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Edited Transcript of AC*.MX earnings conference call or presentation 24-Feb-17 2:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Arca Continental SAB de CV Earnings Call

Nuevo León Feb 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Arca Continental SAB de CV earnings conference call or presentation Friday, February 24, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Melanie Carpenter

i-advize Corporate Communications - IR

* Francisco Garza Egloff

Arca Continental, S.A.B. de C.V. - CEO

* Arturo Gutierrez

Arca Continental, S.A.B. de C.V. - COO

* Emilio Marcos

Arca Continental, S.A.B. de C.V. - CFO

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Conference Call Participants

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* Lauren Torres

UBS - Analyst

* Isabella Simonato

Bank of America - Analyst

* Antonio Gonzalez

Credit Suisse - Analyst

* Benjamin Theurer

Barclays - Analyst

* Alexander Robarts

Citigroup - Analyst

* Luca Cipiccia

Goldman Sachs - Analyst

* Julie Chariell

Bloomberg Financial - Analyst

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Presentation

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Operator [1]

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Good day everyone and welcome to the Arca Continental conference call. All lines have been placed on mute to prevent any background noise. Please note that this call is being recorded. After the speakers' remarks there will be a question-and-answer session and instructions will be given at that time. For opening remarks and introductions I would like to turn it over to Melanie Carpenter of i-advize Corporate Communications. Please go ahead.

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Melanie Carpenter, i-advize Corporate Communications - IR [2]

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Thank you, Jennifer. Good morning, everybody. Thanks for joining the senior management team of Arca Continental to review their results for the fourth quarter and the full year of 2016.

We sent the earnings release out this morning and a long version is available on the Company website, as usual, at arcacontal.com. This call is also being transmitted via webcast and you can listen to the replay of the call via the webcast as well.

It's my pleasure to introduce our speakers. Joining us from Monterrey are Mr. Francisco Garza Egloff, the Chief Executive Officer; Mr. Arturo Gutierrez, Chief Operating Officer; Mr. Emilio Marcos, Chief Financial Officer; Mr. Manuel Gutierrez, Director of Corporate Planning, as well as the Investor Relations team.

And then at this time, I'll turn the call over for the opening remarks to our CEO, Francisco Garza Egloff, to begin. So please go ahead, Pancho.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [3]

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Thank you, Melanie, and good morning and thank you everyone. We appreciate you joining us today to discuss our fourth-quarter and full-year 2016 results as well as our outlook for what we believe will turn out to be a strategically landmark year 2017.

Let me begin by saying that I am very pleased to report that our Company delivered solid fourth quarter and full year results. Despite a challenging year for our consumer growth companies in Latin America we've closed 2016 with several positive milestones and achievements. Total consolidated volume grew 2% in the quarter and 18% for the full year, to reach more than 1.7 billion unit cases. Once again we (inaudible) growth and expanded our volumes and value share in non-alcoholic ready-to-drink beverages.

Total consolidated revenues increased 11% in the fourth quarter and 23% for the full year, reaching record sales of close to MXN94 billion as we selectively adjusted prices in line with or above inflation across all our markets.

Consolidated EBITDA for the quarter increased 9% making this the 23rd consecutive quarter of EBITDA growth since the merger of Arca Continental, which is the result of our deep customer orientation and our relentless pursuit of efficiencies and synergies.

Now, let me take you through some of our major achievements and highlights for the year. Beginning with Peru where we expanded our EBITDA margin from 16% when we started this operation to 20% by year-end 2016. We were able to achieve this outstanding result through three key factors. First, the roll out of our best-in-class commercial model. Second, the implementation of our disciplined value creation program. And third, which is the most important, the full commitment of our highly motivated team in Peru.

Notably in 2016 we reached $40 million in analyzed run rate synergies, which is 60% above the target we originally set when we entered the Peruvian market. Also (inaudible) will reduce exposure to foreign exchange from US dollar denominated debt by approximately 70% to our 200 million purchase of its outstanding senior notes which in fact is a reduction in debt and additional currency hedges for $130 million.

Because of this important achievement S&P and Fitch upgraded AC Lindley's long-term ratings by 2 notches which raised its credit profile to investment grade within the global corporate scale.

Let me spend now a few moments talking about Argentina and Ecuador. In both countries we faced many challenges, macro economic factors and weaker consumptions that affected our volumes. Whereas in Argentina the downturn due to our transition to an open market economy significantly impacted consumption in general. However, by the end of last year we began to see a turnaround in volume, we capitalized on our strong product portfolio and selective price initiatives to drive affordability and mitigate the impact of inflation there.

In Ecuador we faced the full impact of the new tax that was imposed on sugar beverages and also the effect of contraction in private consumption resulting from several austerity measures. However, we put in place also a disciplined cost optimization plan and expanded our portfolio of beverages focusing on affordability and packaging innovation.

As in other cases in the past where we have experienced similar slowdowns we streamlined cost and operations and reinforced our revenue management strategies to offer the consumer attractive price package combinations and to ensure product affordability.

Notwithstanding these challenges that we face in Argentina and Ecuador we were able to sustain overall profitability in both countries throughout the year while gaining value and volume shares across all our beverages categories. Last year we made strategic investments in these key markets to underscore the long-term opportunities we envisioned. So we will be well-positioned to take advantage of the future market recovery. As an example, we acquired a sugar mill in Tucuman precisely where one of our major bottling plants is located.

And also in Guayaquil we began operation in Tonicorp's new state of the art dairy plant to expand its production capacity and product portfolio.

Turning now to our flagship market in Mexico. We delivered exceptional annual volume growth and posted solid top and bottom line results. In the sparkling category we grew high single digits, well above the industry average, (inaudible) a solid growth in the previous year, reinforcing the excellent position that we have in this territory.

In addition, last year we reaffirm our leading position in stills where we command a number 1 or number 2 leadership in most tea categories, let's say, like Fuze (inaudible) ready to drink tea, Isotonics and water among all. We are also rapidly building a strong value added dairy business and accelerating growth in market share in this category.

We continue expanding our product portfolio with the launch of Monster energy drinks and leveraged our distribution execution capabilities in this market.

In the most significant milestone we completed the transfer of the rights of (inaudible) Topo Chico brand in Mexico to the Coca Cola Company. As announced this agreement allowed us to expand distribution of Topo Chico's products to all our territories in Mexico and generated important incremental sales volume in this and the mineral water (inaudible).

And in sport drinks beverage solidified some market leadership across all channels and all our territories, thanks to our execution capabilities, superior quality and ongoing product innovation.

Moving on to our complementary business we continued (Inaudible) and developed a solid foundation for growth. In the snacks we strengthened production capabilities in Wise with the opening of our plant in Trujillo. In Bokados we expanded distribution routes in new territories as we deploy an aggressive plan to expand our market presence and become a national brand in Mexico in the next coming years.

Our vending machine business, another key part of our value-added (inaudible) strategy. We grew volumes, sales and transactions and continue in the upward trend supported by an excellent information technology platform which we are applying, for instance, in payroll so -- in which we are also investing aggressively in vending machine business.

Finally, there is nothing more valuable than recognition coming from our customers where we were honored by Wal-Mart when we received the top award in several categories. Among them we obtained the best overall performance award. We also received (inaudible) award as a top strategic partner for 2016. We are thankful to both of them for these honors. And we are fully committed to continue working hard to serve better every day all our customers.

Let me now move to our recent breakthrough announcement confirming Arca Continental's participations in the Coca-Cola system in the US. As we announced on February 8th we reached a definitive agreement with the Coca-Cola Company to become the sole franchise bottler of the US Southwest region comprised of Texas and parts of Oklahoma, New Mexico and Arkansas. These territory includes nine production facilities and 24 distribution centres, serving a market over 30 million consumers.

