Mr. John Santa Maria, Coca-Cola FEMSA's Chief Executive Officer. Please go ahead, sir.

[John Santa Maria Otazua, executive]

Good morning, everyone. Thank you for joining us to discuss our fourth quarter 2018 results. Constantino Spas, Héctor Treviño and Maria Dyla Castro are all with us today.

We completed a historic year for our company as we celebrated the 25th anniversary of Coca-Cola FEMSA's incorporation in stock exchange listing. At the time of its IPO in September 1993, our company was valued at $1 billion. Today, our company is valued at almost $13 billion, 13x its original market value, for an annual total return to shareholders of over 19.2%.

In 1994, we took our first step abroad with the acquisition of Coca-Cola Buenos Aires in Argentina. In 2003, we achieved the leadership position in the beverage industry with the transformational acquisition of Panamco, expanding our presence to nine of Latin America's most important markets and multiplying our volume 6x.

From 2008 to 2016, we strengthened our company's leadership position in Brazil with the acquisition and integration of four significant franchises that expanded our presence to more than 50% of the Coca-Cola system countrywide. Correspondingly, we bolstered our foremost footprint in Mexico through our merger and integration of four bottling franchises from 2011 to 2013.

Moreover, we remained at the forefront of the total beverage portfolio evolution. First, our joint acquisition of Jugos del Valle in 2007 captured the potential of a powerful brand that is now one of the Coca-Cola system's billion-dollar brands. Second, we established a partnership with Le?o in Brazil to develop a broad portfolio of distilled beverages. Third, we began a journey into the value-added dairy category through our joint ventures with Estrella Azul in Panama, Santa Clara in Mexico and Verde Campo in Brazil. More recently, we entered a new plant-based beverage category with our joint acquisition of AdeS in 2017.

Finally, in 2018, we integrated two franchises in Guatemala and expanded our geographic footprint to Uruguay to continue capitalizing on strategic, long-term value creation opportunities for Coca-Cola FEMSA.

Over the past 25 years, we have reinvested more than $20 billion in our business, with $11.4 billion in accretive mergers and acquisitions, enjoying the privilege of integrating great bottling franchises, traditional families and great collaborators into this new Coca-Cola FEMSA business.

Our entrepreneurial spirit and passion for customers and consumers have always powered our drive to innovate through the integration of transformative practices that have been followed by bottlers around the world from revenue growth management to segmented point-of-sale execution and end-to-end supply chain integration.

Now we are taking our continuous evolution even further, setting a new frontier with cutting-edge digital technology tailored to create a new competitive advantage based on our demand during Coca-Cola FEMSA commercial digital platform, advanced market analytics and Coke digital distribution platforms, which integrate revolutionary capabilities to set the new standards for the way we serve our markets and consumers.

Focused on our clear strategy, we finished a year of continued transformation and growth. After a successful 5-year turnaround of the Philippines operation, we sold our 51% stake in Coca-Cola FEMSA Philippines as the best course of action for our company's shareholders. Looking forward, we will continually evaluate geographic and category opportunities, maintaining our disciplined approach to capital allocation to maximize our shareholders' returns.

With that in mind, 2018 was a year of restructuring and transformation marked by, first, the deconsolidation of our Venezuelan operation at the end of 2017; secondly, the sale of the stake of the Philippines at the end of 2018; thirdly, the integration of three new franchises in Guatemala and Uruguay; and fourth, the adoption of hyperinflationary accounting in Argentina.

Moreover, in the face of a complex and volatile macroeconomic environment in some of our markets, we put Coca-Cola FEMSA on an extremely solid financial foundation. We not only reduced our net leverage position but also affirmed our credit ratings by Moody's and Standard & Poor's.

We reported solid comparable top line growth of close to 6% for 2018. Our revenue management initiatives backed by analytics and deployed in a natural and assertive way directly in each point of sale allowed us to create comparable volumes of 1.3% -- growth of 1.3% while prices were ahead of or in line with inflation in most of our operations.

Our comparable operating income increased 5.5% compared to last year as lower sweetener costs, a favorable currency hedging position in South America and operating expense efficiencies were offset by higher debt prices among our operations.

Our comparable operating cash flow was flat year-over-year. Consequently, our net controlling interest income was 5 point -- 5 billion -- [ MXN 541 billion ] for earnings per share of MXN 2.64 per share. Additionally, we reported quarterly earnings per share of MXN 1.38 for our continuing operations as we consider the Philippines business a discontinued operation.

Finally, I would like to thank Héctor after more than 25 years of our Chief Financial Officer and a distinguished career of more than 37 years at FEMSA for his collaboration and his friendship. Héctor decided to retire effective December 31, 2018. Over the years, Héctor led our company's profitable growth through his strategic vision, unwavering financial discipline and unmatched work ethic. Héctor is leaving a lasting legacy that Coke continues to build on and many, many friendships, deep friendships, at Cola-Cola FEMSA and the Coca-Cola Company.

With that, let me turn the call over to Héctor.

[Héctor Treviño Gutiérrez, executive]

Thank you, John, and good morning, everyone. For me and for our company, it has been a very impressive 35-year journey. Throughout this journey, we sustained our company's strong capital structure and financial flexibility, maintained our disciplined approach to capital allocation while capitalizing on our operational excellence to smoothly and successfully integrate new territories and various categories into our company.

Consequently, we are now the largest nonalcoholic beverage company in Latin America, creating value for our shareholders by multiplying the original value of Coca-Cola FEMSA by 13 times. Cola-Cola FEMSA has true and successful grown -- growth stories, and I am thankful for all the people with whom I interacted. They play an important part in my career.

And with that, I will hand the call over to Constantino.

[Constantino Montesinos, executive]

Thank you, Héctor, and good morning, everyone. I'm very honored to have the opportunity to continue with the legacy that Héctor has built for this organization. Héctor is not only a phenomenal CFO but also a great mentor and friend and has been very helpful for me in my transition into Coca-Cola FEMSA.

I would like to share my five key priorities as I take the role: number one, ensure we maintain our solid financial foundation and a disciplined approach to capital allocation in order to continuously improve our return over invested capital; number two, continue evolving the finance function with a business partner mind-set, working collaboratively with our operations and other functions to ensure that they are fully equipped to drive our top and bottom line results and maximize shareholder value; third, guarantee that we continue attracting and developing our talent base in the finance function; number four, continue with our approach of transparency, fair disclosure and continuous communication with our stakeholders; and finally, support John and the senior leadership team in our continuous journey of cultural transformation, reinforcing our D&A elements: number one, our obsessive focus on customers and consumers; number two, our operational excellence focus; three, continue creating owners mentality across everyone who works at Coca-Cola FEMSA; number four, putting people first in every decision we make; and finally, agile decision making and agile organization as something that is very critical in a volatile, uncertain, complex environment that we face.