At Arca Continental we are proud and honoured to have been selected by the Coca-Cola Company to collaborate in their transformation of the US bottling system. It re-enforces our commitment to serve our customers and consumers everywhere through a stronger system alliance. The US Southwest territory is one of the most relevant in the US Coca-Cola system in terms of size, market dynamics and growth potential. This market leadership and profitability reflected balance and commitment of its management team and associates.

In signing the definitive agreement last month we announced the date of our shareholders meeting. We filed for customary regulatory approvals and we released the information memorandum describing the transaction which remains on track to close in the second quarter of this year.

A dedicated team of experienced executives from the Coca-Cola Company, CCR and Arca Continental are working diligently to ensure a timely and seamless transition. In parallel, we have been working to confirm the value creation of opportunities identified initially where we can make a significant contribution. In the short and mid-term we expect to realize annualized increase of approximately around $60 million to $80 million within a three-year period after closing.

As we have done in all transactions, we plan to combine our best practices in market execution through our commercial model ACT, enhanced process innovation and packaging, optimize our supply chain to reduce costs and procurement of raw materials among other actions to improve. Let me reemphasize that we believe that for Arca Continental this is a transformation and highly value accretive transaction with an implied valuation multiple below our current value.

Our total revenues will increase around 47% and our EBITDA 30% on a pro forma basis. This is really an excellent opportunity to increase shareholder value while further diversifying and improving our geographical presence in the Americas.

With this I will now turn the call over to Arturo to take you through more of the details of their performance of our operations. Please, Arturo, (inaudible).

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Arturo Gutierrez, Arca Continental, S.A.B. de C.V. - COO [4]

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Thank you Pancho, and good morning everyone. Thank you for joining us today. Let me expand on the results across our geographies. I will begin with North America where we continue to demonstrate the resilience of our beverage business in Mexico. We maintain the positive momentum delivering yet another quarter of solid volume growth up 6%, not including jug water, cycling a 7.1% from the fourth quarter in 2015. Notably, we have achieved annual volume growth of 9%.

These outstanding results were driven by superior market execution as we consistently rolled out our ACT commercial model across all territories with a benefit of a strong consumer environment.

On the fourth quarter we further strengthened our leadership position as we gained both volume and value share in non-alcoholic ready-to-drink beverages driven by growth in sparkling with 5.1% and 11.7% in bottled water.

This quarter was also exceptional for the stills beverage category in Mexico up 13.6%.

Total revenues in North America rose 12.5% in the quarter to reach MXN14.3 billion, average price per case in Mexico not including jug water rose 6.8% reaching MXN52.48 sustained by our disciplined segmentation, revenue management and affordability strategies. These top-line results underscore our ability to leverage our (inaudible) brand, price, pack and channel architecture. They are also a result of our capacity to drive performance, improve transactions, and simultaneously enhance price mix.

In the case of Mexico with a 9.2% increase in volumes this proves that even in mature markets with a high per capita consumption and a leading position in the markets, extraordinary growth can be achieved through the deployment of capabilities and a consistent operating discipline based on processes that Arca Continental has been developing throughout the years.

This outstanding growth in our Mexican beverage territories underscores the potential of our business and motivates us to continue setting ambitious long-terms goals in all our markets.

EBITDA in North America increased 6.2% to MXN2.9 billion in the fourth quarter, representing a margin of 20%, a moderate contraction of 110 basis points due to increases in key inputs and foreign exchange rate volatility.

We continue improving profitably driven by selective price increases, targeted market initiatives to boost immediate consumption and investment in coolers. During last year we introduced over 45,000 units to increase cooler coverage to 83%, one of the highest in the global Coca-Cola system.

During the fourth quarter, our sparkling water segment grew 15% driven by Topo Chico sales. We are now ble to distribute Topo Chico across all our franchise territories and capitalize on the strong brand equity developed in the north of Mexico throughout its 122 year history. Exports of Topo Chico delivered another quarter of solid growth, up 22% in the fourth quarter as we expanded product coverage at mainstream stores supported by holiday promotional campaigns.

During the quarter we launched new Topo Chico product expansions in the Twist line, lime and grape fruit flavors in several presentations.

We continued pursuing innovation across the value chain, particularly in our direct-to-home channel. In the fourth quarter we launched a new mobile app, expanded Internet sales and introduced credit card payments to provide our customers and consumers with more flexible ways to purchase our products.

2016 was a positive year for the vending machine business. Volume in this beverage segment in the fourth quarter posted high-single-digit growth and the snacks unit delivered mid single digit growth as we capitalized our productivity improvements. Notably, we expanded coverage of units with wireless capabilities, this proprietary technology provides remote inventory management and allows us to optimize distribution costs and to significantly reduce stock outs. The launch of Monster energy also drove incremental sales in the energy drinks category with over 80% growth in 2016.

Shifting gears to South America, volume in the fourth quarter declined 3.9% driven by volume drops in Argentina and Ecuador partially offset by growth in Peru. Total revenues increased 9% in the quarter reaching MXN10.6 billion. On the profitability front, EBITDA in South America rose to 12.4% to MXN2.3 billion for the quarter representing a margin of 21.8%, an expansion of 70 basis points.

In Argentina, volume in the fourth quarter declined 6.4%. Volume continued to improve gradually from the second and third quarters when the decline was 15.7% and 8.5%, respectively. These results were sustained by our improved point of sale execution, focusing on returnable formats and expanded cooler coverage. Our revenue management initiatives enabled us to selectively increase prices to compensate for high inflation rates, while offering our customers with affordable packages at key price points.

We will continue expanding our sparkling flavor portfolio with Fanta, Sprite and Crush to compete effectively in this segment. This quarter once again we gained market share in the sparkling beverage category.

It is important to note the significant headway we have made in stills beverages. In 2016, we continued achieving share gains in juices, isotonics and bottled water categories. Moreover we are finalizing with preparations to modernize and equip the production facilities of the cane sugar mill acquired in the province of Tucuman last year. This production unit will give us access to 100,000 tons of sugar per year and will secure all of our needs of this key input at very competitive prices.

We're taking steps to deploy the ACT execution model across our operations in South America. ACT aligns all our market initiatives into one model to achieve flawless execution by focusing in core processes such as segmentation, revenue management, route to market, fundamentals and market tools. We are convinced that the targeted investments we made in the last few years put us in a privileged position to capitalize on the opportunities that the market recovery will present as the economy bounces back and lower inflation supports private consumption.

Now in Ecuador, volume was down 12.7% in the fourth quarter. Despite the adverse macroeconomic situation, the impact of the new tax imposed on sugar beverages and the resulting slow down in consumption, we continued gaining market share for our (inaudible) non-alcoholic ready-to-drink categories.

Similar to what we did in Mexico with the excise tax in 2014, we made a comprehensive review of our price pack architectures. We're focusing on affordability of our products, tied to price points in key entry packages such as $0.25, $0.35 and $0.50.

We also doubled down on point of sales sale execution and continued investing in a market while driving innovation with formulating products to offer more low calorie or zero calorie options. We are confident that we have the right strategies to resume profitable growth in this important market. Tonicorp, our value-added dairy business in Ecuador jointly owned with the Coca-Cola Company, has also resented the slowdown of the Ecuadorian economy. The dairy industry in the country as a whole reported double digit revenue declines while Tonicorp posted a low-single-digit drop.

We have achieved important market share gains across all categories in which Tonicorp participates, driven by a focus on point of sale execution, customer base expansion and product affordability. Furthermore, we captured additional synergies among our dairy, beverage and snack businesses by leveraging distribution centers and expanding cross selling opportunities.

We began 2017 with a full operation of our new dairy plant in Guayaquil. This state-of-the-art facility allows significant operational efficiencies by centralizing our production capabilities. It also gives us access to broader opportunities to accelerate our innovation pipeline and to expand our value-added dairy portfolio.

Moving on to Peru, in the fourth quarter volume grew 2%, reversing the negative trend mainly driven by better execution at the point of sale, growth was led by water category up 9.3%, still beverages 3.8%, and sparkling 1.6%. Volume for the year grew 2.6%, reaching 300 million unit cases cycling 4% growth in 2015. Net sales increased 4.5% in the quarter cycling 6.4% in the same period in 2015. For the full year, net revenues grew 8.5% as we implemented selected price increases across our portfolio.

Our top priority will be to continue serving our customers while protecting margins through a flexible price package architecture improving the affordability via returnable presentations and accelerating growth in the non-calorie beverage categories.

Let me take a brief moment to talk about the progress of our synergy plan in Peru. I'm very pleased to report that our team had diligently delivered $40 million in annualized running rate synergies. We deployed a comprehensive program and accelerated our productivity efforts across the value chain.

To mention a few key initiatives, we leveraged scale with key suppliers to obtain better pricing in raw materials, we reduced all raw production waste, we optimized light weight packaging and enhance inline blowing. We consolidated administrative processes and back office functions and we exchange best commercial practices to strengthen RGM and low cost service models.

It is important to mention that that the program was accomplished without disrupting our operations. We have been careful and prudent to implement plant synergies while remaining focused on serving our customers and consumers with excellence. We are ready to accelerate the pace to achieve additional value creation opportunities in 2017 particularly in supply chain. We will optimize our warehouse infrastructure while increasing our own sales force and distribution capabilities.

We are confident that the combination of economic modernization, natural resource abundance and continued improvements in economic governance and political stability that had been taking place are helping Peru to emerge as one of the most stable economies in Latin America.

Let me finish our operations review with our snack business consisting of Bokados in Mexico, Wise Foods in the US and Inalecsa in Ecuador.

Bokados posted solid top- and bottom-line results in 2016 delivering high-single-digit sales growth despite the challenging macroeconomic environment and foreign exchange rate volatility in Mexico in the latter part of the year. Bokados continued its sequential growth trend as we improved point of sale execution capturing additional market share and expanding our geographical footprint.

As part of this strategy, we announced last month the start construction of a new plant in Queretaro. This facility will begin production by the end of March. This $40 million investment underscores our commitment to expand penetration of Bokados outside of our co-bottling territories into the Central and Southwest -- southern regions of Mexico while generating significant efficiencies in logistics and distribution costs.

We're moving rapidly to expand our coverage to new territories through the relationship with their business partner [Carietas dombeg] in the Southeast Mexican region and the deployment of new distribution routes of Bokados in territories such as (inaudible).

Wise, our snack business in the US posted a low-single-digit decline in revenue in the quarter and the full year due to high retailer volatility, competitive pressures and operational challenges.

Product innovation continued as one of our top priorities. In the fourth quarter, new flavors of Crunchy Cheez Doodles were launched which will help us expand market share in the up and down the street channel. We will continue investing in our brands and products through consumer promotions, innovations and programs targeting younger millennial consumers as well as new partnerships and sponsorships.

Our innovation center in Atlanta, our renovated plant in Berwick and our new state-of-the-art production facility in Fort Worth are the pillars of our product portfolio and geographical and geographic expansion strategy. Wise increased distribution by adding over 1,900 new points of sale for brands Wise and Si Senor. New Wise customers included distribution in Delta Airlines, 7-Eleven, GetGo and Stewart's stores among others.

Furthermore, we will continue strengthening our ability to leverage relationships with regional change to deliver cross promotion programs between the Wise and Coca-Cola portfolios, particularly in the US Southwest territory.

Finally, Inalecsa our snack business in Ecuador posted single digit revenue declines in both the quarter and the full year impacted by the lingering economic weakness. Nonetheless, the pace of contraction eased in the latter part of 2016 despite these headwinds Inalecsa continued leveraging its strong brand equity and winning volume and value share in the Southeast snack category. Practical commercial initiatives in our major brands Tortillas, Tostitos, Frisco's and Nachos were combined with cross-promotions with Coca-Cola in the modern channel.

In the last quarter of 2016 we started participating in the bakery segment with the introduction of our Pan de Pascua rapidly capturing a relevant share in our first year participating in this category.

I will now turn the call to Emilio to provide you with more details on our financial results.

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Emilio Marcos, Arca Continental, S.A.B. de C.V. - CFO [5]

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Thank you, Arturo. Good morning, everyone. Thank you for joining us today to review Arca Continental's performance and financial results for the fourth quarter and full year 2016.

In 2016 Arca Continental remained one of the most profitable bottlers in the Coca-Cola system. Despite the challenging year with the economic slowdown affecting some of our operations coupled with exchange rate volatility and political noise. Nevertheless, our positive results were driven by dynamic market execution combined with an important (inaudible) efficiency plan in Mexico, Ecuador and Argentina.

In our first year in Peru we accomplished our synergy goal resulting in more than 200 basis points margin expansion. This fourth quarter was no exception as the consolidated revenues increased 11% for the 3 months and 22.5% for the 12 months of 2016. Thanks to our price architecture capabilities and strong volume performance in Mexico and Peru offset by negative volumes in Argentina and Ecuador.

Net revenues on a comparable currency neutral basis in the quarter increased 9.8% and full year 2016 excluding Peru, 11%. In North America the solid volume growth and price mix were the main drivers for revenue growth of 12.5% in the quarter and 13.8% full year. South America increased sales 9% in the fourth quarter and 39.3% in 2016. For the quarter, cost of goods sold increased 14.2% as a result of higher dollar exchange rate and an increase in sugar prices in Mexico and Peru.

For 2016 cost of goods sold grows 26.1% and 9.8% without Peru diluting the contribution margin by 150 basis points. The G&A expenses were up 6.91% in the quarter reflecting a more efficient structure at 32.3% over sales compared to 33.8% in the same period of last year. This benefit came from the efficiency plans taking place in our operations partially offsetting the impact of higher raw material price.

The same benefit applies for the full year reaching 31.2% over sales from 32% in 2015. Our operating margin improved both in the quarter and for the full year. We reported a 15.4% operating margin in the quarter a 40 basis points expansion. For the year the margin was 17.4%, up 70 basis points explained by the Topo Chico transaction announced in the third quarter.

Consolidated EBITDA reached MXN5.2 billion up 9% over the fourth quarter 2015 with a margin of 20.7%. In 2016 EBITDA reached MXN20.1 billion, a 20.3% increase, reflecting a 40 basis points margin dilution to reach 21.5%. Comparable currency neutral EBITDA increased 7.7% in the quarter and 10.2% for the year without Peru. Income tax provision for the quarter increased to MXN1.1 billion from MXN713 million in the same period of 2015.

Effective tax rate for the quarter was 32% when compared to 28.8% last year. We closed 2016 with an effective tax rate of 30.6%, in line with previous year. In the fourth quarter the comprehensive cost of financing was down 34.2% as we successfully reduced the exposed debt from MXN1.2 billion on December 2015 to only MXN380 million at year end, generating less exchange loses than the same period of last year. Net income increased 16.7% to reach MXN1.9 billion in the fourth quarter, representing a margin of 7.8% higher than fourth quarter 2015.

Full year net income rose to MXN9 billion, a 24.7% increase for a margin of 9.6%. Our CapEx for the full year reached MXN7.4 billion. We closed the year with a cash position of MXN5.5 billion and a net debt of MXN25.6 billion, meeting a 1.3 times net debt to EBITDA coverage ratio as a consequence of Arca Continental's deleverage plan.