Turning to operational and financial highlights. It is important to note that several factors affected the comparability of our year-over-year results for the fourth quarter. Number one, as previously announced, due to the change in the reporting method, the result of Coca-Cola FEMSA Venezuela are no longer included in our consolidated financial statements as of January 1, 2018. Number two, volume and financial results of recently acquired territories in Guatemala and Uruguay were consolidated as of May 1 and July 1, 2018, respectively. Third, on August 16, 2018, we announced to exercise a put option to sell our 51% stake in the Coca-Cola FEMSA Philippines to the Coca-Cola Company. That transaction closed on December 13, 2018. Therefore, according to IFRS 5, the Philippines operation is presented as a discontinued operation as of January 1, 2018, and our consolidated financial statements were represented as if the Philippines had been discontinued from the beginning of 2017. Consequently, our company's consolidated financial results are not comparable to the financial statements published in 2017.

Number four, as of July 1, 2018, our Argentina operation was reported as a hyperinflationary subsidiary. This means that we have to reexpress the results of any given month in real terms to the end of the reporting period. Thus, the results of our Argentina operation in October and November will be expressed in real terms as of December 31. Also, we have to use the end-of-period exchange rate to translate the reported results of our Argentina operation to Mexican pesos.

To better describe our business performance, for certain information, we present comparable figures excluding the effects of: one, mergers and acquisitions; two, translation effects resulting from exchange rate movements; three, the results of Argentina because this operation has become hyperinflationary; and number four, the results of Venezuela in 2017 as it had been deconsolidated.

Guided by our clear strategy, we navigated a very complex environment to deliver positive comparable results this year. Our comparable sales volume increased 0.9% to 972 million unit cases with transactions growing 1.4%. Comparable total revenues grew 7.8% to MXN 50.2 billion. Comparable operating income grew 4.3% to MXN 7.3 billion and comparable operating cash flow grew 4.1% to MXN 10.2 billion.

Now I would like to briefly discuss each of our operations highlights for the quarter. In Mexico, we maintained healthy market share, delivering revenue growth of 4.4% in the face of macroeconomic uncertainty and currency volatility. Our Mexico operations volume declined 0.9% as we experienced worse-than-expected weather conditions in November and December. Moreover, we increased prices in November affecting our volume for the month but proactively preparing us for the beginning of this year, 2019. Also, our portfolio mix impacted our average price for the quarter as multiserve and returnable presentations increased their share of our portfolio mix.

With regard to profitability, our pricing aligned with inflation, currency hedging, declining sweetener prices and expense control strategies coupled with our digital initiatives partially mitigated higher PET and concentrate prices. Beginning July 1, 2018, the price of concentrate increased another 1% of revenues for the next 12 months.

Moving south into Central America, we leveraged our portfolio of portable presentations to continue our turnaround in Costa Rica and Guatemala, while improving Panama's top-line growth. The consolidation of new territories, our successful presale model roll-out in Guatemala, and focus on execution enabled us to achieve double-digit volume growth and improve our market share in such a competitive market.

Increased prices across our four operations drove mid-single-digit organic revenue growth despite an organic volume decline of 3.5%. Our Costa Rica and Panama operations reported low-single-digit volume contraction while Nicaragua continued its slow double-digit contraction. Despite softening consumer dynamics resulting from a disrupted sociopolitical environment, our Nicaraguan operators have been able to contain the volume contraction.

However, including our recent acquisitions in Guatemala, we recorded 27% volume growth for the region. Guatemala continues to perform positively with low-single-digit organic volume growth, and in our new franchises we're capturing synergies through portfolio alignment mainly in the still beverage category as we started implemented our portfolio, and we launched our 2-liter multi-serve returnable PET presentation which has been working very well in the market.

For the quarter, lower sweetener prices and expense control strategies were offset by higher PET prices and depreciation of the average exchange rate of the Costa Rican Colon and Nicaraguan Cordoba as applied to our U.S.-denominated raw material costs.

Moving on to South America, emerging from a tough macroeconomic environment in Brazil we delivered consistent volume growth for the year. Leveraging upon our affordability strategy, our portfolio is very well-positioned to satisfy Brazil's recovering consumer environment. We continued a positive volume trend in Brazil marked by our fifth consecutive quarter of volume growth, as volume grew 4.5% for the quarter with transactions outperforming volumes. Our colas, water, and still beverage categories, volume outperformed for the quarter thanks to our focus on execution and our digital capability which enabled us to launch more than 100 innovations in the back end of 2018, which is a great achievement for the team and an important reconfiguration of a portfolio in the market.

Although we increased prices during the quarter to proactively prepare us for the first half of 2019, our price mix benefited from the performance of our single-serve presentations. However, in Mexican Pesos, our revenues were affected by a negative currency translation.

Led by our affordability strategy we improved our volumes in the face of Colombia's challenging, gradually-recovering consumer environment. For the quarter we generated 3.1% volume growth with high-single-digit growth from our colas portfolio, thanks to a performance of a returnable 2-liter PET presentation which has achieved double-digit growth. We also improved the water and still beverage category performance with our personal water portfolio having double-digit growth and our launch of the Del Valle Frutal improving our share in these categories.

However, after Colombia's very positive performance for 2018, we are operating under a very different environment this year. Starting last January, Colombia's fiscal reform changed the way VAT is applied to sugared beverages and beer, from a mono-phase to a multi-phase scheme. This impacts all of the product chain, from our distributors to our final consumers. While it is too early to tell to confirm the impact on our volumes, we expect negative performance for the coming year.

Accordingly, we are reassessing our currently business model to ensure we have a sustainable, profitable operation.

Confronting Argentina's top macroeconomic environment marked by hyperinflation and deep currency devaluation, our volume declined 27% for the quarter due to a tough year-over-year comparability. The earlier year period marked the last quarter of a positive currency environment. Nonetheless, we were able to increase our prices ahead of inflation, increasing prices by 59% on a local currency basis.

However, due to a negative translation effect, our revenues that were reported declined 45%.

Moving forward, we are much better prepared than ever for this market's challenges thanks to our growing mix of affordable packages and no-sugar beverages, digital initiatives, currency hedging and cost and expense controls.

With respect to Uruguay, which we integrated in 2018, our integration process is proceeding according to plan. We are countering the region's difficult macroeconomic environment through synergies and long-term structural efficiencies. We are also improving our market share, particularly in the flavored sparkling beverage segment.

For the fourth quarter, we reported sales volume of 13.3 million unit cases. Like Argentina, this operations portfolio enjoys a higher mix of low- and no-sugar beverages, reaching 67% this quarter.