In 2016, we've reached MXN17.1 billion of cash flow generation, 48% more than 2015. The efforts done last year will allow us to better-face the volatility in exchange rate and higher raw material prices.

Continue looking for new value growth opportunities in Peru and work on our market execution as we expect the consumption recovery in Ecuador and Argentina. Furthermore, we will begin during the second quarter the integration of the US operations which will bring a greater geographical footprint and hard currency diversification to ensure the profitable growth momentum of Arca Continental. I will now turn things back to Pancho.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [6]

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Thank you, Emilio. Now just let's take the adjusted guidance for 2017 in our current operations. We expect consolidated annual volume to grow around 2.5%, and of course we will selectively adjust prices also to at least recover inflation in each of the countries in which we participate.

So we are always ensuring that our growth remain affordable and competitive, so we will do the right strategy in that regard but we will increase in prices at least with inflation but most probably more.

In 2017 the capital expenditures are expected to be approximately 6% to 7% of total sales. As we have always done we will follow a disciplined approach to invest in production capacity in Mexico and logistics in Peru.

As well as in the marketplace including coolers, vending machines and (inaudible). On the economical front we will continue capitalizing from our vertical integration in Piasa the sugar mills in Mexico and the recently acquired Plan de San Luis sugar mill in Mexico.

And as Arturo mentioned we also expect a benefit from the upcoming integration of the sugar mill acquired in Argentina last year. In conclusion, we reaffirm our commitment to pursue opportunities to create value for our shareholders. Our solid financial position and our firm dedication to adapting to the dynamic needs of our customers and consumers are the platform from which we will continue to find avenues for growth in the beverage sector when we continue expanding our complementary business.

Regarding our long-term growth plans and in line with our commitment to create value, this year, I mean, 2017 we will exceed the revenue target of MXN100 billion set 5 years ago in a profitable and sustainable manner. This is of course without considering the revenues from the new operations in the US (inaudible).

We intend to sustain our growth momentum and continue doubling the size of the Company every 5 years as we have done since 2002. Always of course creating value to all our stakeholders. Again thank you for your support and confidence. And operator, please open the calls for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Lauren Torres, UBS.

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Lauren Torres, UBS - Analyst [2]

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My question is a somewhat general question I guess on Mexico, Pancho, to get your perspective on the consumer, I think you're coming off with two exceptional years of growth and this year we are hearing about a slowdown. At the consumer level you're seeing the effects of the weaker peso, so curious in light of this, we saw some margin pressure last year, if there is the ability to protect or grow margins this year or is it just more of a story of diversification. So with the US on a consolidated basis we'll see progression but in Mexico it will be a tougher year. Just curious to hear your thoughts on that?

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [3]

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Thank you for your question. It's really very interesting. You know that first of all I want to say that the starting of this year has been good in Mexico, I mean also in Argentina and other countries but talking about Mexico precisely, I mean, it being good in January and February still moving well and that's what I hear also from other consumer companies in Mexico. Consumption is relatively in very good shape I would say.

On the other hand what I can tell you that through the year it is clear that, as you mentioned, and as on issues especially in investment probably will not be -- I mean I am sure will be the same as it used to be coming from the foreigners. But what is clear is that other factors are somehow compensating very well up to now and I have the perception that will work on a positive side. Why, because like in the case of remittances for instance, remittances as your know it's grown and around 9% or 10% and then if you multiply by exchange rate which is higher than used to be it means more pesos for total (inaudible) remittances.

And we have some of our territories in Mexico in which we have that. On the other hand also another factor is tourists and tourists is still moving quite well and with the cost of hotels and food and so on in Mexico which at this time we are really I think under-value in general. I am sure that tourists will continue (inaudible) and it's really very, very cheap than traveling to Mexico and Canada. And so there are other positive factors I can mention, but it's important to say that up to now we have not seen anything that we can tell you that there is some signs of reduction in volume for the time being. And I hope that through the year with those positive factors the economy will be affected, but less affected because of the positive factors I mentioned.

Yet longer term we have to see, we have to see what is going to happen, but certainly we feel quite strong and because of, of course our team, our products, banks and so on, and very well positioned to overcome any challenges that we have gone through all these 91 years in this business or more. So we are well accustomed to really drive through this kind of challenges.

But again summarizing, I don't see any reduction in jobs at this time. On the contrary, jobs are growing and (inaudible) we have mentioned. By the way we have several plans in the -- at the border in cities like Yurimaguas or Moquegua or Huaraz. I mean, it's very difficult to get people, very, very difficult to get people. I mean, we need to really start paying even more than the general salaries increase because we need to really be competitive in the specific areas. So it means it's really -- demand is very high in that market.

So we have faith, I can tell you, in the turnover of people on those locations. So we are working hard with our human resourcing team to get a more stable situation, because I mean, definitely there is a huge demand on (inaudible) people, good people and certainly we have good people, so we need to take care of that.

So in general we don't see any major issue up to now at least in our markets and territories and through the year whatever will happen we hope that not only because of the positive factors I mentioned like tourist remittance or other things no matter about that we have the strengths and make products and resources and technology and most importantly the people to overcome those challenges this year. I don't know if that answered the --

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Lauren Torres, UBS - Analyst [4]

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It does, I would just say the kind of the last part of that was in light of those comments, could you or would you be able to still protect margins with the currency that -- ?

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [5]

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Yes, well, again I can tell you that obviously January was a little bit challenging in that regard because we did not see or we didn't foresee the huge impact on the exchange rate especially, but then we react and we accommodate the structure of products, prices and so on. So I can tell you that end of January -- we made an increase in prices at the end of November, okay, but not enough to do this on expected things. So in exchange rates and we were able to move again prices to really take these issues of not only devaluation, but the prices increases in fuels. And we accommodate that to recover the margin again, if not all, practically all, it's a matter of time, but we don't foresee any major issue in that regard, we will recover the margin in our opinion, if not all, most of it.

I mean, in terms of percentage. In terms of absolute numbers, of course we will recover everything and more, but percentage wise in margin, it will be probably recover most of it.

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Operator [6]

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Isabella Simonato, Bank of America.

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Isabella Simonato, Bank of America - Analyst [7]

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I have a question, in the US I understood you released yesterday more details about the transaction, and if you could elaborate to us or give us more color where do you see volume grow potential based on the revenue management initiatives that you plan to do in the region, don't know if you can already talk about that. And second regarding your volume growth, consolidated volume growth forecast for 2017, if you could give us a breakdown per country, where do you see volume growth in each of the regions?

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [8]

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I will ask Arturo to comment on your question, please Arturo, regarding the volumes (inaudible) including the potential in US.

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Arturo Gutierrez, Arca Continental, S.A.B. de C.V. - COO [9]

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First in terms of the guidance that was given for 2017, I have spoken about 2.5 growth in volume throughout the year and obviously it's going to be different across countries, we have not provided a detailed breakdown of that guidance, but we can tell you in general terms we expect, as Pancho was saying a moment ago, to continue to have a good momentum in Mexico and continue to grow our volumes as has been shown by the first month of the year, month and a half of the year. We hope to continue that trend, we know that second part, the second half of the year in Mexico might be a little more challenging, but also we have learned to identify what are the key factors that would be driving growth aside from the issues that are beyond our control and we are working in improving (technical difficulty) clearly identifiable for us right now.

With respect to South American countries, I think the biggest challenge will continue to be Ecuador, where we are still having the comparison with the period previous to the imposition of the tax. So the first quarter of the year is going to be very challenging in terms of the comps and volume for Ecuador. But at the same time we have been improving our profitability in Ecuador based on all the actions that we have taken both from the saving in general terms of SG&A and also increasing the gross margin of the products based on our revenue management strategy. So, I would say Ecuador would be the most challenging.

In Argentina we are seeing some improvement this start of the year, so we are positive on Argentina and we believe that the macroeconomic environment of that country is going to continue to improve. So that is another of our units that will be contributing to growth.

Same thing as Peru, we believe Peru to be probably the country in which we are going to achieve the highest volume growth between Mexico and Peru, I guess, but Peru is where we have the targets for growth that is the highest among our operation. So that would be just general comments about the breakdown of our volume.

In terms of the US, we have not provided and we are not in a position right now to provide specific guidance about US growth for our US business line. Well, as you know, we have an environment at the US that's stable in terms of growth. We know we can contribute to increase the pace of growth in all categories in the US and we have identified in concert many of the initiatives where we can pursue both in revenue management, in execution. It would be basically the deployment of our Arca Continental [act] bottle as you know. There is huge opportunity, well, with Topo Chico for in the US that would be a significant source of growth as you know because of its presence in the state of Texas, but we are not in a position to provide a specific guidance about the US at this point.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [10]

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On further volume, just to add something if you allow me Arturo, just we have seen what, I mean, we understand that our difference is in markets of course, but I think we can add strength with a great team and challenging people that there is in the Southwest territories of Coca-Cola in the US. So I think that we can combine really very good strengths to continue improving especially for instance isotonics you have seen what we have done in Mexico. So, I mean, 10 years ago or 12 years ago we were having just 10%, 15% market share. At this time in isotonics we have, I don't know, 60% plus.

So the point is that it has to be ultimately a well-disciplined system, is not one day to another but there are opportunities to increase our share position, market share position there for sure. So that will be a source of growth for sure and the transactions. We are going to (inaudible) more packages. And that's something that we are willing to work together with Coca-Cola of course to develop additionally more packages and new categories to put there so we can improve that situation both as Arturo mentioned is -- at this time we are limited to give specific information on this guidance for US.

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Isabella Simonato, Bank of America - Analyst [11]

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Perfect, that was very helpful.

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Operator [12]

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Antonio Gonzalez, Credit Suisse.

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Antonio Gonzalez, Credit Suisse - Analyst [13]

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I also have a question on taxes, please let me know if there are portions that you cannot answer about. You mentioned this synergy guidance and you have mentioned before some opportunities like light weighting the bottles et cetera, so I wanted to reconcile if you can, now that you've put out a formal number, give us a little bit more specifics as to where are these synergies coming from, which are the main buckets.

And also now that the transaction has closed, can you let us what is the structure of the team that you are thinking of, have you appointed a country head or how are you foreseeing the integration between the talent that was already there and obviously Arca's capabilities as well?

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [14]

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Thank you very much Antonio, it's always good to talk with you. I just want to mention that thank you Antonio. So to mention that we already had the right person right away who was running that operation. As I mentioned before, we have found -- we are very fortunate to find a very good team and associates there for the leading team, it's been great, so we have been working with them in the last six, seven months, developing addition on this process accordingly to the rules of Coca-Cola established in this kind of agreements. And so we have had the opportunity to know them very well. So we decided to appoint a person that was in charge of this plant in this operation for now. Once we take over this, he will work for (inaudible) already agreed on this, and it's a person called [Mark Charman], a great guy.

And so we are committed and establishing targets and so on. And then we will combine some people, most of the people will be as always, as we did in Peru or in Argentina and other places, the people that is there, is the one that's really takes their roles, I mean it's nothing new. I mean, we are going to share -- to put some key people in the capability, especially in the ACT model that we have which is the execution in the market for the whole (inaudible) of segmentation, revenue management, run to market fundamentals, innovation, all these kind of process that most probably you have known very well already.

And so we will put some key people there and also in the supply chain around to -- in agreement with Mark and Arturo of course who is leading this process. So we will have the right structure to move ahead together proactively. First of all learning and exchanging the best practices and later on to execute the avenues to create value, as always we have done in past.

And talking about the avenues of value. I mean, we cannot really be so specific at this time. But I can tell you that one of the areas of opportunity is really light-weighting but for instance also transportation of bottles, it has been a huge cost there. There are centralized manufacturing of bottles of PET and then you have to ship it everywhere. It takes not only challenges in terms of cost but also time and inventories and so on. So there is an opportunity not only in light-weighting but the way the supply is done and we have restructure these kind of things. In fact there is some already investments on the process investment at this time for blowing machines in some of the facilities which through this process we have agreed already, so it's in the process of installation of those investments that obviously we will absorb because we made the decision together but it is going to be a cash flow in the future for once we are there. So in general the whole supply assistance for bottles could represent not only light-weighting but the whole structure represents a huge opportunity for sure. It will take time and some money but we know how to do it and we are happy to go.

But going to other (inaudible) as was mentioned also by Arturo. We will try to impose much more Topo Chico, that's very important. I mean, by the way, very well-known brand in that territories. Topo Chico is the leader in mineral water from source in that region along the other brands even European brands with the prices even above the European brands there in (inaudible).

So it's really a very important opportunity. And as I mentioned some share in certain products and then how we are going to manage that, well, price pack architecture which there will be -- at this time you know that Coca-Cola team as well the different bottlers are moving ahead on more packages and to increase transactions and value share and they have been doing this through the last two years very well, we have technology that they are changing in that direction. And so we want to get in this market, enhance this process into what we really know, this is managing -- and I think we can contribute to manage a better price pack architecture with better segmentation in that direction.

So we definitely we think we can increase value and transactions just with our most -- a guarantee that we have to show in that regard. And so all foreseen around of course in terms of other tax related to -- energy and other areas that we know we have realized in the facilities, but in general we feel quite comfortable that just sharing the best practices in market execution and the process innovation in packets and optimize our supply chain to lower cost and of course the procurement of raw materials will bring the right number in that direction to accelerate the productivity efforts but more importantly the market position, that's what we know.

Fortunately, as I mentioned, these territories are -- all these territories Southwest territories is -- I mean, I think is the best, if not one of the best territories managed there in the US, among the Coca-Cola, I am not trying to say anything wrong about the rest but it has been a well managed territory with good margins and market positions (inaudible) so we can combine and add strength together to continue creating value as they had gone but now probably combining effort to accelerate this process in all the aspects that we mentioned.

Generally speaking, in the history when we do some major acquisition in Mexico, then we are talking about 7% or 8% of synergies of sales of the company that is mentioned acquire. But if we talk about Latin America we talk about 5%, 5.5%, when we talk about US in our opinion it could be 2%, which is 2.5% to 3.5% for that reason we calculate that, but we have been given enough support to really specifically analyze the avenues that we can create value. So, it's not the same with Latin America because it is much smaller available market and so on and mature it is not the same as that and it's not the same for Mexico, of course because 40% in Mexico given that we have much more opportunity and other things but it will that will be 3% around for sure and according to what we have analyzed in the aspects that we already mentioned to you, we will find that really a very good surprises for all of us.

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Antonio Gonzalez, Credit Suisse - Analyst [15]

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That is great.

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Operator [16]

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Benjamin Theurer, Barclays.

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Benjamin Theurer, Barclays - Analyst [17]

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First of all congratulations for the results. Just a follow up on the CapEx outlook and as you mentioned it's going to very similar 6% to 7% of sales, that's pretty straightforward, but now considering that you are expecting to close the transaction with the US somewhere towards the mid end of the second quarter, do you plan right away to spend a similar amount of CapEx in the US for the second half of 2017 and onwards, and if you plan to invest into the facilities in the US, where would your focus be from a CapEx point of view?