In our South America division, favorable sweetener and aluminum prices coupled with the positive currency hedging and expense control strategies enabled our operations to partially offset higher PET prices and the depreciation of local currency as applied to our unhedged, U.S. Dollar-dominated raw material costs which impacted the division's profitability for the fourth quarter.

In Venezuela, we continuously adjust our business model to serve both consumers and clients in a very tough and difficult environment to operate in.

Finally, as a result of the continuous analysis of our investments and joint ventures, as of December 31, 2018, we realized an impairment of our investment in Estrella Azul, our dairy joint venture with the Coca-Cola Company in Panama. The outcome of this analysis led us to register an impairment of MXN 432 million. Both Coca-Cola FEMSA and the Coca-Cola Company are fully committed to continue focusing on this operation in a very profitable way.

Now with regards to our financial results for 2018, we reduced our total debt by MXN 1.6 billion compared with year-end 2017. This reduction resulted mainly from the payment of USD 445 million Yankee bond due in 2018, which was partially offset by the new bank loans in Mexico and Uruguay. Additionally, a weighted-average cost of debt for the quarter was 8.2% including the effect of debt swaps to Brazilian Reais and Mexican Pesos. This year-over-year increase was due mainly to our fixed exposure to Brazilian Real-dominated debt and the effect of the increase of the TIIE rate on our bilateral loans in Mexican Pesos.

As we received the proceeds for the sale of our 51% stake in the Philippines in December, our net leverage ratio ended at 1.61 times. Our comprehensive financial results recorded an expense of MXN 2.1 billion resulting from two main factors: first, a foreign exchange loss in our U.S. Dollar-denominated cash exposure as the Mexican Peso depreciated in December; and two, in the loss or gain on monetary position level. In 2017 we reported a gain for Venezuela whereas in 2018 we reported a minor gain for Argentina operations.

As we are reporting our Argentine operation as a hyperinflationary subsidiary, we were required to re-express the results for October and November in real terms as of December 2018, as we used the end-of-period exchange rate to translate the results to Mexican Pesos. Accordingly, we recorded monetary position gain in inflationary subsidiaries of MXN 59 million as compared to a gain of MXN 460 million in 2017, driven by our Venezuela operation.

During the quarter, we reported income tax as a percentage of income before taxes of 30%. This result was driven mainly by the increase in the relative weight of Brazil's profits in our consolidated results, which have a higher tax rate.

Finally, as we announced on January 31, 2019, and subject to the approval of Mexican National Banking and Securities Commission, we proposed to our shareholders a stock split and issuance of Series B shares to be listed together with Series L shares in the form of units, to allow our company to increase its capacity to issue new equity which may be used as consideration in future share-based acquisitions, as well as for general corporate purposes.

We will continue to maintain our disciplined approach to capital allocation and we're confident that the listing of Series L shares and Series B shares in the form of units will help unlock value for shareholders and position Coca-Cola FEMSA for new growth opportunities in the future. Obtaining the Commission's authorization, we will announce the record date and exchange date for all holders of Series L shares and the conversion date for all holders of ADSs. We expect that the announcement will happen during the first quarter of 2019.

And with that, I'll hand the call back over to John for his final remarks. Thank you very much.

[John Santa Maria Otazua, executive]

Thank you. In an ongoing effort to promote our leadership talent, starting this year we are pleased to report the following organizational changes.

Fabricio Ponce, former Chief Operating Officer in the Philippines, is our new Chief Operating Officer for our Mexico operation. Prior to his assignment in the Philippines, Fabricio served as the head of our Colombian operations, Managing Director of our Central American operations, Managing Director of Argentina and Brazil and Colombian operations, and Strategic Planning Director of our Latin American operations during his 30-year career with Coca-Cola FEMSA. And now, he's coming back from Philippines to start applying what we learned over there to the Mexican market.

Xiemar Zarazua, former Chief Operating Officer in Mexico, is our new Strategic Planning and New Business Officer. Prior to joining our company, Xiemar served for more than 30 years in the Coca-Cola Company. His different positions included Chief Executive Officer of the Brazil business unit from 2008 to 2016; and Chief Executive Officer of the Latin America business unit from 2006 to 2008. He also served in different areas in Mexico and Central America.

At Coca-Cola FEMSA we are very committed to continuing our legacy of entrepreneurship, innovation, and operational excellence. Strengthening our capabilities to become a bigger, better, and bolder bottling company to achieve our joint vision of beverages for life and generating economic, social and environmental value for all our stakeholders.

In closing, we continue to focus on becoming a total beverage leader in our current and future geographies, continuously pursuing sustainable profitable growth and enhancing our capabilities to remain a superior market developer in the Coca-Cola system.

Operator, I would like to open the call to questions.

[Operator]

[Operator Instructions] We'll first hear from Fernando Olvera of Bank of America Merrill Lynch.

[Fernando Olvera Espinosa de los Monteros, analyst]

I have a couple of questions which are related to Brazil. Regarding volume, you registered really very strong volume growth this quarter. I think this trends for the growth of the year. So can you elaborate more on what was behind such growth, and how does your market share behave during the quarter? Also, how should we think about consumption this year, and what is your outlook on bottling growth this year?

[Constantino Montesinos, executive]

Certainly, Brazil had another positive quarter. We continue to be very encouraged by the positive performance we have in Brazil. It's the fifth consecutive quarter of volume growth, as you mentioned, volume growth increased 4.5%. Overall, weather helped significantly especially during December. In addition to that, as I mentioned, we have a very successful implementation of affordability initiatives, additions to the portfolio as I said -- during the year, we did around 100 launches in Brazil across all categories. And honestly, there's a huge focus on execution at the point of sale by the team. And also we have been driven by some digital initiatives across our omnichannel strategy. Our market share remains steady. We're gaining some traction in market share, both in CSDs, especially in colas but also in juices and nectars, and water, as well as isotonic and energy drinks. Overall, we're seeing a very positive beginning of the year. The outlook in terms of macroeconomics and consumer optimism in Brazil is starting to pick up again. So we hope we continue with this trend and momentum in Brazil. Thank you.

[Operator]

Next, we'll hear from Benjamin Theurer of Barclays.

[Benjamin Theurer, analyst]

Two questions, actually one on the outlook in Mexico. What do you expect? How do you feel about the consumer environment demand scenario, and obviously the fact that you had obviously a little bit of cost pressure from the concentrate? What's your pricing strategy looking into 2019 on the Mexican market? That will be my first question.