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [18]

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Great question Benjamin, thank you for doing that and a good to talk with you again thank you, for your congratulations, I appreciate a lot which we are perfect opportunity to continue what we have. Let me tell you Benjamin that as I mentioned to Antonio in the previous question, we have decided already with Coca-Cola during this period of discussions seven or eight months for this transition and that transaction mainly transition we have agreed already to have some investment for instance in the IT, we have already changed or we are in the process of changing everything throughout what we call -- it's called CONA, Coca-Cola North America system in fact they call (inaudible).

So that is already an important investment that has been already approved by both and we will leverage what is going to be really for our benefit that we are going to become shareholders now but also we have approved other investments regarding some of equipment that is necessary to improve the efficiencies in certain areas like in (inaudible) and some of the facilities that are going to be there soon. And we are already working and so and so forth, for instance all the palletizers things which make sense to start moving in the process we were discussing. Distance and facilities and later on also we discussed some area for new land for some areas that could be new facilities.

So because all of these, there is an investment that has been already approved which probably will represent a big in that investment of course it's moving at this time, but at the moment we answer there will be some investment coming there, okay. But it has been a process to start really ourselves operating that most rated position with systems and some efficiencies that can make sense since the very beginning. And so we made progress ahead of that. So, for a part of that which I really -- it has been done since the last year, since we started discussions about in June last year up to this time and part of that we foresee really a number around the same 6% to 7%.

The previous investment has been lower than that, so I can tell you that this 6%, 7% will be enough to keep really the without paying some of the infrastructure and especially market investment. So, we think that there will be enough let's say resources for phasing these in and we expect that beyond the picture I mentioned that probably will come in the beginning very related from the decisions that we made since June last year to be ready. The rest will be kept on this average process for several years and later on when we load -- we do not expect to have this 7% always I mean for US' capacity high number, but probably will eventually go down to the price later.

But the first year will be in that level, again a bit early and the moment we start because of the previous decisions, later on 6% to 7% and I don't know what values later will be going down to probably 5%. So, in countries like Mexico of course we have a higher growth and so on, it's why we need the 7%, but in the US we don't need that 7%, we probably will need 4% to 5% let's say, but for certain years we will be in the same level of Mexico and other countries in order to catch up some of the infrastructure and market needs that we need to reinforce together with the team of our effects there in the Southwest territories that we have been analyzing.

So, that's more or less and I think that give you a good flavor on this.

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Benjamin Theurer, Barclays - Analyst [19]

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That's a pretty good one and just for the sake of completion on that topic, if you are basically increasing CapEx in the US where it seems that was a little bit of an underinvestment in the past, would that massive amount, are there areas where you think just because of the size of investment you are doing not only in the US Coca-Cola system but also in the Mexican and the South American system that for some items that you might need that you can actually get better quotes for what you need at the facilities, or on the infrastructure side etc cetera, that you -- the part of the synergies what we just discussed on Antonio's question could come as well from better purchasing power on whatever CapEx might be needed?

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [20]

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Well, we definitely see other areas as we mentioned to Antonio and start to reconfirm to you that we are there to add value of course to add value there is no doubt, so and we have been proving through the history that what we invest, we add value, and we add value through first learning from what we have, first taking care of the talent that we have there and joining forces will create value and first with obviously some hard things which are related to infrastructure or different processes to assure that the supply chain in the best manner, we certainly have to agree with Coca-Cola because there is a national supply system that is already in place there.

So, but beyond that I am assuming that obviously we will have the right approvals and so on. We will move in that direction as I mentioned in the investment that I have mentioned. I don't want to say that there is an underinvestment, I think we need to invest into a new opportunity we will find rather than telling you that there is a problem in the -- and in some areas of course there is some investment needed, but most of the investment is for being in a better position.

But regarding the other areas in (inaudible) there could be synergies. We don't need too much investment, it's a matter of, as you said negotiation of raw materials and (inaudible) based on scale already through the Coca-Cola global system, but there are some more things that we add now in the process to provide a better cost to that. And other things related to the market really does not require investment or minimum investment, in developing more packages while we have the flexibility in the infrastructure for global machines close to the facilities and etc cetera, etc cetera, then it's a matter of how we can work together with Coca-Cola and of course the customers to look for and better, I mean, much more wider and larger scope in terms of packages.

You need to have Domino Pizzas to play with this to see to talk about segmentation, you need to have that and prices and packages and products and then and of course investment in the market which in this case there is in place already a huge one, but we will optimize it.

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Operator [21]

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Alexander Robarts, Citigroup.

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Alexander Robarts, Citigroup - Analyst [22]

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Thank you for taking the questions. Two things please I would like to explore, first on sweetener and sugar in Mexico and secondly the synergies in Texas. I mean the margin in Mexico, a little bit weaker than we thought in the fourth quarter. I know there is a couple of things going on there at the gross margin level. And can you tell us what was the year-on-year sugar price increases, your sugar costs, what were they in the fourth quarter Mexico year on year? And do you expect 2017 that those sugar costs to be increased less than what we saw last year? So, the first question around the sugar trend.

The second question is, if I do the math, the $60 million or $80 million, that you're talking about in synergies in three years so for taxes, it puts you to 16% EBITDA margin in that region, of the United States up from -- today you've mentioned that it's around 13%, and that would be higher than from Latin America EBITDA margin levels. And I guess, the buckets that you've talked about with ACT would you expect to execute there in Texas? But if you could talk to us about the cost selling potential with Wise, I mean that's going to be a very unique situation in the United States about where a bottler will have own chips what kind of point of sale opportunities can we expect there? And how can you talk to us about out (inaudible) which is, we understand not in the deal and it could be (inaudible) essentially leading factor in some point of sale. So, sorry for the long question but those would be the ones that I would like to address.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [23]

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Well, several questions I mean I would say that the first one related to sugar. And as you mentioned it has really already an increase through last year I mean very fast increase. So through the year I will not say one quarter only but I would say that the whole year of 2016 probably was an increase mainly 30%, let's say, nearly in Mexico, talking about Mexico. And would also in Peru I mean and other countries if any, in Argentina that probably came a below was less than much more lesser than that it was already (inaudible) high.

So in general sugar prices being increasing very rapidly and high. So when we talk in Mexico of 30% it's a huge increase. But today it's been stabilized. I mean we don't see -- I mean once we have reached that number in this quarter, I am talking of fourth quarter, I think that for the whole mix this year 2017 in Mexico we will see a major decrease in sugar prices, I mean.

Compared with the fourth quarter it will be same or maybe less, depending on the exchange rate and so on. But our perception is that will be stable to the price of the fourth quarter or again maybe less than that.

So that means that we saw already a huge increase in the sweeteners already. By the way in the case of fructose, which we use it also in Mexico because of the devaluation also increased about 25% to 30%. So you can imagine that whatever, if it's fructose or if it's sugar we have a huge impact on that.

But we have already absorbed it and we don't foresee any major change in that regard for the 2017. So (inaudible) the exchange rates changed too much on that, but it is the 20, 21 (inaudible) so that our expected we don't I mean feel comfortable that the prices of sugar are now high and we think that according to the fourth quarter. And the exchange rate today and so on will remain stable for the rest of the whole year 2017.

An important mark now we'll have more sugar because the integration of sugar because remember that we acquired this new facility of Plan de San Luis, it is the third sugar mill in Mexico, and it's very well operated and there is additional production on that.

So we'll have more sugar at the better prices of integration. So in that regard we are well-positioned to even have a better benefit on that. And in Argentina, by the way, the sugar mill that we acquired early last year, it is important to say that the quality of that sugar mill was producing was not the right one to be used last year in our facilities. But we are investing, not too much, but we are investing to have the sugar ready to be used by middle of this year July or -- so that will really represent that we will have integration of sugar in Argentina, and in that case will be 100% integration of sugar through the second part of the year 2017, okay, through this second part of this year.

So it means that the margin will be there and with refined sugar and with very low costs. And by the way there is a tax in that normally you have when you sell to -- from one company to another entity. In this case the entity -- the legal entity is the same so that tax which cannot be credited really will not be there so it is about 6%, 7%.

So the margin in general in that -- this sugar mill that will be ready with the quality by the second part of this year in Argentina will be very positive for us in that country.

Fully integrated, no tax involved in terms the transaction with between legal entities because it is the same entity (inaudible) and better cost. So we feel quite well supported in that regard for in that results and so on and so forth. So I can tell you that the impact has been already done through the last year. Now we see much more stable or lower prices. So we don't see any main challenge anymore in that regard and with more integration in Mexico and in Argentina we will have through the year a much better position of course.

And let me just talk about the Phoenix, again in Texas. Talking -- of course it's a mathematic number, that will increase from 13% or 15.5% to 16% of EBITDA margin. And it varies really better than the other countries in Latin America, while in our case not because it's in other countries that we have in Argentina, we have nearly 20% of -- we used to have 9% 10 years -- 7 or 8 years ago and we are flat about 9%, but today it's in the level of 19%.

So in the case of Ecuador it used to be 16%, today it is 18% or 19% so in case of Mexico we are talking of 22% or 23%. In case of Peru we're talking of used to be 16%, today it's 20%. So we are looking for always in Latin America or are trying to be in the right place.

So to be in the mid-teens I mean -- in Mexico people can vote for a candidate when they are 18 years. So I think that it would be even better to have them at the age of voting in Mexico there, we're talking now 18% will be better. But at least 15%, 16% is something that we should look for, creating value again with the right structure in terms of (inaudible) packaging and certainly the right imports to Topo Chico, Powerade and all the things that we are planning to do together with the team, a great team that we have there in the Southwest territories and with the support of Coca-Cola.

And to overly reinforce the infrastructure and have a much more flexibility and in terms of packaging and the infrastructure in blowing and doing the right things to like lightening all with a permission of the system but certainly moving forward in that regard.

So, is that from one day to you don't know, will take two or three years, hoping but that we always promise and we deliver more than we promise that's been our history and we expect at this time we will do the same. As we have said, we are going to double the size every five years, we have been doubling the size of the Company, profitable and sustainable every five years, in the last 16 years.

And we are planning to double the size again, in the next coming five years because just within this year we are going to be above MXN100 billion profit, MXN100 billion, but you can imagine that just adding the Southwest territory we will be in the level of MXN260 billion around that. So just with the natural growth we are going to be close to MXN200 billion. So with addition I think that we have to do we should surpass the MXN200 billion, so anyway (inaudible).

We feel that we can continue growing profitable and sustainable creating value for our stakeholders like in this case. I don't if that answers the question or you have more specific to answer, Alex?

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Alexander Robarts, Citigroup - Analyst [24]

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Well, coming back we could talk about the (inaudible) strategy offline and when I referred to other Latin American bottlers I was definitely not referring to you as the reference point. But thanks very much for the answer and I can follow up offline.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [25]

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Thank you very much we will see you soon there, thank you, excellent --

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Operator [26]

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Luca Cipiccia, Goldman Sachs

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Luca Cipiccia, Goldman Sachs - Analyst [27]

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Thanks for taking my questions. I wanted to ask two general ones, one maybe more on the positive side and actually first more on the negative side and maybe the second more on the positive. The first one is just with all the noise and talk that we're hearing and where we're witnessing about the relationship US, Mexico, NAFTA changes, great changes, I am just curious what are the factors that you are monitoring more closely that could have a real impact on your business and I ask that because, a lot of companies are sort of moving beyond the regulation but really working on contingency plan, whether the likes of consolation or similar where they are actually say well, this could happen and this is how we are prepared.

So I think in Arca's case with the Texas transaction, is there anything you could point us to that concerns you or that you're monitoring more closely or whether it's importing certain raw materials, whether it is certain plans that you may have had that could be put on hold. So I think that would be my first question and then I have a follow-up as well.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [28]

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Well, thank you Luca, appreciate your question and good to talk with you. Let me tell you that first of all we don't expect any impact on our process or transaction that we have, I mean nothing to do with what we are going to do there because all potential benefits are specifically related to the existing Southwest operation. Southwest territory, so Texas. I mean there is not anything that we (inaudible) combine or whatever, it's -- I mean better practices that we can combine, better knowledge.

But at the end we are going to invest more in Texas. And we will create more jobs because we're going to grow. So in that regard we feel quite comfortable that we are well aligned for any kind of potential issue there, no problem.

So on the other hand we have a very long-term view of this market, developing all the capabilities in these territories. The one that they have (inaudible). Regarding the business in Mexico, well we do not export well I mean well we export these to (inaudible) amount of our business. I mean less than 1% or so. So you may understand that and this is a very value added products because as I mentioned to you that it happened even higher price than the competitors in that category of mineral water from source talking of European brands.

So in general we don't see any major effect on that. And in Peru -- I mean I don't think that there could be one there. But in any case it's too small for considering that problem at all. So really the most important thing summarizing is, what we need to take care, what the consumption is going to develop here in Mexico.

And so we have to monitor this, sense what is happening in the consumption environment. And as I mentioned at the beginning of this conference call we have, as a country, we have positive factors and potential challenges. I hope that the positive factors like remittances or (inaudible) investment in other areas will be -- if not enough will really reduce the effect of any diminishing in investment from foreign investors. So which is the most important partner. But at this times jobs, new jobs creating and at this time we see very good starting for January and February and not only ourselves we are doing great, but other ones are doing that well in this, in consumer products in Mexico.

As I mentioned, we have a lack of -- I mean it's not easy to keep the people in some -- and workers in some areas like, as I mentioned, in Yurimaguas or Huaraz and so on because people is -- I mean there is not enough people.

So training, we have to retrain and train them. So it's rolling. So you grow it this way. So we have decided to develop specific strategies to retain people in those areas so rather than having a challenge in terms of jobs, in terms of reducing jobs in those areas at this time in the offices. So (inaudible) still concerned about the future, no, I could (inaudible) be alert of what is happening, we'll never rest in our (inaudible).

We always take the right actions to be prepared. But certainly we don't see at this time any major issue in our case. And if those happens, I mean we are going to look for anticipating those and we have enough capabilities resources, we don't have a debt -- we have a debt, we are in 1.2, 1.3 times net debt on EBITDA so we balance already all that -- most of our pesos or the currency in each country so in general -- and we are generating good cash and most importantly we have the support of Coca-Cola, our shareholders and the most, most valuable thing, great people, great things.

So we don't see anything that we should be really concerned about, I don't' want to oversell anything that is how we think on it. People like -- many people like to talk about the crisis all they like, we like always to talk about opportunities and to have the right attitude.

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Alexander Robarts, Citigroup - Analyst [29]

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And Pancho a follow up quickly on another point. Leadership changes at the Coco-Cola company level clearly have happened but they seem to now appear more clear in terms of the direction, we listened yesterday to (inaudible) conference and clearly there is a different style or of formal prioritizing, let's say, strategic pillars, he was emphasizing a lot the area of total beverage company, there seemed to be a very strong sense of urgency.