[Constantino Montesinos, executive]

Well, overall we're seeing positive trends as we start 2019. We have been very effective in price management, above inflation. I mean, we're leveraging, we're significantly leveraging our analytics platform for the last couple of years, which as time goes by becomes more robust and more accurate. It allows us to be much more effective not only on pricing and developing a pricing architecture, but at the same time on being more efficient in the allocation of discounts and promotions across our different channels. So that has been and will continue to be a driver for our performance in Mexico next year, coupled with the most significant improvements in our execution at the point of sale. On top of that, we're seeing a resilient consumer [indiscernible]. It's gradually recovering confidence. January we saw positive volumes the start of the year, which is good, taking us in the right path. Although we have some weakness at the end of 2018 but January was pretty positive. And at the same time, weather has been favorable for us throughout the beginning of the year. Our portfolio affordability is increasing. We are working very hard behind a returnable portfolio and our NCB portfolio also continues to gain traction. On the profitability side as you mentioned, we're seeing more stable raw materials environment, sugar and PET prices significantly which were hard last year, coupled with a significant amount of productivity initiatives to protect our bottom line in Mexico. So I think that probably provides you a little bit of an outlook of what we're seeing for the Mexican market now.

[John Santa Maria Otazua, executive]

This is John. I just think, complementing on that -- just complementing on that I think what we're seeing also is the fact that we will have increased government spending. So the short-term consumption pattern for Mexico on consumer business, specifically in our territories, is going to be very favorable.

[Benjamin Theurer, analyst]

Okay. And with that do you expect also transactions to somehow pick up? Because that has been somewhat weak-ish, especially in the fourth quarter. But if we take a look, transactions throughout the year were slightly negative 2018 versus '17 so I assume you're expecting a little bit of recovery there as well. Because what we've basically seen, was no volume growth throughout the year with some minor transactions and everything came from price. So the question is that transaction plus volume, what can drive top-line growth in '19?

[John Santa Maria Otazua, executive]

Right, good question. I think one of the things we're going to start focusing on much more heavily this year in Mexico, is single-serve. Single-serve, and in an affordable way. Single-serve returnables, I think we have a good lesson from the Philippines as we can bring them to Mexico where we can go into having very affordable entry price points in a very significant manner in many markets in Mexico that requires it. So between what we're doing in revenue growth management on multiserve, along with the focus on retaking single-serve, I do think we'll have enhanced transaction growth and revenue growth behind our Mexican operation.

[Benjamin Theurer, analyst]

And then just one last question. This is really just more than accounting one. On the filing, you submitted with the Mexican Stock Exchange, you basically reported MXN 51.8 billion in revenues. Your press release throughout the whole report states 50.2. What's the difference of that 3% because it literally runs through the whole income statement? Just a quick clarification, so which number should we actually use?

[John Santa Maria Otazua, executive]

Benjamin, we had a problem with the platform.

[Benjamin Theurer, analyst]

Hello?

[John Santa Maria Otazua, executive]

Yes, Benjamin. I don't know what you heard until we got cut off. But again, just to reiterate...

[Benjamin Theurer, analyst]

[indiscernible] forward, then it got cut off. That was the last word.

[John Santa Maria Otazua, executive]

As we have -- as we were loading the data to the Mexican Stock Exchange platform last night, we had very -- a lot of difficulties in putting that data onto the platform. And the correct data to focus on is the press release data. We will be correcting the data on the Mexican Stock Exchange during the course of the morning.

[Operator]

Next, we'll hear from Lucas Ferreira of JPMorgan.

[Lucas Ferreira, analyst]

I'd like to say for Héctor to have good luck in this new position, actually, new phase of his life. And my first question is actually on Colombia. If you guys can comment on the outlook performance, how this first month has been and especially considering this change in the VAT charge if these volumes have been coming above expectations? And what's the sort of impact that we should expect for volumes in the first quarter, and for 2019? And my second question is regarding costs, if you guys can comment on the costs trends for the year, if you already foresee some improvements in PET in the first half of the year and also the other main cost lines, if we should expect already a better year in terms of -- for costs per hectoliter sold? And if we should see some improvements in margins on the back of that?

[Operator]

Next, we'll hear from Alan Alanis of UBS.

[Alan Alanis, analyst]

I'll be very happy to ask my question, but I don't know if they're on the line. John, are you on the line?

[Technical Difficulty]

[Operator]

Just a moment. Please hold the line while I reconnect our presenters.

[Constantino Montesinos, executive]

Hello?

[Operator]

You may proceed.

[John Santa Maria Otazua, executive]

Okay. Thank you.

[Constantino Montesinos, executive]

Hello? Lucas?

[John Santa Maria Otazua, executive]

Hello, Lucas?

[Constantino Montesinos, executive]

Let's go to the next question.

[John Santa Maria Otazua, executive]

The next question.

[Operator]

And we're on Alan.

[Alan Alanis, analyst]

First of all, Héctor, congratulations. As a former boss, mentor, I mean, you've always been a great example. And I surely wish you the best at this new station. You will be missed. John, Constantino, my first question has to do with the criteria for transactions and M&A post- the approval of this split. How does it change the criteria, if you could just update us how you're thinking now that you will be able to issue more shares for M&A? And that would be the first question, and then I have a follow-up more regarding -- well, I can -- let me put it on the table right away. It has to do with the role of beer in your portfolio in Brazil. If our numbers are correct, we saw very strong revenue growth for the beer category in your results in the fourth quarter. I think even that Heineken said that they reported low-mid-single-digits in the fourth quarter. It indicates that you had a lot of pricing in beer in Brazil. I just want to see if you can confirm that? And what is the overall role of beer in Brazil, and if you can give us any update in terms of the arbitration that you're going on with Heineken that would be highly appreciated. Those will be my two questions.

[Constantino Montesinos, executive]

Well, let me tackle the last question first. As you know, we are in the middle of a -- everybody wants to know about beer in Brazil but as you're aware we're in the middle of an arbitration process. So there's very little we can say about it until the arbitration process finalizes which we expect it to happen between the first half of the year, or maybe the beginning of the third quarter. So just look for those purposes -- I'm not going to comment around our perspective on beer going forward in Brazil. And I hope you understand that particular -- in terms of performance, you're right. The beer category is going through very positive momentum for us in our region, or in the area of influence where Coke operates in Brazil. I guess Heineken has reported some of those numbers, and I would rather have the guidance from the Heineken release and conversation that occurred a couple weeks ago. But overall, we're seeing strong growth. The brand Heineken, and brand Amstel, have very good momentum. And this particular element is something that we're seeing consistently happening in the market for a while and we first see it happening. So the premium segment of the beer category should continue strengthening from our perspective in the Brazilian market. But that's all I want to comment around beer, and I think the Heineken release has significant information that can provide you guidance in that regard. On the M&A piece, and the stock split, as you know the changes that we announced just aim to give us flexibility on our capital structure by increasing our capacity to issue equity. But maybe using the [indiscernible] as a consideration in future share-based mergers or acquisitions. However, there is no project or initiative or target in mind that drove that decision. It has been something in the making for a while. Actually I have Héctor on my side, who has been the architect of this particular initiative. And I'll ask him if he wants to comment beyond that. But there is no change in our focus on M&A. As you know, we have been historically known by being very disciplined on our capital allocation and would do the investments that are right for our company and our shareholders at the proper value and at the proper time. And the mechanism that we put behind those transactions is defined at the moment we see the target and the initiative unfolding. I don't know if Héctor wants to comment something on the stock split to give you a little bit more guidance.