(Inaudible) in commercial initiatives that are probably going to be accelerated, I'm just curious from your perspective with this new US adventure that is beginning. How would you feel this -- how do you see this within the Coca-Cola company in helping both in terms of what they're demanding of you, what type of skills and capabilities you're bringing to the table, but also the type of agility and easiness of implementing some of these strategies, because I think is a lot of things that they're talking about now for the US and for some of the other markets for different reasons different angles you're have implemented already very well in Mexico and that's why the portfolios, more package and so on and so forth. So I'm just curious are you seeing that changes as well in the interaction with the Coco-Cola company now that you plan the strategy in addition to the simple refranchising of the territories?

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [30]

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Well, I think that, well, first of with (inaudible) all, I mean, all what they are doing in terms of the reorganization or its positions and so on. And I think that they've doing right, most are doing great things to reinforce the brands and make this business to grow and really oriented to the 2020 vision and doing great on this journey. And regarding the -- we congratulate that move up and appreciate that support.

Regarding James, I mean James has been, that he used to be in Latin America, by the way, at the end before he moves to Europe he was in charge of Mexico. So we had a strong knowledge and relationship with him, of course, and he knows very well the Latin American way of thinking and way of acting which is more important. So in that regard what he is now talking about the total beverage company we are there, we want to continue (inaudible) still beverages and in new beverages and definitely and we are doing that. In Mexico we are a good example of that can be done. As I mentioned in our position in the different still beverages in beverages we're number one or close or number two, very close to number one. And that is the target. And all the categories which are not soft drinks we are working very hard.

Talking about sweeteners, having less sugar or less sweetened in terms of calories we are fully aligned on that. We are leading that process by the way not fuly aligned, we are leading that process. We lead that in Ecuador. We are the showcase in that case. And the same thing we are doing now in Mexico together with all trends on bottlers here. So it's a thing that we're well aligned in developing new sweeteners but to reduce sugar on the beverages it's been (inaudible) we are working hard in that direction.

And looking for new packages and new products and especially are moving more into transactions and value share and things like that, we have been mentioning (inaudible) and obviously (inaudible) we are well convinced on that, in all the market that we have we have a high share of our position in the markets in volumes, but always we have higher shares in value and more share in product pool. So if you talk about the share in each of our businesses or categories in sparkling or non-sparkling in beverages I can assure you that we have a clear leading position or close to that position.

And value share is higher than volume shares, transaction is higher than volume share. So we are well aligned that we need to really create value through this market intelligence, but putting the intelligence in place through the model that we mentioned ACT, Arca Continental Total Execution. As I mentioned have five different steps execution, revenue roadmap, route to market, fundamental, innovation and the school for people.

So we are doing great there and we're well aligned again and he knows very well what we have been doing since many years and we hope that we can be a good contribution for the development not only Latin America, but also in to US to develop the market and create a better market for everyone to contribute the most that we can of course with all our capabilities and all our passion to move ahead.

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Operator [31]

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Julie Chariell, Bloomberg Financial.

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Julie Chariell, Bloomberg Financial - Analyst [32]

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I have two quick ones, a specific one and the more general one. Specifically, following up on the disclosures that came out yesterday on the US operations, I'm wondering if you could share with us an update on the fourth quarter numbers for CCR in terms of revenue and EBITDA, do you have those specifics for us?

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [33]

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But we cannot provide this information on this regard because we have said (inaudible) on other things and we have a confidential agreement. So later on when we talk about performance and so. In fact you will see through the info memo that we just put in there -- I think it's already in the net. We released it yesterday, it's because we are going to have the shareholders meeting, the assembly for a couple of weeks more and then we put all this information that we can at this time to arrive, so we have it there and you will probably have a good source of information in that regard. You have for the explanation in that our people in Investment Relations will be more than happy to help you in that to clarify information in that.

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Julie Chariell, Bloomberg Financial - Analyst [34]

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Okay, that's great, thank you. And if I could just ask you a more general question on the outlook. I want to get your thoughts on where you are seeing other raw materials, you talked a lot about sugar as Alice had asked, and I am wondering if you can talk about some of the other raw materials prices that you are looking at, packaging materials, where -- with the allocate you see for that in terms of inflation there, you already talked about wage inflation. Also in that regard for your costs and how that might affect gross margins, the issue of fuel prices in Mexico if you could touch on that and how you see that play out in 2017 if that might be an issue, and of course where you see the peso over the course of the year?

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [35]

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The last part was the most important thing, how will we see peso (inaudible) I will ask really our let's say futurist who is really the mentalist, Emilio Marcos who can help us really in this regard, and CFO, please Emilio, would you please help.

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Emilio Marcos, Arca Continental, S.A.B. de C.V. - CFO [36]

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I can help you in sugar prices, but not in peso exchange rate. Hello, Julie, nice talking to you. Regarding the raw materials in Mexico, as Pancho mentioned, (inaudible) those prices have been really stable for the past two years and we hedged all of our needs for 2017 in Mexico at the same US dollar prices than last year and basically 2015. So really the impact will be based on the exchange rate, okay, so saying that the last days have been an improvement in the exchange rate in Mexico so in very good level. So, that's regarding high fructose.

Regarding sugar also Pancho mentioned that the current prices of sugar are the highest prices that we had last year, which were the fourth quarter of last year. So we don't expect any increase in sugar. In fact they may go down a little bit by the end of the year.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [37]

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Close to integration.

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Emilio Marcos, Arca Continental, S.A.B. de C.V. - CFO [38]

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Yes, yes, that's right, with the sugar mill (inaudible) for last year. That's regarding Mexico.

In Peru we hedged already some sugar prices for this year at a lower price than fourth quarter of last year. And we are looking for opportunities to increase that hedge. We have hedged around 25% of our needs of 2017 and again at a lower price than fourth quarter last year. And in Argentina as also Pancho mentioned that with the integration of -- it's not a hedge, but it's a integration of our own sugar mill that we will be basically having very stable and better cost structure the second half of this year because sugar prices in Argentina are expected to increase this year. But with the integration we really think that we will have a very stable cost structure.

Regarding prices, I will ask Arturo to help us on price strategy for each country.

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Arturo Gutierrez, Arca Continental, S.A.B. de C.V. - COO [39]

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Sure, as you know we have increased prices above inflation in 2016 at a rate of about 4% for the year and for this year the same thing, we are expecting to increase prices in the mid-single digits. I would say that even with a wider margin as compared to inflation for the year, to make sure that we maintain profitability for the Company.

One very important thing about pricing is our ratio for discounts, this ratio is around 3.5% at this point, but it's important to note that we have been improving that number throughout the last year as we used to be at around 5% about three years ago. So, we have become more effective not only in our segmentation and revenue management for pricing, but also in our efforts in the market to be more effective in terms of discounts and that way we can keep on increasing prices net above inflation.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [40]

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Right, and we are moving well this year already.

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Arturo Gutierrez, Arca Continental, S.A.B. de C.V. - COO [41]

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Yes, that's correct.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [42]

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(Inaudible).

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Arturo Gutierrez, Arca Continental, S.A.B. de C.V. - COO [43]

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As Pancho mentioned, we increased again this February and last November, so we are --

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [44]

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Could compensate any background in this regard and hopefully there will be no further increases in the raw materials, at least we don't foresee that on the contraty. Thank you and I appreciate it.

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Operator [45]

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Thank you. At this time I would like to turn the conference back over to Garza Egloff for closing remarks.

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Francisco Garza Egloff, Arca Continental, S.A.B. de C.V. - CEO [46]

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Thank you, Operator. Thanks to all of you for participating in this conference call and for always supporting our Company and for your trust. We look forward to speaking with you again soon and thank you and have a very good day. Thank you.

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Operator [47]

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Thank you ladies and gentlemen, at this time this concludes today's teleconference. You may now disconnect.