[Héctor Treviño Gutiérrez, executive]

As Constantino mentioned, this has been in the making for many years, actually, since the Vonpar acquisition we started to define [ this need ] and if you remember we have this convertible bond that was issued with respect to that acquisition, and that required the structure to be in place. It took a lot of time because we were looking for, in conversation with authorities, so we can have a [ single unit trading ] as opposed to having Series B and Series L with [ a split trading ] that in our opinion will create [ the illusion ] of pricing [indiscernible]. So we finally got the authorization at the end of last year. We were caught with the Christmas break and the change in the government and finally we got final approval in January. But as Constantino said, it's basically something that was being developed and planned for quite a -- basically for 3, 2-1/2, years. The Series B shares will now have some voting rights, which I think are very good for our shareholders and that [indiscernible].

[John Santa Maria Otazua, executive]

I think as you go through the history of acquisitions of Coca-Cola FEMSA sometimes you use a large component of that. Sometimes we use a large component of equity. But always trying to maintain our ratios within reason. And what we have here is incremental flexibility to make sure that as we see opportunities or when they come up, and sometimes they're not necessarily projectable, we have the financial strength and flexibility to do something that is reasonable and conservative for our shareholders assuming that whatever transaction we have going forward is accretive. And I think this allows us a broader spectrum to go out there and feel comfortable and we are in a great financial position, and also in a great capital position to continue down the path of doing further transactions.

[Operator]

Lucas, your line is re-opened. You may pose your question again at this time.

[Lucas Ferreira, analyst]

I'm not sure if you listened to the questions, but the first one was related to the elasticity in Colombia, if this is coming better than expected, what sort of impact you guys are expecting the volumes for the first quarter and full year, if you can comment at least versus your expectations, initial expectations? And the second question was regarding the costs. I wanted to know what part of the curve we are in terms of pressures, especially from PET which I think should be -- should remain one of the lines pressuring your costs. So can we expect already better cost base in the quarters to come? And what about the full year 2019? Thank you.

[John Santa Maria Otazua, executive]

Regarding Colombia, obviously the elimination of the tax benefit that we had in our [ class ] is a very, very large impact for us. And it changed our short-term strategy of want to going out there and restructuring our Colombian operation on a lot of different fronts. The first front was pricing, which we took up immediately in January. We took up over 6% pricing. Secondly we had to resize, beginning to resize our operation. We've taken out 200 people in Colombia, basically staff people to resize that operation. Thirdly, we're looking at redeveloping our route to market plus our supply chain distribution network, because all of our benefits are stuck in the Tocancipa plant, and we're looking to reallocate those to the different plants that we have. So I think the first 4, 5, 6 months in Colombia are going to be very focused on restructuring, and to make sure that we're facing the environment in the correct manner, and sizing our company, for that matter. What we think about elasticity is we've taken up the prices and it worked better than what we thought. So we have -- at the 6% rate, you're not looking at -- you're not seeing the same type of elasticity as we had before when the VAT was taken across the whole country a couple years ago. So we're much better off than we thought. And we're encouraged by what we're seeing in terms of savings, and obviously, it's a very challenging year for Colombia. But I think we're on the right track with the right portfolio and with the right management as well.

[Constantino Montesinos, executive]

And to your other question regarding raw materials, PET and sugar, we're seeing a better curve going forward in 2019 compared to 2018. So overall our outlook in that particular element line in our P&L should be more favorable this year than in the previous year.

[Operator]

Next, we'll hear from Antonio Gonzalez of Credit Suisse.

[Antonio Gonzalez, analyst]

First, similarly, thank you for everything, Héctor, and congrats on a truly remarkable career. Constantino, best of luck on this new role. I have two questions. The first one on dividend. You mentioned on today's press release that the board had proposed a dividend of MXN 3.54 per share, which is 5.7% growth versus last year. And obviously there has been a debate recently after you exited from the Philippines on whether you could substantially increase the payout. On the other hand obviously, [ flexibility ] on the macro side in Mexico I guess has diminished significantly. So I just wanted to pick your brains back to what is the latest thinking with respect to the payout policy? Do you think we will remain at similar levels for the next couple of years, or do you actually see room for a substantial increase? And if so, in which time frame? And secondly, I just wanted to ask [indiscernible] what trigger, is there any specific events that trigger the write-off in Panama, and is there any long-term learnings here that we could extrapolate for your dairy ventures elsewhere, or is it more of a specific situation?

[John Santa Maria Otazua, executive]

Let me address the dividend issue first. We are taking back our dividend policy for about -- for the 2019 year payout, to the about 20%, 21% it was historically. We would have increased dividends further but we wanted to make sure that we have the cash on hand to pay off a $500 million Yankee bond that comes due in February of 2020. So we didn't see any economic benefit of going out there and borrowing to go out there and do just a short-term transaction to bring down the Yankee, so we wanted to keep that cash on hand. But going forward once we're over that hump we do have a possibility of increasing the dividend policy going forward for Coca-Cola FEMSA, and that would be our objective. However, we also would be very concerned with how market conditions continue to evolve and what we'd want to make sure of that we have enough financial flexibility and strength on our balance sheet to be able to ensure that whatever future dividends that we're going to go out there and increase are sustainable. Secondly, on terms of the write-off of the Panama operation, the Panama operation is the first real foray into value-added dairy that we had and I think we had a lot of delays on the plant, in terms of bringing up the plant into spec. This is neither a remake nor a green field. We have what we call a brownfield, but we're just making the plant within -- a new plant within the existing plant. So that, if you've ever remodeled your home, is a very difficult situation. So we've encountered delays and we're also learning a heck of a lot more about how to manage dairies. Because this is really the first time that we've gone into cold and value-added dairies with yogurt, ice creams. So it's been a very large learning process that we don't have anywhere else. In Mexico we're just basically all UHT. Or even in Brazil where it is chilled, but it is [ on a separate basis ]. So I think it's a very specific thing to Panama that we really cannot go out there and project anyplace else. Now that being said, we just came back from Panama a couple days ago and I am very encouraged to see exactly how the project was coming along, the momentum is gaining, and how our production platform is coming onstream [indiscernible].

[Operator]

[Operator Instructions] Next we will hear from Carlos Laboy of HSBC.

[Carlos Alberto Laboy, analyst]

Héctor, congratulations and thank you for 25 years of forthright honesty and straight shooting, which has been I think very helpful for everybody. John, the catalog of achievements that you listed at the start of the call, we all get it. It's what makes you maybe the most valuable bottler Coke has ever had anywhere in the world in those 25 years for driving next-frontier execution. But it all makes for a really great eulogy if you can't exceed your cost of capital on a sustained basis. When you look at the pressures you're facing in Brazil and you look at the pressures you're facing with noncarb profitability, marketing maybe of effectiveness at driving growth for your core brand, can you exceed your cost of capital without these things getting fixed? And the follow-up to that, then, is you said that you're going to evaluate geographic and category opportunities but you're also increasing the dividend. So are you willing to consider geographic opportunities for asset sales, not just for purchases, if you're staring at situations where you can't get from your partner what you need for exceeding your cost of capital?

[John Santa Maria Otazua, executive]

Hello?

[Carlos Alberto Laboy, analyst]

Yes.

[John Santa Maria Otazua, executive]

A couple things. Yes, over the last couple years, we've had a series of years where we're not making our cost -- or making, or slightly under cost-of-capital for Coca-Cola FEMSA, and I think that's a true reflection of the market in terms of how we value Coca-Cola FEMSA. We give you [ just enough ] in increasing shareholder value. Now there's a couple of reasons for that, and I think there's devaluations, there's incremental costs for raw materials, and yes, importantly there's been also [ incidence ] increases that have also been affecting us, to the tune over the last 3 or 4 years is about $154 million that continue to give us [ headwinds ]. There's been consumer headwinds and there's been tax headwinds as well. So I think overall being close to cost-of-capital has not been bad. But it is not what we need. The issue is, how do we go out there and continue to grow costs, or achieve our cost-of-capital? A couple things. First, in the general picture, we need to go out there and amplify our portfolio. First, we need just to get our CSD portfolio back on track and I think it was very encouraging to see during 2018 that Coca-Cola -- brand Coca-Cola, grew almost [ 2% ] in terms of volume. And I think we put also a lot more revenue into the Coca-Cola system by growing both revenues and volume and transactions in brand Coca-Cola. And secondly, you need to go out there and fix our noncarb business, or make it -- not fix it. I would say, make it more profitable. Right now where we are it is growing, but it's not nearly as profitable as our Coke business. But it is, as I would argue, it's marginal for the whole process or to the whole structure. So the more we go out there and grow, the more margin we [ do in-house ]. Now when we bring down Coke and the noncarb business, what noncarb business do you want to talk about? Because within the noncarb business there is a series of large businesses that are very profitable -- energy, tea, isotonics, and ones we have to start I think getting better returns on is the basic juices and nectars. And there's two ways of doing that. One is going out there and getting better formulations. And secondly there's also [ a case of going up ] and being a better portfolio, by premiumizing it. And I think Brazil, as the last time you were down there, you saw how we [ premiumized ] the juice portfolio, making sure that we were going out there with higher premium category glass products and they're doing very well. And there's a lot of margin involved in that. So I think from that end, we're starting to advance on the portfolio and getting it much more accretive for our Coca-Cola FEMSA shareholders. Secondly, I think, is water. Water we have to go out there and figure out exactly what we [ did within juices ], in terms of developing a portfolio of premium brands, to be able to really develop the brands and make sure that we have enhanced profitability over what we have today. Today in most countries, we play with a core brand which is Ciel in some places, Cristal in Brazil, that tries to [ play the gamma ] across premium value and [indiscernible] [ mainstream ]. And what we need to do is go out there and develop those brands differently. We need -- we have just launched Smartwater in Brazil, we've launched Smartwater in Argentina, on a [indiscernible] basis. But those are the type of initiatives we need to continue to develop fully, and aggressively, to make sure that that portfolio becomes as profitable as carbonated soft drinks. And then carbonated soft drinks, and I just said this on another question, you need to refocus on engaging on transactions on single-serve. And I think there we can do that by going back into glass and returnables in a way that I think our competitors can't, both in Brazil, Mexico, and elsewhere. So I think there is a good story so that we're well-poised to be able to go out and increase our profitability and our margins to cover our cost of capital and grow at the same time. In terms of Brazil, you're saying whether Brazil beer is something that we need to do, or don't need to do. Obviously we can't comment on the existing arbitration. But the world is moving towards more and more integrated platforms, and Brazil is an example. I think there's other countries that are also examples. And I think it's more compelling in Brazil than anyplace else. And for us, it would be very important for us to have a beer solution in Brazil. I don't know if that covers all your questions, Carlos.

[Carlos Alberto Laboy, analyst]

Yes, the final question is that you had mentioned that you're going to continue to evaluate geographic and category opportunities but everyone assumes that that means that you're going to consider more asset purchases. But what you've done mostly recently is sales, the Philippines. Do you look at your existing portfolio of territories to sort out, well, maybe there's something in here that we shouldn't have?

[John Santa Maria Otazua, executive]

Sure. Let me be clear about this. I mean, the thing with the Philippines is that it was a very specific transaction and structure for the Philippines and Asia. And the way it was set up, the deal was set up, and that's what we negotiated at the time, that we would go out there and we had a put and a call. And we had to go out and exercise the call to be able to further acquire territories in Asia. And given what's happened in the Philippines with the tax on sugar, we couldn't find a way to make hold of the prices that we had in the original transaction. And so therefore instead of going up and modifying the whole transaction, what we ended up doing was just putting it back to the company. That philosophy is not in Coke FEMSA's DNA. We're not asset sellers. We don't have it envisioned to go out there and sell assets at this point anyplace else. And later on, from [indiscernible] the Philippines and we just went out there and acquired two franchises in Guatemala and one in Uruguay that I would say gives you the pace of where we want to go in the future. We will continue to look at opportunities both on a category basis and a territory basis, Carlos. Again, just making sure that we're not going out there and destroying shareholder value.

[Operator]

Next, we'll hear from Alex Robarts of Citi.

[Alexander Robarts, analyst]

I did want to start out by saying to Héctor, thank you very much for the financial stewardship through the years, and I hope the best in your well-deserved retirement. Two questions from my side, one on the operating deleverage in South America and then the second on noncarbs. I guess we kind of came into the quarter thinking about low sugar in South America, but then higher PET. But what seemed to kind of really explain, or at least impact, a lot of the deleverage, you show us comparatively 12% top line in South America growth in the quarter with 2% EBITDA growth. And that difference seems to kind of go to what you call the raw material hedge, the unfavorable hedge there. Could you give us some more color as to what specifically was behind that raw material unfavorable hedge? Was it a particular input? Was it several? And might we expect some relief in this seasonally-strong summer here in the first quarter? Or might that continue to be unfavorable? So that's the first question. The second one relates to noncarbs, an interesting trend. You talked about it with us in the fall in New York when you came up. And now with the full-year numbers, we can kind of see how those non-carb volumes evolve. And when you look at Mexico and Brazil it's kind of a tale of two cities. Flat noncarb volume growth in Mexico last year, and I guess kind of the impact there is bulk water coming down. The question is, is that going to continue to be a focus for you? Is that something that you want to de-emphasize, and should we continue to see that decline? The other side is Brazil, where you're mid-teen noncarb growth. A lot of it is filled with also waters. But it strikes me that it's 20% of the volume of noncarbs in Mexico. And so does M&A become something that you would look at this year in noncarbs in Brazil, to kind of perhaps more rightsize that growing piece of your volume? And the final piece on the noncarbs, last week Coca-Cola Company talks about in their conference, that new products accounted for about 17% of volume growth last year. How do you think about just generally new products and the impact it can have on your growth this year? Would it be like Coke's number of mid-teens? Thanks very much. A lot of kind of sub-questions but I appreciate the time.

[John Santa Maria Otazua, executive]

Alex, let me see. Let me just try to take the last one first, and then I'll let Héctor or Constantino talk about the hedging questions that you asked. I think -- let me talk a little bit about bulk water because bulk water is a good place to start on this conversation. We do have a very large bulk water business in Mexico, and that is -- it's profitable but it's not necessarily as profitable as we'd like it to be. And we've been working on maintaining or growing our profitability on primarily a [indiscernible] 20-liter jug business. And there, that you will be seeing and what we're going to be emphasizing is obtaining better margins on that business in light of sacrificing volume. What we'd like to do is continue to price up, and continue to gain better margins. And obviously also become much more efficient in our operation than we have, and I would say the purpose of this is probably the more southwest of Mexico than we have anyplace else. So the 20-liter jug business in Mexico is a big deal, and then the profitability on bulk water, 5-liter business, is also something we're going to be looking at to make sure that we get the proper returns on that business. So that's something we're focused on in both Mexico -- Colombia has also an issue with that in terms of the 5- and 6-liter bottle, [ 6-liter bag business ] and how do we start making our profitability a little [ bit better on those tax ]. On the noncarb business in Brazil, as you said, I think one of the things to understand is we restructured that whole business in a big way. Of 100 SKUs that we launched, the majority of those are noncarbs and we're basically going toward two things. First is competing -- first is putting ourselves in a competitive situation in our class, with cold-fill products, which were coming out of Leao, and now we're sourcing them out of Jundai. And that transition from the Leao plant to the Jundai plant is giving us at least -- it's giving us an advantage to compete in [indiscernible] cold-fill juices, that is really the bottom part of the market. And that will allow us at the same token to be able to increase prices on the core liter Tetra juices and nectars, which we were sacrificing before just to be able to maintain margin. And also the increase in all the glass and hot-fill capability in terms of premium products that we're doing also leading to better profitability. And we should start seeing that continue to grow, but profitably so in Brazil, over the first 6 or 7 months of the year. So I think where we are -- and in Mexico, what we're looking at is better formulations, better cost structures, and we have enormous opportunity to make these better both in Mexico and Brazil. So I think that the focus is the right one and we're encouraged to see that we will be able to go out and increase our profitability on noncarbs and bulk water businesses. Constantino, do you want to take a look at the hedge?

[Constantino Montesinos, executive]

Sure. If I understand your question, what you're asking, was the biggest impact in South America regarding the cost [ across the ] quarter. What I'll tell you is that PET was the main driver in -- across all markets, particularly in Brazil and Argentina, less significant price increases in dollar terms in Brazil, almost 30% increases in PET costs in Brazil. Part of that was unhedged but if you couple that with devaluation in Brazil, that was a significant impact for us in that particular operation that considering the size of Brazil in our South America region, that has an important impact for us. We also have some labor cost increases in a couple of markets, Argentina and Brazil. And that explains most of the impact in cost that we had in the fourth quarter for Brazil. I don't know if that tackles your question.

[Alexander Robarts, analyst]

Yes -- sorry, Constantino, specifically the raw material hedge, though, right -- which you talk about in the press release. Was there -- it was hedged, it was a dollar-hedged price for certain raw materials, correct? And that is something that will roll...

[Constantino Montesinos, executive]

Yes.

[Alexander Robarts, analyst]

Okay. And the question is, will that roll off? Is that going to continue into the first quarter? The question was, sorry, on the actual hedge.

[Constantino Montesinos, executive]

Yes. Actually we have a very disciplined approach towards hedging both on currency and on raw materials. I don't know if you're aware of our routine, but we have a monthly routine with every single operation, it's called the CRM process, where we define and -- we [ find bands ] and coverage levels for our critical raw materials, sugar, PET, aluminum, etc. And we'll also look at the coverage from our currency, especially in such a volatile environment. So yes, the question is yes, it will continue. It's part of Coke's disciplined approach on the operation management, and a way in which the finance function supports our operations. So yes, it will continue. I reiterate that answer for you.

[Operator]

Luca Cipiccia of Goldman Sachs.

[Luca Cipiccia, analyst]

Héctor, congratulations and best wishes. Just two follow-ups from my side. One, I think in your introductory remarks you made some reference on the investment you're making on digital capabilities and I was hoping maybe you could qualify a little bit better some of this -- or a little bit more, rather -- some of this initiative. How relevant are they for your operation, for your partners? And also, how is this being rolled out across markets? Are you starting from Mexico and then implementing them across the board? Or is this -- I'm just trying to get a sense of how relevant or how much of a step change, and how much of an incremental benefit that could be from some of this measure that you made reference to. So that's the first question, and then secondly, on the portfolio and on the dairy strategy, also in light of your comments on Panama, do you think that the system overall in dairy would, could benefit, from a more organic strategy across market? Or in other words, do you think that it would be rational for a Jugo del Valle type of structure of transaction, or addition, given that the execution and the portfolio itself can appear not entirely consistent across all markets, the dairy presence is stronger in certain markets, weaker in others. And some there isn't any. Both your franchises and other franchises. So I don't know if you have any comment on that. I'd be interested in hearing your views.

[John Santa Maria Otazua, executive]

Sure. On the digital plan, first thing is what we've done in digital has a lot of components to it. It has a commercial component, it has a manufacturing/distribution component, and then it has also an administrative and back office component or staff component. Let me just take you through what I think is probably the most valuable piece, which is the commercial component. There, what we put out is a digital platform that starts with the analytics day-to-day for -- and let me just use Mexico as an example for the detail. But it goes up and has, per account you have about 7,000 pieces of information and we have all the detail on 800,000 accounts that we have in Mexico. And with new analytics and we also have [ elasticity ] [indiscernible] into that model as well as purchase structure, consumer purchase structures, giving insight as to how to go out there and manage down to the point of sale and making sure that we have the right pricing structure, the right packaging structure. And now we're also getting into the right demand structure. But all those analytics connect to a -- to our marketing department, from the marketing department goes right into the sales department, and we have immediate work orders for each one of our points of sale, independent of -- or we customize promotions for them. And we have this -- we have the ability to send out these work orders on a weekly basis and the feedback that we're getting obviously is weekly and we understand exactly what we're executing, how we're executing it, and what is working for us and not. We have the capability of launching, in Mexico, 5 million customer initiatives on a monthly basis and getting that information back. And obviously that's a lot of data and a lot of [ change management ]. What has it given us? It's given us first-place execution in Mexico, Brazil and Argentina. An incremental execution right now in Colombia. We've rolled out this platform in our traditional trade throughout all our countries, the marketing platform. The analytics have rolled out in Mexico and Colombia and they will be rolling out in Brazil this year as well. And we postponed Argentina given the hyperinflationary situation that we confront over there. So that's going to be postponed until we get in a more stable economic environment. What's it giving us besides better execution? It's giving us better price realization, we've been able to take pricing above inflation in these countries. And it's also given us a better return on discounts. And so our ROI, our promotions, have increased in Mexico about by 9 points and in Colombia by about 5 points. So giving us real pricing power and it's getting to be more effective. Now the second implication important to all this is that when we have all this information we're starting to look at it as a forecasting tool and we put together an artificial intelligence space, so we can go out and predict demand from all the points of sale going forward. And we're testing this right now in Mexico in one of our warehouses and we're getting up to 5 points of better accuracy on demand prediction and demand sensing which will allow us to become a much more efficient supply chain overall. And so all that is done by outlet, by the way. So as we gain more experience we'll be going through this and opening it up the next [indiscernible] in a bigger way and then rolling it out to all the countries. So if you look at the commercial platform, we've rolled it out in terms of the handheld and marketing analytics piece. Not the marketing analytics piece, but the handheld, to all our countries and the analytics are following, this year. Now the second big bucket that we have that goes along with this, is how do we become much more intertwined and end-to-end digitized with our supply chain? So we've implemented what we have in Mexico, on a JDA platform, which is a logistics platform, throughout all of our countries already and it's centralized in Mexico. And that's been providing us with about $25 million worth of savings. We put also digital -- we have all our routes in Mexico are now on -- are digitized. We know exactly where they are, how they get delivered. In Brazil, all of our routes in all of our [ trades ] are digitized. And we're looking to roll that out into other places as well. I think there's an enormous amount of value that we're creating there, and obviously we'll continue to be leading this forward in terms of the Coca-Cola system. The other question you had was on the portfolio strategy on milk, or dairy, and if there is other acquisitions -- potential acquisitions out there that could make sense. Yes, we'd take a look at it depending on the value that we think we can create for our shareholders, we'd go out there and pursue it. I think there are a lot of synergies to be had with those categories but there are also significant differences that you have to understand, which we're understanding in Panama which is cold and also short-shelf-life products, totally different business than what we have in Coca-Cola. But they are something that we could be looking at continuously.

[Luca Cipiccia, analyst]

Thank you very much for the answer, for the details, very interesting. Just on the dairy, just to -- the angle of my question was also across the categories, typically you have brands and brands of products that work across geographies. There is a little bit of an exception where every country has got its own, in a sense. Is that something that you see should change, could change, or does it make sense to do it that way?

[John Santa Maria Otazua, executive]

No. I don't think it makes a lot of sense to go out there and try to leverage dairy from one country to another unless it's UHT. Milk is a very regional business. And so I don't think necessarily we have a large strategy going forward on that end. I do think we have brands like AdeS that goes out there and plays in that space, but on the [ peak base ] that is expandable and which we are expanding. But dairy is more of a local business, with local credentials.

[Operator]

Our final question for today will come from Alvaro Garcia of BTG.

[Alvaro Garcia, analyst]

Most of my questions have been answered. Maybe you could provide a roadmap from the capital allocation fund when we think of the $700 million you received from the Philippines -- perhaps you could provide a roadmap sort of including that Yankee bond up in February next year, of how much debt you expect to pay down over the next 12 to 18 months? Thank you.

[Constantino Montesinos, executive]

Basically we've analyzed the proceeds of that transaction that we did in the Philippines and very straight forward, our intent is to use the cash that we received to pay our debt, continue our deleveraging path. And most importantly I think that in February of next year, 2020, we have a Yankee bond that is due and we'll be using the proceeds of that transaction to continue lowering our net debt ratio which is quite healthy right now, 1.6. So that gives us a very flexible profile on the balance sheet going forward. So the answer is yes, we'll use the proceeds to continue deleveraging and pay our debt.

[Alvaro Garcia, analyst]

Apart from that, is it fair to assume that this year maybe we'll see a couple hundred million dollars in some paydown of debt to sort of get to that $700 million, or is that Yankee bond really the only thing you have on your target?

[Héctor Treviño Gutiérrez, executive]

We are going to use part of the proceeds to repay some of the bilateral loans that we have that were related to the [indiscernible] in Guatemala acquisition. So that's basically, with that, the $200 million plus 500 [indiscernible] 240? That we haven't [indiscernible] 2020. That will take [indiscernible] $700 million. And as John and Constantino were explaining in the [indiscernible] that we had yesterday the decision was to hold to the $500 million and wait. Even the good coupon that we have on that Yankee [indiscernible] investing back those resources in a secure manner, the negative carry is basically sealed and the decision was to keep this $500 million in cash given the volatility that was seen in the markets and just wait for 2020 and do that, so we pay it.

[Operator]

And that does conclude the question-and-answer session. I'll turn the conference back over to our presenters for any additional or closing comments.

[John Santa Maria Otazua, executive]

Thank you all for being here today, and I'd just like to take the opportunity again to thank Héctor for such a remarkable career, and being such a great collaborator, friend and leader of the Coca-Cola FEMSA -- not only the Coca-Cola FEMSA company but also Coca-Cola Company, and also just a great friend. And I trust him and [ Maria Fernando ] are going to have a lot of good times going forward, but we'll always be counting on his advice and closeness as we go forward. And to you all on the line, thank you for your confidence and interest in Coca-Cola FEMSA. They are interesting times, but I'm sure that we'll be coming out very positively during this very challenging 2019. And our team is always available to answer questions, Maria Dyla and her team. And hope to talk to you very soon. Thank you very much for being with us today.

[Operator]

That does conclude today's conference. Thank you all for your participation. You may now disconnect.